Pharma Futures 3 Emerging Opportunities

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Pharma Futures 3 The Undertow Given the enormous growth potential of emerging markets, it is perhaps surprising that the Western pharmaceutical industry has, in the eyes of some analysts, been relatively slow to consolidate its presence there. Although most companies have had some operations in some markets in the past few decades, it is only in the past two years that investment in R&D, human resources and sales force has reached levels that draw significant interest from the investment community. There are a number of reasons for this toe-dipping approach: Complexity The emerging markets are immensely complex. They are characterised by extreme cultural and ethnic diversity, marked income inequalities, a significant rural-urban split, with large percentages of the population with very poor access to transportation, infrastructure and other basic services. Figure 1A Global Pharmaceutical Sales Growth Forecasts Compound Annual Growth Rate (CAGR) % Sources: IMS Health, Market Prognosis, March 2008 2006 2011 This complexity is further compounded by rapidly changing and unpredictable operating environments and requires considerable investment to manage well. Affordability and Low Purchasing Power The potential for massive sales volume in emerging markets is tempered by lower purchasing power, which means patients cannot support comparable margins to developed countries. Reaching this potential would require price differentiation and segmentation between and possibly within countries. The industry and its investors are wary of experimenting – at least visibly – with significantly different pricing models in emerging markets because of the potential effect of eroding margins in mature markets. 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 North America Latin America 10 Accessibility and Weak Healthcare Infrastructure In particular, the absence of strong payers and corresponding service providers presents extreme challenges to access, delivery and distribution. This is particularly true of rural areas. To access patients and consumers in these markets requires companies – at a minimum – to understand and support coordinated efforts to create or strengthen health systems. This is both a potentially expensive and complex undertaking of which investors and companies alike are wary. Uncertain Government Relations Relations with governments are complex. In part this is the result of an uneasy history of interactions between the pharmaceutical industry and governments which has been shaped by differences in opinion over trade and health policy, making relations unpredictable and, at times, difficult. Europe Asia + Africa + Australia Japan
Pharma Futures 3 The Social Contract The final intangible and yet highly significant reason for the cautious approach to these markets is a result of industry’s awareness of the immense challenge of reconciling the high societal expectations that surround pharmaceutical companies with the limited ability of millions of people to pay for medicines. More even than water or food industries, the pharmaceutical sector is held to an unwritten, but widely understood ‘social contract’ that stems partly from the fact that people do not become consumers on a completely discretionary basis – they are propelled into it by health problems. In exchange for being permitted to pursue profit, society expects industry to deliver affordable, accessible medicines to the population according to need. And even though this expectation is not expressed in all emerging markets, in a globalised world it is articulated in highly influential international health debates. Figure 1B Global Pharmaceutical Sales Growth Forecasts US$ Billions Sources: IMS Health, Market Prognosis, March 2008 2006 2011 While real, these challenges also present opportunities. Although rural areas might be difficult to access, the competitive environment is less fierce than in the large cities. Per capita heath spending may be lower than in Western markets, but the power of numbers can generate significant markets. Underserved rural areas and weak healthcare infrastructure are currently limited but as infrastructure develops and wealth increases new markets will emerge. Especially if catalysed by public private partnerships, these could present significant opportunities over time. Below, we take a closer look at these five key challenges of the emerging markets and examine the reservations they give rise to about the scale and pace of investment by the pharmaceutical industry. Will the investment required to develop stratified offerings to meet the needs of society’s many tiers yield returns adequate to satisfy investors? What can society reasonably expect from the pharmaceutical industry? And how far into the economic pyramid can experimentation take profit-maximising enterprises? 500 450 400 350 300 250 200 150 100 050 North America Latin America 11 The PF3 dialogue preceded the global economic turmoil resulting from the collapse in the financial markets. Although it is not yet possible to assess the full impact of the downturn, it is safe to say that the fallout of the credit crisis will be felt in economies across the globe for a long time to come. Healthcare is more recession-proof than other sectors, but it is not altogether immune, particularly when it comes to personal discretionary expenditures. China and India have proved less ‘decoupled’ from US and European economies than they had hoped – a situation that is likely to slow considerably the vertiginous growth of the last few years. Recession in the developed economies is, however, likely to lead to reinvigorated attempts to make the most of new markets. The pressure to manage societal expectations well and an increasingly nuanced approach to affordability and accessibility are only likely to increase. Europe Asia + Africa + Australia Japan
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