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It's back to the future in Pharm Exec's second-annual review of industry prospects in the IMS "Pharmerging 17"
There is fresh momentum in big pharma's seismic shift toward emerging countries, with the latest surge looking more disruptive to the industry business model than the early wave of interest around revenue growth. In this second-annual review of the emerging market shock, Pharm Exec surveyed IMS Health and several pharma players to find that industry's vision for these markets is now much larger and ambitious, extending to the global comparative advantage from creating innovative local precedents in how medicines are developed, distributed, promoted, and reimbursed. The battle is on to lock in the loyalty of an enormous rolling wave of aspiring, diverse, and increasingly networked health consumers.
GETTY IMAGES / MACIEJ FROLOW
Pithy phrasing from a software pioneer in emerging markets is equally fit for purpose in Big Pharma today: "We came for the cost, we stayed for the quality, and we're now investing for the innovation."
For companies like Pfizer, which hopes to push emerging market sales as a percentage of total revenues to more than 20 percent from 13 percent over the next five years, the appeal is equally simple. "Sheer growth is the allure, particularly in therapeutic areas like cardiovascular, pain, and anti-infectives which have reached their peak in the mature markets," says Guilherme Maradei, Vice President for Strategy in the company's Emerging Market Business Unit. "It's like gaining a second life for these products. The unmet medical needs we find in the emerging markets gives us scope for improving the lives of patients who previously did not have access to our existing medicines while we also have an opportunity for fresh innovations in how we adapt the science to the patient."
New data and insights provided by IMS Health to Pharm Exec confirm that the trends explored in the July 2009 issue are stronger and more pronounced. The focus then was on just seven "pharmerging markets"—China, Brazil, Russia, Turkey, India, Mexico, and South Korea—that were forecast to drive industry growth to 2020. IMS has now expanded this list to 17 countries, whose growth rate in medicine sales over the next three years will comprise about 50 percent of global market expansion. By 2014, IMS predicts the "pharmerging 17" will match the size of Europe and Japan combined, adding $140 billion of incremental sales, with China occupying a class by itself, replacing Japan as the world's second-biggest market for drugs after the US by 2016 (see chart).
Rising levels of healthcare access and funding, and the changing mix between generic and innovative products are contributing to the market realignment. In the latter case, patents are expiring at an accelerated rate without a compensating flow of new innovations, allowing cheaper generics to expand their reach in the US and Europe. The trend line may even be more pronounced as prices in Europe contract sharply due to high government deficits. Surprisingly, most emerging markets are in far better financial condition, with rising personal incomes, minimal entitlement exposures, and lower levels of public debt. The large personal out-of-pocket segment in the pharmerging 17 is another factor that softens the impact of patent losses on the ability of companies to price to the market.
While the numbers alone suggest high potential for growth, the landscape for emerging markets is not uniformly fertile. Improvements in IP enforcement and a commitment by many governments to upgrade product regulation must be balanced by insular industrial policies that favor local producers, particularly in generics. Patients still carry much of the burden of healthcare spending, which requires customized investments around willingness and ability to pay for innovations.
More important, government interest in the sector, while largely positive, could lead to price controls and the adoption of European-style measures to limit the overall size of the drugs bill. Turkey is emblematic of this trend, having imposed earlier this year a new pro-generic pricing and reimbursement regime that will cut market growth to around 5 percent through 2013. "Uncertainty is a killer for investment in any market, and unfortunately the emerging bloc is not immune. Turkey made its reforms with little notice and minimal consultation and as a result industry expectations for the market have dimmed considerably. Actions were taken in isolation of the impact on the country's future as a global competitor in innovative pharmaceuticals," says Jeff Kemprecos, Public Affairs Director for Emerging Markets at Merck.
To help companies clarify the level of opportunity in each market, IMS has produced a new global analysis that separates out the mature markets (those with a per capita GDP threshold of $25,000 or higher) and then groups the pharmerging segment into three tiers based on each country's minimum anticipated added value to the total pharmaceutical market between now and 2013. IMS Market Prognosis evaluations were also used to provide a broader policy and horizon-scanning context.
