Harnessing Emerging Markets
The emerging markets are home to 85 percent of the world’s population and represent a potentially massive source of untapped consumption. How can the pharma industry capitalize on this huge, underserved market?
Ambuj Jain |
Regardless of industry, whether it be smart phones or medicines, emerging markets hold enough ‘pockets of non-consumption’ to be of commercial interest. However, issues such as per capita income and low levels of reimbursement have led some to wonder how deep these pockets are. The aim of our recent workshop at Cambridge Consultants was to bring together senior executives from across the pharma industry to explore the sustainable growth potential in emerging markets, particularly the Indian market, and assess the opportunities and challenges of the next 5–15 years. The findings were published in a recent report (1). Here, I share some of our key discoveries and offer advice on how to make your journey into the emerging markets a successful one.
A rebalancing act
If you single out any multinational pharmaceutical corporation, be it Pfizer, Novartis, GlaxoSmithKline, or Abbot, and look at its annual performance over the last 6-7 years, you will see rather low levels of revenue growth in the US or European markets – maybe 1-4 percent at best. Now consider this: the corresponding figures from emerging markets are in the 15–20 percent range.
How? The trend is part of a global rebalancing away from mature economies. Whereas industries previously saw challenges in the emerging markets, they now see opportunities. And the pharmaceutical industry too is embracing this change; multinationals are setting up local operations, often giving them significant autonomy, and exploring numerous innovative arrangements to access local markets. Indeed, emerging markets should expect to receive 30 percent of global pharmaceutical spend in 2016, which I predict will increase to 35 percent in the next 5 –7 years. Currently, a large organization may have an 80/20 revenue split between developed and emerging markets, but this too is evolving. Soon, I believe these companies may start moving towards a 65/35 split. It’s all part of a trend that’s occurring in all industry sectors.
We can see the potential for growth in an emerging market if we take an example from another industry: smart phone technology. Four years ago, Apple India had a revenue of around $250 million and was probably overlooked in boardrooms across the world as contributing only a tiny slither of Apple’s total $80 billion pot. But something surprising happened in the last four years – Apple India consistently doubled its yearly revenue and now, in 2015, is chasing two billion dollars (3 percent of the total Apple revenue), a number that is growing exponentially. As Apple India’s revenue increases, so too does its influence. I expect the pharmaceutical market to evolve in a similar way, especially given the growing Indian middle class, with its burgeoning spending power. Ultimately, this has to translate into growth in the pharmaceutical market. And it’s happening already – look at Abbot Pharma. In the last few years, Abbot has started chasing a billion dollars in revenue in the Indian market alone, and its projected revenue growth rates are 16–20 percent.
However, it would be a mistake to think that all emerging markets are the same, or that any of them will be easy markets to enter. There are still unique challenges to address. When deciding whether to enter a market, an organization has to balance the demand and supply considerations with its own company culture, resources and vision. For example, a company that needs a very quick return on its investment should probably focus on a smaller market, such as Vietnam, where you can get a product to market quicker and start making returns that can then be used to enter bigger markets like South Africa.
There is a misconception that emerging markets are only interested in low-cost mass-market products, but it is possible to price the product according to the value you are offering. Each emerging market has its own intricacies and idiosyncrasies, which demands the tailoring of specific commercial and production models orientated around accessibility and affordability to ensure value at the right price. Many emerging markets are characterized by high levels of out-of-pocket expenditure for medications, but we should also consider that over 208 million households have an average income above $10,000 per annum – which is more than the combined income for many of households in the US and EU. There is clearly a significant chunk of the population that can afford some level of healthcare expenditure. In addition, we’re also seeing emerging markets starting to converge with the developed markets in some aspects of healthcare dynamics.
Like mature markets, emerging markets have many stakeholders in the value chain. But a significant difference between mature and emerging markets always used to be the identity of the payer. In developed markets, the payer is the government (for example, the UK) or an insurance company (for example, the US). In these markets, a patient is entitled to receive medicine or treatment, but someone else funds it. Until a few years ago, people living in emerging markets had to pay out of their own pocket to get their medication, which essentially meant that most people didn’t receive treatment. Recently, some governments, such as the Indian government, have been putting more money into public health, with a focus on making healthcare affordable for their population. At the same time, private insurance or social insurance systems are expanding in many countries. The pockets of untapped consumption we spoke of earlier can now be accessed.
