Crunch TIme for Emerging Markets - Pharmaceutical Executive


Crunch TIme for Emerging Markets

Pharmaceutical Executive

Game changers

Pharm Exec's roundtable exchange with the IMS Health team as well as other experts identified a number of additional factors that are helping to push the reset button on Big Pharma strategies for the emerging markets.

Real institutions—with the power to drive resource decisions on health—are taking root. As their economies expand, emerging markets are increasingly in a position to set their own public health and disease priorities. Brazil is a good example, with its selective government policies that provide 100 percent public reimbursement for medicines for the treatment of HIV and hepatitis C, while most other medicines must be obtained from private insurance or out-of-pocket. There is also the close involvement of Brazil's major public health institutions in industry development of a vaccine for dengue fever, a near-endemic disease in Brazil, a cure for which could generate enormous health savings.

Almost every emerging market country has adopted a comprehensive plan to guide development in the health sector, the common feature of which is promoting eventual universal access to basic health services. The WHO tagline "Health for All" is the unifying theme, but the larger driver is the idea that health creates wealth.

This more overt public engagement, along with the choices being made by a more affluent and informed patient community, will transform investment opportunities in emerging markets, in many therapy areas. As local health infrastructure matures, Big Pharma will need to make tough choices on where to focus its efforts—now, before it is too late. It certainly will not work to continue the previous path of touting a few costly imported medicines that attract negative attention because only a fraction of the local population can afford them. "The advantage is to companies that create a locally appropriate portfolio of products, with an aggressive commitment to be number one in each therapeutic category, against those that simply decide to adapt what's already in their global asset set," said Sydney Clark, IMS Consulting group vice president based in Latin America. "It won't work to build a business by repurposing the global pipeline—that's like trying to put a square peg into a round hole."

Business blunders can go viral very fast. Commercial transactions in emerging markets are not transparent and are poorly understood even by locals with years of experience. Interlocking group dependencies rooted in personal relationships often matter more than official rules or legal safeguards, so keeping a "nose to the ground" is a vital skill for foreign investors wanting to stay out of trouble.

In many cases, however, the sheer density of these relationships makes this task very difficult. In Brazil, for example, the local drug distribution system is larded with so many intermediaries that it is hard for anyone to track exactly what is going out to the marketplace. Earlier this year, Sanofi discovered this fact when its local management responded to an imminent rise in the VAT paid directly by consumers for medicine by forward-selling huge amounts of inventory that, instead of meeting demand, overwhelmed it. The miscalculation resulted in a bill of nearly $300 million for unsold, returned, and expired products. The loss affected the entire company, forcing it to take a charge that cut €0.17 per share off corporate earnings for the second quarter.

CEO Chris Viehbacher attributed the Brazil setback to "bumpiness in the trade channels" but the big lesson here is how emerging markets can impose stiff penalties on the unwary. As Ansis Helmanis, Principal of RegLinks LLC, told Pharm Exec: "The firetraps can come from anywhere, because in these markets no one but you, the investor, is in charge. Is it any wonder that corruption is endemic in China when there is no effective institutional control over the promotional practices of a pharma sales force that is now the second largest in the world?" Another prerequisite is knowing the most about the customer base, which begins with an understanding of each stage of the patient's journey with your ­medicines.

The IMS Health "Pharmerging" Markets: 21 is a Charm
Local competition shifts global. Emerging market drug companies are taking the blinders off and extending their reach beyond the home market, relying on partnerships, licensing, and M&A activities to acquire technology and know-how from the Big Pharma multinationals. A case in point is Aspen Pharmacare, South Africa's largest generic drug-maker, which has sealed deals with GSK and Merck to acquire underutilized manufacturing capacity in Europe as well as products that appeal to customers beyond its current geographies. Likewise, EMS, Brazil's biggest drug company, is increasing investment in R&D and exploring stakes in research projects conducted by academic institutions in the United States, with a particular focus on new therapies for senile dementia. Due to the increase in life expectancy, this is becoming a leading cause of death and disability in Latin America.

