Emerging Markets:The Myths and Traps - Pharmaceutical Executive


Emerging Markets:The Myths and Traps

Pharmaceutical Executive

Myth: We don't need to worry about local competitors. Local incumbents are smaller than their multinational competitors and generally have inferior capabilities in areas such as R&D. Yet many local competitors grew up in the generics sector and are defending their home turf effectively against large multinational players. In fact, while many multinationals trumpet relatively high growth rates in emerging markets compared to core developed markets, they are generally growing slower than these markets overall and are losing share to local players. Local players continue to displace global pharmaceutical players, especially in state-run auctions for products without patent exclusivity. These local players can source API from India and China and manufacture and package locally at considerably lower cost. Furthermore, if we look at the evolution of other industries, where low-cost local players have emerged over time as regional or global leaders, it would be a mistake to exclude local competitors from serious consideration.

To give one example: While multinationals lead the Mexican market in absolute local sales, the five fastest-growing companies are all local players. Locals can also provide key partnership opportunities, enabling multinationals to learn the nuances of markets and to access workable models for mass-market segments.

Myth: We won't face the access and trust challenges we face in developed markets. Many players have pursued a very aggressive commercial model in emerging markets, which seems to be predicated on the assumption that access and cost control challenges, which have increasingly constrained their businesses in Western markets, will not be an important factor. In fact, access is shaping up to be at least as important in emerging markets. While China has an attractive, growing segment of wealthy urban patients who are either insured or willing to pay out-of-pocket for innovative pharmaceuticals, most patients are served through China's basic healthcare system.

As part of this system, reimbursement lists and price caps are set by central bodies, but can be adjusted at the provincial level. And at the local level—an expanse that includes about 10,000 hospitals and clinics—local reimbursement policies are used to control the usage rates of top-selling drugs. It's not an easy course to navigate, and success requires multinational pharmaceutical players to negotiate a complex tendering process with each hospital. Price controls can also have a significant impact on the attractiveness of the opportunity. China's National Essential Drugs List caps the prices of about 300 drugs and India is following suit by revising its National List of Essential Medicines to include about 300 bulk drugs and nearly 600 related formulations under government price control. It is therefore advisable to test growth plans for robustness at low equilibrium price points and to consider the parameters of business models which would be profitable even at the low end of plausible prices.

Global pharmaceutical companies should also prepare to face intense scrutiny over product quality and authenticity. This increases the importance of choosing local partners wisely and managing supply chains tightly, to protect precious corporate reputations and trust. Thus, penetrating emerging markets requires sophisticated, on-the-ground knowledge and investment in science policy, pharmacoeconomics, healthcare policy, corporate responsibility, and other capabilities to ensure that players emerge as trusted insiders, contributing to national health priorities, with accessible offerings and undisputed value.

Myth: Emerging markets can be run effectively from Western headquarters. As emerging markets have risen in strategic visibility and priority, there has been a shift in the management model from a relatively hands-off approach for a heterogeneous portfolio of markets, to a more deliberate and centralized model. But given the specificities of each market, their rapid rates of evolution, the intrinsic ambiguity and uncertainty of their development, and also the importance of the political dimension, the pendulum may have swung too far.

To build a viable presence in these countries, multinationals must have a well-defined approach for identifying, developing, and retaining local talent, reinforced selectively with expatriate appointments. Some pharmaceutical companies treat emerging markets' management roles as short-term leadership developmental opportunities. While these rapidly changing markets may indeed be an effective leadership development laboratory and the excitement of an 18-month international posting is an effective talent retention tool, if companies are serious about establishing a long-term presence, they must systematically attract and integrate top-notch local management talent and take a longer-term view.

It is also important to establish longevity in local market relationships. It takes time to build the same level of relationships and credibility with regulators and customers that local pharmaceutical companies have worked for decades to establish. It also takes local knowledge to identify whether partners are needed, and if so, which ones are the right ones. Many local emerging markets' pharmaceutical players are family-owned, have a long history of operations, and compete with multinationals for top local management talent.

Finally, pharmaceutical market data providers do not provide audited data for the entire market and, in some cases, overlook major rapidly growing market segments. For instance, in Mexico, Walmart purchases significant volumes from local generics players. Such elements are not reflected in widely accepted market data. These insights are easy to miss without a sophisticated on-the-ground presence and knowledge of market dynamics.


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