Pharma Emerging Markets 2.0: How Emerging Markets Are Driving the Transformation of the Pharmaceutical Industry
Matthias Buente, Stephan Danner, Susanne Weissbäcker, and Christoph Rammé

To better understand both the challenges faced by the global pharmaceutical industry in its pursuit of emerging-market opportunities and the strategies that leaders are employing to address them, Booz & Company surveyed executives from more than 25 of the top pharmaceutical and generics companies, other industry experts, and members of Booz & Company’s global pharmaceutical practice. The results paint a compelling picture of the hurdles and opportunities Pharma faces in pursuing perhaps its best opportunity for growth.



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Briefing

Matthias Buente Stephan Danner Susanne Weissbäcker Christoph Rammé

Pharma Emerging Markets 2.0 How Emerging Markets Are Driving the Transformation of the Pharmaceutical Industry

Contact Information Berlin Peter Behner Partner +49-30-88705-841 [email protected] Stephan Danner Partner +49-30-88705-868 [email protected] DC Rick Edmunds Partner +1-703-682-5755 [email protected] London Tobias Handschuh Principal +44-20-7393-3368 [email protected] Moscow Steffen Leistner Partner +7-985-368-78-88 [email protected] Mumbai Nikhil Bhandare Principal +91-22-6128-1130 [email protected] New York Marcus Ehrhardt Partner +1-212-551-6421 [email protected] São Paulo Fernando Fernandes Partner +55-11-5501-6222 [email protected] Shanghai Sarah Butler Partner +86-21-2327-9800 [email protected] Zurich Matthias Buente Partner +41-43-268-2136 [email protected] Susanne Weissbäcker Principal +41-43-268-2149 [email protected]

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CONTENTS

Foreword: Taking a Fresh Look at Emerging Markets.................................................. 4 Executive Summary: The Potential and Challenges of Emerging Markets .................... 5 I. Emerging Markets: A Fundamental Driver of Pharma’s Future Growth................. 7 II. Barriers to Growth................................................................................................ 13 III. C onquering Emerging Markets With New Strategies............................................. 21 IV. Africa: The Next Big Opportunity?....................................................................... 30 V. Finding the Right Operating Model and the Right Talent to Support It.................. 38 VI. Successful Players and Conclusions....................................................................... 42 About the Authors ...................................................................................................... 44

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FOREWORD: TAKING A FRESH LOOK AT EMERGING MARKETS This is a time of changing priorities for global pharmaceutical executives. As growth patterns in developed markets continue to flatten, firms are shifting more of their focus to finding new sources of revenues and profitability in emerging markets. There is reason for hope: Driven by increasing wealth and a growing awareness of the advantages of good healthcare and healthier lifestyles, emerging markets are developing into sources of significant growth. But there is also reason for caution: The initial enthusiasm that erupted when emerging markets first demonstrated their potential has often given way to disappointment, as early—and possibly exaggerated—expectations remain largely unfulfilled. Since go-to-market models typical of mature economies have often failed to adequately tap the huge potential attributed to emerging markets, leaders are rethinking and, in many cases, transforming their operating models to better address what they have learned about these markets. Traditional models have for decades been largely defined by fully integrated operations, which included significant investments in R&D hubs and selected manufacturing sites. Emerging markets, on the other hand, have usually been regarded as places for selling medications, but very rarely as potential locations for developing or manufacturing them. This view is now being challenged. To better understand both the challenges faced by the global pharmaceutical industry in its pursuit of emerging-market opportunities and the strategies that leaders are employing to address them, Booz & Company surveyed executives from more than 25 of the top pharmaceutical and generics companies, other industry experts, and members of Booz & Company’s global pharmaceutical practice. Participating in the survey were 12 of the top 15 global pharmaceutical players, accounting for some 50 percent of total global pharmaceutical revenues. This comprehensive study outlines how pharmaceutical companies can effectively and successfully manage their emerging-market regions. We would like to take the opportunity to offer our sincerest thanks to all those who contributed to this study by providing input into the survey or sharing their insights during the interviews. Matthias Buente Stephan Danner Susanne Weissbäcker Christoph Rammé

