Emerging Pharmaceutical Markets: Industry Challenges

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1 Emerging Pharmaceutical Markets: Industry Challenges Emerging pharmaceutical markets will account for 30% of global spending in These are defined as countries such as Brazil, Russia, India, China (collectively known as the BRIC countries), South Africa, Turkey and Mexico, as well as some Asia-Pacific markets, including Thailand, Malaysia and Indonesia. With growing economies, big patient pools, increasing numbers of patients with chronic diseases and regulatory bodies motivated to bring new medicines to market, these countries could be the oasis that pharmaceutical giants need amid a growing desert of drugs going off-patent and increasing generic competition in mature markets like the US and Europe. Although compared to recent years, US overall pharma hiring as increased, companies like Eli Lilly continue to cut sales forces in the US while expanding their human strength in countries like China. Additionally, companies like Novartis and AstraZeneca are opening plants and R&D facilities in these emerging markets. These actions are based on projections of growing economies in these markets. But what happens when the economy slows down? As per World Bank and International Monetary Fund projections, the Gross Domestic Products (GDP) growth predicted for these emerging markets has been downgraded, with conjectures that they may fall into recession. If events unfold as forecast, the pharmaceutical industries may fall well short of their high expectations. The fall is inevitable, according to Ernst & Young, which expects these emerging markets to be under-achievers. Countries like China and India are considering price controls for their drugs. The Russian government is strategically working toward making local generic companies provide 50% of drugs sold in the country. The governments of a majority of these countries are proving to be very unyielding to the demands of foreign drug-makers that are trying to bolster their revenues through sales in emerging markets. Unexpected developments like price controls and compulsory licenses (CLs), to name a few, have only added to the worries of these pharmaceutical giants. This might be a wake-up call for the companies investing heavily in these markets. If they thought generating revenue from this sector would be simple, it is time they re-analyzed their business approaches. Disappointments From Emerging Markets In the last year or two, the projected growth and revenue from emerging countries fell short. According to Ernst & Young, the big drug-makers have overestimated the sales from emerging markets by $47 billion. Figure 1 represents the increase in the net income for drug giants through a 12-month period, which was lower than expected for companies like

2 Merck and Pfizer. As portrayed in the graph, some companies like Lilly have reported negative numbers. Analysts believe there are multiple reasons underlying this development. The economic downturn in the US led to slower economic growth in emerging pharmaceutical markets than previously projected. Another cause for the lower-than-expected revenue from these markets was the hard-to-break loyalty of patients to the local low-priced generic brands they had been using. Foreign drug-makers are and will have to reinvent their strategies to sell their comparatively more expensive drugs to the local people in order to break even in the market. Some of these giant pharmaceutical companies have been around for years and might find an emotional quotient they could use to connect to the locals. This pattern runs counter to changing to the purchase of unfamiliar, more expensive foreign medicines. Also, the governments of the BRIC countries are imposing CLs on brand giants and stripping their drugs of their patents, as in the case of Bayer-Natco. This landmark legal case in India led to local companies selling the same drugs for cheaper prices while the brand-name drugs faced plummeting sales due to tough competition from local generic companies. Additionally, the CLs have led the giants to rethink their decisions about entering these emerging markets, as Intellectual Property (IP) rights were not only violated by private actors, but were also not given due significance by authorities. Furthermore, countries like India and China have proposed price controls on essential drugs. This serves as an additional challenge to meeting revenue targets proposed earlier. Together, these factors have prompted the brand giants to re-strategize their business expansion models in emerging markets, especially if they want to approximate their initial projections. However, on a broader scope, the real question to be asked is what should be given priority: innovation or humanity? These emerging markets are nations with a growing middle class and a significantly lower socio-economic class. During an October 2012 interview, the CEO of GlaxoSmithKline (GSK), Andrew Witty, addressed this issue of business, IP and profitability with a humane touch. He believes that in markets like India, marketing strategy needs to consider the affordability factor in target prices. To that end, GSK has instituted a multi-tiered pricing model for its products in India. The pharmaceutical companies aiming for the emerging markets need to consider adopting this attitude toward all the