With a GDP of $7.9 trillion in 2008—third-largest in the world—and a pharmaceutical market that is expected to drive $40 billion in growth through 2013, China, as Tier 1, occupies its own space in the rankings. An increasingly affluent population of 1.3 billion is raising pent-up demand for healthcare, and drugs to treat chronic diseases and manage a looming transition to a much older society are keys to meeting the need. At the heart of China's healthcare transformation is a comprehensive $125 billion investment to provide basic health insurance coverage for all citizens by 2011. Massive investments are also under way in health infrastructure, particularly outside the major coastal cities. These moves, which presage a much stronger government hand on the health till going forward, is forecast to double the size of the pharmaceutical market by 2013.
The growing role of government in healthcare does carry possible downsides. Ray Hill, IMS Senior Vice President for Consulting and Services, told Pharm Exec, "Public reimbursement rules around the essential drugs list will lead to more government scrutiny of pricing by foreign multinationals. Companies ought to be figuring in their operation plans a possible 20 to 30 percent contraction in margins for products on the essential drug list sometime in the next two years, due to pricing reform." Interestingly, however, the fact that India is not moving closer to a subsidized reimbursement system has led IMS to conclude that growth there will lag the potential indicated by its population size and income expansion. "India shows the trend can work both ways," said Hill.
Brazil, Russia, and India are each expected to add $5 billion to $15 billion to the pharmaceutical market through 2013. Prospects aside, balancing the relative benefits and risks of these markets will be paramount to developing a clear position for successful entry or expansion.
Brazil has achieved consistent double-digit pharmaceutical growth over the last few years, growing to 20 percent in 2008. The market benefits from a high percentage (85 percent) of city dwellers, where access to medicine is higher, public health insurance covers around 90 percent of the population, and there is increased uptake of supplementary private health insurance. However, out-of-pocket healthcare costs are high, and income distribution is poor, limiting the number of people who can pay for innovative therapies. The local environment has seen a number of recent changes, including growing competition from generic medicines, increased government investment in state-owned pharmaceutical plants, and greater emphasis on cost-containment initiatives which tend to favor local companies.
The Russian market has also experienced high double-digit growth in recent years and offers potential from increased private insurance and reimbursement. Physician education is improving, although poor knowledge of prevention, diagnosis, and treatment at primary care level and the overall lack of clinical standards and guidelines still impede successful management of chronic disease. High out-of-pocket prices, increasing government influence over drug prescribing, and powerful lobbies in favor of local manufacturers are also a feature of this market.
In India, a number of recent developments have helped foreign drug investors, not least of which is the establishment of intellectual property rights (IPR), as well as a rising middle class, emerging rural markets, and improvements in medical infrastructure. The worry is the dominance of local generic firms and lack of enforcement of IPR regulations. Competition from copycat generics and low-cost biosimilars are also problems, which is accentuated by the absence of a transparent drug approval process.
Following behind the Tier 1 and Tier 2 markets are a group of 13 far-flung nations ranging from Argentina to Vietnam. Generating GDP of under $2 trillion in 2008, with an anticipated cumulative contribution of $1 billion to $5 billion to global drug sales through 2013, these lesser-known pharmaceutical markets offer rich opportunities for growth.
Romania, for example, has been a consistently high-performing market relative to its Central and Eastern European peers and is currently growing at nearly 23 percent. Notwithstanding a reduction in the healthcare budget and challenging new price regulations, a number of major changes will positively impact the pharmaceutical sector over the next few years. These include improvements in public hospital quality, increases in health insurance contributions, healthcare decentralization, expanded reimbursement for pensioners, and healthcare screening for chronic diseases.
Although highly fragmented and with ongoing concerns over drug registration and IPR protection, Vietnam is also attractive. There are expanding opportunities in the over 65-year-old patient category, an enlarging private insurance market, and increased public funding that will boost growth in the hospital sector. Egypt, too, while long overdue for increased healthcare investment and tighter IP regulations, offers rising potential, with a fast-growing population, widespread access to healthcare, significant growth in the dominant retail market, and a relatively quick drug approval process. And
By and large, however, most global drug companies remain underexposed and underperforming in the pharmerging markets. In 2009, the top 15 pharmaceutical manufacturers derived just 0.9 percent of their combined sales from China; 2.9 percent from the Tier 2 markets of Brazil, India, and Russia; and 5.6 percent from the Tier 3 markets. In many cases, this reflects a continued focus on the premium section of the market rather than the typically larger-branded generics segment, where margins are lower. This is beginning to change, with some manufacturers now deciding to operate in the generics sector.
