A marketing manager at a big pharmaceutical firm observed recently that only one projection about the future of the health-care business in the 2010s truly matters: emerging nations like China and India are expected to buy health-care products and services at a rate at least twice that of developed nations like the United States and Japan.

A typical projection: UBS Investment Research estimates that the E7 emerging nations -- China, India, Brazil, Russia, South Korea, Mexico, and Turkey -- should generate growth in drug sales of 10.7% annually in this decade. In the other emerging nations, drug sales should increase at a rate of 8.3% annually. As a result, emerging nations should account for drug sales of $550 billion annually by 2020, representing more than 70% of all such sales growth during that time.

In contrast, drug sales in the developed nations figure to advance much more modestly: a 1.6% compound annual growth rate in the U.S., a 2.9% rate in Western Europe, and a 1.6% rate in Japan, according to UBS projections. In the process, China and Brazil are likely to become larger health-care markets than France, Germany, and the United Kingdom.

As we see it, the health-care markets of emerging nations should matter and grow faster than any others in this decade for three reasons:

Spending linked to GDP

One, emerging nations should expand per-capita gross domestic product the most. Historically, a nation’s GDP growth has correlated closely with the increase in health-care spending by that nation. In short, the greater the GDP growth, the greater the rate of health-care spending. The E7 nations’ per-capita GDP growth should average 6.9% annually through 2020, according to UBS. The other emerging nations should record per-capita GDP growth averaging 5.3% annually. By comparison, growth in the U.S. should amount to less than 4% annually.

Two, governments in emerging nations, especially in China, Brazil, and Russia, are increasing health-insurance coverage for their citizens. That should in turn help expand public access to, and demand for, health care.

China, for instance, has announced ambitious reforms aimed at providing 95% of the population with health insurance, The Wall Street Journal reports. The Chinese government is spending about $125 billion on health-care improvements between now and 2011, according to CLSA Asia-Pacific Markets, a brokerage. That spending should stimulate revenue growth of 25% in China’s pharmaceutical industry over the next two years.

An expanding safety net

Although actual estimates of future expenditures on health insurance in much of the world tend to be scarce, we think it’s safe to say that as living standards improve, governments in emerging nations should fund a bigger social safety net that includes health care in the years ahead. Historically, as their level of affluence rises, nations have spent more and more on health care. The emerging nations are likely to follow suit, in our judgment.

Three, demand for health care should accelerate as a greater proportion of the population in emerging nations becomes elderly. Seniors are the biggest consumers of health care, mainly because they are the most prone to suffering chronic diseases and physical problems. So the demand for health care should be acute in China, for instance, where the ratio of elderly dependents to people of working age will quadruple in the next four decades, from 10% now to 40% in 2050, The Economist says. Brazil and Russia are also aging fast. All told, among the E7 emerging nations, the percentage of the population over the age of 65 is expected to increase by 43% within a decade.

To the health-care companies in the developed nations, such statistics translate into an exceptional business opportunity. For instance, The Wall Street Journal reports that Eli Lilly wants to double its sales in emerging nations over the next five years.

Big Pharma, small share

To beef up their presence in emerging nations, Eli Lilly and other Big Pharma firms are making acquisitions, developing joint ventures and licensing arrangements with local health-care partners, and intensifying marketing efforts there. Currently the level of business of Big Pharma in emerging nations is relatively small: the 15 largest drug companies derive less than 10% of their sales from emerging nations, says IMS Health, a consulting firm.

We think that percentage could grow by at least five percentage points in this decade, due partly to acquisitions. In general, health-care companies in the U.S. and Europe are sitting atop a mountain of cash (more than $230 billion, according to Moody’s Investors Service) and can take advantage of the low cost of capital to make acquisitions in emerging nations. The most significant recent acquisition closed last spring, when Abbott Laboratories bought Piramal Healthcare, an Indian drug company, for $3.7 billion. Piramal has the largest drug sales force in India, 6,000 representatives.

Overall, we believe nine health-care companies based in emerging nations are among those well positioned to capitalize on all the prospective growth there. In our view, some of them may be the objects of acquisitions over the next three to five years. However, as The Wall Street Journal observes, "Competition is fierce among Western health-care companies for the rapidly dwindling number of prized emerging-market targets, and getting a good asset has meant paying up for it." So would-be buyers could prove cautious about plunging into the acquisition waters in emerging nations. But they certainly have the financial means to make the plunge even if prices inflate further.

