The emerging pharmaceutical markets

Emerging markets look set to catch up to the Western world in healthcare standards. Jesper Høiland outlines the pharmaceutical industry’s response.

“I call the European economy a pancake economy going forward.You do not see any growth there, and you are not going to see any growth for many years”
-Jesper Høiland

“More than 65 percent of the world’s GDP growth is coming from the emerging, non-Westernised markets,” begins Jesper Høiland, enthusiastically. As SVP of International Operations for Novo Nordisk – a global leader in healthcare provisions – Høiland is acutely aware that he stands on the precipice of a seismic global shift for the pharmaceuticals industry, and he’s justifiably excited by the prospects of this new world order. “You don’t have to go that many decades back to see life expectancy in the 40s, 50s or 60s in some countries, whereas today you are seeing emerging markets catching up – life expectancies in China, India and Brazil now average the mid-70s. Whether you are born in central China, Latin America or North America, you have the same wish: to live long and be healthy.”

Bringing about a level playing field in global healthcare will be no mean feat. Humankind has been conditioned for centuries to look West for financial prosperity, artistic inspiration and high life expectancy, yet the emergence on the world stage of the BRIC economies (Brazil, Russia, India and China) will have long-lasting repercussions for all, particularly in the healthcare sector.

“In the past few decades, 85 percent of the world’s healthcare expenditure has been allocated to just 15 percent of the world’s population,” reveals Hoiland.  “In very simple terms this means that North America, Europe and Japan have been consuming 85 percent of the world’s healthcare, while 85 percent of the world’s population has hardly had any spending per head in terms of healthcare.”

Høiland warns that the West’s ingrained sense of entitlement to better healthcare and higher standards of living is about to be challenged by the emerging nations, who will no longer be content to settle for second best. “Many people have a very strong misconception that if you are not receiving exactly the same quality of healthcare as you are in Europe or in the US you might still be willing to settle for less. The opposite is now the case. Those with money [in the emerging markets] are more likely to spend more on quality healthcare because they want to make sure that they do not get cheated.”


New world order
As countries such as Russia, India and China become more and more energised by their tangible realisation of unprecedented economic growth and financial stability, Høiland calls out the general malaise and stagnation of Europe’s healthcare market. “I call Europe a pancake. You do not see any growth there, and you are not going to see any growth for many years. I wouldn’t be surprised to perhaps see a decline in the market share, a decline in healthcare spending.

“Therefore, the outlook for the pharma industry in Europe is not that encouraging. Healthcare in North America remains, of course, a big part of the industry – between 40 and 50 percent of the world market for healthcare has been spent in the US. Everything for the past 20 years has been US-focused; the US has been the backyard for over half of the industry’s multinational companies, most of which are American. They thought, ‘If we’re so successful in North America, why look outside of this market?’”

As the economies of China and India continue to outpace all others, increased spending in healthcare is driven not just by a top-down desire to improve the overall health of the population, but also from the bottom up. Afflictions and diseases that have long been seen as Western woes are now starting to have an impact on the emerging economies. “We’re seeing a strong rise in diabetes in the emerging economies,” says Hoiland. “The reason for this is that many economies – China, India, Brazil – have been stifled for the past 200 years. With the growth of these economies many millions of people have rapidly changed their lifestyle. They have moved from rural areas to cities. They have grown older and their eating habits have changed dramatically.

“Those three parameters have been a part of the pandemic growth we are seeing in diabetes, but also hypertension and a number of other things.” The growing pains of emerging markets are obvious and well documented, and it is only natural, explains Hoiland, for pharmaceutical companies to earmark them for expansion. “There has been a paradigm shift. Previously you sent your most rookie people to these markets because no one else really wanted to go there. They would gain experience and you would move them on to more exciting and profitable markets. The trend today, however, is for the pharma industry to send all of its most experienced executives to China and India.”

Another facet of this progression is the emergence of a sizeable and financially active middle class in countries such as China and India. “Every month in India and China 30 million new people get their first mobile phone. Mobile phones are an important part of these societies because of connectivity. Things are changing with the mobile phone because you can call the doctor and get some advice and so on and so forth. But to me the indications are that the penetrations of mobile phones are significant - today the world’s largest mobile phone market is China, closely followed by India. It is not the U.S. and it is not European countries that are dominating the market.

