The Staying Power of Emerging Markets

Whatever used to be wrong with the world of big Pharma could be fixed with a single tag phrase: emerging country markets. Most of the majors have invested heavily in this geographic segment, and the biggest of the big-companies like Novartis-now rely on it for more than a quarter of their global sales. Like all good things, however, there are shadows amidst the sunlight, and the task of turning volume sales into sustainable profits is getting harder. Economic growth in these markets is fading as commodity prices ditch in tandem with capital flight and a rising public and private debt burden. Local governance challenges are adding to the risk of building the reputation essential to securing commercial rewards. Most important, can these markets maintain the GDP growth momentum necessary to make that difficult transition to a strong middle class of consumers able to pay for the quality medicines that drive better health?  

To assess the way forward, Pharm Exec met recently in a Roundtable exchange with principals from the McKinsey & Co. pharmaceutical practice emerging

country market access team. The message: rich opportunities still await those companies that (1) put long-term potential before one-off profit; (2) live-and learn-locally to find the right path to market access, because every geography is unique; and (3) recognize the importance of investing in human capital as a differentiating factor against the competition. And knowing who that competition is comes from having your boots firmly planted on native ground: the McKinsey Global Institute estimates that by 2025, 45% of the Fortune 500 list of the world’s biggest companies will be based in emerging markets. 

The following are highlights from the conversation.        

PE: McKinsey & Co. is best known for providing forward looking strategic advice to the “c-suite.” As a scene setter, what’s the one question that comes up most frequently in your work with multinational biopharma companies on emerging country markets?    

Boris Bogdan, Regional Leader EMEA, Pharmaceuticals and Medical Products (PMP) Practice: The answer depends on an idea fundamental to competing successfully in the emerging countries. Every market is different; there is no “one-size-fits -all” approach that works across geographies. This has been true since the industry began focusing on opportunities outside the mature market triad of North America, Europe, and Japan a decade ago-and we don’t see it changing, because today conditions in the emerging counties require an even greater level of local commitment. 

In non-EU Eastern Europe, Russia, and Central Asia, the key question facing the industry is precisely about the level of that commitment: given the price collapse of oil and other commodities and the accompanying pressures on fiscal stability and economic growth, should they continue to invest and build up our local

presence? Should they instead fall back to a “hibernation” mode, or even withdraw from the market entirely? Companies are carefully evaluating each market and opting to consolidate some operations, which means they are withdrawing from several of the smaller regional markets. Strategically, it’s an important decision as a common theme in government policy in this region is pressure to make binding commitments to local manufacturing, distribution/packaging, and research-all of which can be costly when they don’t conform to the business imperative for global economies of scale.   

Tania Holt, Partner for Africa, PMP Practice: Africa is a large continent consisting of 54 countries, each of which is distinctive in market demographics, health status, and medical practice. The top-of-mind question is how to move beyond the traditional focus on South Africa and North Africa and build a viable business presence across sub-Saharan Africa-still a blank spot for most companies. What does a go-to-market business model look like here? While industry recognizes the long-term potential in Africa, there are concerns that the standard approach of relying on the high-end discretionary spend customer through physician detailing might not be the best way forward. Investors realize this is the one region where you cannot find long-term success by repeating the playbook in mature markets. Instead, investors are seeking a more innovative and customized approach to unlock the enormous latent demand for better healthcare that exists throughout the sub-Saharan zone. 

Julio Dreszer, Regional Leader, Americas, PMP Practice: Industry is asking a question relevant to all emerging country markets, and which naturally reflects the evolution in how companies take advantage of this burgeoning global market for healthcare.   It’s simple: how do I capitalize on the growth factors that drive potential in emerging countries? In the Americas, there is a focus on two aspects of this growth. The first is the diversity of local health systems and the new financing and delivery infrastructure now being established throughout Latin America. The changes call for a focused strategy to advance market access for products. How do you assess commercial potential for your product line in national health systems that now provide a variety of options, ranging from full or partial public reimbursement to private insurance as well as the traditional self-pay, out of pocket model?  

The second is managing risk, particularly across therapeutic categories, to reconcile what you have in your portfolio against local public health priorities and patient need. In other words, the demand for great therapies is there, but are your product offerings consistent with what payers and patients want? The two have to be in sync if you want to capture a share of the growth. Thus, it’s important to examine the drivers in the health system, review the commercial portfolio, and then decide where you want to play. Is the approach a broadly-based one that covers not only the top of the pyramid but the bottom and everything in between as well? Or is it a tailored strategy built on specialty or biologic drugs that appeal to a narrow innovative core?   

