Pharma steps towards the emerging markets

By Nick Pryke

With emerging markets set to overtake more developed countries in the contest to attract pharmaceutical investment, Frost & Sullivan’s Sumit Sharma offers a commentary on their importance to the industry’s future success.

“I strongly feel that the companies that already have a strong strategy in the emerging markets will be more successful than others in future years”
-Sumit Sharma

The race is on

In the past 10 years, the pharmaceutical industry has witnessed a vast change in its landscape. Where the Western market once thrived in pole position, fuelled by continuous innovation and rising prices, it now finds itself in the pit lanes contending with colossal amounts of expense and risk. Conversely, less economically developed countries have been pushed up the grid with the introduction of higher standards of infrastructure – which in turn is attracting multinational companies. It seems as though the race to enter the emerging markets is well and truly on.

One of those best placed to commentate on this race is Sumit Sharma, Senior Vice President for Emerging Markets and New Business at Frost & Sullivan. “Traditionally in the 1970s and 1980s,” begins Sharma, “pharmaceuticals as an industry were primarily driven by North America and Western Europe. Most of the drugs were designed or meeting the needs of the more developed part of the world, dealing with diseases that were more common in North America or Western Europe because that’s where the money was.

“As we moved in the 1990s, there was an emergence of new economies where the likes of China, India and West Asia Pacific started to take off. The pharmaceutical industry saw the population of these economies and one of the things that they started doing was taking a lot of their existing products there. When it started to work, many of the new products were designed around these economies and diseases. Excluding the drying of pipelines that we see now, that was a huge paradigm shift.”

Drying up

Indeed, there is no escaping that 20, even 30 years ago there was an abundance of drugs in the pipeline that upped the valuation of pharmaceutical companies and their share prices: everything was upbeat and there was plenty of innovation and constant demand. In the last five years, however, all of this has significantly reduced due to the cost of R&D and bringing out new drugs, getting approval from the FDA and registering in different markets. Nowadays, it’s far more difficult for pharmaceutical companies to continue to produce blockbuster drugs, which is unquestionably having an impact on their current valuations.

“These kind of changes are having a massive impact on the consumers and within the pharmaceutical space,” continues Sharma. “The generics, which have dropped in price, can compete far more openly now – and far more smartly. They’re hiring people from the ethical side to brand their drugs and make it big in the lower set of the so-called ‘weaker economies’. A lot is happening, so it’s changed significantly.

This significant change has come from simple fact: the pipelines are running dry and new markets are naturally attractive. Going one further, Sharma outlines that there are three major issues: the emergence of generics, the growth of new economies and the indisputable fact that the pipelines are indeed drying up. All of this is driven by the economy and the way that consumers in pharmaceutical spaces are increasing significantly. Diseases such as diabetes, cancer, cardiovascular disorders and even asthma get far more investment today in China, Russia and India than in any of the emerged markets. In addition, the relevant governments aren’t too concerned whether a patient consumes a drug made by a multinational or a local company, as the relative allocated budgets allows the generics to easily meet the needs of patients.

However, the presumptive grouping of all emerging markets together can be a dangerous one. The term ‘pharmerging’ that has recently been bandied around would suggest that there is in fact one blanket strategy to cover all emerging nations. This is simply not true. Of course, some of the bigger pharmaceutical companies might have an input in the majority of emerging markets, but judging which ones will work within their respective portfolios comes down to a combination of history and fit.

 “As we speak today, China is up there,” asserts Sharma. “It pretty much functions as some of the companies function in North America in terms of their depth and breadth of operating and reach of distribution. China is a far more developed emerging market in the respect that you have a greater focus in terms of human resources, products being launched and marketing activities. I would still put China outside the others – basically the bricks and mortar – of Turkey, Indonesia and Mexico; then you put the bricks up and complete it with a ‘K’ and call it Korea.

“China is an outsider simply because it has almost emerged. It is by far the biggest emerging market. You have the major ethical players who make it big in the urban part of China with their regular blockbuster drugs and maintain a very good uptake rate. Then you have the generics, which are benefiting the tier 3 cities whilst the tier 1 and tier 2 cities are with the big multinationals. It’s the sheer size of the market that is helping China accommodate pretty much everyone.

“Personally, I see China as emerged. It’s not at the same level yet as you’ve seen in North America where everything is much more regularised and far more legalised. Regardless, it’s far beyond the likes of India, Russia, Brazil and Turkey simply because the market is big; they’ve accepted every type of company plus they have their own generics and a great healthcare program in place, which is ensuring that everyone has a piece of the pie.”

