Clearing the Emerging Market Hurdles
Despite the long-held promise of the emerging markets, dominance in these territories has eluded leading pharma companies. Hussain Mooraj addresses the ongoing problems and offers a strategy for success.
As markets around the world become saturated, the life sciences industry is becoming increasingly aware that sustained growth may become dependent on an effective strategy for emerging markets. These markets, particularly the BRIC nations (Brazil, Russia, India and China), are increasing areas of focus for life sciences companies due to the potential revenue streams. For instance by 2016, at least one projection is that the four BRIC nations will all be in the top 10 global pharmaceutical markets and will constitute 30 per cent of the top-10 market.
Despite this potential, many pharmaceutical firms have not been able to establish and maintain a major foothold in emerging markets. A glance at the publicly available financials of the top nine pharmaceutical companies reveals that for many of them, no more than 10 percent to 30 percent of their revenues come from emerging markets. Research has shown several reasons for this, from complexities in the manufacturing and supply process to fragmentation of markets and shortage of skilled labour.
Thus, although “expansion into emerging markets” is now a popular topic for boards at many life sciences companies, there is a need for an effective multifaceted strategy to get established, maintain competitiveness and drive profit.
Through our research we have analysed current value chain capabilities in the BRIC markets and identified six main challenges and trends that could help break the impasse for leading pharmaceutical companies.
· Immature logistics and distribution. The distribution value chain in emerging markets is often immature, inflexible and highly fragmented. Take the example of the typical Chinese distribution system that, by western standards, appears complex and restrictive, with many distribution companies operating at all levels. A lot of these distributors are province-based or city-based, and cover a small area of the country. Five primary distribution centres supply more than 200 provincial-level wholesalers, which, in turn, supply around 3,000 local distributors. This system may have the advantage of simplicity, but it can also be highly inefficient.
· Inadequate manufacturing infrastructure. Different emerging economies have very different levels of maturity in terms of their manufacturing ecosystems. A great deal of fragmentation exists among pharmaceuticals manufacturers. In India, for example, no single company has more than seven percent of market share.
· Diverse regulatory environments. Successful expansion into emerging markets depends on a comprehensive understanding of the different regulatory environments of these nations. Approval times can range from about 18 months in Russia to more than three years in China — over and above the timelines for registration in the United States and the European Union.
· Uncertainty in pricing and reimbursement. Although each market employs some combination of free-market pricing and price controls, the level of pricing controls can vary significantly across markets and is, in part, a reflection of local economic conditions and the government’s role in healthcare provisioning. For example, although both Brazil and India have similar market sizes in terms of value, drug prices in India are only a fraction of the prices in Brazil.
· Complex taxation structures. Recognition of the vital role of R&D and innovation has led to the implementation of specific tax incentives in many of the emerging and developed markets. Many local government bodies are trying to attract investments in their regions by setting up tax-free zones and providing access to better infrastructure and resource pools.
· Shortage of skilled talent. As opportunities in emerging markets expand, the competition for skilled talent is likely to be intense, especially in areas such as cold chain management, biologics manufacturing, demand planning and pricing analytics. The support structure to provide a consistent stream of skilled talent is being developed but, at the moment, demand is outpacing supply.
These significant challenges make it vital for life sciences companies to establish and execute a strategy that looks for commonalities across the BRIC markets—commonalities that support cost-effective approaches while also being sensitive to unique market, governmental and consumer attributes within any specific region. Our research recommends the following four-pronged approach that companies should adopt that in order to gain a competitive edge in these markets:
The importance of submarkets and ‘customer clusters’
Any particular emerging market has some diverse segments requiring differentiated treatment. However, analysis of markets in the BRIC countries suggests that customer clusters or submarkets can be identified within a national or regional market based on an understanding of consumers who have common health needs, such as those suffering from a particular disease such as Type 2 diabetes.
By focusing on customer clusters and submarkets, life sciences companies can develop a more detailed understanding of the specific needs of potentially profitable groupings of customers, leading to more effective and customer-centric R&D, as well as stronger marketing and sales strategies.
When developing an emerging-markets strategy, companies should not be constricted in their planning by national boundaries. An approach, which is too focused on individual nations and regions could mean that customer similarities across markets are not being sufficiently leveraged to create solutions that can move across borders.
Global reach with local relevance
Whether in an urban or rural market, it can be beneficial for companies to “think globally and act locally” in meeting the needs of consumers in the BRIC markets. Cities that may be similar in economic strength are often quite different in terms of human capital components such as population growth, working-age population, entrepreneurship, risk-taking mind-set and quality of education.
Understanding these different levels of maturity can give a company an overall assessment of a particular function and also help it understand the drivers that can improve the existing maturity of that function. This more granular assessment can help companies develop more customer-centric, localized solutions.
Effective and rapid execution capabilities
The fourth strategy to consider for potential success in emerging markets in the life sciences ties all the other strategies together: execute the solution across the markets in a timely and cost-efficient manner. Such execution can be a difficult task for life sciences firms, given that many of them continue to operate in functional silos. It is important for companies to create a single, coherent strategy instead of trying to coordinate separate supply chain strategies, commercial strategies and so forth.
Two capabilities are especially critical when planning the rapid execution of an emerging-market strategy. The first involves developing the ability to understand and to get very close to the customer — by leveraging networks and chains of influence so that a market strategy can reach consumers quickly. The second involves companies improving their risk management capabilities to the point that they can take well-considered risks as a means to rapidly seize market share.
It is evident that growth strategies in the life sciences industry are becoming more and more dependent on expansion into emerging markets. A growing middle class in these areas represents an opportunity for life sciences companies to improve the quality of life there, while also improving their own market standing. Companies that are more advanced in areas such as manufacturing infrastructure, logistics, distribution and talent management — and, of course, in understanding consumer needs and behaviors — can gain an edge in achieving high performance.
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