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Whatever used to be wrong with the world of Big Pharma could be fixed with a single tag phrase: emerging markets. Had enough of grumpy, cost-conscious, risk-averse payers and regulators? Consider the vast new opportunities in countries with undeveloped health infrastructure, a largely out-of-pocket payment system and no requirement to negotiate access.
Facing loss of exclusivity on multiple blockbuster products? Fill the gap with high-margin branded generics that benefit from a privileged market position and local infant industry protection.
Too many jaded customers skeptical of more "me too" medicines? Tap that billion plus population of aspiring, middle-class healthcare consumers in Asia, Africa, and Latin America, all with untreated chronic diseases.
And you say you don't have much to show for all those costly investments in corporate reputation? Stand out with imported brands that confer automatic respect because of multinational producers' association with quality, safety, and service—still a hit or miss prospect for drug purchasers in much of the world beyond North America, Europe, and Japan.
The idea that countries classified as middle and lower income could spawn new growth for an industry increasingly characterized as mature is now an ingrained part of the strategy of every Big Pharma company. It's that rare instance where geography itself qualifies as a disruptive innovation. The biggest players—Pfizer, Novartis, GSK, and Sanofi—tout their stake in emerging markets as a trump card in differentiating themselves against the competition, just as a healthy drug pipeline used to do in years past. "Less than a decade ago, no company had a dedicated strategy for these markets," said IMS Consulting vice-president Waseem Noor, in a roundtable discussion with Pharm Exec last month. "It was all opportunistic and short-term, focused on a small elite segment of the local population. Today, you can't be a true pharma multinational if you aren't present in the emerging markets in a big way."
But that first blush of anticipation is yielding to some harsh realities glossed over in all those forward-looking statements to investors. The reality is buttressed by some hard truths:
» There is no prototype "emerging" market; each is distinctively complex, with its own rules and culture of business, an intimate, ongoing knowledge of which is necessary for success.
» Most are "emerging" in name only, having capitalized on technologies first developed in rich countries to leapfrog the time span for new business innovation; in some areas of health services and delivery, like biosimilars, these countries are emerging as market leaders, not laggards.
» Growth, while a blessing, can also be a curse, as exemplified by civil unrest and governance problems spawned by rapid fire social and economic changes that in the West took multiple generations to work through.
The pace of change in emerging markets is making it harder for unwieldy Big Pharma organizations to execute on strategy. For many companies, results have failed to keep pace with projections. And there are signs of overall market fatigue, as these economies adjust to lower global commodity prices and pressure on local capital and currency markets due to the more attractive interest rates now offered on money invested in the United States and Europe. China excepted, real GDP growth is trending flat in the BRICs as well as other standout emerging markets like Turkey; even in China, the official real GDP growth forecast of 7.5 percent for 2013 is only two thirds of what it was two years ago.
There are real implications beyond the numbers. The expanding middle classes that Big Pharma is depending on to drive demand for medicines are taking a hit. Consumer discretionary spending is down, an important indicator in geographies where drugs are purchased mostly out-of-pocket. Governments are trimming subsidies and scaling back investments in neglected health infrastructure, with a ripple effect on incomes felt by physicians, pharmacists, distributors and others all the way down the pharma supply chain. Lower rates of growth are also exposing deficiencies in institutional oversight and good governance, manifested in the rise of an activist, take-to-the streets civil society determined to pursue reform on its own—and on the fly. Institutions of law are still in the adolescent phase, to the point that a well-intentioned crackdown on corruption can quickly become a vehicle for settling political scores. This only yields more uncertainty for investors.