Characteristics

Sharma predicts that in the next 10 years, India will be where China is now – simply because of its sheer size and the fact that it has the unique advantage of being a completely self-producing market. In addition, India has benefited from its history of maintaining a quasi-colonial healthcare system; these kinds of characteristics help companies penetrate a bit faster. In two to three years time, according to Sharma, India could potentially become the second or third biggest global market.

“After these two,” predicts Sharma, “I would put Korea. Again, it’s a massive market and very developed. It’s smaller than Japan, but it competes in terms of its similar demographic characteristics and a highly sophisticated healthcare system that has witnessed a lot of expensive investment on patients. Many expensive drugs, such as ones focused on obesity, have become big in Korea. While it may not be sustainable as it’s not as big as Brazil or Russia, it has a sophistication about it that has seen companies focus more on it than Japan. In fact, Japan is dying out because of the downturn in the economy.

“Turning the focus on Turkey and Russia – Russia is an extremely tough market, as they have to deal with exterior control factors and politics to get drugs approved and to build distribution networks. Distribution is a massive hassle in Russia, which makes it difficult for multinationals. I’ve had conversations with GSK, Sanofi, Novartis and others trying to do business in Russia and they feel that they will face roadblocks simply because they’re of European or North American origin.

“What’s more, Russia’s infrastructure is not improving. There’s a huge health deficit there and their disease programs are not in order. A lot of people are not treated, and as a result they die. The mortality rate in Russia has risen significantly, with life expectancy rates in the 50s and early 60s. Worryingly, a big chunk of the problems relate to mental disorders, hepatitis and liver issues because of alcoholism and cardiovascular disorders that aren’t addressed because no disease programmes are in place to control them.”

It becomes clear that companies look at where the biggest opportunities are in terms of size, ease of doing business and how regulated the market is. Today, although China and India are not 100 percent there yet, if companies decide to ignore them, they may as well “shut up shop” as Sharma puts it. However, with a multitude of other challenges and potential issues relating to culture and political health, companies will have to be astute in their considerations.

“One of the biggest issues in China and India is finding the right people to work for you. American, UK or German field representatives are slightly different people to those you will find or hire in China or India. Here, you want people who are much stronger on the drug side in terms of the science behind it. In China and India, you want to hire people who have rooted relationships – so it’s difficult to find people. You have to be very ‘local’ in these places and many companies are missing this opportunity simply by being extremely multinational or globalised in their approach and not being flexible. Being local is an opportunity but also the biggest challenge facing companies.

“Even getting your human resources right –marketing managers to salespeople – is pivotal, as these are the most important people who will go out, sell and detail the drugs. If these people are not well trained, or they’re not the ideal ones for a local market, then it’s certainly going to be a struggle. HR challenges are large and many.

“Secondly, I would say that these places are becoming more expensive to operate out of. Every multinational is trying to get into India and China, so there is a huge demand for real estate; if you want to set up factories and distribution networks and you’re not doing it right now, it’s going to be a massive challenge to do so in the future purely because of the expense.

“Besides the pharmaceutical standpoint, getting the local sales infrastructure in place with local skills and relationships is key. In addition, fighting the government at times and being a lobbying agent for price and reimbursement is a massive challenge because you’re an outsider and have no say. The trick is to partner with a local company or agency and hire some powerful local people who could be part of your organisation.”

There seems to be a vicious cycle of wants versus challenges; for some of the least emerging nations, political instability has shut down any hint of an opportunity for multinational companies. “If you look at some of the emerging markets – let’s leave out Western Europe, North America and Japan – and consider the rest of the world as still emerging and plot it on a curve, you will see that the ones that are not even on the curve yet are the nations that face huge political crisis: Africa, Latin America and certain parts of the Middle East.

“These are big markets with huge opportunities because people are extremely sick, as a generalisation, because they live in unhygienic environments. The problem arises from the fact that governments don’t focus on healthcare because they tend to spend the majority of their budgets on defense. Remember every government that spends a dollar on defense spends 50 cents less on education and 50 cents less on healthcare. Every government spending a dollar more on defense is leading to lesser healthcare spends, which is not helping Africa or places like Brazil.

