Emerging Markets: finding your way in a Brave New World
Chris Marks and Michael Craig
Ask almost any pharmaceutical marketer where the future growth lies for the industry, and the answer will be almost certainly be emerging markets.
Of course pharma will continue to exploit the core opportunities that still exist in the established markets of the US, Europe and Japan, but with the traditional blockbuster-led market model largely broken, we need to look to new territories to continue the growth of the business.
Chief among the emerging markets are the ‘BRIC’ countries: Brazil, Russia, India and China. The opportunities in BRIC are potentially huge. These four countries, combined, currently account for more than 40% of the world’s population.
In the eyes of pharmaceutical marketers in established regions, this bloc represents a huge opportunity. The combined population of the BRIC countries is approximately 2.5 billion people - more than a third of the current global population. Many patients in these countries have limited (or no) access to the more sophisticated and clinically proven pharmaaceuticals.
But there is danger in assuming that by putting the might of the Western pharmaceuticals industry behind it, we will be able to impose our mindset and medicines into those environments.
Goldman Sachs, who originally coined the acronym BRIC back in 2001, suggests that by 2050 the combined economies of the BRIC bloc could eclipse the combined economies of the current richest countries of the world. China is now the second largest economy in the world.
The BRIC pharmaceutical markets are currently only valued at $58.4 billion, significant, but collectively lower than the leading markets such as the US and Japan.
Yet, according to Novartis, half of the world’s smokers and 75% of people with high blood pressure live in the emerging BRIC economies. In the next decade, cancer rates are expected to climb 50% in emerging market countries and the incidence of obesity and diabetes is also predicted to rise substantially.
So the sheer potential of these emerging markets obviously makes them highly attractive. As do the growth rates.
In 2006 the emerging markets such as China, Russia, along with South Korea and Mexico grew by 81% compared to 5.7% for the US and the other nine biggest markets. So much so that in 2008 GSK announced the development of a new division within the organisation solely responsible for sales to these emerging markets.
Putting things in perspective
There are wide regional differences in expenditure levels within the individual BRIC markets, far more so than in developed countries where health systems have evolved to provide a more uniform level of coverage.
All four BRIC countries have a relatively wealthy urban population with a far greater spending power than their respective national average, and this is where current sales of pharmaceuticals are concentrated.
In the case of China and India, these urban populations have grown rapidly and number in the hundreds of millions.
A key challenge for these countries is to extend this level of wealth to the rest of the population, in order that better levels of healthcare become affordable.
But this is evolution not revolution and change will be incremental. Short-term opportunities exist in meeting the health demands of the burgeoning middle classes, and future prospects are bright.
As we seek to maximise the opportunities they present, we must challenge ourselves to think differently because these markets are different.
Pharma’s current model for the Brave New World appears to focus on accessing the affluent who can afford our products and treating them like ‘Old World’ consumers.
But is this truly our future?
If we are to take full advantage we believe the only way to seize the opportunities is to re-evaluate how we engage with these different cultures - the ‘competition’ and the infras-tructure - before we can even start the discussion about our products/brands.
What are the issues facing pharma companies looking to break into these emerging markets?
Russia is a potentially vast market with a sizeable domestic generic industry, but local production of innovative drugs is negligible. In 2009, the Russian market for pharmaceuticals was estimated at around $11.6 billion. However, per capita spending was low at $82. Although around 75% of the market is supplied by imports the market environment remains challenging for overseas companies. Major problems reported include corruption, bureaucracy, counterfeiting and poor data confidentiality. Government officials and politicians often discriminate in favour of the domestic industry, and enforcement of existing rules is often weak.
Turning to India, with a population in excess of one billion people, we can see there is a growing middle class with access to high quality healthcare. Conversely, in this geographically vast country plagued by natural disasters, the majority of the population is both rural and poor, and Western style pharmaceuticals are not even a consideration for millions of people.
India has an established domestic industry, responsible for around 8% of world pharmaceutical production. The larger domestic companies are striving to compete in the global market for both generics and original products. The market is dominated by low priced, domestically-produced generics and relatively low per capita expenditure on pharmaceuticals.
However it is not all doom and gloom. In contrast, the pharmaceutical market in China looks set to grow even further in the short-term, with the establishment of an Essential Medicines System during the 2009-2011 period.
The plan calls for an estimated 300-400 essential medicines to be made available at all public facilities, starting at the grassroots level.
In 2009, the Chinese government committed 850 billion yuan ($124 billion) to develop the country’s healthcare system over a three-year period. The plan is to create a solid platform for universal healthcare access for all by 2020.
In China, pharmaceuticals are sold in hospitals and drugstores, and the healthcare reform plan will inevitably see access to pharmaceuticals increase, as it includes the construction of around 2,000 county level hospitals, so that each county will have at least one such facility, the construction of 29,000 township hospitals and upgrading of another 5,000.
But there is more to it than that
In order to satisfy our industry’s ambitions, simply focusing on the middle classes in urban communities and waiting for them to grow in sufficient numbers, whilst looking to governments to initiate the sort of healthcare system we would choose to work with, will neither meet our financial objectives or fit within our timescales.
