The rise of developing markets has been a defining feature of the global economy in recent times. Emerging markets now contribute to more than half of global gross domestic product (GDP). When it comes to healthcare, developing economies are expected to experience double-digit growth and account for 30% of global pharmaceutical spending by the end of 2016.
Pharmaceutical industries in the US and Europe are now experiencing a growth plateau as companies struggle with expiring patents, and regulatory roadblocks attributed to significant reduction in healthcare funding by governments. Emerging markets have now surged ahead of the EU5 with regard to pharmaceutical spending. The total market size of the pharmaceutical industry in emerging markets has risen to USD 281 billion, in comparison with EU5’s USD 196 billion in 2014.
However, pharmaceutical companies are faced with unique challenges in terms of supply chain operations, manufacturing processes, and regulatory requirements which are vastly different from that of developed nations.
The key to a profit-oriented pharmaceutical expansion to BRIC-MT countries is for organizations to understand the inherent differences persisting in emerging markets, the landscape of governments, regulatory and policy structures of each country and more specifically, each region, where the company seeks to expand.
2. Why major pharma companies are looking to emerging markets for growth
Western pharmaceutical markets are becoming challenging from a growth perspective, with governments implementing austerity measures to curtail healthcare expenditure. The risks associated with developing and researching innovative products for regulated markets are on the rise. To tackle these challenges, pharmaceutical firms are now committing resources to explore emerging markets as a means of sustaining growth.
“Pharmerging” nations like China, Brazil and India will drive nearly half of the growth in pharmaceutical industry in the near future, making them attractive markets for life science firms. According to a recent report by the IMS Institute for Healthcare Informatics, demand for drugs in emerging markets will see a compound annual growth rate of nearly 11%.
Drug spending is witnessing an upward trajectory growth in emerging markets with an increasingly ageing and affluent population, and a growing middle class with greater disposable income to spend on healthcare. The shift from rural menial labour to skilled labour in emerging countries has contributed to greater inflow of population to cities, and a sedentary lifestyle for the masses, giving rise to high levels of public health problems related to chronic diseases.
The rise in China’s GDP has mirrored across different sectors, with substantial increase in public infrastructure and healthcare.
The Chinese government has increased budgetary allocations to as much as 7 percent of overall gross domestic product (GDP) by the year 2020, compared with 5.5 percent, or US$350 billion, in 2010.
The healthcare sectors in other emerging countries are also poised for growth, leveraging the trend of economic expansion and governments’ focus on welfare policies for the people that are more inclusive in principle.
3. The current state of play
The life sciences industry is experiencing a frenzied period of M&A activity, as companies seek out cross-border acquisition deals for gaining multinational reach and easy access to new product pipelines. The first half of 2015 witnessed $164.3bn worth of deals – an increase of almost 53% on $107.5bn in the same period of 2014. The second half of 2015 continued the trend with a burst of new transaction announcements.
According to a recent survey of 100 senior executives (CEO, CIO, Director of Strategy) in biotechnology and pharmaceuticals companies by Mergermarket, nine out of 10 life sciences businesses expect to explore the possibility of an acquisition in the course of the next year. In terms of geographies, life sciences companies are
looking towards the APAC region for acquisitions. The region’s large population base combined with emerging markets, where demographic changes and increasing personal incomes are combining to create ever larger potential customer bases for pharmaceutical businesses are factors contributing to the choice.
Just as important, however, is the increasing willingness of APAC countries to welcome international companies to compete with domestic players. China has announced that it is considering relaxing restrictions on international entrants in a bid to encourage foreign direct investment in the pharmaceutical sector. As well as deciding which geographical regions to prioritise for M&A activity, businesses must also decide what type of company to target. Out of the total respondents surveyed by Mergermarket, 74% stated that pharmaceutical producers will look to acquire companies with strong drug discovery/early stage R&D potential.
Following are healthcare policy changes/patterns and projected demand for pharma in selected global clusters:
China: China’s biosimilars industry has become one of the most lucrative in the world due to large population and low rates of insurance coverage. In a forecast estimated jointly by McKinsey and the China Pharmaceutical Association, China’s pharmaceutical market is projected to grow at 17 percent annually through 2020, propelling it to second spot in the pharma market while reaching 1.9 trillion yuan in retail sales.
