By Peter Behner, Marcus Ehrhardt, and Verónica Tapia, Booz & Co.
Emerging markets are now the major driver of growth in the pharmaceutical industry, but multinational pharma companies must tread carefully in order to navigate the local barriers and incentives to market access. Until recently, pharmaceutical companies looking to enter emerging markets in countries such as Brazil, Russia, India and China could do so simply by setting up sales and marketing teams in these regions. Now, however, many of these governments are making sure pharma companies "pay the toll" for reaping the benefits of their market growth with measures that incentivize local manufacturing, including deterrents to importing pharmaceutical products, improved market access with local manufacturing and financial incentives for establishing plants locally. It's imperative that pharmaceutical companies define a strategy for dealing with these local requirements, including whether to invest in setting up their own manufacturing sites, acquire existing players or enter partnerships.
Risk and concerns
The opportunities present in emerging markets are clear; the markets' expected annual pharma revenue growth over the next three years is around 14%, which is well above the 5% global average. However, local manufacturing requirements present several potential risks and concerns.
In a recent Booz & Co. executive roundtable, pharma operations executives discussed their experiences with manufacturing in emerging markets and pointed out that beyond making the decision of which countries to invest in, executives must take into account some complex local considerations in the choice of regions. Furthermore, they must understand what "local manufacturing" means for each country, because the definition is not always clear and could depend on both the ownership and extent of value generation in the local territory. Along these lines, pharma companies should pay particular attention to the following factors:
It is not clear to what extent the economic and political situation of these countries will allow the execution of their governments' plans, and this limited predictability is detrimental to committing long-term investments.
Intellectual property protection varies greatly from country to country.
Constructing sites in emerging markets requires significant investment--perhaps a questionable choice, considering that the industry is already experiencing overcapacity.
Measures driving local investment
Regulations can turn imports into a weakness for pharma companies, either by creating a price disadvantage or by lengthening the time to market for drugs. Countries such as Russia and Brazil impose customs duties for imported drugs, and Turkey requires foreign manufacturers to obtain good manufacturing practice accreditation by local authorities' inspectors, causing delays in the process.
The production of drugs in local facilities may allow for better market access in the form of reimbursement or preference in local currency. In China, for example, the city government of Sichuan Nanchong establishes an out-of-pocket payment of 20% for local products and 40% for imported products. Local manufacturers in Brazil, Russia and Saudi Arabia, meanwhile, benefit from price advantage in tenders by public institutions. The Brazilian government-owned laboratory Fiocruz has signed contracts with multinational pharma companies that entail guaranteed volume and price for their products for up to 5 years in exchange for technology transfers in key disease areas. GlaxoSmithKline ($GSK) has taken advantage of this opportunity and has already transferred technology for 5 vaccines, successfully entering the fully reimbursed national immunization program.
In a further effort to strengthen the local pharmaceutical industry, governments in some emerging markets have established incentives for local manufacturing in the form of tax relief, provision of funds, and access to infrastructure and talent. Regional and federal governments have invested around $8 billion in Russia alone in an effort to support localization.
Planning the strategy
Multinational pharma companies must develop an emerging markets operations strategy to address these requirements and establish a meaningful presence, taking into consideration their overall long-term strategy and competencies as well as their existing asset structure and global operations strategy. In recent years, pharma companies have pursued joint ventures, acquisitions and greenfield investments in response to local barriers, most of their activity taking place in China and Russia. Those currently in the beginning stages should consider the following steps:
Assess country requirements in light of the company's situation in the market and the overall global operations strategy.
Consider how important it is to have full control versus leveraging local partners, and weigh the trade-offs.
Evaluate the availability of potential partners and existing assets as opposed to greenfield investment.
There is no perfect strategy here. Companies must carefully assess the risks and benefits of local manufacturing investments and be willing to adjust their localization strategies for each country accordingly. It can be tempting to move quickly when the opportunity is so great in emerging markets, but ultimately, flexibility, due diligence and careful evaluation of local requirements will prove the best course of action.
Peter Behner is a partner and leader of the health practice at Booz & Co. in Europe. Marcus Ehrhardt is a partner with Booz & Co. in New York. He specializes in supply-chain cost reduction and value-creation programs, with a strong focus on the pharmaceutical industry. Verónica Tapia is an associate in the health practice at Booz & Co. in New York, specializing in commercial strategy with a focus on emerging markets.