Hence, when an executive asks what their company’s strategy should be for emerging country markets, I often say there is no answer until you’ve examined your product portfolio and, based on that, figure out how to ensure that portfolio is best positioned to capitalize on incentives embedded in the local health system. So how you play in each market will differ, based on a good understanding of these distinctive market characteristics.   

Gaobo Zhou, Regional Leader Asia, PMP Practice: The key issue in China today is making sense of the economy’s slower growth trajectory and what it means for biopharmaceuticals. The sector still has an enviable growth rate compared to the industrialized country markets, but it will be slower that the double digits we’ve seen in the past five years. Pricing is a challenge due to a combination of regulatory factors and the impact of many branded drugs that are nearing the end of their life cycle. With the off-patent segment poised to assume a larger share of the product mix, the question is, again, how do you drive future growth? It’s a salient point when 90% of the market still consists of commodity generic products where low-cost local producers dominate. 

One way is for foreign-based drugmakers to introduce in China products that appeal to patients’ desire for innovations that address prevalent local diseases. The government is promoting the transition to quality biologics and other innovative treatments, with the recently announced boost to the mandate of the CFDA serving as a case in point. Change will be necessary, as the government pushes domestic players to upgrade their capabilities and establish a presence in the global market. One well-traveled strategy is to start producing APIs (active pharmaceutical ingredients) for markets outside of China, where quality standards are high. But only a few local firms appear ready to scale the innovation and quality divide with internationally competitive finished products. Hence, it falls to the foreign multinationals to figure out first how to take advantage of all the government pressure to perform better. The dilemma is that there are still risks to making China the launch market of choice for cutting edge therapies.

PE: Can you identify the most transformative business trend within your region over the last 10 years? 

Dreszer: In Latin America, it is the gradual evolution of a sustainable financing and delivery infrastructure for healthcare. Institutions have taken root and a budgeted allocation of resources is in place. For example, Brazil and Mexico now have public reimbursement programs that provide universal coverage for drugs to treat conditions identified as priorities from a public health perspective.
Governments are actively making decisions on what drugs to cover, using formal budget planning to estimate the tradeoffs involved. Although private insurance mechanisms are becoming more common, it is interesting that most of the big money to support reimbursement of innovative, high-cost drugs is coming from the public side. In practice, big Pharma has to be conversant in the politics of government partnering to become a sustainable business in Latin America.  

Bogdan: Opportunity in Russia and periphery along with Central Asia have become more differentiated due to variant rates of growth in GDP. This means that new, attractive markets are emerging beyond the big country players like Russia, Turkey, and Ukraine. Kazakhstan is the best example of this trend, with a growing drugs market whose prospects have been hidden due to the larger pall cast by sanctions and the commodity recession in Russia. Kazakhstan is following a carefully drawn path to health reform, focusing on building physical infrastructure and professionalizing their human capital-and the foreign multinationals are paying attention. 

Another important development is the commitment of governments in the region to make smarter decisions on building market access for higher priced innovative drugs. Every country is looking to create networks to share data on drug prices with other countries and to build capabilities around health technology assessment (HTA). But much of this is still aspirational. The tool of choice remains the budget impact estimate, a blunt instrument by any measure. Politics matter here.

Holt: In Africa, companies are starting to expand their presence beyond South Africa and North Africa along with some representation in the old colonial

markets associated with their home country base. We are seeing French-based and UK-based drug companies investing in Portuguese-speaking Angola, for example. Another trend is that you do not see corporate social responsibility (CSR) as the rationale for investing in Africa. The mindset today is to forgo history and heritage for something more pragmatic: where is the best business growth opportunity and how can we capture it?  

Zhou: The challenge of patient access and coverage have been consistent themes confronting foreign drugmakers in China over the past decade. Obtaining share of voice in the more affluent coastal cities and major hospitals has gradually become more difficult, persuading pace-setters like AstraZeneca to extend investments to second-tier interior cities with untapped demand for better healthcare. 

That’s still a viable strategy, but overall the situation has become much more complex. Patients are more discriminating and are “market shopping” to get the best treatment, which means that drug companies need to develop a detailed

understanding of how patients in their therapeutic areas are diagnosed and treated. Every company has to create its own “ecosystem of delivery” by cultivating ties with KOLs, professional associations, and government agencies while raising the talent/expertise bar on sales reps-all to ensure patients have access to quality medicines. Affordability remains the key to access, so several companies are investing in their own privately sponsored insurance vehicles to bring more patients into the reimbursement stream.  You have to work every appropriate angle to get the product on reimbursement lists.