“Brazil’s biggest problem is that they don’t have the infrastructure on the healthcare side; they don’t have the skills, so it’s a massive challenge to build a health infrastructure. It’s not like a service industry where you just set up shop and you’re done. Hospitals need to be built and skills need to be acquired. I don’t think there are political problems in Brazil as such, but Brazil is not a safe place and the government spends a lot more money on security and law and order, which doesn’t help because it means they’ll spend less on healthcare. Making this problem worse is the huge ageing population in Brazil.

“If you want to work with such nations successfully, you should always have the government on your side and keep the Department of Health happy, because if they don’t approve any of your drugs, millions of dollars could be lost. To give an example, GSK has been in Asia in all those tough markets like the Philippines, Indonesia and Vietnam – and they’re doing quite well. One of their greatest strengths has been working very closely with the government and helping during the political challenges they faced in the 1980s.

“How did they help? By saying that they would be in a position to drop prices, conduct forms of social marketing and run some disease programmes. Those kinds of things help, and today, any drug that GSK tries to launch in these markets gets registered, approved and to market faster.”

Current climate

One would have thought that the recent worldwide economic downturn would have stopped movement into emerging markets, but Sharma is keen to assert that the exact opposite is true: companies are entering emerging markets because of the economic downturn, and if anything, emerging markets have saved pharmaceutical companies as they have their own domestic economies to consume the majority of products. Underpinning this is the view that the global economic crisis has had very little impact on the healthcare industry because it has been battling its own recession for the last 10 years, with fewer products coming out, more expensive price tags and governments cutting back on spending.

“Companies have gone to emerging markets a bit more aggressively,” continues Sharma, “because they realise that in the US, the government’s not going to spend much more on healthcare, while emerging markets such as India and China have not changed their economic strategies, so healthcare has continued to grow. In addition, if you take certain disease areas such as obesity or asthma that are traditionally common in North America, you soon realise that they are just as common, if not more, in China because of the smoking and food habits.

“What these pharmaceutical companies are trying to do is get there at an early stage where they can go in with the right products and get in on preventative healthcare – where drugs are produced or launched with the intention of controlling such factors at an early life stage. Because of the affluent Chinese and Indian societies we see today, there are plenty of drugs coming out that control obesity and glucose levels – drugs like Abbott’s Reductil in China. We’re currently doing some work where we’re trying to understand the psychology of the people who take these drugs and what it comes down to is wanting to be thinner than the next person.

“It’s this consumer psychology that these pharmaceutical companies are picking up. They’re launching these products because younger, 20-something women go to doctors asking for a prescription for Reductil and then begin a three month dose just to maintain their waistline – and they’re willing to pay for it. In years to come, targeted, personalised drugs for these types of demographics, and I would even include Africa a few more years down the line, will prevail.”

The next question to be answered is, who is better geared up to deal with working outside of their own home markets? For European-based companies, who have more of a history of thinking about markets outside of their own, there really is no competition. Sharma even goes as far to say that in 10 years time he doubts that many of the current North American companies will still exist.

“It’s a bold statement,” admits Sharma, “but with drugs not getting approved, the US government might have to bail the industry out; it’s one of the flagship industries in the US. The pharmaceutical business originated from here and France. My view is that there will be far more consolidation and this will make the European companies stronger. What I normally see is that the companies who are doing well in China are the non-American companies; they have worked out that it is largely about cultural adaptation and an ability to think on the local scale. It’s also the fact that a lot of the French and British companies have been there for a very long time due to colonial history.

“I strongly feel that the companies that already have a strong strategy in the emerging markets will be more successful than others in future years. The population isn’t growing much in Western Europe and North America but a lot of untapped population still exists in China, India and even Brazil and Russia. Then, of course, you have Turkey, Indonesia, Malaysia and Korea, to name a few. However, the companies who will do the best will not only be involved with emerging markets, but will also be the ones who don’t ignore their home markets. That would be suicidal as those are the more mature, bread-and-butter markets.”

To return to specifics, Sharma analogises where China will be in 10 years time by putting it like this: “China did the best modern-day Olympics in 2008. No other country will come close to that in the next 10 to 15 years, so China could surprise everyone and emerge in the next one to two years”. It may seem slightly tenuous, but Sharma’s message carries validity. With the right companies being attracted to a sustainable infrastructure that can also provide a massive population base, Sharma predicts that in roughly 20 years time India will be as big as the US, and China will be the biggest emerged market to date. With such a prediction, perhaps it’s time to place your bets on the biggest race in pharmaceutical history.

Biography

Sumit Sharma is Senior Vice President of Emerging Markets and New Global Business for Frost & Sullivan.