Where the Growth Is

Emerging markets are demanding more pharmaceuticals. Certainly a great opportunity for big pharma, but a great challenge, too

By Dr. Marcus Ehrhardt and Peter Behner, health practice, Booz & Company

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Because big pharmaceutical companies are currently saddled with excess capacity in their home markets, any uptick in global demand would seem helpful in putting that capacity to work. But a wide range of mitigating factors including local production requirements in many emerging markets, varied supply chain and distribution paradigms, different regulatory and legal climates, etc., suggest that trying to meet emerging market demand from mature market facilities will prove unsustainable. Rather than simply shipping goods from Europe or the U.S. to Asia or Latin America, multinational pharma companies will need to develop global, holistic operations strategies that reflect the highly varied market dynamics at play in different parts of the world. They will have to be flexible and nimble enough to adapt to ever-changing conditions in various countries.

The time to start planning for this changeover is now. Winding down production facilities with excess capacity, ramping up new capacity in emerging markets, revamping supply chains, and mastering new distribution models is a multi-year undertaking.

Growth in emerging markets—and the implied shift of pharmaceutical product volumes from mature markets toward markets like India, China, and Latin America—pose challenges to big pharma operations networks and strategies, including deciding what multinational pharmaceutical companies must do to adapt.

In the pharmaceutical industry, the defining difference between emerging and developed markets is the speed with which their appetite for prescription drugs is growing. Developed economies are still home to most of the world’s demand for pharmaceuticals, accounting for 80% of sales on a U.S. dollar basis, according to IMS. But sales in developed economies are projected to grow at only about a 2% average annual rate over the next few years, whereas sales in emerging markets are projected to expand at a 13 percent annual pace. By 2016, IMS forecasts, emerging markets will account for about 30% of sales on a dollar basis.

Because of lower pricing levels and a stronger focus on generics in developing economies, the disparity in growth will be even greater on a volume basis. China and (to a lesser extent) Brazil, in the coming years, will remain the largest markets in these developing economies, followed by Russia, India, Turkey, Mexico, and Venezuela.

Beyond the speed with which they are growing, emerging markets differ significantly from mature markets in terms of their market dynamics and infrastructure; their health systems and customer requirements; and their legal, regulatory, and economic policy climates. All these differences present challenges for pharma companies accustomed to operating in mature markets.

Unlike mature markets, which are characterized by a well-developed infrastructure and an established pool of pharmaceutical manufacturers in a saturated market environment, emerging markets are characterized by rapid growth and volatile market dynamics that are difficult to predict.

This creates a high level of uncertainty from a demand planning perspective. Still very much in the development stage, emerging markets are home to many new competitors—often local players with much lower cost structures—that are positioning themselves in the marketplace. Emerging markets must also contend with a patchwork of distribution networks that differ dramatically from one country to another, adding to the complexity of managing various supply chains in parallel. Many of these distribution networks are highly fragmented, involving not only wholesalers, pharmacists, and physicians but also multiple intermediary wholesalers and third-party repackagers. Consider:

• China alone has more than 13,000 participants in its multilayered distribution system. Although the Chinese government has adopted policies aimed at consolidating the marketplace, a two-tier system is expected to remain in place. The first tier distributes product to cities and the second then delivers product to the countryside.

• The infrastructure in the Indian market is both underdeveloped and complex, a reflection not only of its multitude of wholesalers/pharmacies and their business partners but also two additional layers of distribution: clearing and forwarding agents, and “stockists.” This complex infrastructure, combined with the vast size of the country, poses major challenges to international pharmaceutical companies seeking to tap into the Indian market.

• In Latin America, distribution systems differ from country to country. The resulting complexity is compounded by a lack of stability in local labor markets, which makes the creation of specialized distribution networks difficult. Brazil alone has more than 350 distributors, and the top three control less than 40% of the market.

The complexity of these supply/distribution chains has led to increased risk of counterfeiting, fraud, and parallel trade. An estimated 15% of the drug supply is counterfeit in emerging markets, and the figure rises to more than 50% in parts of Africa and Asia. In China alone last year, investigators uncovered more than 14,000 cases of fake medicines valued at about $26 billion, leading to the arrests of more than 20,000 individuals.

Parallel trade, in which traders buy products for a low price and export them to countries where they can command a higher price, is also on the upswing globally. In some cases this is encouraged by government support. With more countries offering low prices on the horizon, parallel trade will further squeeze profits from multinational pharmaceutical companies.

Developed markets enjoy mature healthcare systems and insurance programs that promote the consumption of healthcare. Among the 34 countries in the Organization for Economic Co-operation and Development (OECD), healthcare expenditures equate to 9.5% of gross domestic product. Widespread insurance coverage helps to support higher price levels.

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