3 developing countries. In the case of India, about 70% of the population pays for total medical expenses out of pocket without reimbursement, which includes doctors visits, payments for prescription drugs and total hospitalization and surgical costs. India does not have a public healthcare system that covers partial costs of prescription medicines unlike markets with a health reimbursement system or widespread access to private insurance. With a majority of the population earning between $ (US) a month, medicines that cost $1,000 or more a month are rarely affordable. Locals opt for cheaper alternatives to safeguard the financial security of their families in these difficult economic times. Could this be an underlying cause for the enormous quantity of substandard drugs on the market in India? Such drugs are made in manufacturing plants with inadequate quality management systems in place and are sold at prices cheaper than their international or domestic competitors. The cheap prices are offset by the products inadequate quality. Businesses that follow such non-regulated practices give no importance to ethical considerations such as adhering to current Good Manufacturing Practice (cgmp) regulations and adequately maintaining a manufacturing facility. A recent example of this is Ranbaxy pleading guilty to manufacturing drugs at its Indian sites with inadequate safety standards. Although it is expensive, companies are required to follow these practices to ensure patient safety. Compulsory Licensing The demand for affordable medicines is increasing significantly in India. The Indian government is taking drastic measures to fulfill this basic necessity. As a cornerstone, it has enforced CLs on brand-name companies like Bayer, Bristol-Myers Squibb (BMS) and Roche. As the first step, it licensed Bayer s Nexavar, prescribed for kidney cancer, to Natco Pharma. This turned out to be the first CL granted by the Indian government that in effect lowered the price of the drug from Bayer s offering of US $5,000 a month to $170 a month. A few other products (Roche s Herceptin and Sprycel and Ixempra by BMS) also were licensed to local generic players. According to the provision of compulsory licenses, the brand company reluctantly permits local generic companies to formulate and sell cheaper copies of their patented drugs, thereby making them affordable to the local populace. As a royalty, the local companies pay a certain percentage of revenue to the patent holder. CLs generally are awarded to local companies in the name of public interest, and India believes this reform will bring its people a step closer to affordable medicines. In addition to the difficulties of dealing with compulsory licenses, last year a court in India invalidated Roche s patent on its hepatitis C drug, Pegasys. The same court ruled that Cipla s drug, Erlocip, did not infringe on Roche s patent for Tarceva. These unexpected developments eventually pushed Roche to slash prices on two of its drugs, Herceptin (31%) and Mabthera (53%). The Indian market is significantly intractable, and GSK was one of the few companies that understood the key to survive in this market at an early stage. GSK s tiered pricing ends up making drugs 25 40% cheaper, on average, than their prices in mature markets. Similarly, on grounds of public interest, Brazil issued its first CL in May The CL was issued for the Merck drug, Efavirenz, to a local company, FarManguinhos. Latin America is a budding market, with Brazil, Venezuela and Mexico as big players. These countries are similar to India in that they have a growing middle class with a burgeoning lower socioeconomic class increasingly unable to afford current drug prices. Latin America has a big generic market with some very strong local players. Drug giants like Sanofi, Pfizer and BMS are gaining ground in these countries by partnership, licensing or acquisition of local companies.

4 d Price Controls Another emerging challenge is the potential for price controls. In May 2013, the government of India, for example, proposed price controls for a number of essential drugs. Decades ago, these price controls were implemented for an array of drugs. The controls were then repealed in the 1990s. Since the revocation, there have been approximately 74 drugs under price controls. They make up 20% of the drugs sold in India. This new proposition encompasses about 348 drugs in all, accounting for 30% of the local pharmaceutical market sales. Through this process, the National Pharmaceutical Pricing Authority (NPPA) of India sets prices on domestic drugs based on actual production costs, but foreign companies base their prices on statutory profit caps. So adhering to proposed price controls could be a deterrent for the big drug-makers. This maneuver from the Indian government forms the other side of the double-edged sword that international drug companies face. On one hand, the brand-name drug-makers are forced into compulsory licensing, which obviates international patents earned through fundamental research conducted to discover these drugs. On the other hand, they may face price controls. The drug giants, of course, are unhappy with these price controls, and with reason, since any price the government imposes would be lower than the drug-makers target profit brackets. In the face of compulsory licensing, foreign drug-makers are making efforts to adapt to the requirements of emerging markets to take advantage of opportunities that remain. Roche, for example, has contracted the manufacturing of its drugs, Herceptin and Mabthera, to a local generic company, Emcure Pharmaceuticals, to be able to sell then at lower prices. This will help Roche give tough competition to the local companies. The foreign drug-makers are banking on the brand names that they have built in the market, hoping those will help sustain their sales in the face of cheaper drugs. But with price controls in place, Indian subsidiaries of these drug-makers will be hit hard. Following suit, Gilead announced collaborations with generic drug makers like Mylan and Strides Arcolab to develop cheaper generic versions of its HIV drug, Emtricitabine, for developing countries. With cost being a major shortcoming for many branded drug-makers, and CLs issued on a few of them, collaborating with local companies to reduce cost might