Another milestone occurred in June when a small Indian-based drug firm, Zydus, obtained final regulatory approval in India to market a new combination therapy, Lipaglyn, for high cholesterol and the high blood sugar associated with type 2 diabetes. Zydus management touts the drug as the first original patented medicine intended for the global market to be discovered and developed entirely in India, by an Indian company. At the same time, however, many other Indian companies are abandoning their home base due to unpredictable ­pricing rules and controls on investment capital; one of the country's largest generics producers, Lupin, now derives nearly half of its global revenues in the United States and is actually repositioning itself as a virtual US company, with a new CEO based in Baltimore, MD.

The implications of these moves for Big Pharma are twofold. First, it reinforces the need for a permanent visible presence, on the ground, in emerging markets. Companies there are poised to grow from a lower—and different—base and thus serve as a window on the future of global competition, most prominently as a source of product and process innovation. Today, few, if any, of these local companies can carry an identifiable pharma brand beyond their own borders, but that is likely to change over time. Also, many have a common feature in being family-owned, which avoids all that shareholder baggage and makes them faster than Big Pharma in seizing opportunities.

Second, the greatest benefit will accrue to companies that find the right way to partner with local market leaders. "Smart companies are using joint ventures with domestic players as part of a new business model, using them to create go-to-market strategies with a lower cost structure. With a strong local partner, you can manage the economics of going broader into the marketplace," says Matt Guagenty, IMS Consulting group vice president for APAC and China. A good example is Pfizer's new joint venture with a leading Chinese generics company, Hisun, which will help expand the product portfolio in therapy areas where Pfizer is weak while lending sales and distribution muscle to penetrate those second- and third-tier urban centers—China has some 160 cities with more than one million people—that represent the next phase of market growth.

Industry price and access regulation is morphing—at warp speed. Early on in the emerging market gold rush, it was assumed that these governments would take many years to build the capabilities found in mature markets on controlling access and rewards in the medicines trade. But technology and communications improvements are such that regulators in emerging markets are closing the gap. This is particularly evident in pricing and reimbursement, where pharmaceuticals are easy to target, as a highly visible element in the health distribution chain. The issue is also politically sensitive because in most emerging countries pharmaceuticals comprise an uncomfortably high percentage of health spending—upwards of 40 percent or more of the total, compared to less than 20 percent in the industrialized countries. The rationale for action is simple: if countries want to build and finance a modern, integrated health system, then the share of spending on drugs has to fall.

The bump up in regulation is evident in a number of areas, including the application of domestic competition law to limit pricing freedom in South Africa; adoption of reference pricing in Vietnam; preferential access treatment based on local production commitments in Russia; discriminatory misuse of WTO GMP certification standards to delay foreign drug registration in Turkey; and a requirement for proof of cost-effectiveness for public drug reimbursement in Brazil.

Emerging governments are also obtaining support from their mature market counterparts eager to share best practices in regulation. Cross-border chatter is increasing. One example is the MOU signed in June between India's Department of Health Research and the UK National Institute for Health and Care Excellence (NICE) to help India establish a national health technology assessment (HTA) board to review the cost-effectiveness of new drugs. The transfer of expertise through this kind of de facto consulting contract is actually becoming a source of income for NICE and several other Western regulators. "Everyone is sharing this economic evidence. Cost effectiveness studies right now are simply nice to have as part of the reimbursement process, but in three years time we think it's going to become a requirement to obtain access in most emerging markets," Cem Baydar, IMS Consulting's senior principal based in Turkey told Pharm Exec.

The IMS Health "Pharmerging" 21
In addition, two of the biggest emerging markets, India and China, are moving to end their historic protection of the profitable branded generics segment, a special focus for Big Pharma as it looks to extend the geographic range of its large inventory of off-patent medicines. India is adopting a plan to require licensing of generics only by their WHO INN name rather than by company brand. China is phasing out price preferences for products that date back to the time when the country did not offer patent protection for drugs, and are now off patent. It is also expanding price controls on a list of more than 300 drugs deemed essential to public health that includes patented and branded off patent products.


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