Do emerging markets provide the answer to the pharmaceutical industry?

The pharmaceutical landscape is changing. For the last four decades the pharmaceutical industry has focused its attentions on servicing the needs of the western and developed markets with very little attention paid to what used to be referred to as 'the international markets'. However, with advances in science, medicine and technology, many new 'pharmerging' markets are being created with rapid phases of growth and expansion. For example, the emerging markets of Brazil, Russia, India, Turkey, Mexico, South Korea and China will soon account for around 50% of the global pharmaceutical growth by end of 2010.¹

The importance of the emerging markets becomes apparent when one considers that diseases that were once prominent in the West and scarce in the East are now becoming prevalent in countries such as China as their economies grow and their citizens adopt western lifestyles.

JEFFREY COOLIDGE/GETTY IMAGES

This article discusses the importance of developing medicinal products for the emerging markets and the various factors that need to be considered, using China as the primary example.

Serving unmet and growing medical need: a focus on China

Epidemiological studies¹ conducted in China have shown the following diseases to be widespread: HIV, hepatitis, cardiovascular and cancers. Figure 1 shows how China is catching up with the US with respect to the main causes of death from illness and disease.

HIV

The United Nations investigated the prevalence of AIDS in China in 2008¹ and found that 700 000 people were living with HIV, with 75 000 of these cases having developed into full-blown AIDS. The Chinese Government is therefore naturally concerned by the threat of HIV to the rest of the population.

Hepatitis

There are two forms of hepatitis (inflammatory liver disease) — B and C. It has been estimated that there are 170 million people infected with hepatitis B in China. This patient population is poorly served; a mere 4% of sufferers receive treatment and, as a result, 300 000 people in China die each year from the disease.

Hepatitis C, which is a more virulent form of the virus, currently affects 46 million people in China. This number dwarfs the incidence of the disease in the US, UK, Spain, Japan, Germany and France combined.

Diabetes and cardiovascular disease

According to a study by Arnold and co-workers,¹ there are approximately 40 million diabetics in China with around 1.5 million new cases reported each year. Studies show that the prevalence of diabetes is stratified across China as follows: 2% in rural towns, 4% in small cities, and 6% in large cities (Beijing and Shanghai account for up to 10% of this figure).

Cancer

China has a high incidence of lung, mouth and neck cancers predominantly influenced by the high levels of smoking in the country. The WHO estimates that cancer is one of the main causes of death in China with an incidence level of 13% and this is projected to rise to 24% by 2030.¹

Does serving unmet medical need in the emerging markets make good business sense?

Emerging markets are usually defined as those markets or regions that are expected to experience high economic growth and, if we use this definition then it certainly does make good business sense to serve unmet medical need in these markets. According to Pacek and Thorniley³ : "Countries such as China, Russia, India, Brazil and Turkey will be the engines of corporate growth. By 2015, China and India will account for 25% of the world output in real terms and by 2025, 50% of world exports will come from emerging market economies compared with only 10% in 1980 and 25% in 2004." Table 1 depicts Gross Domestic Product (GDP) for a number of western markets compared with Brazil, Russia, India and China (BRIC) markets.

Table 1

From the data, it appears evident that all the emerging markets are on course to outperform the developed markets of the US and the Euro Zone. According to recent data, the economic potential for China is further enhanced by its low debt levels to GDP ratio.⁴ It is not surprising, therefore, that many corporations have actively pursued sales in these regions; many CEOs have expressed their desire to expand their position in China. For example, Andrew Witty, CEO of GlaxoSmithKline (GSK) Pharmaceuticals, gave the following quote:

"I've lived in Africa, I've lived in Asia. I've spent a lot of my career outside Britain and a big chunk of it in the emerging world and I think there's tremendous scope for companies like GSK to play a very constructive role.'' (Sunday Telegraph, 7 February 2010)

Meanwhile, Pfizer, the world's largest pharmaceutical company, is apparently aiming to add $3 billion sales in the emerging markets by 2012.⁵ Of particular interest to Pfizer are the markets of China, Brazil, Mexico, Russia, India and Turkey. The President of emerging markets at Pfizer, Jean-Michel Halfon, told Reuters⁵ :

"The emerging markets pie could increase to $120 billion by 2012 with China providing the greatest growth prospects".

It is also not surprising that China is the major market and prize in waiting.

China and understanding the dragon

Data collated by IMS⁶ and projected through to 2013 has shown the following:

• Current sales of pharmaceuticals in China exceed £15 billion.

• China is currently the sixth largest pharma market in the world and is forecast to be the third largest by 2013.

• The growth rate of the Chinese pharma market is predicted to be around 20% (CAGR) through 2013.

In addition, what makes China equally attractive are the following demographics,^1,3 which make the healthcare sector worthy of pursuit:

• Massive consumer base: China has the second largest birth cohort in the world (16 million births/year. Compare this with the population size of Australia at 19 million).

