Novartis: LEADing in Emerging Markets

For a company whose HQ sits astride Europe's second-longest river, "riding the current" is a descriptive metaphor for a distinctive strategy. That strategy is to set a steady course through waves of market turbulence—connecting to the flow of opportunity, fixing a destination, and getting there first with an anchor chain of distinctive, segmented products that out-propellers the competition. Novartis CEO Joseph Jimenez calls it "focused diversification." His strategy is now being applied to aggressively expand sales by 2015—and the number of patients served—in the key emerging markets of Asia, Latin America, and Eastern Europe, where growth is trending one way: upstream.

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Novartis begins the effort on a strong base, with its six top emerging markets—China, Russia, India, Brazil, South Korea, and Turkey—notching $5.8 billion in sales in 2011, up from just over $4.6 billion in 2010. In 2011, double-digit gains were posted in three of the four BRIC countries (Brazil the lone exception), with China leading at a heady 24 percent. Looking at prescription pharmaceuticals alone, the company predicts sales in the six countries will account for a fifth of the global total by 2020, compared to slightly less than 10 percent today. Hopes vested in these iconic geographies are vital to replacing the revenue from the loss of exclusivity for the company's biggest-selling medicine, the anti-hypertensive Diovan, whose U.S. patent runs out in September.

Beyond the BRICs

But there is no desire to stop there. In an interview with Pharm Exec, CEO Jimenez said management has set its sights much wider. Two other countries where Novartis is making a bet are Taiwan and Indonesia. Novartis is investing approximately $17 million annually in clinical development in Taiwan and is a key funder in clinical trials in the country. Under an existing Memorandum of Understanding with the Ministry of Economic Affairs, Novartis is working to foster local R&D and is currently collaborating with five leading medical centers to help build clinical trial capabilities and excellence. Another high-profile market is Indonesia. "Indonesia's demographics alone—the world's fourth-most-populous country, with a rising middle class—makes it a fit for all of our businesses," Jimenez says.

The play for emerging markets is a natural extension of the company's overall strategy, which is to apply the best science to those therapeutic areas where there is unmet patient need and a high potential for growth. A Swiss small-market heritage dictates an outward perspective in seeking new opportunities; through its predecessor companies, Sandoz and Ciba-Geigy, Novartis can count on a long history in the BRICs, with a business in Russia, for example, that dates back to the 19th century. More importantly, Novartis has amassed a diverse, multichannel product portfolio that can be customized to fit local health demographics and medical practice. Familiarity and depth are important to chasing profits from the often bewildering complexity of the local environment, which can consist of literally dozens of sub-markets: Urban or rural? Rich, poor, or inbetween? Variant geographies: coastal or interior? And the distinctive architecture of reimbursement: private out-of-pocket, social insurance for the manufacturing middle class, and the publicly subsidized solidarity programs for the poor? The choices are vast.

Choice for the Customer

Hence, success for Novartis is a question of offering a range of options—including services beyond the pill. A leadership position in five distinct businesses—innovative pharmaceuticals, eye care, generics (the Sandoz unit ranks second in sales worldwide), vaccines and diagnostics, and consumer health (including veterinary products)—gives Novartis the advantage in providing these options in a way that accommodates stark differences in the demand profile of each country. Jimenez notes that Novartis "is comfortable in pursuing very different strategies depending on the country. For example, in China we are building a visible field-force presence, as the market is still very much driven by share of voice, while in Russia we are taking a more concentrated, key account management approach." Adds Peter Catalino, a physician who is the global head of pharma strategy for Novartis: "A portfolio relevant to a diversity of local purchasing segments is a precondition for benefiting from the sheer momentum of growth in these countries."

