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.
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.
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.