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EXECUTIVE SUMMARY: THE POTENTIAL AND CHALLENGES OF EMERGING MARKETS Emerging markets have long been regarded as the “promised land” of the pharmaceutical industry. They are expected to amount to nearly a third of the global pharmaceutical market by 2016, and it is anticipated that they will play a vital role in sustainable growth in the industry. With huge populations, increasing prosperity, and improving longevity (albeit at differing rates), these markets are very attractive to those companies suffering from the stagnation of mature markets, patent expirations, and increased regulatory hurdles. However, although these regions offer huge untapped potential, they display a wide diversity in their stages of development, particularly with regard to their healthcare infrastructure. For this reason, there can be no “one-size-fits-all” approach to emerging markets. Even among the three main clusters of markets—the BRICMT economies (those of Brazil, Russia, India, China, Mexico, and Turkey); second-tier countries such as those of Southeast Asia; and finally Africa—there are local idiosyncrasies that make bespoke approaches to these markets essential. Given this diversity, it is paramount to distinguish between those markets in which pharmaceutical companies want to expand their presence in the short term, and those that are “on the back burner” for the time being. Then comes the challenge of defining markettailored and effective business strategies for each market segment, and the appropriate time lines. Many organizations have failed to do this adequately in the past, with consequent losses of both revenues and confidence. These harsh lessons of the past must not be forgotten, as they provide a framework on which to build success in the future. Our study of top pharmaceutical executives indicates that those lessons remain fresh in the minds of industry leaders. Indeed, 27 percent see insufficiently tailored strategies as the biggest strategic misstep, while 25 percent criticize a lack of patience and long-term strategy. According to our survey, executives also believe the following: • Emerging markets will increase in general significance: Fifty-two percent of those we interviewed expect more than 30 percent of their global sales to originate in emerging markets by 2018. • Although the BRICMT group is expected to remain the dominant force, second-tier markets, such as those in Southeast Asia, are increasing in relevance. • As a consequence of growing prosperity and better nutrition, disease patterns in emerging markets are rapidly changing and shifting toward “lifestyle” diseases that are more common in mature markets. This trend opens up new markets for existing products. Almost half of our respondents estimate that the number of cases of diabetes will increase by more than 20 percent over the next five years, while cardiovascular and oncological diseases are expected to follow a broadly similar trend. In line with the changing therapeutic areas, the relative importance of stakeholders is also changing: Seventy-eight percent of our respondents agree that the significance of payors will increase, while 58 percent expect the same for hospitals.

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• Across all emerging markets, access is seen as a highly significant challenge. A lack of reimbursement and public funding is considered the key problem by 68 percent of respondents, closely followed by the lack of healthcare infrastructure and the issue of affordability. • Emphasis is currently on developing the top line in emerging markets, although gaining market share is also considered to be important. • A clear trend toward localization can be observed, particularly with regard to BRICMT countries. More than 60 percent of respondents consider investment in local research, local development, and local manufacturing to be the most effective levers for commercial success in these regions. • As emerging markets develop further, go-to-market models will gradually mirror those currently employed in mature economies and include local R&D and manufacturing capabilities. Seventy-eight percent of interviewees are in favor of having and maintaining local subsidiaries in BRICMT countries, while 75 percent advocate having a local sales force. • Respondents are more hesitant to commit themselves to long-term investments in second-tier markets and Africa. For the moment, the majority prefers to establish and maintain partnerships within the existing infrastructure. • As a consequence, Africa is seen as a long-term opportunity. Although strong growth rates are expected, only 22 percent of our respondents expect to employ the marketing and sales approaches that are typical for mature markets over the next five to 10 years. By contrast, 67 percent see this happening in BRICMT countries, and 43 percent in second-tier markets. • Survey participants rated building good relationships with both local governments and local players among the key factors for success. Governments in emerging markets have learned much from their mature-market counterparts and are looking to retain control of their pharmaceutical markets. They are doing this by various means, including supporting local players even if they breach patent law. • In order to maximize the opportunities in emerging markets, executives are beginning to realign the distribution of management power. The majority of industry leaders would prefer that control moves away from headquarters toward regional management, a measure that would increase the empowerment of regions and ensure local market focus. • Retaining and recruiting local talent in emerging markets will turn into a decisive driver for success. In particular, companies will have to deal with high local attrition rates as more companies compete for the best resources. • The “winners” in emerging markets will be those companies that know how to best balance their global competences with tailored approaches for local markets.

