Emerging markets – the new gold rush? (part 3)
Samkoman Consulting Limited
(Continued from “Emerging Markets – The New Gold Rush? (part 2)”)
In the first two articles of this series, we highlighted and attempted to put into context some of the factors that must be considered alongside some of the potential risks that may be encountered on this gold rush journey into emerging markets. One of the messages we tried to convey is that it can in many instances be a long and costly journey. Senior management buy-in and commitment to such an expansion is critical.
In this third part we dwell in more detail on this lengthy journey and the implications by examining two concepts – time and timing.
“It’s about timing not time”
Anyone who has enlisted the help of a financial investment advisor will likely have heard this phrase. Typically when the value of the investment has gone down, the advisor politely uses this cliché to remind you that you entered and exited at the wrong time. Success he will go on to describe is about timing of entry and exit and not absolute time in the market. He will then likely point out to you that the fact that you invested for over 10 years in that product is irrelevant! The advisor may also tell you how so many people make the classical mistake of seeing big returns in a market and enter the market when it is high only to exit when it is low or going down. He may even point out that investment carries risks and the time to often consider this investment product was at the point when it was highly risky and priced low. This analogy can be considered for emerging markets. So allow me to explain.
In an emerging market context, timing and time are both very important. Timing because those who entered the gold rush ten or more years ago are likely to have had fewer barriers to entry, than those contemplating entry now. These developing or emerging markets have become more sophisticated in their regulatory and clinical requirements to the extent that some have introduced reimbursement controls that could have serious impact on product pricing, whilst those that had reimbursement, for example Turkey, have reduced the rates of reimbursement dramatically impacting on future growth projections for companies operating in Turkey.
“In an emerging market context, timing and time are both very important.”
Other potential barriers to entry may include the requirement after a period of time for local manufacturing or a requirement for a percentage of products that must be generic and locally manufactured.
So timing must be seen against these potential barriers to entry and a Company decision must be cognizant of such barriers. It is wholly futile to enter a market such as Algeria or Russia in the hope of a quick entry and making quick wins – it is a long journey ahead and one that will involve for these two examples significant downstream capital investment in local manufacturing or a joint venture with a local manufacturer – and that joint venture may just “skim the cream off the milk” if one has not evaluated what it will really cost to enter the market! On a similar vein, Saudi Arabia is now looking to stipulate local manufacturing for exporters wishing to sell in Saudi. And there are many other such instances all over the emerging markets landscape.
Nigeria has a forbidden list of products that are forbidden to be imported but must be made locally. Furthermore, owing to a high degree of border porosity and counterfeit goods, Nigeria has a high regulatory burden that must be considered before making an entry into the largest market by population in Sub Saharan Africa.
Timing should also consider the dominance of in-market local players. For example, Brazil is an attractive Latin American market with sustained high Compound Annual Growth Rates (CAGR) and macroeconomic indicators. However, the Brazilian market is characterised by strong dominant local players and so an entry strategy for an ‘outsider’ must evaluate this and consider local partnerships. When considering a joint venture, finding the ’right fit partner’ between success and failure. What does an ideal partner look like, how do we find that partner and then what risks have we identified and what is the investment required?
Why is time married with timing so important? Entry into many emerging markets is a journey. For some it is not as long as others. One can assume it is always longer than one predicts or stated by the countries’ regulatory authorities and potential distributor partners.
Take for example South Africa – seen as falling under the category of emerging markets but probably by all counts a developed market, highly regulated like the European markets, a mature market. It has patent protection with enforced generic substitution at patent expiry.
Anyone wanting to enter the South African market should be forewarned that it is probably at least a 24-36 months journey from time of submission to the regulatory authority (MCA) to complete the regulatory process. The timing to be granted registration is completely open-ended because one cannot be certain what deficiencies in the dossiers will be raised by the regulatory authority or by when. Then one must consider one’s own company ability to respond to the queries and of course those manufacturing site audits and inspections – one has no idea when those will happen and if they will throw up areas for rectification in the manufacturing process.
Furthermore, only a legally-registered Company in South Africa may hold the registrations – so a pre-requisite to entry is to register an affiliate, employ a superintendent pharmacist, have your own premises (all costs so far) to register the products – and all this takes time as well as money!
“A shrewd out-licensing vendor / broker would have filed in good time to hit the market at the right time and sell the MA to a purchaser”
There is an alternative for South Africa and that is to use an independent company to manage the registration process for you and appoint them as “Holder of Certificate of Registration (HCR)” which circumvents some of the costs but exposes a company to IP and Trademark risks since everything will be registered in the name of the HCR. It boils down to risk evaluation and risk management.
For branded generics in the South African market in this example, recognising that a considerable number of patents will expire in the period 2011 – 2015, the time for registration to be completed becomes one of the critical success factors since it impacts on timing of entry to the market.
By the time the registration is granted for a branded generic, one could have missed the proverbial boat because the branded generics market is characterised by a relatively high price versus the innovator at patent expiry and thereafter continuous price erosion over time. The steepness of the curve may be different for different molecules. Some of you may recollect how the price of omeprazole 20mg x 28 capsules in England fell from around £25 in 2002 to around £1 by 2009! Imagine coming in to the market at 2008!
