Alternative markets for pharmaceutical companies

By Marie Shields and Nick Pryke

As big pharma’s traditional business model looks increasingly unworkable, many companies are looking to emerging markets to boost demand for their products. What does this mean for the future of the industry?

“I strongly feel that the companies that already have a strong strategy in the emerging markets will be more successful than others in future years.”
-Sumit Sharma, SVP for Emerging Markets and New Business, Frost & Sullivan

Without the steady stream of blockbusters to prop up their balance sheets, pharma companies are being forced to find new ways stay solvent. As Simon Friend, Global Pharmaceuticals Leader for PricewaterhouseCoopers, points out, “The industry has been in a watershed mode for the past few years, and to some extent is starting to work its way out of it. But there are huge pressures on it from a number of different angles, and the most critical or fundamental is, where are the new products coming from?

“Compounding the pipeline issue, you’ve got patent expiries. We predicted two years ago that $157 billion of sales would come off  patent by 2015. We’re now some way into that. It’s very real and companies are struggling to work their way through it in the absence of significant new products coming through.”

Indeed, there is no escaping that 20, even 30 years ago there was an abundance of drugs in the pipeline that upped the valuation of pharmaceutical companies and their share prices: everything was upbeat and there was plenty of innovation and constant demand. In the last five years, however, all of this has significantly reduced due to the cost of R&D and bringing out new drugs, getting approval from the FDA and registering in different markets. It’s now far more difficult for pharmaceutical companies to continue to produce blockbuster drugs, which is unquestionably having an impact on their current valuations.

Moving abroad

One strategy that many of the bigger companies are employing is to seek new markets outside North America and Western Europe. PwC’s ‘Pharma 2020’ report, which analysed industry trends for the next 10 years, says that seven countries – China, India, Brazil, Mexico, Russia, Turkey, Indonesia, the so-called ‘pharmerging’ markets – will play a crucial role in the future of the pharmaceutical industry.

According to the report, “The real GDP of the E7 countries will triple from US$5.1 trillion in 2004 to US$15.7 trillion in 2020, whereas that of the G7 countries will grow by just 40 percent, from US$25.8 trillion to US$36.1 trillion. Their wealth relative to that of the G7 will rise from 19.7 percent to 43.4 percent over the same period.

“In 2004, the E7 countries spent 0.94 percent of their GDP on prescription medicines (although the precise percentage varied from one state to another). They collectively accounted for eight percent of the US$518 billion global market. The G7 countries, by contrast, spent 1.31 percent of their GDP on medicines and accounted for 79 percent of all sales.

“If all 14 countries continue to spend the same proportion of their GDP on medicines as they do now (and if their GDP grows as we have projected), the global pharmaceuticals market will be worth about US$800 billion in 2020, and the E7 countries will account for about 14 percent of sales.”

Sumit Sharma, Senior Vice President for Emerging Markets and New Business at Frost & Sullivan, also believes the future of pharma lies outside traditional markets. “In the 1970s and 1980s,” he says, “pharmaceuticals as an industry were primarily driven by North America and Western Europe. Most of the drugs were designed or meeting the needs of the more developed part of the world, dealing with diseases that were more common in North America or Western Europe because that’s where the money was.

“As we moved in the 1990s, there was an emergence of new economies where the likes of China, India and West Asia Pacific started to take off. The pharmaceutical industry saw the population of these economies and they started taking a lot of their existing products there. When it started to work, many of the new products were designed around these economies and diseases. Excluding the drying of pipelines that we see now, that was a huge paradigm shift.

“These kind of changes are having a massive impact on the consumers and within the pharmaceutical space,” continues Sharma. “The generics, which have dropped in price, can compete far more openly now – and far more smartly. They’re hiring people from the ethical side to brand their drugs and make it big in the lower set of the so-called ‘weaker economies’. A lot is happening, so it’s changed significantly.”

This significant change has come from simple fact: the pipelines are running dry and new markets are naturally attractive. Going one further, Sharma outlines that there are three major issues: the emergence of generics, the growth of new economies and the indisputable fact that the pipelines are indeed drying up.

All of this is driven by the economy and the way that consumers in pharmaceutical spaces are increasing significantly. Diseases such as diabetes, cancer, cardiovascular disorders and even asthma get far more investment today in China, Russia and India than in any of the emerged markets. In addition, the relevant governments aren’t too concerned whether a patient consumes a drug made by a multinational or a local company, as the relative allocated budgets allows the generics to easily meet the needs of patients.