Over time, IMS predicts a big swing in industry revenues to the 17 pharmerging markets as they continue to gain share at the expense of the US and the top five European markets. Much of this will be volume growth, and the impact will be most pronounced in the short term. In fact, IMS expects a resurgence of growth in the mature markets by 2015 and beyond, with the US leading the way (see chart). The worst of the patent cliff will be over and new product introductions will help address a growing array of unmet medical needs that insurers will be more willing to pay for.
Assuming the IMS forecasts pan out, there is a premium on companies finding the right strategy. A Pharm Exec discussion with IMS anslysts on July 2 as well as feedback from key pharma players revealed seven basic principles that will help drive success in emerging markets.
There are clear advantages for the decisive early movers. Companies that take the lead in market entry can often reap the benefits of more discernible differentiation and better key opinion leader relationships, compared to those who choose to wait. Bayer AG is a good example, having picked early on two emerging markets (China and Turkey) as the focus for its investments and then pouring in the resources to secure double-digit sales growth in each. Superior local execution and a stable senior leadership team have also played an important role in Bayer's performance.
Competition for space in the emerging markets is getting intense, and the choice is to build or buy market share—which, in turn, requires a substantial resource commitment. Examples include the Sanofi-Aventis acquisition of generics manufacturers in Brazil (Medley) and Mexico (Kendrick), making the French company Latin America's market leader. Similarly, GlaxoSmithKline's expanded partnership with Aspen has paved the way for increased access to the wider African market. Novartis has committed to major investments in China, including $1 billion on R&D, and is investing heavily in R&D capabilities in Brazil. Last month, Merck announced a major joint venture with local Chinese manufacturer Sinopharm to collaborate on vaccines and other portfolio products the company does not yet sell in China.
No defined strategic blueprint exists that can be applied uniformly throughout the emerging market universe. The IMS statistics make this very clear. There are profound differences in the structure of healthcare, the position of various stakeholders, the capacities and expertise of governments, and the culture of medical practice. Geographic variations in development and urbanization are another important, often overlooked factor: internal regional differences can loom as being more important than contrasts between the countries. Regional and city-based strategies have to be carefully tailored to take account of these differences. Similarly, disease profiles, treatment paradigms, and diagnostic rates in the pharmerging markets are not only different from those of the major developed countries but also carry subtle distinctions between the various tiers. Differences in key market segments, including the role of generics, are a further challenge.
Finally, competition in pharmerging markets is also different to that in the mature countries, with power often in the hands of local companies who know the operating environment. While the large multinational pharmaceutical companies have no doubt increased their presence in China, they continue to be outnumbered and outperformed by local manufacturers with their strong geographic reach, wide distribution networks, flexible promotional methods, and close engagement with local governments and hospitals.
Because local competition can be intense, companies must strive to differentiate their offerings, relying on the global portfolio of medicines that with some effort and ingenuity can be adapted to local conditions. Pfizer has found success by building scale while maintaining strict criteria on what it will introduce to the market. "Our core focus is on select products that we can show have been proven scientifically superior to the current standard of care," says Maradei. "It includes not only innovative treatments, but generics, where we can demonstrate that superiority against local players through our quality guarantees and more reliable product supply."
Bayer also emphasizes a targeted portfolio approach. In China, it opted to invest continuously over time in mature products for diabetes (Glucobay) and hypertension (Adalat). The company has been able to achieve a dominant position in these high-growth therapy areas and now derives 3 percent of its global revenue from China.
Another tactic is fostering customer loyalty around the portfolio. In the Philippines, IMS helped one big pharma company devise a strategy to deploy a bundle of useful supplementary services, such as free blood tests, for an infusion product where patients undergoing treatment were subjected to substantial down time. These "loyalty programs" can make a big difference in capturing what is in many emerging markets a fragmented, unorganized, and still evolving customer base.
Identifying who your customer is may sound elementary, but in many emerging markets it is the most difficult task of all. Alignments among the trade are not obvious and it is often counterproductive to hold fast to the traditional perception that the physician is key to purchasing decisions. While this may be true for the very top tier of the market, the physician is frequently irrelevant when companies begin examining how to extend medicine's access to a larger population. Plugging this gap raises the question of whether it is better to build customer relationships from scratch or to in essence purchase the expertise through local acquisitions.