For over 4,000 years, medicine in China has been the preserve of Traditional Chinese Medicine (TCM). It is a part of the culture and we should not expect to see this culture change overnight. For example, Jia Wei Xiao Yao Wan, a Chinese herbal remedy created 600 years ago for the treatment of depression is known colloquially as ‘the happy pill’. Sound familiar?
So to start taking advantage of the Brave New World, it is essential that we consider the culture.
Key questions you need to begin asking include:
1. What is the underlying medical culture in the country you are considering?
2. What are the prevalent conditions? Remember in many countries, there is sometimes a negative perception of Western medicines for Western diseases.
3. What alternatives to pharmaceuticals exist already? And for how long have they been entrenched in the culture?
For example - in India, whilst the use of toxic metals is perverse to our Western approach to medicine, Ayurvedic medicine has been practiced for over 3,000 years and is still the most important form of medicine in the Indian subcontinent.
4. To what extent is there an acceptance of pharmaceuticals? And if so, amongst whom?
5. What is the belief set surrounding health and medicine in general?
Once we have considered the cultural differences, we need to consider the infrastructure of the market we are looking at including the geography, affordability, access to healthcare professionals etc.
Also, whilst some emerging markets are clearly committed to improving logistical access, the significant challenge of simple affordability comes into play.
A single tablet of Prozac in China costs approximately 100 yuan. With up to 6% of the Chinese population estimated to suffer from depression, the opportunities for marketing anti-depressants are potentially huge.
However, in 2008, the average salary of employed Chinese urban citizens was 29,229 yuan.
Thus, a 30-day supply of medication would cost over 10% of the annual salary – so perhaps the opportunities are not quite as straightforward as they appear at first glance.
So, reviewing what we know, what are the key challenges facing the pharmaceuticals industry in the emerging markets and how do we address them?
Supplying the right portfolio
You need to ensure that the products you’ve targeted for high growth opportunities are available to meet the needs of the specific disease priorities, and that they are identifiable and supported by that country’s respective government (local, regional and national). An obvious example here would be the treatment of the Hepatitis B virus in China.
Getting the balance of distribution right
Making sure that the key large cities, doctors and hospitals are not your only focus. The new growth opportunities lie in targeting those ‘second level’ hospitals and making in-roads into the rural areas through community hospital promotion and such vehicles as China’s Essentials Medicines System. To access patients and consumers in these markets requires companies to understand and support co-ordinated efforts to create or strengthen developing health systems.
Getting the price right
Remember that most ‘patients’ have easily accessed both culturally endorsed and cheaper alternatives (TCM, Ayurvedic etc.,) and have low disposable incomes.
This puts pressure on us to think carefully about matching price with local demand - supported by the value proposition being right whilst being underpinned by the relationships with payers and doctors in the key hospitals - in the major cities.
Access to healthcare professionals/prescriptions
Quality service and excellent healthcare professionals are available in all of these emerging markets, however the challenge is getting patients to be able to present to them.
Once we have overcome the cultural barriers, the infrastructure needs to be considered, not just following our traditional market access model but incorporating the next tier for taking advantage of the Brave New World:
1. Recognise and work with the challenge of access to treatment.
2. Work with government where possible to drive provision of medicines that demonstrably add value in the areas of prime interest to the country.
3. Price according to the economic realities of the environment. Maybe, in time, the ‘Big Mac Index’ might just become the ‘Statin Index’!
It would be a mistake to underestimate the importance for the pharmaceutical industry, of the developing and scaling up innovative business models that are suited to emerging markets.
There appear to be three elements that meet the needs of lower income consumers in emerging markets:
Be culturally adept and aware: Establish a culture amongst the populous at large where Western pharmaceuticals are acceptable, embraced and supported. This will not occur overnight. Do not ignore the local competition and remember they are not just other pharmaceuticals companies - they are the local alternatives perhaps even established over thousands of years.
Companies need to ensure that their products/services meet customer needs. Pharma companies expanding into emerging markets must critically examine their product offerings and portfolios for individual markets.
A new approach to understanding affordability: Engage and work with the Government authorities to build the appropriate access that recognises local cost models and environments.
It is highly likely that product life cycles in BRIC and other emerging markets may be significantly longer, but with a lower peak that we are used to, and this should be borne in mind. The Doctors are qualified. The challenge is getting people to access them and be able and willing to pay for the right drugs. Cost-cutting, volume-based business models, customer aggregation and other financing mechanisms will all help to improve affordability. Companies will have to implement innovative pricing schemes for emerging markets, without negatively impacting our Western markets.
Seek new means of market penetration: Focus on the key cities and the urban conurbations with highest disposable income only as a starting point. The great opportunity lies in the population at large, but this is also where the barriers of history are most likely to be evident. Beyond greater affordability, expanding access to low-income populations depends on improved distribution.