"A portfolio relevant to a diversity of local purchasing segments is a precondition for benefiting from the sheer momentum of growth in the BRIC countries." – Peter Catalino, global head of pharma strategy, Novartis

In addition, many analysts believe the recent—and costly—acquisition of Alcon carries huge potential for building a bigger presence for Novartis in the BRICs. "Eye care is a significant unmet medical need for millions of consumers in these countries, with Brazil being a particularly good example," Seamus Fernandez of Leerink Swann told Pharm Exec. "It looks like a crown jewel to us."

To ensure the full Novartis portfolio is properly leveraged, the company has a central coordinating unit, Group Emerging Markets. It pools resources from the five business units and then works with the affiliates to create customized solutions for big local customers. The goal is to make sure that size is not a disincentive and that Novartis operates with one face as a supplier of products and services.

The common thread to all this is that once Novartis commits, it does so full throttle. In contrast to the strategies of some Big Pharma rivals, it relishes a highly visible local presence with the kind of sizeable investments that span the range from manufacturing, to R&D, to public health infrastructure. These also attract positive attention from governments as a contribution to industrial policy and local development through technology transfer. In the past two years, the company has committed nearly $2 billion to build a manufacturing presence in Russia and Brazil and to conduct R&D in China with a vast brick-and-mortar facility in Shanghai. "These are not toe-in-the-water partnerships but rather a signal that Novartis is here to stay," says Catalino.

Priorities: The BRIC fit

The potential from emerging markets is critical to executing against Jimenez's three strategic priorities. He explains, "The first, extending our lead in innovation through pipelines that are best in class, requires us to build strong networks and pursue new ideas outside the traditional range; consumers in emerging markets use technologies differently and the lessons from that can lead to innovations that are applicable worldwide. The emerging bloc is also making big investments in basic R&D, so we have to be there if we want access to the talent pool. That's one of the drivers behind our investments in R&D in China. Our second goal, accelerating growth, can only benefit from our access to the rising disposable incomes of a billion-person-strong emerging middle class determined to invest in its own health. The third priority, improving productivity across our operations, will prove elusive unless we take appropriate advantage of the lower cost base and infrastructure in many of these countries. And any savings we make there are strategic, in that we apply them to fund investment in the medicines that emerging markets will need tomorrow."

The scale of commitment Novartis is making, particularly in the BRIC zone, is not without its share of risk. This is why, in addition to the investment, the company works with local stakeholders to improve standards for conducting business. Jimenez says Novartis considers four factors as crucial: predictable, non-discriminatory and transparent rules on market access; consistent and effective enforcement of intellectual property rights; a qualified and well-trained labor pool; and government support for good business ethics, including anti-bribery legislation, to be observed by all. The perspective explains why an erratic stance on patent protection has put India behind the other BRICs in winning the big, trend-setting investment dollars from Novartis.

Building for the Big Picture

Emerging markets also serve as a test of Jimenez' vision to reposition Novartis from a pure-play pharmaceutical company to a broadly based health solutions enterprise. The transition is well under way; with the recent acquisition of the Alcon eye care business, the share of pharmaceuticals in overall sales is down to about 56 percent, from 80 percent a few years ago.

What emerging markets offer here is a relatively blank slate. Basic health infrastructure is either being created from scratch or repurposed to address the fact that, with rising disposable incomes, health is becoming a consumer priority as well as an essential public good. This gives Novartis the opportunity to grow its business by offering investments that promote good health practices while expanding access to treatment. These investments are focused outward, with an emphasis on institution-building rather than one-off sales; many local stakeholders benefit from the company's engagement and there is a reputational enhancement for Novartis by reinforcing the perception that it is going to be there for the long term. "We call it a social business model because it blends corporate citizenship with entrepreneurship," Jimenez says.

An example is a comprehensive health education program, "Arogya Parivar" (Healthy Family), that Novartis launched in India in 2007. The initiative recruits and trains citizens in predominantly rural areas to teach preventive healthcare and disease management practices and to direct those deemed most vulnerable to chronic conditions to a network of mobile clinics—health camps—for screening, diagnosis, and treatment. Novartis funds the camps and makes available a range of prescription and OTC medications to treat major chronic ailments at low cost.