India: An erosion of patent jurisdiction can be observed in India. An extension of direct price control to all drugs in a move against free pricing is possible in the near future. A steady increase in population as well as sizeable increment in chronic illness makes India a strong export market which is expected to grow 15% CAGR to 2020.
Israel: Tel Aviv has encouraged innovation through a new R&D park and incubators to promote life science start-up organizations, sending out a positive message to international investors.
While the Israeli pharmaceutical sector was worth $1.7 billion in 2008, it is projected to reach a value of $2.3 billion by 2020.
Brazil: In Brazil, the creation of an economic evaluation agency (CITEC) has become a big barrier to market access. New fast-track approval for biosimilars is expected.
The next four years until 2020 will deliver attractive growth for the overall market, at rate of 7 to 10 percent annually.
Indonesia: The pharma market in Indonesia recorded 85% growth from 2007 to 2013, with domestic companies holding 70% of market share. International pharmaceutical firms will acquire facilities in Indonesia to help gain a foothold in the market as the demand for prescription generic drugs escalates. Additionally, 83% of local companies are cGMP certified which makes it even more appealing to overseas multinationals looking to explore the Indonesian market.
However, foreign investors are forbidden to acquire 100% of an Indonesian firm; their maximum ownership stake is 75%.
Turkey: The implementation of the Health Transformation Program (Saglikta Donus, um Programi, HTP) resulted in social security reforms aimed at universal health coverage. Technology development zones that provide tax exemption to pharma entrepreneurs until 2023 has introduced Turkey as an attractive investment destination for foreign investment. The healthcare sector in Turkey is set to boom by a CAGR of 5.6 percent between 2013 and 2017 according to Economist Intelligence Unit (EIU) forecasts.
South Africa: Revenue growth in South Africa has been affected due to weakened purchasing power of the population. Although these trends will continue up to 2018, the pharmaceutical market is anticipated to grow by an average of 6% a year.
The government’s national health plans will boost demand for lower cost generics in coming years with a view to provide greater access to anti-retroviral medication within the public health system to combat the HIV/AIDS pandemic.
4. Challenges multinationals are facing when targeting emerging markets
Drug companies seeking market access for their products are competing for attention not just with other pharma companies, but with defence, education, and other government-funded sectors.
In such cases, market access needs to be defined in a broader term covering three core areas:
- Regulatory: Ensuring marketing authorizations through initiatives such as securing local medical share of voice at the prelaunch phase
- Pricing and Reimbursement: Securing appropriate price levels and inclusion in reimbursement lists
- Infrastructure: Addressing bottlenecks in healthcare infrastructure and health-system resources
Access in emerging markets with countries with similar disease profiles and levels of pharmaceutical spending can differ widely in their consumption of the same drug.
Scarcity of funding in emerging markets is another barrier, with lower per capita healthcare spending reserved for basic therapies, denying access to innovative treatment. Higher drug development costs coupled with pressures to keep prices low in order to compete with local players are obstacles to tapping into developing markets.
Weak protection of intellectual property in emerging economies like India limits patients’ access to new medicines. India’s lack of intellectual property rights enforcement serves as a major hindrance to drug companies because the financial reward is limited, especially considering the risks.
Inconsistent policy making by governments is a major hurdle to market access in emerging countries. Regulatory obstacles in countries like Russia hamper FDI and investment opportunities for foreign businesses. The Russian government regulates the prices for 608 drugs that are classified as “vital and essential”, the price thresholds of which have not been adjusted since 2010, rendering sales of these drugs unprofitable.
There is an apparent imbalance of regulatory requirements for foreign producers as opposed to domestic players in a market entry phase in Russia. Excessive bureaucracy and complicated legislation hinder US based pharmaceutical companies compared to their Russian counterparts.
Dependence on local partners can also be a barrier in markets as the need to manage five to ten partners can make the task of ensuring compliance and performance highly complex. Substantial resources may be required to create and maintain the infrastructure needed to serve the partnership.
