Will pharma forsake emerging markets?
In pharmaphorum's emerging markets themes month, Salil Kallianpur questions the importance of the emerging markets to the pharmaceutical industry.
The post-9/11 world was a difficult place for both political and business leaders to adjust to. As power structures in the world shifted, the developed world struggled to retain political and economic control in a scenario sometimes described as the 'decline of the West'. Capital fled these risky markets in search of those that were relatively safe and presented opportunities to grow. The influx of capital from the West into markets around the world caused 'the rise of the rest'. These markets in the developing world quickly adopted open-door policies and welcomed large western corporations to their humungous customer bases.
This context is important to understand how the pharmaceutical industry viewed the developing world and how they leveraged opportunities that it offered. It is also important to understand how governments and policy makers in the developing world responded to the influence that western businesses wielded in their jurisdiction.
While growth strategies in the pharmaceutical industry had become dependent on expansion into emerging markets, they did not seem to consider a growing middle class in these areas as an opportunity to improve the quality of life there. Instead companies treated these populations just like their customers in the western world. Almost identical business strategies were deployed in geographies that were – in reality – culturally, socially and economically very different.
What caused markets to 'emerge'?
What the industry failed to acknowledge was the 'DNA of the emerging markets': the failure of state-led economic development and the need for capital investment. First, state-led economic development failed to produce sustainable growth in the traditional developing countries. This failure and its tremendous negative impact pushed those countries to adopt open door policies, and to change from the state's being in charge of the economy to facilitating economic growth along market-oriented lines. Second, developing counties desperately needed capital to finance their development, but traditional government borrowing failed to fuel the development process.
In light of the unsatisfactory results of government borrowing, developing countries began to rely on equity investment as a means of financing economic growth. They sought to attract equity investment from private investors who they hoped would become their partners in development. In the past, the pharmaceutical industry failed to grasp this.
As governments saw industry practices that seemed more exploitative than collaborative, the enthusiasm for foreign equity seemed to disappear. Emerging markets became keen to ensure that medicines were more accessible and affordable to their population, while also ensuring that healthcare bills remained within control. So, in parallel to rolling out health cover, China for example has also introduced several cost containment initiatives that are expected to keep costs under check.
Similarly, other markets increased their market access barriers. Turkey — which possesses a generous public health insurance system — recently increased its social security discount rates on reimbursed drugs. This, along with changes to the reference pricing system, saw the pharma industry lose billions of dollars in that country. Russia and India also took steps towards controlling prices of their respective essential drugs. Brazil has adopted several protectionist policies that seek to assist its domestic industry. The bad news is that matters like these that were of utmost importance to local governments; lay at loggerheads with business plans of the pharmaceutical industry.
What should pharma do in Emerging Markets?
The initial enthusiasm that erupted when emerging markets first demonstrated their potential has often given way to disappointment, as early—and possibly exaggerated—expectations remain largely unfulfilled. Since go-to-market models typical of mature economies have often failed to adequately tap the huge potential attributed to emerging markets, pharmaceutical industry leaders are rethinking and, in many cases, transforming their operating models to better address what they have learned about these markets. This is the good news.
Traditional operating models have for decades been largely defined by fully integrated operations, which included significant investments in R&D hubs and selected manufacturing sites. Emerging markets, on the other hand, have usually been regarded as places only for selling medicines, but very rarely as potential locations for developing or manufacturing them. This view is now being challenged.
The pharmaceutical industry is now trying to balance the drive to build a sustainable business through increased market share, volume, and profits with a global commitment to work with governments and other stakeholders to support efforts to deliver medicines to as many people as possible. Localization is important as Brazil and Turkey have shown. Investments in local research, development and manufacturing will be effective levers to succeed in this geography. The industry does not want to be seen as hesitant to commit itself to long-term investments in the region. To paraphrase a well-known cliché, the industry well realizes that winners will be those who understand how to balance their global competencies with tailored approaches for the local environment. And it is rapidly preparing itself to do so. The industry is actively seeking to avoid an influx of western business practices resulting in a mirror image of western markets, but with a lower price structure.
Are Emerging Markets still important?
By various estimates, the global pharmaceutical industry is expected to derive 30-40% of its total sales in emerging markets. Companies are now actively considering customer clusters, finding cross-border similarities, establishing global reach with local relevance, and creating effective and rapid execution capabilities to be better able to gain the foothold in emerging markets they've long been trying to achieve.
As the pharmaceutical industry readies itself for its next wave of growth, are the highly attractive emerging markets occupying an expanding share of its geographical portfolio? The question is more relevant now as US stocks have rallied impressively over the past several months while emerging markets stocks are essentially unchanged since the beginning of 2010 and currencies have been volatile. Even though these have been lagging for several years, investors should not be surprised if that trend reverses in 2014 as the Federal Reserve winds down quantitative easing and moves toward a more hawkish monetary policy. The impact has been visible now for a few weeks as bourses across emerging markets rallied.
The term "emerging" hints at a process that will in all likelihood unfold over a period of time. It is estimated that it will take a minimum of a decade to build the necessary delivery infrastructure and create the ability to pay for sophisticated pharmaceuticals in the emerging world before the pharmaceutical markets there begin to reach the value and volume of those that currently exist in the developed world. Therein lays the great opportunity.
As the pharma industry grabs the chance to channelize its global focus into the developed world for the good of the people there, its business practices will evolve to embrace and not forsake markets that emerge to support it.
About the author:
Salil Kallianpur is a health care marketing professional based in Mumbai, India. He has experience in the pharmaceutical and the medical devices industries in India. He is an avid reader and follows the health care industry, its politics, strategy and current affairs and writes on the intersection of health care and life in general at his blog "My Pharma Reviews". The views in this article are his own and not those of his employer.
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