Marcos Macedo, IMS Practice Principal for Brazil, notes that much of his work today focuses on helping companies understand changes in the local stakeholder environment, with particular emphasis on who is actually making decisions on prescribing and access. "Brazil has a strong out-of-pocket business and a reimbursement-based segment that is rising in importance. In both cases, decision-making power is moving from the physician to the trade, which means companies are facing players more willing to choose among alternative therapies, [so] it's more important than ever to pitch the value behind the brand," says Macedo.
Another key challenge is building a pricing strategy that accommodates the complexity of the purchaser community in emerging markets. It is compounded by a lack of transparency in how basic decisions on pricing are made, with insider status often deemed to be more important than technical competence. The impact of the informal economy on demand is another intangible. And Big Pharma has to accommodate the growing reliance on international price referencing, where low prices accepted in one country can carry forward to depress margins in larger markets.
There is also more complexity within a company's own portfolio, led by the question of how to skew the traditional reliance on premium-priced innovations against the new investments being made in branded or commodity generics. Do you sell a new innovation through a generics subsidiary that has an established local presence or build a firewall between them? Or is contracting through a third party a better—if more costly—option?
Making the right choice can spell the difference between a successful launch or the unrecoverable loss of an entire segment of the market. Says IMS Senior Principal Adam Sohn, "The strategic implications around pricing are critical. A low-price strategy means you have to grow on the basis of volume, at rates significantly faster than your price discounts, in order to ensure that profits will continue to rise. This means that regardless of whether a company moves from a branded focus to a branded generics or even a fully commoditized offering, it has to capture new sales from the next level of the population to achieve those operating efficiencies and be commercially successful." Pricing is thus the entrée to access, much more so than in the US and Europe.
According to Pfizer, the best way to address this complexity is through careful analysis. "We work extensively to identify countries with the strongest institutional safeguards that allow for tiered pricing and other tailored, flexible approaches to establishing the value of our medicines while also meeting the needs of different customers. Government engagement is vital to avoid price leakage," says Sandeep Duttagupta, Pfizer's Emerging Market Business Unit lead for emerging market access.
The focus on value also serves as a rich incentive for the kind of process and program innovations that help to widen access to care—and can be applied globally. Adds David Campbell, Senior Principal for IMS Health, "Companies in emerging markets have little choice but to be innovative in their value propositions because the institutional supports for establishing that value are still weak. People want better healthcare and now have the disposable incomes to obtain it; but in contrast to a purchase from Nike, you don't wear the drugs you consume on your chest."
Attracting and serving this wider base of customers is fundamental to the potential of emerging country markets as a source of future industry profits. With income levels still likely to remain low in comparison to the mature markets, profitability will depend more on volume growth rather than high prices. Customizing distribution to serve hard-to-reach rural populations, packaging and discount specifications linked to income and ability to pay, and partnership affiliation programs for pharmacists and other key non-physician influencers are examples of the innovations needed to prevail. In Latin America, Novartis and AstraZeneca have taken on this strong service orientation by introducing customer service cards to increase prescribing rates.
One of the pitfalls of previous efforts to target these markets was ad hoc engagement, with companies (US-based pharma in particular) dipping in and out of countries as dictated by short-term headquarters priorities. This was emblematic of a centralized management style, with functions arrayed into silos and with little awareness of the need to build specialized skills appropriate to the distinctions that bear between mature and emerging countries. Strategy as well as execution was directed from the center, especially in sensitive areas such as pricing.
The best companies are now abandoning this approach in favor of more autonomy for each emerging country in managing its business, from product portfolio to pricing. Portfolio analysis is now a critical function as companies discover how to refit old branded products, often sold exclusively in one country, for their sales potential elsewhere.
Local leadership is more empowered to make decisions without extensive vetting, while the heads of key markets now report to the C-suite—even to the corporate CEO himself. Detailed instructions are giving way to a generalized mandate focused on change management. The president of one emerging market affiliate told Pharm Exec he operates on the basis of only one vague bullet point directive from his headquarters: "Find the wealth that is somewhere."