Metamorphosis - In our first article in the Welcome to Pharma 3.0 series, "A New Business Model for Delivering Sustained Value," (CHEManager Europe 2-3/2010), we described how the industry's legacy business 1.0 model, based on marketing blockbuster drugs, is currently morphing into a more diversified 2.0 model. Knee-deep in the transformation to 2.0, the industry is preparing for its next and most profound transformation to a 3.0 model-moving away from a focus on products to a focus on health outcomes. In this article, we look at key strategies for growth that are already propelling the industry to its next phase of evolution.

The Pursuit of Emerging Markets

In today's global pharmaceutical industry, most companies view emerging markets as a strategic source for future growth. They are expanding business from the major markets of the U.S., Europe, and Japan to the BRIC region (Brazil, Russia, India, and China) and the next 11 emerging markets (Mexico, Nigeria, Egypt, Turkey, Iran, Pakistan, Bangladesh, Indonesia, Vietnam, South Korea, and the Philippines). With strong demographics, a rising middle class, a shift from infectious disease to lifestyle-associated chronic diseases, and often, an improving environment for intellectual property (IP), these markets are rife with opportunity.

Although emerging markets offer much promise, they also represent enormous challenges for an industry that has focused so much of its efforts on selling to the top of the income pyramid. Despite rapid economic growth, the percentage of gross domestic product (GDP) spent on health care is still very low in these markets, as is health insurance coverage, with most health care costs paid out of pocket. Such markets are often characterized by unevenly applied regulations, rampant counterfeiting, disjointed political landscapes, and fragmented distribution and retail end-markets. Also, because major emerging markets have few similarities, the potential is limited to leverage scale, requiring customized approaches in most countries.
Yet, as economies develop in these markets and wealth grows, health care is increasingly a focal point.

Reform measures designed to bring health care to a larger proportion of the population are sweeping just as quickly through emerging markets as through developed markets. Such measures will further support emerging market growth and will have far-reaching effects on the global pharmaceutical industry, challenging established norms of pharmaceutical access, use, and distribution.

Reforms are being considered or enacted, in fact, across all BRIC markets. Perhaps the most progressive activities to date are in China. "Healthy China 2020," the nation's mid- to long-term plan for health care development through 2020, is a key vehicle for achieving universal access to essential health care services. China's state council passed the plan in January 2009, allocating $124 billion for five priorities to address soaring medical costs, the cost and quality gap between urban and rural health care, and inequities in funding and resource allocation. Given China's large population and current low rate of insured individuals, its reform plan will create a huge growth market for the pharma industry. Of the overall investment in health care, 45% is earmarked to improve national coverage, which is expected to translate into a significant increase in drug consumption. The latest pharma forecasts indicate that in the year to come, China will become the world's third largest market. Its growth rates in the double-digit range will outpace growth in all mature markets.

As pharma companies increasingly target emerging markets such as China's, they are taking a holistic approach, encompassing market access, localization, and an innovative supply platform aimed at serving the local market and leveraging back to the global organization.
Local emerging markets present both an epidemiology and purchasing power that barely match the portfolio and pricing strategies of most multinational companies (MNCs). To expand their footprint, companies are increasingly venturing into the field of branded generics, either through acquisitions or alliances. The branded generic market is detailing-intensive, and while MNCs are shrinking their sales forces in mature markets, they are building them up in emerging markets. Often, pricing strategies in emerging markets have put the most innovative drugs out of reach for average-income individuals. Arriving at dynamic - and sustainable - pricing strategies requires maximizing market penetration and revenue, while at the same time covering costs. In a market that has become a playing field for commercial innovation, MNCs are developing and testing customized approaches and applying different strategies, with offerings ranging from a pure-play innovative drug portfolio to branded generics; pricing strategies varying from western prices to a tiered approach; and geo strategies ranging from a focus on tier 1, 2, and 3 cities to pursuit of rural markets.

China has recently attracted much of the emerging markets' investment in research and development (R&D). Centers are being implemented locally as part of the global organization to tap into the supply of scientists, to serve as a base for managing alliances with academic centers and service providers such as clinical research organizations (CROs) and contract manufacturing organizations (CMOs), and to explore local epidemiologies.