Practical concerns

Ann Brady, Vice President of New Market Development for Shire, confirms that her company is seeking new markets in less developed areas of the world. “The traditional model within pharma has been dominated by Western developed markets, treating Western diseases. In recent years we’ve seen a trend for big pharma, as they have come under pressure with regard to patent expiries and a lack of pipeline, to move commercialization activities beyond the developed markets.”

Shire is a specialty biopharmaceutical company focused on helping people with serious diseases, wherever they are in the world. Brady continues: “The world is becoming more connected and as an industry, we do need to look at global development, and specifi cally for Shire, that’s where we are directing our business. We’re looking beyond just what will service the developed Western market.”

It’s one thing to say you’re moving into emerging markets, and quite another to deal with the practicalities involved. The seven countries that make up the top of the emerging market list are obviously vastly different from each other in terms of geography, population, culture and political situation.

The presumptive grouping of all emerging markets together can be a dangerous one. The term ‘pharmerging’ that has recently been bandied around would suggest that there is in fact one blanket strategy to cover all emerging nations. This is simply not true. Some of the bigger pharmaceutical companies might have an input in the majority of emerging markets, but judging which ones will work within their respective portfolios comes down to a combination of history and fit.

Difficult choices

There is no such thing as a generic ‘emerging markets policy’ – each country requires its own specific plan, which brings with it its own challenges. How then, does a company choose which new market to invest in? As Nycomed’s Jostein Davidsen points out, the top 10 companies will most likely invest in all of them, while for mid-sized and smaller companies, it’s oft en a matter of history. “It has to do with the history of the different companies, the history of Nycomed being, for example, active in the Soviet Union for 20 years. We had a footprint there from an early stage and we automatically built on that.

“When it comes to countries like Turkey or Mexico, if you were not there in the early days, maybe you’re reluctant to go in later.  It will cost much more, of course, and in some of these markets you may well have to go in and acquire local companies, only by that time there is not much left  to acquire, so it is much more difficult.”

As General Director for Nycomed Russia-CIS and Senior Vice President, Nycomed, Davidsen has been involved with the company’s operations in the country since the Soviet days, and has seen the region rise to play a key role in Nycomed’s growth strategy; so much so that the current aim is to have Russia-CIS represent 38 percent of the company’s growth in 2013.

That doesn’t mean there won’t be challenges along the way, as Davidsen explains: “Entry costs are high, although there is relatively less expense on the registration of products and on clinical trials. But offi  ce premises are much more expensive here than in other parts of Europe, and the cost of media campaigns and TV campaigns for over-the-counter products has risen dramatically. And then are unforeseen events that can have a negative impact.

Unforeseen events are indeed a potential downside of moving into any new market, but particularly so in markets where the political situation or other factors may be unfamiliar to the investing company. As Mazen Darwazah, Vice Chairman of Hikma Pharmaceuticals, puts it: “You need to understand the local culture. Oft en, when you’re a multinational company, you think globally and you act globally. Work-ing in this part of the world you have to think globally and act locally. 

“You have to understand the barriers of entry. You have to understand the perception that the healthcare community has in a particular country, so you have to work with them on the basis that these are local requirements in terms of dosage forms, pricing and delivery of goods.

“You also cannot work in a country, and then when there’s a crisis or a civil war, leave that market. This is what happened for example in Algeria, when there was a civil war and all of the multinationals left. You cannot go into a market in the good times and leave when there’s a crisis. You have to stay in a long-term partnership.”

Hikma started out as a Jordanian company 32 years ago, so its perspective is a little different from that of European or US-based companies. Having concentrated on the immediate surrounding markets of Lebanon, Syria, Iraq and Saudi Arabia for its first 10 years, the company then expanded into other parts of the Middle East and further afield, and has a presence today in 42 countries in 18 markets.

This history of moving from an emerging market outward rather than the other way around has given Hikma an interesting insight into the complexities of doing business in different parts of the world, as Darwazah explains: “Egypt, for example, is a US$2.2 billion market, while Bahrain is a US$40 or US$50 million market. To make a file for registration for a product takes the same time in terms of preparation for both countries. You cannot say, ‘I want one fi le for all the Arab countries.’ It’s an accumulation of the registrations and an accumulation of the time that you spend in countries where you get your market share and you gain your footprint in those markets.”

PwC’s Simon Friend points out that this tremendous variation is not something that is unique to emerging markets: “The reality is that this is also the case in developed parts of the world: the US market is very, very different from the markets in Europe, for example. It may be changing in the US at the moment, where you will end up with a much greater percentage of the industry being funded by government, but right now US healthcare is still largely private, whereas in the UK and other economies, it is very heavily a government-funded market.

