The days when emerging countries were viewed by pharma as places to be colonized and exploited for growth are long gone. Nick Stephens argues that success in these territories is now reserved for companies that produce better, faster, quicker, and more cost effectively in an increasingly demanding and competitive marketplace.
The future of the life sciences industry lies in the emerging and growth markets, but not in the way that many imagine. The bottom line is that there is insufficient money in emerging and growth markets to buy medicines at prices that will sustain traditional pharmaceutical industry margins. The industry will have to learn how to innovate better, trial quicker, regulate faster, develop and manufacture more cost effectively to allow the distribution of more affordable products.
We live in interesting times. Influential themes include the practice of open innovation, stratification and all it entails in terms of drug diagnostic combinations and personalized medicine, plus new concepts of wellness and outcomes-based payments. The one thing missing from this cornucopia of new sciences and markets are the Asian solutions, and that’s what I’m looking for. But first the concept of wellness; it is self-evident that prevention is better than cure. Vaccines clearly play an important part as do nutrition, diet and personal behaviors of other kinds. Making wellness a priority, combined with outcomes-based payment is clearly the best way forward for people and for governments. It’s also a major challenge for pharma but it could ultimately provide the wherewithal to maintain and grow shareholder value.
Here’s an interesting question: The World Health Organization (WHO) estimates that over 60% of world’s heart patients live in India, where the incidence of high blood pressure and cholesterol is rising on a diet of Western foods. Given the fact that oats are good for the heart and have been shown to reduce cholesterol by 7%–10% (as compared to 20%–30% for statins), would it make more sense to have a broad population eating more oats or to spend money on a small proportion consuming statins?
PepsiCo India manufactures Quaker Oats and was not slow to spot the opportunity. A nationwide ‘Make India Heart Healthy’ campaign included a website http://www.goodmorningheart.com, where visitors can take the ‘Quaker Heart Health Test’ and get special offers, health tips and a free Quaker trial pack. In the first four months, over 160,000 consumers took the test, 100,000 downloaded a mobile heart health application and the sales of Quaker Oats increased 74%. The Quaker Oats story shows how to leverage opportunities around outcomes. Whilst Pepsi saw the usual erosion of margin that comes with a huge expansion of market, by overlaying some of their innovation from India onto their existing businesses in the developed world, margins increased substantially and with them, shareholder value. The biopharmaceutical industry can do the same and we see some signs of businesses learning from the ‘Made in Asia’ experience.
End of Empire
Pharma is recognizing the value it has captured by investing in clinical trials: an unparalleled understanding of diseases and patients and how to treat them. A potential mistake for the industry to make would be to believe that all of its value is locked up in its intellectual property; far from it — a large part lies in its understanding of diseases, patients and outcomes.
Historically, parts of the industry were living in an imperial past where emerging countries were viewed as other markets to be colonized and exploited for growth and a second life for products that had peaked in mature markets. Fortunately, the world and the industry have changed and instead of colonies there exist new markets and new competitors. Those that will best prosper will be the ones that have learnt how to produce better, faster, quicker and more cost effectively.
The emerging market potential is enormous, with industry analysts suggesting that it is on the way to $140 billion of incremental sales and a market size that matches Europe and Japan. Some 50% of global market expansion is expected to come out of emerging countries. Given the scope of this opportunity it is surprising that by 2009, the top 15 established pharmaceutical companies had failed to register any significant market share in China (0.9%) and the Tier 2 (2.9%) and 3 (5.6%) countries.
One path to success is to enter a market early with commitment and to leverage your portfolio while adding local value. Bayer has done this in China and Turkey with a focus on diabetes and hypertension. A rather more visionary approach might be to create local precedents in how medicines are developed, distributed, promoted and reimbursed. A software pioneer summed this up with: ‘We came for the cost, we stayed for the quality, and we’re now investing for the innovation’.
Back in 2010, Pharm Exec editor-in- Chief William Looney suggested that the visionary approach to the market is all about defining and educating the customer, a realistic pricing strategy and service innovation.
What companies needed to focus on was innovative value propositions, serving a wider customer base, volume over prices, and customized distribution. If this is the case then we can learn something from consumer product development and marketing. The Quaker Oats story is a case in point and the story of Pepsi’s Lehar Chusti is another.
Iron in Lehar Chusti
In 2011, PepsiCo India launched a major education program on iron deficiency and the part that it plays in anaemia. It covered 250 towns and villages across coastal Andhra Pradesh and on into Maharashtra. As one team was talking to school children, another was talking in parallel to the trade about a new vitamin-fortified beverage Lehar Gluco+ and an associated snack, Lehar Iron Chusti.
PepsiCo’s goal was to test-market affordable products that fulfill a health need for consumers at the ‘bottom of the pyramid’. Geetu Verma, Pepsico’s director for innovation says that is all about ‘scoping out the next billion consumers at the bottom of the pyramid. What are the gaps? What are the offerings? And what’s the business model required to reach these consumers?”
The process started with opportunity mapping around a fixed price point of between two to five rupees. The idea was to work backwards to create products that did more than just tackle hunger and thirst. The team found that 55% of Indian women were anaemic and most of them were unaware that they suffered from the condition. So what they came up with was a new health drink and snack with an associated health education program.
Apart from the products and pricing, test-marketing the new drink helped PepsiCo to formulate go-to-market strategies, work out how to leverage the network to pull the product through the system, and optimise manufacturing and distribution. A team from the US went to India to find out how they did it and then took these lessons back to US and Europe to implement and bring a leaner approach to the business.
Stronger with Horlicks
Many countries are investing in health insurance for their citizens, all are looking to limit the size of their drug bills, and each poses individual challenges in terms of go-to-market strategies. Add to this strong local competition and you have a very large but fiercely competitive and demanding marketplace. Adapting to these markets can make established pharma stronger and the lessons learnt there may prove the key to maintaining margins across the business.
It is certainly incredible to think that the price of another iconic health food brand, Horlicks, in India, is less than the cost of the empty jar in Ohio. Despite this it has become the brand leader in the £220 million Indian health food drinks market. And alongside the incredibly efficient manufacturing and distribution operation, is the recognition that outcomes are the key to growth and success. It was only really in 2005, when the company published the results of a clinical trial which claimed that children who consumed Horlicks were “taller, stronger, and sharper” than those who did not, that the brand really took off.
So for those looking for a similar growth spurt, I would suggest that a combination of lean production and a focus on outcomes are key ingredients for success. What is certain is that the days of the empire are over. In today’s global marketplace, it will be the companies that learn how to deliver effective outcomes at an affordable price for what Ikea calls ‘the many people’, who will prosper.
About the Author
Nick Stephens is CEO of RSA, a global life sciences executive search and interim management specialist.