Upfront investment by companies, governments and non-governmental agencies involved in the healthcare sector is vital. Partnerships, between varieties of players who can help develop and deliver solutions, will be a key determinant of success.
Then, and only then, our traditional model of ‘doctor writes prescription, patient gets pharmaceutical product’ might just work!
Pharma industry analysts IMS Health have expanded the four-market ‘BRIC’ paradigm into a group of seven ‘pharmerging markets’: Brazil, India, Turkey, Mexico, Russia, South Korea, and China.
IMS figures show that in 2008, Brazil was the fourth largest of these markets, close behind Mexico and Turkey in second and third place.
Market growth hit 20% during 2008 in Brazil, and similar growth is expected for 2009’s results. Over the past five years, Brazil has produced consistent double-digit growth hitting a high of 33% in 2005. Currently worth around $20 billion, Brazil represents a 39% share of the Latin American region and is ranked in 9th place overall in the world pharma market.
Brazil’s government is keen to build up its own home-grown industry, and is looking to do it through collaborations with big pharma. An example of this is GSK’s $2.2 billion deal agreed in 2009 to supply its Synflorix vaccine to Brazil.
One unusual and innovative component ofthe deal is a provision for the price of the vaccine to fall from €11.50 to €5 per dose over time.
It also includes an agreement in which GSK will pass on its expertise and technology so that Brazil can manufacture its own vaccines.
GSK will also invest $51m into research for a dengue fever vaccine, matching Brazil’s own investment.
Such efforts are being replicated in many emerging markets, with pharma trading its expertise and prices in order to gain market access and long-term, stable agreements.
Multinational companies are having to compete with home-grown companies to gain market share in India, where decades without patent laws fostered a strong generics industry. Chief among these companies is Cipla, which overtook Ranbaxy and GSK to be the company with the biggest market share in 2007. Overall, Indian-owned companies account for almost 80% of domestic sales.
Nevertheless, Cipla’s market share is still small - just 5.38% - reflecting a highly fragmented market.
The demand for ‘Western’ pharmaceuticals is growing in India as a burgeoning middle-class population begins to earn more money to spend on their healthcare.
Outside the urban centres, rural markets are harder to access, but India is making efforts to open up these areas by improving the medical infrastructure.
However, even though intellectual property regulations now exist, enforcement is lacking, and some generic manufacturers are exploiting the situation by continuing to launch copies of new drugs. Other problematic issues include an insistence on local manufacturing and uncertainties about import duty, a common feature across emerging markets.
Russia’s economy endured a turbulent 2009 because of a steep drop in oil prices, undermining its formerly strong growth. Greater doubts about the stability of Russian economic growth have led many commentators to doubt whether Russia should remain in the vanguard of emerging markets, as the ‘R’ in the BRIC acronym.
This is mirrored in the healthcare arena, where pharma companies operating in the region have to accustome themselves to instability and unpredictability - one pharma exec recently noted that major health policies can literally change overnight.
Russia spends less on health in per capita terms than any other country in the G8 and EU countries. This under-investment is one reason for the country’s serious healthcare problems, with average life expectancy and rates far lower than elsewhere. In positive terms, this of course means there is huge scope for improvement in the country, and therefore much potential growth for the pharma industry.
Pfizer has chosen Russia as the first emerging market to launch its new ‘e-payment’ scheme which offers patients discounts on the company’s products.
Russia consumers will be offered discounts of up to 50%, with the aim of increasing uptake in countries where individuals must pay most medicines costs themselves.
Pfizer hope the discounts will be offset by an increase in sales, and it will also be able to track data through the electronic system. The system allows Pfizer some access to patients’ medical information and thus a potentially high volume of market data.
China’s continuing economic growth is fuelling the globalisation of most industries, pharma included – it is currently the world’s sixth largest market and is forecast to become the third biggest by 2011.
Two of the prime factors behind this change are the growth of a wealthier, urban, middle class, and the Chinese state’s investment in healthcare reforms.
In Janury 2009 the country unveiled its ‘Healthy China 2020’ vision of a new healthcare system which aims to give fair and affordable services to all of China’s 1.3 billion residents within the next decade. The government is set to spend 850 billion yuan ($124 billion) with the goal of providing medical insurance coverage to more than 90% of all citizens.
Despite the huge potential of the country for pharma, pitfalls remain.
China insists that a drug can only be licensed if it has been tested in clinical trials in China on Chinese citizens. Patent legislation exists, but its enforcement is unreliable. Lastly drug counterfeiting is a major problem, although one which pharma could turn to its advantage as drug safety becomes increasingly important to consumers.
As in other developing countries, access to primary care is limited, which means the remaining options are often in hospital care (expensive and time-consuming) or through OTC pharmacies which are cheaper and easier to access.
Consultants PricewaterhouseCoopers say China’s OTC market is forecast to grow to $21.49 billion by 2012 as consumers begin moving away from taking prescription drugs in hospitals to using self medication via pharmacies.
Chris Marks and Michael Craig are consultants at The MSI Consultancy and can be contacted by visiting www.msi.co.uk