Declining influence

The other thing to bear in mind is, who is actually buying? That is transforming the way in which the sales and marketing functions are being designed for the future, away from the traditional model of going out to the physicians and leaving samples.

“The influence of physicians has declined, because the buying pro-cess is becoming increasingly binary. You need to get to the payer and get behind the payer’s mindset and understand what the payer’s economics are. And that applies equally in the emerging and the developed world; you need to know who are the real influences and what sort of sales forces you need in the future.

“One of the interesting things for domestic companies in countries like India, China, Brazil and Central Eastern Europe is that the best thing they can do is not to follow the western model. If the view is that the western model is broken, why would you try to replicate it?”

Given the number and nature of the challenges involved, you may wonder why companies would bother moving into emerging markets at all. The benefits do, however, outweigh the challenges. “Those markets are becoming increasingly attractive in a number of different ways,” says Friend. “Emerging markets are playing a pivotal role in how established companies will move forward and in their growth potential for the future.

“Part of that is in terms of where the money sits, and if there is a growing purchasing power in some of these emerging markets there in itself lies a market potential. That’s why companies are looking to build their footprints in those marketplaces, where the demand for branded drugs will start to increase in the same way that it has done in the developed world.

“Equally, there are other significant opportunities in emerging markets from an industry perspective – whether it is around the further development of new products, or establishing manufacturing, R&D or other facilities. These environments are increasingly attractive because of the skill sets that exist there, and the speed at which they can accelerate and get to market.

“There are still concerns about the infrastructures in place, about the IP considerations and about the ability to properly establish compliance and regulatory standards in these areas, which will require proper monitoring and resources to ensure that companies are not exposing themselves to undue risk.”

Opportunities

It becomes clear that companies look at where the biggest opportunities are in terms of size, ease of doing business and how regulated the market is. Today, although China and India are not 100 percent there yet, if companies decide to ignore them, they may as well “shut up shop” as Sumit Sharma puts it. However, with a multitude of other challenges and potential issues relating to culture and political health, companies will have to be astute in their considerations.

“One of the biggest issues in China and India is finding the right people to work for you. American, UK or German field representatives are slightly different people to those you will find or hire in China or India. Here, you want people who are much stronger on the drug side in terms of the science behind it. In China and India, you want to hire people who have rooted relationships – so it’s difficult to find people. You have to be very ‘local’ in these places and many companies are missing this opportunity simply by being extremely multinational or globalized in their approach and not being flexible. Being local is an opportunity but also the biggest challenge facing companies.

“Even getting your human resources right – marketing managers to salespeople – is pivotal, as these are the most important people who will go out, sell and detail the drugs. If these people are not well trained, or they’re not the ideal ones for a local market, then it’s certainly going to be a struggle. HR challenges are large and many.

“Secondly, I would say that these places are becoming more expensive to operate out of. Every multinational is trying to get into India and China, so there is a huge demand for real estate; if you want to set up factories and distribution networks and you’re not doing it right now, it’s going to be a massive challenge to do so in the future purely because of the expense.

“Besides the pharmaceutical standpoint, getting the local sales infrastructure in place with local skills and relationships is key. In addition, fighting the government at times and being a lobbying agent for price and reimbursement is a massive challenge because you’re an outsider and have no say. The trick is to partner with a local company or agency and hire some powerful local people who could be part of your organization.”

Simon Friend cites the rise of homegrown companies in developing markets as the force behind regulatory and infrastructure improvements that may help to draw the big international companies in: “The domestic companies are building and growing and establishing themselves in the larger world. They’re no longer small off -shoots. Th ey’re starting to become well-established companies with well-established products that are competing against others in the more developed environment.

“The infrastructure that is starting to be put in place to support domestic companies provides great support for the Western companies to come in behind and have a more security around what is happening. For example, in India where they put in new IP legislation in 2007 or 2008, the issue there around policing it is still exists. Does that mean you wouldn’t go there? I don’t think it does.

“What we’re seeing with many companies building a pres-ence there, is that you just have to go in with your eyes open. “In China, we know that from a counterfeit perspective, the authorities are working hard and have identifi ed the pharmaceutical industry as one where they need to ensure that the IP is protected. Th ey are taking steps in the right direction.”

Instability

There seems to be a vicious cycle of wants versus challenges; for some of the least emerging nations, political instability has shut down any hint of an opportunity for multinational companies. As Sumit Sharma says, “If you look at some of the emerging markets – let’s leave out Western Europe, North America and Japan – and consider the rest of the world as still emerging and plot it on a curve, you will see that the ones that are not even on the curve yet are the nations that face huge political crisis: Africa, Latin America and certain parts of the Middle East.