Nine with good fundamentals

At any rate, we like the fundamentals of these nine health-care companies -- small and mid-sized firms in the pharmaceutical, diagnostic-testing, medical-device, and medical-plan industries -- whether they are acquired or not. All nine have proven their ability to generate consistent double-digit growth in earnings annually. Indeed, they are growing faster than their larger U.S. and European counterparts.

*  In the pharmaceutical industry:

> Dr. Reddy’s Laboratories (headquarters: Hyderabad, India; market capitalization: about $4.9 billion), India’s second-largest drug company and a prolific introducer of branded drugs, generic drugs, and biopharmaceutical drugs in India, the U.S., Europe, and Russia.

> Genomma Lab Internacional (headquarters: Mexico City, market capitalization: about $1.9 billion), one of the world’s fastest growing and most profitable drug firms, which does more than 80% of its business in Mexico.

> Hikma Pharmaceuticals (headquarters: London, market capitalization: about $2.2 billion), which holds a major share in generic drugs in two markets that Western companies have found hard to crack, the Middle East and North Africa.

> Kalbe Farma (headquarters: Jakarta, Indonesia; market capitalization: about $2.5 billion), the largest public pharmaceutical company in Southeast Asia.

> United Laboratories (headquarters: Mandaluyong, Philippines; market capitalization: about $2 billion), the leading manufacturer of over-the-counter drugs in the Philippines.

DASA and Fleury: diagnostic leader

*  In the diagnostic-testing industry:

> Diagnosticos da America, also called DASA (headquarters: Sao Paulo, Brazil; market capitalization: about $2.1 billion), the largest diagnostic-testing company in Latin America.

> Fleury (headquarters: Sao Paulo, market capitalization: about $1.5 billion), another Brazilian diagnostic-testing leader, known for providing customer amenities like valet parking, as well as personalized customer service and efficient digital reporting of test results.

*  In the medical-device industry:

> Shandong Weigao Group Medical Polymer (headquarters: Weihai, China; market capitalization: about $4.9 billion), which makes single-use medical products such as syringes and blood bags; orthopedic products such as artificial joints; blood-dialysis machines; and cardiovascular stents.

*  In the medical-plan industry:

> Amilpar (headquarters: Rio de Janeiro, market capitalization: about $3.5 billion), the largest health-care company in Brazil, which recently acquired a major competitor, Medial, giving the combined enterprise a 10% share of the highly fragmented Brazilian medical-plan market, a market that we think is ripe for consolidation.

Risks may temper growth

Of course, doing business in emerging nations is not free of risks for any of these companies. We consider three risks especially significant:

One, emerging nations’ economies may be less robust than expected going forward, which would diminish consumer demand for health-care products and services and limit governments’ ability to expand health-care coverage.

Two, the counterfeiting of health-care products, especially in China, Russia, and Mexico, is a perennial problem that could cut into sales of legitimate products in emerging nations.

Three, a lack of pricing power could offset even strong health-care sales in emerging nations. Emerging nations historically have favored low-cost medicines, and drug companies, among others, have had to introduce flexible pricing to compete in certain nations. Pfizer’s Viagra pill for erectile dysfunction, for instance, is being sold in India at a fraction of its U.S. price. So the emphasis on low prices in emerging nations may reduce profit margins for health-care companies in aggregate.

In sum, we think emerging nations, despite their risks, represent the most promising health-care markets of this decade. The U.S. has traditionally been the most profitable health-care market. But that may change. Paced by superior economic growth rates and fundamentally attractive companies like the nine firms just cited, emerging nations appear poised to shake up the established order in the world’s health-care markets, in our judgment.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

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Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm with more than $16 billion in assets under management in stocks, as of June 30, 2010. Turner manages growth, global/international, core, value, quantitative, and alternative separately managed accounts and mutual funds for institutions and individuals.

As of July 31, 2010, Turner held in client accounts 137,716 shares of Dr. Reddy’s Laboratories, 9,960 shares of Genomma Lab Internacional, 209,160 shares of Hikma Pharmaceuticals, 11.7 million shares of Kalbe Farma, and 6,328 shares of United Laboratories. Turner held no shares of Diagnosticos da America, Fleury, Shandong Weigao Group Medical Polymer, and Amilpar.