PE: A common thread in your assessment of changes is that products do make a difference-building a strategy tailored to each market begins with the portfolio profile.   

Holt: A company with bench strength in high-end oncology products, where the out-of-pocket segment is going to be quite limited-in Africa, maybe less than a half of one percent of the patient population-will need to focus on obtaining third-party reimbursement, from government or private insurance. If the portfolio is centered on lower-priced primary care medicines, the eligible population expands significantly and a reimbursement portal is less important. For example, anti-infectives will find a market even if access is not subsidized in some form. Thus, as a general rule, companies with a diversified portfolio around a strong primary care orientation tend to have the stronger presence in emerging countries. Companies with a more specialized portfolio, as in biologics, will be likely to put their emphasis on a few select markets that may support the brand through partnerships with the private sector and government.  

Dreszer: There is an imperative today to not only grow sales but to secure long-term profitability as well. It requires being able to achieve strong volume growth without compromising too much on the margins that deliver profits.

8 Steps to Engagement (click to enlarge)

Getting this right is particularly important in the largest emerging markets.  

Bogdan: What we are really talking about is access. Our research (see sidebar) indicates that the most successful companies rank access, not profits, as their first priority. They recognize that profits will come, but only after you invest in infrastructure, build strong KOL relationships, and boost patient adherence with the right disease awareness programs.    It’s important to think beyond the product, to engage governments in helping them spend healthcare funds more wisely, and through partnerships geared to removing barriers to patient access.  

PE: A common theme here is the importance of managing each emerging country business differently, based on its distinctive market characteristics. If a decentralized approach to decision-making is key to success, what is the appropriate role for HQ? How does a biopharma organization strike the right balance between autonomy and control?  

Jan Ascher, Global Leader, PMP: A strategy for emerging markets must be based on three pillars. The first is maintaining a standard around the overall corporate interest in building a productive business with global reach. HQ works to ensure all the constituent parts contribute to the objectives of the whole, which is to maximize company return on revenues while conforming to its legal and reputational obligations. It also prioritizes among the countries as far as the best long-term opportunities are concerned.   

The second is to define the overall strategy for the product portfolio and provide oversight so that necessary resources are applied in each market, whether it be R&D, commercial sales and development, or medical affairs.  This involves everything from centralized procurement of services to building a regional drug development center in China. 

The third is overseeing the deployment of management talent, by transferring relevant skills to fill the gaps that often exist locally. Finding and supporting the right people with a broad mindset is a critical task for HQ, particularly now that corporate reputation cannot be ring fenced. 

PE: Overall, emerging country markets are facing a reversal in economic conditions due to the fadeout of the commodity boom, fiscal deficits, currency instability linked to the strong US dollar, and unresolved governance issues. Has the situation been overblown-are emerging markets still a good deal for biopharma?  

Dreszer: The only thing that has changed is that opportunities must be evaluated over a longer time frame. It also requires greater confidence about the merits of

your strategy. Consistency counts, too. In some markets, economic privations will increase the temptation to cut and run. Experience in Latin America suggests that this is not a wise move-the winners in countries like Argentina are those that found a way to make it through the debt default and currency crises, reaping the benefits when the economy came back. You have to see these markets as a portfolio of risk; it’s a long cycle business. The biggest mistake is to make strategic decisions about the local business on the basis of the situation today. 

Bogdan: Russia has a population of 142 million. It will always be a market with the size and reach to stand on its own. Again, companies will have to wait longer for the pay off. It’s a question of timing. Throughout the region, there are positives beyond the adverse economic conditions, the most important of which is the steady trend toward the professionalization of health services. In addition to Russia, Turkey, Kazakhstan, and the Ukraine are modernizing their delivery and financing infrastructure. Iran and its long dormant health sector is a wild card that may be interesting for some foreign companies once economic sanctions are lifted.   

Holt: Two factors are driving the current situation in Africa. The first is the plunge in oil prices, which has a disproportionate impact on some of the big economies, including Nigeria, Angola and Gabon. The second is the knock-off effect of the downturn in China. The PRC is a major investor in Africa, particularly in financing large-scale infrastructure projects at the country level.  

That said, demographics paint a positive picture long-term. Africa’s population is young and growing at a rate faster than any other continent. By 2025, 70% of African households will have an annual income greater than $5,000, which is the accepted entry point for an emerging middle-class lifestyle-with enough discretionary income to spend on health. 

