In my last few posts I wrote about the importance of health care in raising the standard of living among developing countries which in business parlance are today called “Emerging Markets”. Analyst reports on the future of the pharmaceutical industry predict that the changing dynamics of mature and emerging markets signify a large upheaval in the way of the pharmaceutical world. IMS Global Pharmaceutical and Therapy Forecast™ shows that growth in emerging markets is already outstripping growth in the developed markets of North America, Europe, and Japan. However, despite pharma’s newfound enthusiasm for emerging markets, these markets will not transform overnight into less developed versions of European and U.S. markets. For years, the R&D-based pharmaceutical industry viewed today’s emerging markets as hostile territory where a combination of low prices and nonexistent intellectual property protection made market entry an unattractive prospect. Now, many Western pharmaceutical companies are viewing emerging markets as a future customer base because these markets offer a greater growth potential than mature markets.
Emerging markets will prove to be a very important part of future corporate growth as long as companies do not expect overnight miracles and are prepared to adjust their strategies, product ranges, and pricing to suit target countries. Josh Ruxin, who writes for the Huffington Post, estimates that it will take a minimum of a decade to build the necessary delivery infrastructure and create the ability to pay for sophisticated pharmaceuticals in the emerging world before the pharmaceutical markets there begin to reach the value and volume of the pharmaceutical markets that currently exist in the developed world.
There in lies the great opportunity. A chance to channelize the focus of the global industry for the good of the people of India. If the industry wants to ‘milk’ the market, it must be ready to ‘develop’ it as well. After all, sound business sense lies in milking a cow and not sucking it dry! And, India is a cash cow! Ruxin’s experience as Country Director for the Millennium Village Project in Kigali, Rwanda, where he currently focuses on comprehensive approaches to fighting poverty with emphasis on scaling up national health programs has been that unless industry collaborates with governments to help improve the people’s health, any attempts to help them lift themselves out of poverty will ultimately fail. As he puts it, “public health holds all our efforts together”. Public health, however, is not just drugs and equipment – it is the effective distribution of those drugs to those who need them and effective use of that equipment to cure disease or keep people healthy. For both of these, we need health care infrastructure. We need management systems and people with leadership skills. This is what big pharma can provide.
But, a conundrum exists—if most big pharma companies jump into emerging markets for their growth opportunities, will the influx of competition and western business practices result in a mirror image of western markets, but with a lower price structure? This is highly unlikely. A company no less than General Electric has realized this. Reuters reported today that its Chief Executive, Jeff Immelt argued in an article published yesterday in the Harvard Business Review, that rather than taking its high-end, high-cost equipment and finding ways to make it less expensive for developing-world customers, GE needs to focus on designing lower-cost technologies that will appeal to customers in emerging markets. Low cost, high quality mass customization! “If GE doesn’t come up with innovations in poor countries and take them global, new competitors from the developing world — like Mindray, Suzlon, Goldwind and Haier — will”, Immelt notes. Relevance to pharma? If big pharma like Pfizer, Johnson & Johnson and GlaxoSmithkline don’t look at India’s vast swathes of rural population as an opportunity, local Indian generic players will. Indications are that they do!
As GE realized, innovating to create products for emerging markets can help to find unexpected markets elsewhere as well. In China, it developed a $15,000 laptop-based ultrasound machine that sells for a fraction of the $100,000-plus of the appliance-sized units it sells to US hospitals. GE, found an unexpected market for these machines in US ambulance crews. “With far smaller per-capita incomes, developing countries are more than happy with high-tech solutions that deliver decent performance at an ultra-low cost — a 50% solution at a 15% price,” Immelt wrote. Pharma has its job cut out as this difference in bioequivalence will obviously will not work for medicines. A 100% solution at 30% of price sounds even better! Today, public trust in the pharma business is lower than at any point in living memory with community baying for increased regulation of the “profiteering” pharma business model. Restoring this trust will be crucial to long-term prospects for big pharma. The pursuit of sustainability in community-based initiatives has a valuable role to play in rebuilding trust.
Last but not least, the watchdog! With big pharma seriously entering India, it will be affected by increased regulation, even though as I wrote before, the analogy of the global asset bubble crises showed that it was some of the most heavily regulated financial institutions that brought about the ruin. Nevertheless, it would be unwise to simply reject regulation: the general public will not understand the underlying benefit that industry is trying to usher in. Instead, businesses should co-operate with government to ensure that regulations are not shaped by an angry backlash due to lack of trust, but instead target areas where greater restraints on action may be valuable. The crisis might have had its genesis in the West, but the poorest, as always, will suffer the most, for continued lack of access to basic healthcare.
In the current economic landscape, it is imperative that companies will choose the right survival strategies that will allow them to evolve successfully. Charles Darwin’s theory that animal species evolved to cope with changing circumstances since nature favors the survival of the fittest, has a clear parallel with the biotech and pharma industries now — evolve or die is the rule. Clearly, large emerging markets like India are one of the routes to evolution and future growth. But it is very important to spare a thought to what really happens to India’s 700mn population surviving close to the poverty line? In rural areas, close to 12% of income is spent on healthcare and over two-thirds of the population do not have access to critical medicines. Indeed, for an impoverished Indian family, healthcare is the second largest source of expenditure (first being marriage of a female child). Hospitalized Indians, on an average spend 58% of their total annual earnings on healthcare. Over 40% borrow heavily to cover expenses, and over a quarter fall below the poverty line because of hospital expenses [Source: India Pharmaceuticals & Healthcare Report Q3 2009 Published by BUSINESS MONITOR INTERNATIONAL LTD.] Disturbingly, what is received in return is often substandard. For example, almost seven out of 10 medicines sold in rural India are of poor quality or are counterfeit. As they fight to cut costs and identify areas for future growth, companies should think carefully about whether their strategy for emerging market is to drive health or simply business.