• Aging population: by 2015 140 million people will hit the 50+ age segment in China, leading to higher demand for medical treatment.

• Urbanisation: by 2015, 160 million will migrate towards urban China.

• Healthcare reform: the Chinese government aims to make healthcare available to more than 90% of the urban and rural residents by 2011.

However there are a number of challenges for western pharmaceutical companies developing products in China:

• Slow and conservative regulatory process for approval of new drug products.

• Pricing of drug products is complicated and open to interpretation.

• Counterfeit medicines are a real concern.

• High levels of capital investment are required to penetrate and maintain a credible presence in China.

However, from my own experiences of running projects in China, it is evident that widespread changes have occurred, heralding a safer and more patient centric welfare state.

Broadening access to healthcare

As Government reforms begin to take shape in China, it is anticipated that healthcare provision will begin to spread outwards from Tier 1 into Tier 2 and Tier 3 cities. A Tier 1 city has a registered population >4.5 million and a GDP/Capita >US$3000 e.g., Shanghai, Beijing, Guangzhou and Shenzhen. A Tier 2 city is defined as having either >4.5 million or GDP/Capita >US$3000 e.g., Tianjin and Chongqing. Meanwhile, a Tier 3 city is defined as having a population of 1.5–4.5 million and GDP/Capita in the range US$1500–$3000.

To put it into context; Shanghai (China) is classed as Tier 1 city with a population size of 18 million, whilst other cities outside of China, for example, London (UK) and New York (USA), are also Tier 1 cities but with a population circa 8 million.

Figure 1

Scaling the pyramid of wealth in the emerging markets and China

Affordability is key for the emerging markets as the disparity in income levels is particularly heterogeneous in these territories. Although the work by Prahalad and Lieberthal⁷ is somewhat dated, the general trends that have been summarised in Figure 2 still apply today, in that there are consumers who "Have a lot, Have, Have Less and Have Not".

Figure 2

Many pharmaceutical companies have traditionally focused on the "Have a Lot" segment and have very limited experience in developing low cost medicines or supplying generic drugs. However, a high proportion of the Chinese population resides in the 'Have Less than $5000' bracket (typically young professionals, graduates and people who run their own businesses). In contrast to the traditional approach, GSK is proposing a portfolio of offerings (see sidebar) in order to compete with the cost leadership position that many generic companies have already established in China.⁸

Sidebar: GSK approach to sustaining R&D in the emerging markets

In summary

Overall, most pharmaceutical companies are in agreement that the emerging markets offer huge potential and, at the same time, serve unmet medical needs as the population expansion, adoption of western lifestyles and increased urbanisation will result in many patients needing access to a diversified portfolio of affordable and effective medicines.

The author says...

• Emerging markets, defined as regions or markets that are expected to experience high economic growth, are increasing in importance to the pharmaceutical industry.

• Not only do the growing economies of the emerging markets provide an incentive for investment, but so too does the rising prevalence of diseases that were once more prominent in the West, owing to expanding populations, adoption of western lifestyles and increased urbanisation.

• According to research, China, Russia, India, Brazil and Turkey will experience most significant growth and by 2025, 50% of world exports are expected to come from emerging market economies.

• Many pharmaceutical companies have actively pursued sales in these regions, in particular in China, which is currently the sixth largest pharma market in the world and forecasted to be third largest by 2013.

• When considering R&D, a number of challenges must first be overcome before western pharmaceutical companies can develop products in China. However, the situation is expected to improve as government reforms begin to take shape in the country.

Luigi G Martini is Director, pre-clinical development, world-wide business development, APJEM R&D, GlaxoSmithKline (UK). Tel. +44 1920 883833 Luigi.G.Martini@gsk.com

Sandy Macrae is Senior Vice President APJEM R&D, world-wide business development, GlaxoSmithKline (USA). Tel. +1 610 270 5659 Sandy.Macrae@gsk.com

References

1. C. Arnold et al., China: The Giant is a wake (Credit Suisse Industry Primer analyst report, November 2009).

2. CDC National Vital Statistics (November 2007).

3. N. Pacek and D. Thorniley, Emerging Markets (2nd Edition; The Economist, Profile Books, London, UK, 2007).

4. Grail Research and de Luxe & Associates, Vision Statement: A Map to Healthy — and Ailing — Markets (Harvard Business Review, January-February 2010), pp 30–31.

5. J. Irish, "Pfizer eyes deals to raise emerging markets presence" (June 2009). www.reuters.com

6. B. MI, Break the Myth of Branded Generics (Intelligent Market Surveys reports for the 2009 Pharmaceutical Industry Business Development Forum, 22 October 2009).

7. C.K. Prahalad and K. Lieberthal, The end of Corporate Imperialism (Harvard Business Review, July-August 1998).

8. M.E. Porter, What is Strategy (Harvard Business Review, November-December 1996), pp 61–78.