“This indicates to me that there are huge middle classes that want and have exactly the same call for drugs that we are having in the Western world. In Shanghai, for example, life expectancy is now higher than in the US, and purchasing power is on par with Washington DC. So the average person living in Shanghai has exactly the same wealth as the average person living in Washington, DC, with a higher life expectancy.”

Tackling the new markets
As China in particular attracts greater foreign investment, Høiland is cautious in declaring a free-for-all on the country’s pharmaceutical market. “In the very short term it’s business as usual,” he stresses. “Things are not going to change that dramatically, but what you are seeing is a much more focused government. They are focused on spending money on healthcare, and we are seeing healthcare plans coming out as part of the central government policy. But you have to understand that China is not one market; you just have to look at the huge differences between the 29 provinces, they are all different.”

As the world’s most populous country, overseeing a national healthcare policy in China is a daunting prospect, but Høiland is adamant that the Chinese government is in this for the long haul. “Healthcare is extremely high on the agenda for China. Smoking is something that people are talking about. Obesity is a huge problem. The country is growing very, very rapidly. I would say that in 15 years there is no doubt in my mind that China will become the number one single market in healthcare. If you take Goldman-Sachs’ outlook for the world economy, then China is already at number three. By 2035 China will be largest, with India in second.”

India’s market is an interesting one for Hoiland. It currently ranks fourth in terms of global healthcare spend, yet the market is rather unregulated – pushing it down to 14th in value terms. “Hardly a week goes by without hearing of some scandal or other where products in India do not live up to quality and expectations. There is not much regulation there at the moment, but this is going to increase in line with demand.”

Høiland is equally positive on the Russian market, which has seen a great upswell in healthcare demand in the last decade. “Russia is undergoing a dramatic shift. There, pharmaceuticals have become available to everyone, which was the political intent of Putin – the easiest way to make yourself popular as a leader is to build an infrastructure that looks after people’s health. Putin’s DLO (Federal Drug Supply) programme has made him a very popular man, and Russia’s increasingly wealthy inhabitants are demanding the very best healthcare, which has led to Russia introducing a new plan called Pharma 2020, with the country keen on building its own pharmaceutical industry.”

Turning his attentions to Brazil, Høiland is equally effusive about the potential of this rapidly expanding market. “In Brazil there is a huge sponsored public market that is created by tendering. They go out and have the biggest tenders in the world in many different drug categories. Companies are then applying. That is both by similars and multinationals, and then the lowest price is the law. That, in a nutshell, is the public market in Brazil.”

“There is also a huge private market in Brazil,” continues Hoiland. “Out of the 200 million or so people in the country, there is a sizeable middle class who are typically willing to pay for pharmaceuticals either out of their own pocket or via insurance. So there is a two-tier market to tackle there.”

Other markets that are of particular interest to Høiland at this time include Mexico (“Mexico is a huge market with a sizeable GDP”), Korea and Africa, where a number of Chinese pharmaceutical companies are beginning to invest. “China is also a big investor in Indonesia and Vietnam. There will be a spillover effect into these markets and as that effect comes into place in 20 years’ time, I believe that these economies will be very interesting too, thanks again to the two-fold driving factors of large population and high GDP.”

Pharma’s future
Høiland believes that, as with any industry, the pharma industry will see a number of winners and losers over the next few decades. The market, he argues, is cash rich, but is sometimes lacking in innovation and insight. Companies that can bring new compounds to the market and adopt their strategies to take advantage of both the established Western markets and the expanding emerging markets will be the ones to succeed.

“The Chinese are going to want things done their way; be it in drug doses, or the way drugs are applied. The Chinese healthcare regulatory body is demanding that in order to get approval in China you need to have conducted trials in Chinese populations. It is not enough to now only do so in Westernised populations. In the future, if not already, clinical trials will be conducted in emerging markets because of greater demand from governments. This is also a cost-effective approach, which is great news for the shareholders.”