The New Tier 3 Pharmerging Countries Emphasize the Potential of the MEA and Reinforce LatAm Position
As a result, the narrative has changed. "The buzz about emerging markets has been tempered by a message of constraint. Optimism about long-term growth is still there, but management is being more selective about where they intend to find it," says Noor. Sanofi has abandoned earlier multi-year guidance promising double-digit revenue growth in emerging markets; Pfizer has dropped its revenue projections for 2013 from the high to mid single digits, with "fluctuations due to long-term uncertainties" thereafter; and GSK, while predicting continued solid growth in emerging markets for pharmaceuticals and vaccines, posted turnover increases for the second quarter that put the United States back at top of the league, with a five percent gain compared to only two percent for the Asia (ex-Japan), Africa, Latin America and Mideast regions.
What is now apparent is a stark difference between straight line forward projections of market expansion and the reality of actual historical growth rates in the emerging markets, which are highly volatile. Companies have no choice but to look at the record and be more cautious about raising expectations.
Pfizer also announced last month it was shutting down its business unit devoted to emerging markets, preferring to refocus its businesses there around different therapeutic franchises. It simply confirms the new view that these geographies are far too diverse to be managed as a single segment.
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.
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.
The IMS Health "Pharmerging" Markets: 21 is a Charm
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.
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.
The IMS Health "Pharmerging" 21
As the pace of price regulation continues, the danger is a global convergence—in the form of a pricing race to the bottom. China's National Development and Reform Commission (NDRC) is conducting an investigation of production costs and drug pricing at 60 domestic and foreign-based manufacturers to determine whether China, with its relatively low GDP per capita, might be paying too much for its medicines compared to other countries. The inquiry includes a comparison of local prices against those in nine other countries. Adoption of a system of international reference pricing seems a logical consequence once the commission's findings are made public, along with plans to overhaul the drug registration process, later this year.
Overall, finding the "right" price for a product and then securing access to patients is destined to become a bigger headache for Big Pharma in emerging markets. The task is made more complicated by another, little-noticed trend: the majority of the world's poor now reside in a few of the biggest emerging countries—China, India, and Nigeria—that are also becoming richer. Politically sensitive "tiered" pricing schemes vulnerable to price leakage among consumers with vastly different buying power within countries appear to be the only way out of this conundrum.
This makes it more important to maintain a balance in the P&R process overall, by limiting global exposure to price points that reflect the lower level of purchasing power in emerging markets; if you tilt too far toward the latter, it could have a disastrous impact on prices in the rich countries where Big Pharma still derives most of its profits. Industry market access managers must operate in a world where no country wants to pay more: everyone wants to be "average." The risk is that a mishandled pricing strategy in individual emerging markets can drive that average way down. From a strictly organizational view, P&R is one function that has to be managed globally, even if your local management might prefer it otherwise.
Testing the boundaries on patent rights. Just a few years ago, emerging markets were lionized for introducing basic patent protection for biopharmaceuticals, accomplished largely through their ratification of the 1994 WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS). Today, much of that optimism has faded. Industry encountered an early setback in November 2001, when WTO members unanimously adopted a ministerial declaration, on TRIPS and public health, allowing developing country governments to defer certain IP protections (including restrictions on compulsory licensing) in the event of a vaguely defined "public health emergency."
Use of this public health exemption has exploded in the last 18 months, mainly in the form of compulsory licenses that neutralize enforcement of a drug patent and/or compel the transfer of production rights from the originator to a generic competitor. While India remains the chief culprit—local patents have been revoked on products owned by Roche, Merck, Novartis, Pfizer, Bayer, Allergan, and GSK—the practice is now occurring in other countries, including Indonesia, Thailand, and the Philippines. China, which has a compulsory licensing provision in its new IP law but as recently as March said it had no plans to use it, imposed a license in July against the Gilead ARV drug, Viread. The decision has been interpreted as a means to promote local generic alternatives and drive down prices for a treatment that is critical to containing the growing incidence of HIV and Hepatitis B in China.
