In 2000, Pfizer launched Viagra in China. Six months later, 90% of the blue pills sold in Shanghai were counterfeit.

Blatant violation of intellectual property law allowed cheap knock-offs and fakes to flood China’s growing drug market. Despite pleas from multinational drug companies, state officials looked the other way. But today, the game is changing…

Chinese officials are cracking down on counterfeiters, busting up several multimillion-dollar rings. And in 2006, a Chinese high court reinstated Viagra’s Chinese patent, which had been repealed in 2004. The landmark ruling sent a signal to pharmaceutical companies that China was finally open for business.

The timing couldn’t be better for drugmakers…

The drug industry relies on the U.S. market for half of its profits. But two-thirds of prescriptions filled by U.S. pharmacists are generics. In the next four years, $200 billion of brand-name drug sales will be lost to generics. So the industry is beginning to eye emerging markets…

Countries like India, China, and those throughout South America were once a huge problem Big Pharma. Access to cheap labor, disregard for international patent laws, and demand for cheap medicines from low-income populations gave birth to the generic-drug industry… along with a booming counterfeit market.

But today, emerging markets’ new middle class is demanding top-shelf medical treatments.

China is now the world’s fastest growing drug market, expanding at 20% a year. Fueled by a massive aging population, rapid economic development, and urbanization, China will likely be the world’s largest drug market by 2050. (In 2008, China’s drug market was around $20 billion – less than one-tenth the size of the Western market.)

IMS, a leading provider of pharmaceutical trends, estimates the drug industry in emerging markets will total more than $300 billion by 2017. That’s the same size as the American market plus the top five European markets. The developing world will account for 35% of worldwide drug sales growth in 2009 (just 9% will come from the U.S. market).

Big Pharma’s thirst for new growth has triggered a spat of emerging-market buyouts and collaborations.

As I told you earlier this month, Japan-based Daiichi Sankyo acquired a majority stake in India’s largest drugmaker, Ranbaxy, for nearly $5 billion this past summer. Sanofi-Aventis recently wrapped up its $2 billion buyout of Czech Republic-based Zentiva. And it’s reportedly the frontrunner in a bidding war for India’s Piramal.

Britain-based GlaxoSmithKline (also a bidder for Piramal) has been the most active Big Pharma in establishing an emerging-market footprint: In 2008, it inked a distribution deal with South Africa’s Aspen Pharmaceuticals. It also ponied up $200 million for Bristol-Myers Squibb’s Egyptian operations. And in January, it acquired the African, Asian, Middle East, and Latin American operations of Belgian drug company UCB for $650 million.

As Jean-Michel Halfon (head of Pfizer’s emerging-market business) said, serving customers in developing countries is now “a business, not a charity.”

The most direct way to invest in this trend is the same tactic Big Pharma is using – buy up emerging-market drug companies. The one problem is that many of these companies are private and the ones that are public trade on international exchanges.

An easier strategy for American investors is to pick up a high-quality generics company. You see, most emerging-market drugmakers produce generics. And the wave of takeovers is pushing valuations up across the board. My favorite name here is Israel-based Teva (TEVA)…

Teva has been – and likely always will be – the top generic-drug company in the world. U.S. pharmacists now use Teva products to fill more than 1.6 million prescriptions per year, that’s 50% more than its closest competitor. Its incredible scale allows Teva to achieve a gross margin of 57% and an operating profit margin of 26%. Both numbers are industry bests. Owning Teva is the safest and easiest way to profit from the coming generic drug windfall.

Good investing,

By Rob Fannon
Growth Stock Wire