Since its launch, Arogya Parivar has provided this basic service to more than 42 million people in 33,000 villages in 10 Indian states. The company is rolling out similar programs in several other Asian and sub-Saharan African countries—Novartis has a related "Health Express" initiative in China geared to health professionals in rural Xinjiang province to improve public health awareness—with the aim of reaching 100 million people. Each of these programs provides a commercial boost by giving management more insight into local customs and the relationships that motivate patterns of medical practice, including patient compliance with dispensed medications. One consequence is that Novartis has tailored its distribution strategies to give precedence to OTCs and generics issued in smaller packs that require the patient to return to clinics more frequently for refills. This conforms to patient preferences for lowering the out-of-pocket costs of each transaction while providing the means to better measure rates of compliance—a key driver of public health outcomes.

Another attribute of these initiatives is it gives Novartis the opportunity to showcase the synergies between Sandoz and its prescription pharmaceuticals business. "Our message to even the poorest consumer is that our generic products form part of a global portfolio characterized by a consistent overall commitment to delivering the highest possible standard of quality," said Catalino. "When we sell a generic in an emerging market, we are selling the best you can get."

Management is emphatic that the social business model is not to be confused with charity. Instead, the intent is to help Novartis structure its commercial operations to allow for maximum penetration of the customer base. In other words, what good is a great product if it is unaffordable and can't be accessed by the audience most likely to benefit from it? Jimenez also takes the view that programs with a social objective can be profitable too. "Our Arogya Parivar initiative turned profit-positive this year, after four years of losses. This is critical for sustainability," he notes.

So, in looking ahead, Novartis sees its commercial progress in emerging markets as dependent on how well it does in facilitating market reform. This represents a departure from Big Pharma's traditional reluctance to engage in issues beyond the narrow circle of what is required to obtain the authorization to sell medicines. Yet because the rules of the road are either different from mature markets or are still subject to the mystery detour, Novartis feels it has no choice but to engage, in the widest way possible.

And the big question the company must answer is: What is our value proposition? That answer, according to Novartis, must be tailored to each market. But it begins with an assessment of the diverse mix of products a big company like Novartis can bring to the customer. Beyond that is the post-pill service orientation, which Novartis feels is a much underestimated driver of value. This includes leading the competition with "reverse innovations" in process applications, ranging from diagnostic tests to supply chain improvements, all based on local precedents; developing evidence directly from local sources to document the clinical and cost effectiveness of Novartis products, including customized clinical trials and relevant pharmacoeconomic data; and promoting patient access through novel P&R strategies, patient assistance, and adherence programs, each appropriate to the way healthcare is delivered and paid for. Information, in particular, is a prized asset in demand in these markets, and a data analytics center the company has built in the Indian city of Hyderabad is one way Novartis is responding.

The People LEAD

Although the business investments outlined above are an important indicator of strategy in emerging markets, Novartis is placing its ace card around another factor: human resources—'people power.' The core unifying element in the Novartis game plan, it comes from the recognition that the best strategy is little more than a paper weight without the internal capacity to motivate and change the organizations responsible for executing it. This view is bolstered by a new CEO issue survey conducted by PricewaterhouseCoopers, which found a high level of concern about the ability to recruit—and retain—capable managers in the emerging markets. While its rivals also stress the importance of building a strong local talent base, Novartis is unique in leading this process from the very top, with a specialized management training and exchange program that Jimenez himself has personally driven the creation of and actively participates in.