“These are big markets with huge opportunities because people are extremely sick, as a generalization, because they live in unhygienic environments. The problem arises from the fact that governments don’t focus on healthcare because they tend to spend the majority of their budgets on defense. Remember every government that spends a dollar on defense spends 50 cents less on education and 50 cents less on healthcare. Every government spending a dollar more on defense is leading to lesser healthcare spends, which is not helping Africa or places like Brazil.

“Brazil’s biggest problem is that they don’t have the infrastructure on the healthcare side; they don’t have the skills, so it’s a massive challenge to build a health infrastructure. It’s not like a service industry where you just set up shop and you’re done. Hospitals need to be built and skills need to be acquired. I don’t think there are political problems in Brazil as such, but Brazil is not a safe place and the government spends a lot more money on security and law and order, which doesn’t help because it means they’ll spend less on healthcare. Making this problem worse is the huge ageing population in Brazil.

“If you want to work with such nations successfully, you should always have the government on your side and keep the Department of Health happy, because if they don’t approve any of your drugs, millions of dollars could be lost. To give an example, GSK has been in Asia in all those tough markets like the Philippines, Indonesia and Vietnam – and they’re doing quite well. One of their greatest strengths has been working very closely with the government and helping during the political challenges they faced in the 1980s.

“How did they help? By saying that they would be in a position to drop prices, conduct forms of social marketing and run some disease programs. Those kinds of things help, and today, any drug that GSK tries to launch in these markets gets registered, approved and to market faster.”

These potential pitfalls will not be enough to stop the industry’s major and niche-market players from making the move overseas. Shire, for one, has set itself a goal that will be driven by expansion into non-traditional markets: it aims to be the most valuable specialty bio-pharmaceutical company in the world by 2015. “An important part of achieving that goal is the diversification of our revenues across a bigger geography globally,” underlines Mark Rothera, Vice President for Europe, the Middle East and Africa for Shire’s Human Genetics Therapy business. “This means not just the revenues that we’re generating, but the quality of those revenues and the sustainability of them that will build value.”

“We have a broad ‘rest of world’ definition,” adds Shire’s Ann Brady. “Today our revenue base is very heavily weighted to the US, and we need to diversify that. We need to look in geographies beyond the US, Canada and the major European markets. Our definition is extremely broad in that it encompasses Central and Eastern Europe, Latin America and Asia Pacific. So we have a huge opportunity to in-crease our presence in many of the developed markets within this ROW definition.

“In addition, the traditional emerging markets are a significant component of our ROW activity. As a business, we will be targeted in our expansion here. We’re not saying we’re going to every one of these markets, and nor are we saying that we are going to invest directly in these markets. We need to target our rollout into new geographies on the basis of our portfolio and how we may best optimize value for our global business.”

Current climate

One would have thought that the recent worldwide economic downturn would have stopped movement into emerging markets, but Sharma is keen to assert that the exact opposite is true: companies are entering emerging markets because of the economic downturn, and if anything, emerging markets have saved pharmaceutical companies as they have their own domestic economies to consume the majority of products. Underpinning this is the view that the global economic crisis has had very little impact on the healthcare industry because it has been battling its own recession for the last 10 years, with fewer products coming out, more expensive price tags and governments cutting back on spending.

“Companies have gone to emerging markets a bit more aggressively,” continues Sharma, “because they realize that in the US, the government’s not going to spend much more on healthcare, while emerging markets such as India and China have not changed their economic strategies, so healthcare has continued to grow. In addition, if you take certain disease areas such as obesity or asthma that are traditionally common in North America, you soon realize that they are just as common, if not more, in China because of the smoking and food habits.

“What these pharmaceutical companies are trying to do is get there at an early stage where they can go in with the right products and get in o preventative healthcare – where drugs are produced or launched with the intention of controlling such factors at an early life stage. Because of the affluent Chinese and Indian societies we see today, there are plenty of drugs coming out that control obesity and glucose levels – drugs like Abbott’s Reductil in China. We’re currently doing some work where we’re trying to understand the psychology of the people who take these drugs and what it comes down to is wanting to be thinner than the next person.

“It’s this consumer psychology that these pharmaceutical companies are picking up. They’re launching these products because younger, 20-something women go to doctors asking for a prescription for Reductil and then begin a three month dose just to maintain their waistline – and they’re willing to pay for it. In years to come, targeted, personalized drugs for these types of demographics, and I would even include Africa a few more years down the line, will prevail.”