Another market that is beginning to demand greater provision to affordable and high-quality healthcare is Turkey. This ancient land has traditionally been a place where East meets West and so is in a strong position to take advantage of improved healthcare standards in both Asia and Europe. “If you take the Turkish market,” says Hoiland, “there are 78 million people living there, yet its market strength is on a par with Spain’s [a nation of 42 million]. The latest initiative of the Turkish government is enforcing significant price decreases in the country. Coupled with just how dynamic the country is, I think it is a strong indicator of how the world is developing.”

As the world becomes more and more egalitarian, extra challenges present themselves in many forms, and Høiland manages to encapsulate the two camps of thought perfectly. Both sage-like and cautious when speaking as a man of his experience, Høiland is also intensely passionate and optimistic when discussing the future. He is both the Western world and the emerging markets, rolled into one. “There are two things I have learnt that are important in the pharma business. One thing is growth and the other is market share. Those are the only two parameters when I’m out judging opportunities – I look at potential growth and I look at market share.”

With growth always a more attractive proposition than stagnation, Høiland admits that he often gets frustrated at Europe’s apparent inability to rouse itself from its self-induced slumber of contentment and comfort. “The European markets will say: ‘We generate all this cash because we’re still selling,’ but my argument is: ‘You’re not growing, and investors are not interested in necessarily just delivering the same results as last year. They’re interested in growth and prosperity.’”

Big pharma companies that are not agile enough to move with the times will suffer in the future, warns Hoiland. Doing business the same way they did in the past is a recipe for failure, particularly when faced with the dynamic demands of the increasingly vocal and pernickety – but extremely wealthy – new markets. “The Chinese market is currently growing at around 24 percent. The Russian market and all of the other BRIC economies are experiencing double-digit growth, and then behind them is Saudi Arabia, Algeria, Turkey and Mexico. I see these markets and I can hardly believe the numbers that I am looking at.

“Negotiating prices in these markets is different. You have to be out and about, you have to groom the market on an ongoing basis. You have to take part of diagnostics. You have to adapt.”

The next challenge
 With the Western world sewn up and understood, and the emerging markets working collaboratively towards a system that is suitable for all parties concerned, Høiland believes that the pharma industry’s next challenge lies in providing affordable healthcare to the world’s poorest. “There are four billion people – two thirds of the world’s population – who survive on just US$2.00 a day. These people are what I call the bottom of the pyramid, and I believe there is a pharma market there. I do not think it is necessarily the same product market for the types of propositions you are seeing in the Western world, but it is beyond doubt to me that initiatives at the bottom of the pyramid present huge opportunities.”

As the market seeks to diversify to take advantage of the economic upheavals that have come to the fore in the past few years, Høiland believes that it is not simply a case of survival of the fittest. Companies and investors are going to have to work harder, yes, but smarter too. It is no use focusing on a market that you are traditionally comfortable with while overlooking strategies that can gain you a foothold in more diverse and energetic markets. “The US companies have been very insular on this matter in the past,” admits Hoiland. “They have focused on their own home market, because it accounted for 50 percent of their market share.

“Other countries, while smaller, have acquired a broader market share. Let’s take Germany. The German pharmaceutical industry is extremely strong in Latin America, so there is an opportunity there for pharmaceutical companies to move forward and take advantage of the region’s growing economic power. If you come too late to the market, all the business opportunities are likely to have disappeared.“

This ‘early adaptor’ mentality is a truism in business as a whole, yet for a pharma industry that is racing along at break-neck speed, there is an even greater emphasis on flexibility and forward thinking. Of course, the pharmaceutical industry can only prosper if governments in these emerging markets are prepared to place greater emphasis on the welfare and health of their citizens, putting healthcare above things like military spending in order to nurture not just a stronger, happier and healthier society, but also a more supportive one.

“Governments need to be engaged,” concludes Hoiland. “I think that politicians are smart enough to see that, by tackling issues such as ‘What sort of healthcare will I get for my money?’ they will make themselves more popular. As people get wealthier they have more money to spend on healthcare. They want to live longer. They want to feel better and they want to look better.” And nobody could begrudge someone for wanting that, be they from Sweden or Swaziland.

Biography

Jesper Høiland is Novo Nordisk’s SVP of International Operations.