Called "LEAD," the program singles out 25 of the most promising executives from each of the business segments in the four emerging markets where Novartis wants to extend its footprint—Brazil, Russia, India, and China. The group meets twice a year for a weeklong session consisting of leadership course work and coaching based on individualized skill development plans; lectures by a mix of local and outside experts; and consultations with members of the HQ Executive Committee around an ongoing set of "country action" projects designed to implement LEAD learnings under actual market conditions, in real time. These include:

» Identifying talent needs in Brazil as the local business grows, sponsored by Andrin Oswald, division head of Novartis' vaccines and diagnostics unit;

» Setting targets to improve regulatory compliance standards for the Russian business, sponsored by Jeff George, division head of Sandoz, the company's generics business;

» Building a locally appropriate strategy to market and distribute medicines in rural China, sponsored by David Epstein, division head of Novartis pharmaceuticals; and

» Leveraging India's leadership in traditional medicines and other areas to create innovative marketing campaigns for the Novartis portfolio, sponsored by George Gunn, division head of the Novartis animal health business, who also leads the company's corporate social responsibility.

The emphasis here is on practicality in solving a business problem. For example, the Brazil project is responding to a specific challenge: the ability to find qualified staff and management talent to run the new vaccine manufacturing plant Novartis has built in the distant and impoverished state of Pernambuco. Although the investment is a huge boost to the local economy, it will not succeed without the right people, so the project is drafting a plan to create a talent pool from scratch, with training programs and other outreach activities conducted in cooperation with local academic institutions. "The spillover from this effort in terms of local development is immense," says Joshi Venugopal, assistant to the chairman and administrator of the LEAD program.

At the most recent LEAD session, held in Kerala, India, in November 2011, the group focused on understanding how culture and environment affect the practice of management in different countries; responding effectively to these forces requires a capacity to interpret, adapt, and integrate on the spot—there is no lesson book for success. Practical exposure to this learning was provided through visits to local hospitals and healthcare management facilities, where the group was assigned to evaluate and then recommend ways for Novartis to adjust its business model with product and service offerings that fill an unmet need—not only in Kerala but in other locations as well.

But the highlight of the meeting was the full day Jimenez spent with this small group, where the exchange was frank and informal. As I observed firsthand, no intermediaries or "handlers" were present to interfere with the provocative question Jimenez posed to each country participant: "If you were in charge, what would you do differently?"

Where LEAD Leads Next

LEAD has already been judged a success, and the plan is to expand participation to young managers from 12 other emerging markets: Algeria, Argentina, Egypt, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey, and Venezuela. Ultimately, what Novartis intends is to build a reserve of young managers who combine local business expertise with a global policy perspective, whose skills can be applied throughout the company, between businesses and across geographies. Eventually, these managers will be in a position to return home and lead their country business from a perspective that is not parochial but expansive.

What Novartis hopes to achieve is to focus on developing an at-home innovator and not have someone from the multinational leadership team being recycled as a manager or administrator. Good benchmarks already exist, in that for three of the four BRICs, the head of the business is a local.

World in 2015: Measuring Success

The Novartis profile in the emerging markets is front forward, with many good people executing around a diverse portfolio that can be bundled to meet the apparently endless variations in customer need. Maintaining that global perspective has been challenged, however, by the difficulties the company has encountered in integrating the manufacturing function across the different divisions, such as Sandoz and Consumer Health. But there are still some rich tools in the arsenal: "Alcon has a strong competitive position in tapping the global potential in cataract surgery, while the upward growth cycles for Gilenya and Tasigna, combined with the launch of the meningitis B vaccine Bexsero and Afinitor for breast cancer, means that Novartis will have good things to sell that match the long-term demand implicit in emerging markets, Fernandez of Leerink Swan told Pharm Exec.

For Novartis management, the metric for success is more than financial. Says Jimenez, "What's most rewarding is heaering from patients whose lives we've touched. This past year, we reached more than 1.1 billion patients around the world, and we're constantly striving to address new disease areas where we can have an impact."

No intermediaries or "handlers" were present to interfere with the provocative question Jimenez posed to each country participant: "If you were in charge, what would you do differently?"

Familiarity and depth are important to chasing profits in the often bewildering complexity of the local environment, which can consist of literally dozens of sub-markets.