Crunch TIme for Emerging Markets

Sep 01, 2013

Whatever used to be wrong with the world of Big Pharma could be fixed with a single tag phrase: emerging markets. Had enough of grumpy, cost-conscious, risk-averse payers and regulators? Consider the vast new opportunities in countries with undeveloped health infrastructure, a largely out-of-pocket payment system and no requirement to negotiate access.

Facing loss of exclusivity on multiple blockbuster products? Fill the gap with high-margin branded generics that benefit from a privileged market position and local infant industry protection.

Too many jaded customers skeptical of more "me too" medicines? Tap that billion plus population of aspiring, middle-class healthcare consumers in Asia, Africa, and Latin America, all with untreated chronic diseases.

And you say you don't have much to show for all those costly ­investments in corporate reputation? Stand out with imported brands that confer automatic respect because of multinational producers' association with quality, safety, and service—still a hit or miss prospect for drug purchasers in much of the world beyond North America, Europe, and Japan.

The idea that countries classified as middle and lower income could spawn new growth for an industry increasingly characterized as mature is now an ingrained part of the strategy of every Big Pharma company. It's that rare instance where geography itself qualifies as a disruptive innovation. The biggest players—Pfizer, Novartis, GSK, and Sanofi—tout their stake in emerging markets as a trump card in differentiating ­themselves against the competition, just as a healthy drug pipeline used to do in years past. "Less than a decade ago, no company had a dedicated strategy for these markets," said IMS Consulting vice-president Waseem Noor, in a roundtable discussion with Pharm Exec last month. "It was all opportunistic and short-term, focused on a small elite segment of the local population. Today, you can't be a true pharma multinational if you aren't present in the emerging markets in a big way."

Tattered playbooks

But that first blush of anticipation is yielding to some harsh realities glossed over in all those forward-looking statements to investors. The reality is buttressed by some hard truths:
» There is no prototype "emerging" market; each is distinctively complex, with its own rules and culture of business, an intimate, ongoing knowledge of which is necessary for success.
» Most are "emerging" in name only, having capitalized on technologies first developed in rich countries to leapfrog the time span for new business innovation; in some areas of health services and delivery, like biosimilars, these countries are emerging as market leaders, not laggards.
» Growth, while a blessing, can also be a curse, as exemplified by civil unrest and governance problems spawned by rapid fire social and economic changes that in the West took multiple generations to work through.

The pace of change in emerging markets is making it harder for unwieldy Big Pharma organizations to execute on strategy. For many companies, results have failed to keep pace with projections. And there are signs of overall market fatigue, as these economies adjust to lower ­global commodity prices and pressure on local capital and currency markets due to the more attractive interest rates now offered on money invested in the United States and Europe. China excepted, real GDP growth is trending flat in the BRICs as well as other standout emerging markets like Turkey; even in China, the official real GDP growth forecast of 7.5 percent for 2013 is only two thirds of what it was two years ago.

The New Tier 3 Pharmerging Countries Emphasize the Potential of the MEA and Reinforce LatAm Position
There are real implications beyond the numbers. The expanding middle classes that Big Pharma is depending on to drive demand for medicines are taking a hit. Consumer discretionary spending is down, an important indicator in geographies where drugs are purchased mostly out-of-pocket. Governments are trimming subsidies and scaling back investments in neglected health infrastructure, with a ripple effect on incomes felt by physicians, pharmacists, distributors and others all the way down the pharma supply chain. Lower rates of growth are also exposing deficiencies in institutional oversight and good governance, manifested in the rise of an activist, take-to-the streets civil society determined to pursue reform on its own—and on the fly. Institutions of law are still in the adolescent phase, to the point that a well-intentioned crackdown on corruption can quickly become a vehicle for settling political scores. This only yields more uncertainty for investors.

As a result, the narrative has changed. "The buzz about emerging markets has been tempered by a message of constraint. Optimism about long-term growth is still there, but management is being more selective about where they intend to find it," says Noor. Sanofi has abandoned earlier multi-year guidance promising double-digit revenue growth in emerging markets; Pfizer has dropped its revenue projections for 2013 from the high to mid single digits, with "fluctuations due to long-term uncertainties" thereafter; and GSK, while predicting continued solid growth in emerging markets for pharmaceuticals and vaccines, posted turnover increases for the second quarter that put the United States back at top of the league, with a five percent gain compared to only two percent for the Asia (ex-Japan), Africa, Latin America and Mideast regions.

What is now apparent is a stark difference between straight line forward projections of market expansion and the reality of actual historical growth rates in the emerging markets, which are highly volatile. Companies have no choice but to look at the record and be more cautious about raising expectations.

Pfizer also announced last month it was shutting down its business unit devoted to emerging markets, preferring to refocus its businesses there around different therapeutic franchises. It simply confirms the new view that these geographies are far too diverse to be managed as a single segment.

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