The next question to be answered is, who is better geared up to deal with working outside of their own home markets? For European-based companies, who have more of a history of thinking about markets outside of their own, there really is no competition. Sharma even goes as far to say that in 10 years time he doubts that many of the current North American companies will still exist.

“It’s a bold statement,” admits Sharma, “but with drugs not getting approved, the US government might have to bail the industry out; it’s one of the flagship industries in the US. The pharmaceutical business originated from here and France. My view is that there will be far more consolidation and this will make the European companies stronger. What I normally see is that the companies who are doing well in China are the non-American companies; they have worked out that it is largely about cultural adaptation and an ability to think on the local scale. It’s also the fact that a lot of the French and British companies have been there for a very long time due to colonial history.

“I strongly feel that the companies that already have a strong strategy in the emerging markets will be more successful than others in future years. The population isn’t growing much in Western Europe and North America but a lot of untapped population still exists in China, India and even Brazil and Russia. Then, of course, you have Turkey, Indonesia, Malaysia and Korea, to name a few. However, the companies who will do the best will not only be involved with emerging markets, but will also be the ones who don’t ignore their home markets. That would be suicidal as those are the more mature, bread-and-butter markets.”

To return to specifics, Sharma analogizes where China will be in 10 years time by putting it like this: “China did the best modern-day Olympics in 2008. No other country will come close to that in the next 10 to 15 years, so China could surprise everyone and emerge in the next one to two years”. It may seem slightly tenuous, but Sharma’s message carries validity. With the right companies being attracted to a sustainable infrastructure that can also provide a massive population base, Sharma predicts that in roughly 20 years time India will be as big as the US, and China will be the biggest emerged market to date. With such a prediction, perhaps it’s time to place your bets on the biggest race in pharmaceutical history.

How do the pharmerging countries rank?

Sumit Sharma, Senior Vice President for Emerging Markets and New Business at Frost & Sullivan

“China is up there. It pretty much functions as some of the companies function in North America in terms of their depth and breadth of operating and reach of distribution. China is a far more developed emerging market in the respect that you have a greater focus in terms of human resources, products being launched and marketing activities. I would still put China outside the others – basically the bricks and mortar – of Turkey, Indonesia and Mexico; then you put the bricks up and complete it with a ‘K’ and call it Korea.

“China is an outsider simply because it has almost emerged. It is by far the biggest emerging market. You have the major ethical players who make it big in the urban part of China with their regular blockbuster drugs and maintain a very good uptake rate. Then you have the generics, which are benefiting the tier 3 cities whilst the tier 1 and tier 2 cities are with the big multinationals. It’s the sheer size of the market that is helping China accommodate pretty much everyone.

“Personally, I see China as emerged. It’s not at the same level yet as you’ve seen in North America where everything is much more regularized and far more legalized. Regardless, it’s far beyond the likes of India, Russia, Brazil and Turkey simply because the market is big; they’ve accepted every type of company plus they have their own generics and a great healthcare program in place, which is ensuring that everyone has a piece of the pie.”

“In the next 10 years, India will be where China is now – simply because of its sheer size and the fact that it has the unique advantage of being a completely self-producing market. In addition, India has benefited from its history of maintaining a quasi-colonial healthcare system; these kinds of characteristics help companies penetrate a bit faster. In two to three years time, according to Sharma, India could potentially become the second or third biggest global market.

“After these two, I would put Korea. Again, it’s a massive market and very developed. It’s smaller than Japan, but it competes in terms of its similar demographic characteristics and a highly sophisticated healthcare system that has witnessed a lot of expensive investment on patients. Many expensive drugs, such as ones focused on obesity, have become big in Korea. While it may not be sustainable as it’s not as big as Brazil or Russia, it has a sophistication about it that has seen companies focus more on it than Japan. In fact, Japan is dying out because of the downturn in the economy.

“Turning the focus on Turkey and Russia – Russia is an extremely tough market, as they have to deal with exterior control factors and politics to get drugs approved and to build distribution networks. Distribution is a massive hassle in Russia, which makes it difficult for multinationals. I’ve had conversations with GSK, Sanofi, Novartis and others trying to do business in Russia and they feel that they will face roadblocks simply because they’re of European or North American origin.

“What’s more, Russia’s infrastructure is not improving. There’s a huge health deficit there and their disease programs are not in order. A lot of people are not treated, and as a result they die. The mortality rate in Russia has risen significantly, with life expectancy rates in the 50s and early 60s. Worryingly, a big chunk of the problems relate to mental disorders, hepatitis and liver issues because of alcoholism and cardiovascular disorders that aren’t addressed because no disease programs are in place to control them."