Due to the uncertainty it creates, this backsliding on IP has a cascading negative impact on the basic "back office" infrastructure required for any country that wants to compete globally on innovation. Foreign patent holders will hesitate to make important seed investments in local clinical trials, also limiting growth prospects for key innovator support functions like CROs. It complicates due diligence in negotiating research partnerships with the local private sector and academic institutions that rely on such links to facilitate basic science and entrepreneurship. Finally, concerns that exclusivity will be violated tends to knock the country down the list in any Big Pharma "go to market" launch strategy, which means that patients wait much longer to get access to the latest treatments.
Pfizer agrees. "The only way to shift the balance in our favor is by showing that patent protection will increase the range of options—from medicines to service platforms and new delivery technologies—required to treat and cure neglected diseases. It's not the entire solution; its just part of the fabric of confidence that clothes the response," Roy F. Waldron, Pfizer's senior vice president and chief IP counsel told Pharm Exec.
China is a good example. A sketchy record of enforcement against patent violators means that, despite an investment in local R&D that now surpasses $1 billion, most foreign drug companies have erected internal "firewalls" that prevent the more promising breakthrough compounds from being tested in the country. The result is that China may be punching below its weight on drug innovation. Most experts believe it unlikely the government will achieve its goal of introducing a new "made in China" biologic to the world market before 2020.
Taken together, these trends suggest that the emerging countries are actually entering a "maturing" phase—some are even beginning to exhibit structural characteristics of the industrialized country markets. Despite a slowdown in economic growth, the ascent of the middle-class consumer interested in obtaining more Western medicines will continue; many of these consumers are also aging, meaning that disease patterns between the West and the pharmerging countries are converging. This in turn will force governments in these countries to seek the same kind of policy solutions to healthcare financing and supply found in the United States and Europe—solutions that by definition will require more overt involvement from drug makers in expanding access to care, and not just for pharmaceuticals.
A key question for Big Pharma in emerging markets is how far it is willing to go in stretching for sales beyond the top tier, to the vaster set of opportunities found in the "middle of the pyramid." Success here requires abandonment of an operating principle that industry used to regard as sacrosanct: that is, we do nothing beyond developing and selling the pill. Instead, expanding sales is going to depend on offering something extra to the customer, the most important element of which is making that product affordable—and hence accessible—to a population base that is still more aspirational than affluent.
Despite having an advanced biologics portfolio that carries a stiff price premium in Western markets, Roche has made significant sales inroads in poorer countries like China, Brazil, and India by following this approach to business development. Struck by the fact that many cancer patients in China had to pay directly out of pocket for medicines they could not really afford, especially for a full course of treatment, Roche recently negotiated a new service model with the global reinsurer giant Swiss Re. With health data, testing and screening tools supplied by Roche, Swiss Re has set up insurance contracts with five Chinese insurers to provide private, reasonably priced individual drug coverage as a supplement to the government subsidized hospital treatment for certain types of cancer. The goal is to have 12 million enrollees in China by the end of this year, a small but still measurable dent in the access challenge that fosters goodwill from the government and other stakeholders while serving as a precedent for something larger in the future.
Roche has also been successful in offering its personalized diagnostics capabilities to narrow the range of patients eligible for its oncology medicines. This has resulted in government-backed funding for its breast cancer treatments in countries ranging from Brazil to India to the Philippines. "What Roche has proved is that there is a viable business in emerging markets for high-end products—the catch is finding innovative purchasing solutions that align with governments and deliver a market where there was not one before," says Guagenty.
You don't think the business of Big Pharma should play any role in healthcare reform? The message from emerging markets is, well, think again. In the end, what is going to make the most difference here is the same as anywhere else Big Pharma chooses to play: reducing that lengthy time to market. You've got to engage to get paid.
And the best way to do that is by adding others to the dance card. "Launching new products jointly with a reputable domestic partner is here to stay as the big differentiator against the prevailing paradigm of offering only your off-patent, late in life-cycle drugs," concludes Les Funtleyder of Poliwogg Investment Advisers.
William Looney is Pharm Exec's Editor-in-Chief. He can be reached at firstname.lastname@example.org.