Curing the world's ills?

With emerging markets poised to contribute more than 50 percent of the pharmaceutical industry’s growth in the next year, most of the big players – and many of the smaller ones – now have a presence there. Marie Shields takes a look at what this means for the future of the industry.

“The global pharmaceuticals market will be worth about $800 billion in 2020”

China, India, Brazil, Mexico, Russia, Turkey, Indonesia - these are the so-called 'pharmerging' markets, and they could hold the key to the future growth of the international pharmaceutical industry.

Two years ago, PricewaterhouseCoopers produced its 'Pharma 2020' report, analyzing industry trends for the next 10 years, and these seven countries - called the E7 - play a crucial role in that vision of the future. According to the report, "The real GDP of the E7 countries will triple from $5.1 trillion in 2004 to $15.7 trillion in 2020, whereas that of the G7 countries will grow by just 40 percent, from $25.8 trillion to $36.1 trillion. Their wealth relative to that of the G7 will rise from 19.7 percent to 43.4 percent over the same period.

"In 2004, the E7 countries spent 0.94 percent of their GDP on prescription medicines (although the precise percentage varied from one state to another). They collectively accounted for eight percent of the $518 billion global market. The G7 countries, by contrast, spent 1.31 percent of their GDP on medicines and accounted for 79 percent of all sales.

"If all 14 countries continue to spend the same proportion of their GDP on medicines as they do now (and if their GDP grows as we have projected), the global pharmaceuticals market will be worth about $800 billion in 2020, and the E7 countries will account for about 14 percent of sales."

Simon Friend, PwC's Global Pharmaceuticals Leader, confirms that this view has not changed. "The industry has been in a watershed mode for the past few years, and to some extent is starting to work its way out of it. But there are huge pressures on it from a number of different angles, and the most critical or fundamental is where are the new products coming from?

"Compounding the pipeline issue, you've got patent expiries. We predicted two years ago that $157 billion of sales would come off patent by 2015. We're now some way into that. It's very real and companies are struggling to work their way through it in the absence of significant new products coming through."

These challenges are forcing pharma companies of all sizes to change their business models - exploring the potential of generics and how to leverage the biotech space for example - and one of these new models, perhaps the most important one, is expanding into emerging markets.

Ann Brady, Vice President of New Market Development for Shire, confirms that her company is moving in this direction. "The traditional model within pharma has been dominated by Western developed markets, treating Western diseases. In recent years we've seen a trend for big pharma, as they have come under pressure with regard to patent expiries and a lack of pipeline, to move out of or beyond the developed markets."

Shire is a specialty biopharmaceutical company focused on helping people with serious diseases, wherever they are in the world. Brady continues: "The world is becoming more connected and as an industry, we do need to look at global development, and specifically for Shire, that's where we are directing our business. We're looking beyond just what will service the developed Western market."

Dealing with diversity

It's one thing to say you're moving into emerging markets, and quite another to deal with the practicalities involved. The seven countries that make up the top of the emerging market list are obviously vastly different from each other in terms of geography, population, culture and political situation. There is no such thing as a generic 'emerging markets policy' - each country requires its own specific plan, which brings with it its own challenges.

How then, does a company choose which new market to invest in? As Nycomed's Jostein Davidsen points out, the top 10 companies will most likely invest in all of them, while for mid-sized and smaller companies, it's often a matter of history. "It has to do with the history of the different companies, the history of Nycomed being, for example, active in the Soviet Union for 20 years. We had a footprint there from an early stage and we automatically built on that.

"When it comes to countries like Turkey or Mexico, if you were not there in the early days, maybe you're reluctant to go in later. It will cost much more, of course, and in some of these markets you may well have to go in and acquire local companies, only by that time there is not much left to acquire, so it is much more difficult."

As General Director for Nycomed Russia-CIS and Senior Vice President, Nycomed, Davidsen has been involved with the company's operations there since the Soviet days, and has seen the region rise to play a key role in Nycomed's growth strategy; so much so that the current aim is to have the region represent 38 percent of the company's growth in 2013.

That doesn't mean there won't be challenges along the way, as Davidsen explains: "Entry costs are high, although there is relatively less expense on the registration of products and on clinical trials. But office premises are much more expensive here than in other parts of Europe, and the cost of media campaigns and TV campaigns for over-the-counter products have risen dramatically. And then are unforeseen events that can have a negative impact."

Unforeseen events are indeed a potential downside of moving into any new market, but particularly so in markets where the political situation or other factors may be unfamiliar to the investing company. As Mazen Darwazah, Vice Chairman of Hikma Pharmaceuticals, puts it: "You need to understand the local culture. Often, when you're a multinational company, you think globally and you act globally. Working in this part of the world you have to think globally and act locally.

"You have to understand the barriers of entry. You have to understand the perception that the healthcare community has in a particular country, so you have to work with them on the basis that these are local requirements in terms of dosage forms, pricing and delivery of goods.

"You also cannot work in a country, and then when there's a crisis or a civil war, leave that market. This is what happened for example in Algeria, when there was a civil war and all of the multinationals left. You cannot go into a market in the good times and leave when there's a crisis. You have to stay in a long-term partnership."

Hikma started out as a Jordanian company 32 years ago, so its perspective is a little different from that of European or US-based companies. Having concentrated on the immediate surrounding markets of Lebanon, Syria, Iraq and Saudi Arabia for its first 10 years, the company then expanded into other parts of the Middle East and further afield, and has a presence today in 42 countries in 18 markets.

This history of moving from an emerging market outward rather than the other way around has given Hikma an interesting insight into the complexities of doing business in different parts of the world, as Darwazah explains: "Egypt, for example, is a $2.2 billion market, while Bahrain is a $40 or $50 million market. To make a file for registration for a product in Egypt takes the same time in terms of preparation for both countries. You cannot say, 'I want one file for all the Arab countries.' It's an accumulation of the registrations and an accumulation of the time that you spend in countries where you get your market share and you gain your footprint in those markets."