Before companies start establishing local operations in a particular emerging market, they should invest time and effort in building a close collaboration with the government of that country. Close liaison with policy makers may provide valuable insights into market dynamics and uncover collaboration opportunities that could otherwise be missed. Furthermore, many emerging markets have some elements of protectionism in their industrial policy, and it may be impossible to access the market without going through government channels. Even so, governments will probably try to negotiate a lower price so that you will end up selling at a lower margin, but then you will be able to supply a high volume to that market. In addition, the government may take care of distribution channels, product awareness and making the product available to the patient, which means you can start making revenues much earlier. In some cases, the annual volume and price may be guaranteed over a set period of time, giving the manufacturer a valuable level of certainty. However, nothing is free; in exchange for the above benefits, the government is likely to require significant local investment or technology transfer. Nevertheless, all things considered, I believe that companies would benefit from examining the potential for their products to make their mark in emerging market.
Another key parameter that affects the pharma market in an emerging economy is the nature of the regulatory environment. Some countries have rigorous regulatory regimes, while others have none. Markets that don’t have regulatory guidelines are often perceived as being unsophisticated. However, a lax regulatory regime can be an advantage, since a market with a lower threshold may be a convenient entry point for an innovative product, allowing it to rapidly gain in-market data and momentum. But it is important to remember that these markets do eventually adopt guidelines from the US or Europe, resulting in good manufacturing practice (GMP) regulations in the long term. And that means that products approved in these markets should also be acceptable to the regulators in mature markets.
The importance of innovation
Investment in innovation is important in a market like India, which has 80 percent branded generic saturation, multiple iterations of the same drugs and a dwindling pipeline of new drugs. Regarding areas of focus for new products, I believe that we can drive innovation through reformulation (e.g., extended release tablets, syrup formulations of unpalatable drugs, or nasal delivery formulations of drugs that are currently given by injection) and novel drug delivery devices. New drug delivery devices will be important because the disease profile is changing in India. Infectious diseases are being replaced by chronic, so-called Western diseases, such as diabetes, cardiovascular disorders, hypertension, chronic respiratory disorders, neurological diseases, and so on. Innovation is investment intensive, so to get an adequate return it may be necessary to ‘cluster’ countries that can absorb a particularly innovation you are trying to drive, rather than focusing on just one market.
As an example of drug delivery device success, let’s look at the Sanofi insulin pen. By outsourcing design to the UK and manufacturing the pen in India, Sanofi was able to create a quality product with lower costs. Product uptake has been very strong, suggesting pent-up demand (although sales have been assisted by a strong marketing and branding campaign). But the main point is that Sanofi was able to offer the right product at the right value, and, as a consequence, many more patients are now able to afford insulin pen therapy. In fact, the product has been so successful over the last two and a half years that it has significantly changed the way emerging markets are looking at insulin therapy.
In brief, a focus on innovation and technology is important, but it has to be well researched, keeping the patient and other stakeholders involved in the overall system – that is how to make a real impact.
Each emerging market is developing its own ecosystem involving patients, pharmacists, insurance companies and the government. The way in which pharma companies collaborate – and engage – with all of these stakeholders will affect the position and success they achieve in an emerging market. Companies must be aware of the important trends that are manifesting in these markets. For example, patient services are expected to grow significantly in the next 5 to 10 years, driven by the evolution of changing disease profiles. And the increasing incidence of lifelong chronic therapies will drive patient desire for new drug delivery techniques, especially systems that allow patients to self-administer drugs at home.
Another key trend is that of “reverse innovation”. An example of this comes from GE Healthcare’s Indian innovation center, which developed a lower-priced version of a portable ECG device specifically for the subcontinent. It only has about 80 percent of the features of the standard ECG machine sold in the US, but still works effectively. It has achieved a great deal of success in India and a few other markets, which is why reverse innovation is important: a product that was developed for the Indian market, at the right value and at an appropriate price (so that many more patients were able to afford it), will likely return to the Western market and be successful there too. In other words, by focusing on the needs of emerging markets, multinational pharmaceuticals will also be serving – eventually – the mature markets too.
Ambuj Jain is India general manager at Cambridge Consultants.
- Cambridge Consultants, “Emerging Markets: an Opportunity for Pharma to Drive Sustainable Growth,” (June, 2015). www.cambridgeconsultants.com