Government: Big Pharma's Best Friend in Emerging Markets?

As multinational pharmaceutical companies rush to establish themselves in fast-growing emerging markets, they face a dilemma. While companies refine their value proposition for medical professionals and their patients, governments are asking what economic value they will bring to the country overall. As governments in emerging markets have significant influence on market access, one key to market entry will be providing a strategic Corporate Value Proposition (CVP) for each market.

At a time when pharmaceutical companies are rationalizing what used to be considered necessary investments in manufacturing and R&D in developed markets, adding capacity in emerging markets ranks low on most companies' priority lists. Yet, in many of the high-growth emerging markets, if companies want to establish a strong market footprint they must offer the government a robust CVP. The balance is difficult to strike—too little investment in emerging markets could undercut performance in markets that drive growth; too much investment, too soon, and companies will make themselves vulnerable in markets still developing legal and administrative stability. Good practices are becoming apparent, however, and wise companies will take advantage of them.

Why do companies need a CVP?

Today, a CVP strategy is more important than ever. The global economic slowdown has encouraged governments to seek investments with extra urgency. Larger emerging markets have experience and confidence in insisting on technology transfers, either directly (as in Brazil or China) or through policies that favor local products (as in Russia and Turkey). Meanwhile, pharmaceutical budgets are shrinking, patients are having to make greater out-of-pocket contributions, and there is growing concern that new therapies are not cost-effective. All these factors contribute to higher barriers for market entry and more difficulties in bringing products to market quickly; hence the need for a pro-active CVP strategy.

What would a robust CVP look like?

A CVP should touch on each core attribute of global pharmaceutical companies—research skill, proven ability to convert knowledge into products, broad networks of scientific experts able to prove clinical worth, marketing depth, and the ability to manufacture at maximum efficiency.

The lure of a new plant or an acquisition is strong and easy to present in the media, so the "bricks and mortar" commitment remains most governments' opening position. Fortunately, the more enlightened governments realize that if they are to compete in the global market, acquiring science and technology expertise is important for their citizens. The challenge is to make the economic benefits easily identifiable.

For example, a CVP could have three streams of activity: manufacturing; science; and technology; and partnerships. These activities would progress up a value chain as confidence and expertise increased. For manufacturing, initially this might be just a packaging facility, but over time it could progress to more complex manufacturing tasks. Similarly with science and technology, initially the focus might be on science education and clinical trials, and then progress to more complex R&D projects. Lastly, partnerships with local companies would likely start with marketing but could over time cover manufacturing, science and technology. These activities would develop the work force and a local knowledge base that can help countries develop a competitive edge.

Companies should take care to explain that each of these elements can have a clear benefit for the local economy. Clinical trials help talented local researchers stay in country while working on cutting edge projects; they also, according to one proprietary survey, contribute more than $2 for each $1 in direct spending.

Success in presenting CVPs requires careful attention to the major stakeholders in each market. Political leaders must be involved, so that they see the benefits for constituencies important to them. Senior technical officials in ministries covering health, labor, investment, and industry should also be consulted. Opinion leaders outside government in the private sector, science, and patient groups must be part of the support network for a CVP. A PowerPoint deck left in a government office is not enough. A successful CVP is by definition a campaign with local support.

When should a CVP be used?

Today, pharma companies seem to be divided into two camps—those that are successful in developing innovative medicines and those that are struggling to keep up, only producing "me-too" products. Both can benefit from a strong CVP to secure market access in these emerging markets. Companies with innovative products can leverage a CVP for early market access, but companies with just "me-too's" can use a CVP to bolster their weaker market position.

A robust CVP may not be right for each company in each market. Many CVP's require substantial capital investments in-country, even at a time when companies are closing factories and R&D facilities in other parts of the world. In addition, there are the challenges of operating manufacturing and R&D facilities in these countries. Smaller, confidence-building steps like clinical trials or packaging operations might be the best way to start a CVP. One concern for pharmaceutical companies is respect for intellectual property (IP) and the application of the rule of law. For example, in China, investments are often needed to support market access, and these investments usually require a voluntary transfer of IP, even though pharma (like many companies in research-based sectors) still have major concerns about enforcement. In Russia, the government is looking to rebuild the local pharmaceutical industry. The government has set out its plans with the "Pharma 2020" strategy that focuses on local manufacturing, R&D in designated clusters, and partnerships with local companies. Firms that tailor their CVP to the "Pharma 2020" strategy will clearly benefit. However, experience shows that companies need to be very careful in selecting their future partners. In Brazil, the government looks to pharma companies to form public-private partnerships if they want to have wide access for their products and vaccines in key therapy areas. These investments and transfers of IP look like good deals today, but when evaluated over a five-year period, the Brazilian partners could emerge as capable competitors to global firms, at least in their region. Big Pharma must be sure that it will maintain its ability to produce innovative products or they risk being overtaken by world-class competitors from these emerging countries.

It can be difficult for a company to make efficient decisions about which CVP to offer and where, when faced with demands from every regional manager. One lesson is that companies should consider their global options, and their own estimate of their comparative advantage going forward, in deciding on the content of a CVP.

Likewise, as pharma re-orientates itself from Europe towards the emerging markets, European governments may question the lack of a strong CVP in their country and take steps to limit market access.

Some companies, primarily the European-based firms, appear to have embraced the need for a robust CVP in emerging markets by quickly investing in manufacturing, R&D facilities, and partnerships with local companies. Others appear to approach the investment much more cautiously, as they first try to reduce their cost base before investing in these markets. These companies risk missing out on the exceptional growth that the emerging markets can deliver.

The future

In a fast-moving and sometimes uncertain world, pharma companies are going to have to become truly global companies with no special allegiance to a specific country, and with a management team that reflects a global experience and strategy. For the US government this then poses a question: To what extent should the US government pursue an industrial policy to encourage pharmaceutical companies, particularly US companies, to invest in the US rather than overseas in emerging markets?

For pharma companies, investment choices should be based on whether they can support worldwide business growth, which may lead to some difficult trade-offs. For example, investing today in R&D in Boston provides access to first-class academic institutions, but will do little to lift revenues in the short-term. However, new innovative medicines should eventually develop from these R&D investments. On the other hand, investing in R&D as part of a CVP in some of the emerging markets will probably provide short- to medium-term incremental efficiencies. The long-term impact of the choice probably still favors Boston, but Shanghai and other emerging market R&D centers are closing the gap. US policy makers must consider how this shift in investment strategy towards emerging markets will affect the long-term health of US pharma and US-centered innovative R&D.

Nigel Thompson is senior adviser at the Albright Stonebridge Group and former executive director for economic strategy for emerging markets at Merck. He can be reached at Nigel.thompson@albrightstonebridge.com