5 be the right approach. Roche and Gilead are the first two to move ahead with this choice. Recent progress on the issue of CLs indicates that they might be voided, considering price controls preclude their need. An order by the Drug Controller General of India, Dr. G.N. Singh, might be the tipping point for this bubble to burst. As per the Union Health Ministry, orders have been passed to all Indian states mandating that they grant drug licenses to manufacturers and permitting the sales of drugs based on their generic name only. An example of this order would be the sale of Tylenol as acetaminophen in the US. There has been strong opposition to this by local and international drugmakers, which would lose business. China in Line With India In May 2012, major strengthening measures were instituted in China for the regulatory framework governing CLs. Many considered this as a step in line with the developments in India, although this was not the case. Analysts believe that China may not follow in the footsteps of India. There are many reasons to believe so. First, China has always been a friendly country with regard to foreign investments. Imposing CLs might make the international market more wary of China. Also, China is trying to develop itself as an innovation-driven country. China may not actually grant any CLs in the future, a trend it has followed since CLs became effective, but it might use CLs as a negotiating tool. Big pharmaceutical companies might have to comply with the country s demands in light of this possibility. China can compel these companies to open domestic manufacturing plants or collaborate with local companies to provide cheaper drugs like Roche does in India. In 2003, amid the SARS outbreak, a Chinese company applied for a CL for the Roche drug Tamiflu and was denied the request. The request to grant a CL for Tamiflu definitely made a strong case for a national emergency and its denial clearly revealed the intentions of the Chinese government. If things have changed, it is conjecture, but going with the trend, the pharmaceutical companies need not worry but should be prepared for a good negotiating game. Africa in the Long Term According to the World Health Organization (WHO), not only life-threatening communicable diseases haunt Africa, but non-communicable lifestyle diseases (blood pressure, diabetes, heart disease, etc.) are following suit. This only reiterates the fact that Africa has a tremendous need for medicines. With a growing middle class and uptake of urban lifestyles due to massive urban migration, Africa is and will continue to experience a steady escalation in the rate of noncommunicable diseases (NCDs) like cardiovascular diseases, cancer, respiratory diseases and diabetes over the next 10 years. Non-communicable diseases are expected to account for 46% of all deaths in sub-saharan Africa by 2030, up from 28% in 2008, according to the World Bank. This current projection of disease rates for the next few years underscores the fact that Africa is now ripe for business expansion. But there is a catch: Africa is the source of about 24% of world health problems but has only 1% of the budget. Therefore, even though Africa has a growing number of chronic diseases that need immediate attention, business strategy used in other parts of the world will not suffice. One cannot expect to sell patented brand drugs in Africa at high prices and receive government reimbursement.