Given the potential customer base, drugmakers are slowly building a long-term presence in strategic markets like Nigeria, with its 180 million people, while maintaining a stable base in South Africa and the North Africa states. East Africa, led by Kenya, is attracting interest because its small generic companies with links to Indian producers offer a vision of the future for off-patent medicines. 

Africa is also a source of innovation in healthcare technologies. Its limited infrastructure offers the opportunity to invest and test new approaches. Donor agencies and private enterprise are exploring health applications from mobile phones, particularly in the collection, analysis, and dissemination of patient data. The technology is applicable to everything from the communication of treatment guidelines to community health workers in rural areas to the practice of telemedicine. 

PE: Hasn’t the downturn endangered a crucial transition in the emerging market economies-the establishment of a strong, viable middle-class able to afford high-quality medicines?  

Dreszer: The number of people that have evolved into the middle class has accelerated sharply over the past 10 years Lower growth is definitely a bump in the road, but the trend is clear and we don’t see that reversing.  

Zhou: The middle class transition in China has been taking place for some time. You must evaluate this transition in the context of other positive changes such as urbanization, which evidence demonstrates enhances patient awareness and access to healthcare services. Demand for healthcare from an aspiring middle class also puts more pressure on the public health system, which is good for reforms that improve quality. This is true not just for China, but for other countries as well.

PE: Can we conclude by identifying the most important capabilities, skills and credentials to enable biopharma companies to compete successfully in emerging country markets over the next five to 10 years?

Bogdan: Companies must move from a narrow, limited product focus to a system-wide perspective that relies on outreach to external stakeholders. It’s going to be about engaging with governments, providers, and patients to solve barriers to access-to spread best practices. Multinational drugmakers have considerable expertise and awareness that can help emerging country policymakers move the delivery and financing of healthcare to the next level. This will raise the level of trust, which, in a reputation-driven world, is going to be an essential part of a foreign company’s license to operate.  

Dreszer: Biopharma has been active in emerging country markets for several decades. It took a while to resolve key
strategic questions like whether to make big investments in branded generics as a way to gain market share. Applying that past learning curve to keep the thinking fresh about how to benefit from the growth cycles of the future will be a real competitive differentiator. The next wave in emerging markets is not going to involve more of the same. Companies will need to think and act differently.  

For example, everyone acknowledges that obtaining reimbursement status is a critical business issue. But achieving that alone is not going to be enough to create access.  In some markets, the patient may be eligible to have a drug reimbursed, but may lack the money or the time to take the bus ride to the place where they can get diagnosed and treated. Access in emerging markets is all about connecting the patient to the product-end to end. 

Zhou: Competition from local industry in the big emerging markets will increase. This is going to require the foreign multinationals to refine their ground game through more effective partnering and outreach to the KOLs that matter most to the product portfolio. In China, we will see more competition between the big local players and smaller biotech companies, which will be reflected in more frequent strategic tie-ups to be better positioned for entry to the global markets. 

Foreign drugmakers must recognize that innovation in the Chinese biopharma industry is increasing dramatically. The rationale for continuing to invest in China, even as economic growth slows, will be the ability to tap into this expertise through “win-win” partnerships with leaders of the local industry. In fact, the best long-term opportunities can be found by staying close to the market. Bright spots include continued expansion of China’s interior mid- and low-tier market, where government is funding hospital infrastructure to advance the progress of universal health insurance coverage; expanded regional pharmacy networks, which gives industry a new distribution and access channel for medicines; and a big push for digital health, including new platforms for remote physician consultations, online sales of medicines, and customized big data analytics. 

Ascher: The referenced article reflects our thinking on what biopharma must do to stay relevant. A point that we emphasize is HQ investing in human capital through the sponsorship of capabilities training for local executives. This accomplishes two objectives: (1) defining what the necessary management skills are to succeed in the local environment, with access-building capabilities as a

central precept; and (2) embedding such skills internally so that proficiencies don’t go lacking within the organization.  

We found it is particularly important to develop a talent pool with strong executive leadership capabilities, which means combining the ability to drive the local business plan with the outward-facing political savvy to navigate the many sensitivities involved in relationships with external stakeholders-including HQ. In other words, companies should cultivate the multi-faceted characteristics of a “Chief Access Officer” as their role model for leadership in every emerging country market.  Field managers who simply execute orders is not the formula for future success. Some companies are deliberately recruiting talent from other industries outside biopharma-this virtually guarantees a split with status quo, linear thinking, and bolsters the creativity side of the management equation.

William Looney is Pharm Exec's Editor-in-Chief. He can be reached at wlooney@advanstar.com