PwC's Simon Friend points out that this tremendous variation is not something that is unique to emerging markets: "The reality is that this is also the case in developed parts of the world: the US market is very, very different from the markets in Europe, for example. It may be changing in the US at the moment, where you will end up with a much greater percentage of the industry being funded by government, but right now healthcare is still largely private, whereas in the UK and other economies, it is very heavily a government-funded market.

"The other thing to bear in mind is, who is actually buying? That is transforming the way in which the sales and marketing functions are being designed for the future, away from the traditional model of going out to the physicians and leaving samples.

"The influence of physicians has declined, because the buying process is becoming increasingly binary. You need to get to the payer and get behind the payer's mindset and understand what the payer's economics are. And that applies equally in the emerging and the developed world; you need to know who are the real influences and what sort of sales forces you need in the future.

"One of the interesting things for domestic companies in countries like India, China, Brazil and Central Eastern Europe is that the best thing they can do is not to follow the western model. If the view is that the western model is broken, why would you try to replicate it?"

Looking for advantages

Given the number and nature of the challenges involved, you may wonder why companies would bother moving into emerging markets at all. The benefits do, however, outweigh the challenges. "Those markets are becoming increasingly attractive in a number of different ways," says Friend. "Emerging markets are playing a pivotal role in how established companies will move forward and in their growth potential for the future. Part of that is in terms of where the money sits, and if there is a growing purchasing power in some of these emerging markets there in itself lies a market potential. That's why companies are looking to build their footprints in those marketplaces, where the demand for branded drugs will start to increase in the same way that it has done in the developed world.

"Equally, there are other significant opportunities in emerging markets from an industry perspective - whether it is around the further development of new products, or establishing manufacturing, R&D or other facilities. These environments are increasingly attractive because of the skill sets that exist there, and the speed at which they can accelerate and get to market.

"There are still concerns about the infrastructures in place, about the IP considerations and about the ability to properly establish compliance and regulatory standards in these areas, which will require proper monitoring and resources to ensure that companies are not exposing themselves to undue risk."

Friend cites the rise of homegrown companies in these markets as the force behind regulatory and infrastructure improvements that may help to draw the big international companies in: "The domestic companies are building and growing and establishing themselves in the larger world. They're no longer small offshoots. They're starting to become well-established companies with well-established products that are competing against others in the more developed environment.

"The infrastructure that is starting to be put in place to support domestic companies provides great support for the Western companies to come in behind and have a little bit more security around what is happening. For example, in India where they put in new IP legislation in 2007 or 2008, the issue there around policing it is still exists. Does that mean you wouldn't go there? I don't think it does. What we're seeing with many companies building a presence there, you just have to go in with your eyes open.

"In China, we know that from a counterfeit perspective, the authorities are working hard and have identified the pharmaceutical industry as one where they need to ensure that the IP is protected. They are taking steps in the right direction."

These potential pitfalls will not be enough to stop the industry's major and niche-market players from making the move overseas. Shire, for one, has set itself a goal that will be driven by expansion into non-traditional markets: it aims to be the most valuable specialty biopharmaceutical company in the world by 2015. "An important part of achieving that goal is the diversification of our revenues across a bigger geography globally," underlines Mark Rothera, Senior Vice President for Europe, the Middle East and Africa for Shire's Human Genetics Therapy business. "This means not just the revenues that we're generating, but the quality of those revenues and the sustainability of them that will build value."

"We have a broad 'rest of world' definition," adds Shire's Ann Brady. "Today our revenue base is very heavily weighted to the US, and we need to diversify that. We need to look in geographies beyond the US, Canada and the major European markets. Our definition is extremely broad in that it then encompasses Central and Eastern Europe, Latin America and Asia Pacific. So we have a huge opportunity to increase our presence in many of the developed markets within this ROW definition.

"The traditional emerging markets are a significant component of that as well. As a business, we will be targeted in our expansion here. We're not saying we're going to every one of these markets, and we're not saying either that we are going to invest directly in these markets. We need to target our rollout into new geographies on the basis of our portfolio at a particular point in time."

Nycomed's Davidsen also foresees emerging markets playing a big role in his company's future. "In terms of Russia-CIS, we have a very tough year behind us in 2009," he explains. "Russia was very negatively affected by the global financial crisis - GDP was minus nine percent. It is expected that this year we will achieve a GDP of between one and three percent. The oil price is helping here, and, of course, any industry in Russia is very much dependent on macroeconomic elements; much more than in any other western country. Many things are oil-price dependent, which is now looking much more stable.

"The prediction for the Russian pharma market is that we will have slight growth this year. The challenging factor for this market are the state regulations and the new laws related to medicine and the price regulations that are in the later draft stages, about to be accepted and decided in the national assembly and signed off by the president. We don't know exactly what the impact of these regulations will be, but again it is a major move toward a more regulated marketplace.

"Nycomed is also strong in some Latin American and South American countries like Brazil, Argentina, Mexico and Venezuela. We are also looking at China, and attempting to get a better foothold in India and in Asia, although for the near future, Russia-CIS and Latin America will play the most dominant role."

Despite the challenges involved, it seems clear that increased pressures on pharmaceutical companies at home combined with their attractive earnings potential will combine to drive further investment into these new markets. After all, according to the forecast by PwC's 'Pharma 2020' report, in 10 years' time, the E7 emerging economies will account for 20 percent of sales in the $1.3 trillion pharmaceutical market. Any company worth its salt won't be able to sit back and let that opportunity slide away.