6 Various countries in Africa work differently, and drug companies need to study individual country profiles to determine their target therapeutic markets. In Africa, the drug market can be divided into public and private sectors. These sectors determine price reimbursement capabilities and market revenues. The private sector encompasses low-volume products like oncology medicines and medicines for other NCDs. These are expensive medicines used by a fraction of people in the countries, and are paid for either through individual out-of-pocket expenditures or through private insurance. On the other hand, the continent has a public sector for high-volume medicines like those for AIDS, tuberculosis and malaria. Governments spend millions of dollars on tenders for these medicines. Until now, the majority of the pharmaceutical world has been concentrating on the private sector (low-volume drugs) but what they have failed to observe is that the high-volume drugs bring in revenue through long-term contracts and large revenues. A vanguard of this change would be Sanofi, which has won tenders worth billions of dollars in the high-volume sector. Many pharmaceutical companies are restructuring their corporate policies to target Africa as a long-term project. Some are trying the decentralized approach. This strategy entails trying to gain access to the African market through local licensing, setting up manufacturing plants in African nations and providing medications at the cheapest prices possible. Sanofi, Novo Nordisk and GSK are the harbingers of change. Novo Nordisk partners with Saidal in Algeria to produce insulin through technology transfer. GSK has won many government tenders by applying through local partners. Local partners help overcome non-transparent and often corrupt barriers that one might experience in these countries. Having built two plants, Sanofi is pushing for a third in Algeria. The pharmaceutical industry is aware that the emerging pharmaceutical markets will eventually slow down and will not grow exponentially forever. Considering the lull in mature markets and the legal battles in emerging markets, Africa is an attractive investment option. According to the consulting firm IMS Health, pharmaceutical expenditures in Africa are expected to reach $30 billion (US) by Its compound annual growth rate (CAGR) through 2016 is projected at 10.6%, second only to Asia Pacific (12.5%) and in line with Latin America (10.5%). The United Nations (UN) has projected that the Foreign Direct Investment (FDI) in Africa could more than double by Government, non-government organizations (NGOs) and private sector investments are paving the way for a booming Africa, which is channeling some of these resources into healthcare development. By 2020, the African markets are projected to more than double from the current level to $45 billion.

7 A mix of multinational companies (MNCs), Indian, Chinese and local firms are advancing in this budding market. MNCs include Sanofi (the only company that actually reports sales and revenues from this part of the world), Novartis, Merck, Abbott and GSK. There are Indian firms like Cipla and Ranbaxy and local companies like Aspen and Cipla Medpro. All these companies have their special hold on different parts of Africa. The MNCs face tough competition from Indian and Chinese companies that are known to supply cheaper medicines. The local companies might find it difficult to draw investments due to a lack of CGMPs, but the WHO and UNITAID are assisting them with specialized programs like imparting sound technical knowledge for sustainable manufacturing, three-month rotational posts offered at the WHO headquarters to national regulatory staff, conducting audits and providing technical assistance if issues arise. Some of the mature markets targeted include Morocco, Egypt, Algeria and South Africa. Cities like Luanda, Kinshasa, Khartoum, Dar es Salaam and Harare in sub-saharan Africa and a few other nations like Nigeria, Kenya and Botswana are projected to represent high amounts of pharmaceutical spending in the future. GSK has established the Least Developed Countries (LDC) unit, which focuses on 40 countries in Africa and 10 in Asia. The primary focus of this unit is to provide medicines to these countries at rates below the market price. Although there is revenue loss, GSK tries to compensate with volume sales. It believes this goodwill gesture will help in the long run. It will help the company build a trust factor that will associate it with the lower socio-economic segment of the countries, eventually leading to market dominance when these markets develop. These units are currently making very little money, but GSK believes that this will change over time. Along with immense scope for growth comes the biggest fear of the pharmaceutical industry counterfeiting. Africa, like India, has been a target of counterfeit drugs. WHO estimates that 700,000 people die in Africa alone due to fake antimalarial and tuberculosis drugs. Companies like Merck and GSK in Africa and the government in India are trying to track their medicines via unique codes placed on the product labels. The patient can text this code back to the company to authenticate the product. It is a cheap and reliable method of tracking counterfeits anywhere in the supply chain. The texting-the-code tracking system promises to work at the grassroots level. This is reflected in the fact that as of mid- 2012, there were more than 600 million mobile subscribers on the African continent. This system might be the answer to a problem that is not only killing people but also is hindering the years of hard work put in by goodwill ambassadors to eradicate morbid diseases on this continent. Counterfeit drugs may give rise to resistance of these diseases to possible cures by existing drugs. Conclusion The emerging pharmaceutical market is a valuable proposition for foreign drug companies as it continues to generate a considerable amount of revenue even though it has failed to meet projected expectations. Although the revenue numbers are dwindling, if foreign drug companies modify their business models to accommodate the local needs and the dynamic conditions of these developing markets, they can correct, albeit marginally, the errors they made in underestimating the complexities of these markets. And while companies ponder modified strategies to gain a better foothold in these markets, some have advanced to test relatively new but budding markets like Africa. Africa, undoubtedly, will eventually be a territory with increasing worth. While the stakes are high on both emerging markets and Africa, the next few years will be crucial for these drug companies as the pharmaceutical industry steps into a new defining phase.