The absence of local data in countries without patient registries or epidemiological data hampers stakeholder discussions about budget management and addressing healthcare needs of the hour.
The sheer size of emerging markets along with their relatively undeveloped infrastructure, makes it difficult for pharma companies to reach their full customer base.
A shortage of talent and skilled professionals exacerbated by a lack of coordination between different spheres and systems poses additional hurdles to access emerging markets.
Some companies have found that their supply arrangements are unable to deliver the cost benefits they are looking for, and lack of transparency makes it difficult to ensure that suppliers are complying with quality, cost, and delivery targets.
5. What can multinationals do to meet these challenges?
While both market access and the patent cliff present challenges, access is clearly the primary concern for executives.
Access driven models: To overcome market barriers, companies need to move from brand-by-brand access planning to integrated cross-brand planning. A customized approach to tackle local conditions will help in implementing an access-driven model. For instance, Roche successfully developed a pricing program in the Philippines that takes into account what a patient can afford to pay, granting a discount if they are unable to pay the full price. Novo Nordisk pioneered a public-private partnership in Kenya to reach 40,000 diabetes patients with its insulin products.
Pharma companies need to approach market access systematically, and it should be the central agenda in the overall strategy for the region. A framework for market access can be summarized as follows:
Understand access environment and needs of stakeholders: A good understanding of regional structures best suited to manage emerging markets, along with all the stakeholders that shape the ecosystem is imperative for decision making at the top level. Information from medical, sales, marketing, and access teams needs to be consolidated and shared across verticals.
Allocate resources thoughtfully across brands: New product launches expand companies’ portfolios of patent-protected drugs, while off-patent drugs continue to perform well. Both categories require heavy investment to create demand in a developing market, and multinationals must choose which opportunities to pursue and which to forswear.
Embrace the power of price elasticity & innovate pricing catering to local needs: When local companies launch a generic drug, they sell it at a price 30-50% lower than the branded equivalent, spurring additional demand at a lower price. Companies need to reconsider price points for mature brands every 3-5 years, so as to tap latent demand and capture value that would otherwise go to generics. Price reductions would help address issues of affordability and social responsibility.
Design successful public–private partnerships & collaborations with influencers: Building mutually beneficial relationships with local governments is indispensable for smooth operations and helps companies invest ahead of the markets. Key collaborations could involve working with patients’ and physicians’ associations, and regulators to improve access and health-system performance.
Understand the regulatory landscape and actively engage in health-system policies: Pharma companies should endeavour to actively shape policies that will affect them. Organizations at the top hire senior government affairs managers to provide support to policy makers.
Actively manage supply relationships: Managing supply relationships involves establishing rigorous procedures for performance management and issue resolution. In most cases, there will be a handover between the cross-functional team that negotiated and established the new supply relationship and the operations team which will handle it at a later stage. Companies must manage this process with care, particularly during early stages of supply.
Develop strategies to eliminate bottlenecks for patient access: For handling barriers from the patient’s point of view, companies should address issues like lack of awareness, public transport, and lack of medical infrastructure which would help in setting up the base for long term measures to improve patient access. Companies should actively engage with local governments and NGOs for improvement of medical infrastructure and fund allocation.
Develop centralized market access strategies: Pharma companies should focus on developing a centralized market access team which combines inputs from commercial teams for brand and access strategies. A unified access plan across the portfolio, catering to various stakeholders should be a priority.
Market access is the key challenge in all developing markets, with localization coming up as an emerging trend. For crucial markets, companies must develop a local footprint, including R&D and manufacturing capabilities if required.
Engaging with regional policy makers and governments is vital, as is collaboration with influencers and local players. Ensuring quality and depth of reach of distributors and suppliers is imperative for penetrating the domestic market in emerging countries. Collaborating with physicians associations, general practitioners as well as nurturing medical talent are all long term measures to gain market access.
Every company must adopt a tailored approach to meet specific needs and challenges. Strategies should be adapted and tweaked to cater to current political and market scenarios.
Pharmaceutical companies seeking to expand into emerging markets must exercise patience and appreciate the complexity of each individual market segment. The winners will be companies which are in for the long haul, and demonstrate commitment to local governments in shaping healthcare systems and infrastructure.