ImageThe emerging markets are the final frontier for pretty much every industry. The huge untapped markets have lots of potential, and pharmaceutical companies have jumped in full tilt.

For instance, GlaxoSmithKline (NYSE: GSK) purchased Bristol-Myers Squibb's (NYSE: BMY) businesses in Egypt and Pakistan last year and hooked up with Indian drugmaker Dr. Reddy's Laboratories and Belgium's UCB to market their drugs around the world.

(NYSE: PFE) and sanofi-aventis (NYSE: SNY) have also jumped into the mix, signing deals with or outright buying generic-drug companies to get exposure to developing companies.

On the surface, the emerging markets look like they could play a pretty big role in the soft landing that pharmaceutical companies are seeking as their blockbusters start to face generic competition. A look at the second quarter results shows that emerging markets are becoming a substantial portion of pharma's top line.


 Year-over-year increase (decrease) in emerging market sales

Sales coming from emerging markets 



















To be fair, Pfizer, which reports in dollars, was hurt by the rising dollar over the last year; on a constant-currency basis, emerging markets would have grown at a healthy 9%.

Not all revenue is created equal
Sure, there's plenty more room to grow in the emerging markets. All you have to do is compare the population in emerging-market countries with that of the U.S. and Europe and you'll come out with staggering growth potential.

But potential only becomes reality if people can afford to buy the drugs at full price, and it's pretty clear, at this point, that those in emerging-market countries can't. Unfortunately, branded drugs are expensive.

The companies don't break out profit from the emerging markets, but I'm willing to guess it's a lot smaller than the fraction of revenue coming from the emerging markets because of contracted gross margins.

Take the Philippines, for example, where 30% of the population lives on less than $0.85 per day. On Tuesday, the country forced drugmakers to slash prices by as much as 50%, imposing maximum prices on many drugs, including Pfizer's Lipitor and Johnson & Johnson's (NYSE: JNJ) cancer drug, Doxil.

Brazil has taken a more brutal approach with HIV drugs. A few years ago, it started buying generic versions of Bristol-Myers Squibb's Sustiva, which was sold by Merck (NYSE: MRK) in Brazil as Stocrin, when Merck wouldn't give the country a good price. It also recently rejected Gilead Sciences' (Nasdaq: GILD) patent on its HIV drug Viread, which allowed the entry of cheap generics.

Get back to me when they've emerged
Pharma's move into the emerging markets isn't premature; the money to develop the drugs has already been invested, so clearly some revenue is better than none. The same is true of Canada, where government-imposed drug prices mean that drug companies aren't making as much per pill as they do south of the border.

For investors, though, the allure of drugmakers is, in part, the high gross margins they can fetch. The launch of a new drug can have a major effect on earnings because so much of the new revenue trickles down to the bottom line.

Since those high margins aren't yet available in the developing world, I'm not going to get excited. I'd rather see pharmaceutical companies use their stockpiled cash to buy or license drugs in development. Blockbusters need to be replaced with blockbusters  or a few smaller market drugs rather than a legion of low-priced drugs.