Message? Timing is critical.
What should companies do with this time versus timing issue?
Companies need to consider in their market entry strategy a scenario-based approach on what the market may look like at the end of a potentially long regulatory registration process. Indeed for the South Africa example, one has to question whether to register one’s own or buy through an out-licenced approach from a vendor broker with a complete own-label MA package. A shrewd out-licensing vendor / broker would have filed in good time to hit the market at the right time and sell the MA to a purchaser – at a good premium to circumvent the registration process. What is required in this case is the ability to carry out due diligence on the potential vendor and sharp commercial negotiation skills – and preferably with someone who has done it before and not from a text book and some role plays at a training course!
“On the matter of time – be prepared for the journey – there are no quick wins.”
On the matter of time – be prepared for the journey – there are no quick wins. The quicker one tries to go, the greater the risks one exposes the business to. Follow the process diligently and never be tempted to follow any recommendations from third parties to take ‘short cuts’ – there are no short cuts – take it from me after all my years of dealing with emerging markets. Make sure therefore that the thinking is done up front, that there is buy-in from senior managers and directors to the journey and follow the path along the journey. It goes without saying that make sure the financial director is on-board and that the numbers make sense and the scenarios have been clearly communicated. Then review regularly.
Finally consider a portfolio approach in your emerging markets strategy. There is the obvious attraction of the big BRIC economies. But whilst the opportunities are attractive, consider also that the investment required to succeed is high. Therefore one may benefit from a portfolio approach of some big ‘star’ markets along with selected markets in different Continents of Latin America, Africa, Middle East, Eastern Europe and Asia. This is similar to an investment plan with a financial advisor. Spread the risks and tap into the fact that some countries will start generating revenue against the investment quicker than others whilst the longer markets to enter may yield much higher results than the others. It is about trying to balance the investments in a portfolio manner.
Managing the portfolio requires programme management skills – managing multiple projects with differing timelines and interdependencies across different departments in a company across different international locations requires different skills than pure and simple project management with the proverbial GANTT charts.
In this concluding article on emerging markets, we have looked at the concept of time and timing and described how the two are different but important in their own rights:
• Timing of entry to the market – for a generic is it the right time or are you entering as number 51 and not differentiated from the other 50 generics? For an innovator are you the first or an early entrant to the market with a well-differentiated offering? If the market is dominated by local players, how can you succeed as the outsider coming in? If it has to be a joint venture, what does an ideal partner look like and what are the non-negotiables in any joint venture?
• Time to complete and manage the regulatory process – a Company’s regulatory capabilities, assets and their ability to comply to different climatic zone requirements as well as preparedness to register trademarks and IP through third party distributors?
• Consideration as to how the market might be at the end of the regulatory process using a scenario-based approach.
Time to market may dramatically impact on the agreed strategy. For example, if there are inordinate delays in the registration process arising from dossier deficiencies or quite simply the company does not have compliant dossiers for different climatic zone, there is a risk that the market may not be as attractive as initially thought. Rarely does delay make the market more attractive in my experience, but I am sure there will be an example out there in pharma where a delay to the market made market entry more attractive for a new entrant.
Finally, it may be useful to consider emerging markets in a financial investment concept of portfolio comprising major emerging markets such as BRIC with smaller carefully evaluated and selected markets in Latin America, Africa, Middle East, Eastern Europe and Asia. Whilst they may all differ in size of opportunity, there may be differences in speed to generate revenue to offset some of the longer investment times on the journey for the bigger opportunities.
About the author
Amit Vaidya is the Director of Samkoman Consulting Ltd. Samkoman Consulting offers emerging markets business development consulting services with a particular emphasis on using distributors and agent based trading models.
Samkoman Consulting can add value by helping pharmaceutical clients in three core areas:
1. Developing their emerging market entry strategies through identifying appropriate commercial trading models cognizant of their product portfolio using distributors.
2. Increasing the commercial effectiveness of their current business in emerging markets through portfolio optimisation, carrying out a review of distributors and agents, assessing distributor- fit aligned to current client requirements, reviewing commercial models and agreements for re-negotiation, benchmarking Sales force effectiveness and consulting on business consolidation as a result of merger or acquisitions (products, processes, support infrastructure and supply chain/logistics).
3. Coaching senior managers and project teams on emerging markets strategy, entry and commercial effectiveness.
Over 30 years experience in pharmaceuticals spanning roles in Sales Management, Commercial Development, Sales Force Effectiveness, Change Management, Supply Chain, Logistics and International Business Management in Territorial, Area and Global roles.
Hands-on blue-chip experience with AstraZeneca for over 20 years, latterly as Territory Director Africa for over 6 years in a General Management role running the full P&,L for 18 countries in Sub Saharan Africa and recently setting up a new pan-African branded generics distributor business from scratch for a market leader branded generics Company in Turkey.
Expertise and focus on commercial negotiations and trading models using distributors in emerging markets with specialist hands-on current knowledge, networks and experience of Sub Saharan Africa.
Tel +44 1260 280306 / + 44 7860 617081
Do you consider a portfolio approach in your emerging markets strategy?