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I. EMERGING MARKETS: A FUNDAMENTAL DRIVER OF PHARMA’S FUTURE GROWTH By 2016, the global pharmaceutical industry is expected to generate an estimated 30 percent of its total sales in emerging markets. But these expectations will be met only if the industry moves toward more bespoke market strategies. A comprehensive understanding of these highly significant but very diverse markets is therefore essential. Too late, too fast, too overconfident: The sorry list of mistakes that international pharmaceutical companies have made in emerging markets is long, and the resultant squandering of resources has been great. As one manager stated, “One of our biggest mistakes was to treat emerging markets like mature markets. We were wrong. Pharmaceutical strategies have to fit a country’s individual needs and its development.” This clear “mea culpa” on behalf of the pharmaceutical industry demonstrates the need to create new, individualized approaches that exploit opportunities while avoiding pitfalls. A growing number of executives, having learned the hard way, now share this view (see Exhibit 1).
Exhibit 1 The Biggest Mistakes in Emerging Markets

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

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WHAT ARE THE BIGGEST MISTAKES THAT PHARMA COMPANIES MAKE IN EMERGING MARKETS? PERCENTAGE OF RESPONSES Insufficient tailoring of approaches to local needs Lack of patience and long-term strategy Poor HR management and hiring vs. partnering strategy Underestimating challenges, risks, and investment needs Late/too slow decision making and execution Centralization Others
Source: Booz & Company analysis

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27% 25% 14% 14% 9% 5% 7%

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Approved Co 11.0 millio aölkdfölka 32.8% 30.1%

WHAT ARE THE BIGGEST MISTAKES THAT PHARMA COMPANIES MAKE IN EMERGING MARKETS? PERCENTAGE OF RESPONSES By 2010, healthcare spending in emerging markets had overtaken that of the EU5 27% Insufficient tailoring of approaches to U.K.) local needs (Germany, France, Italy, Spain, and the in total. Lack of patience and long-term strategy management and hiring vs. partnering strategy Over Poor the HR past five years, sales generated in emerging 14% doubled, Underestimating risks, and investment needs US$191 billion inchallenges, 2011, and representing approximately 25%

markets have totaling USD 20 percent 14% of the global market Late/too 2 slow decision making and execution 9% on their expected volume (see Exhibit ). Emerging markets are beginning to deliver Centralization 5% potential. However, threats to that potential need to be taken into consideration.
Exhibit 2 Importance of Emerging Markets in a Global Context
Others 7%

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PHARMA MARKET DEVELOPMENT 2006–16, IN US$ BILLIONS 1,190 956 658 14% 86% 2006 80% 70% Rest of the world 20% 30% Emerging markets

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2011

2016

Source: IMS Market Prognosis, September 2011; IMS Pharmerging Overview, 2011

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• The International Monetary Fund has recently revised expected GDP growth in emerging markets slightly downward. However, it should be noted that, in comparison to expected growth in mature markets, emerging markets still represent a very attractive proposition. • By 2015, 40 percent of today’s pharmaceutical market will lose patent protection, which will also affect sales in emerging markets. This is an indisputable stumbling block: Pharmaceutical companies must build up-front strategies to circumvent this hurdle in emerging markets. Despite such concerns, our interviewees are optimistic about the prospects for emerging markets (see Exhibit 3). • Currently, only 1 percent of respondents generate at least 45 percent of their revenues in emerging markets, while 76 percent stated that the portion of their revenues from 27% Insufficientmarkets tailoring of approaches local needs emerging is less than to 30 percent.
Lack of patience and long-term strategy 70% Rest of World Poor HR management and hiring vs. anticipates partnering strategy • Every second respondent that Underestimating challenges, investment needs pany’s global salesrisks, will and originate in emerging 2016 25% 14% by 2018 more than 30 percent of their com14% markets. Fifteen percent of respondents even Late/too believeslow that by that time and emerging markets will account for more than 45 percent decision making execution 9% of their sales. Centralization 5% Others 7%

Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

DEVELOPMENT S$ BILLIONS 1,190 30% Emerging Markets

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Exhibit 3 Importance of Emerging Markets

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Lines: 0,5 pt Lines for legend: 0, WHAT IS THE IMPORTANCE (REVENUES CONTRIBUTION) OF EMERGING MARKETS IN YOUR COMPANY TODAY AND WITHIN THE NEXT FIVE YEARS? PERCENTAGE OF PARTICIPANTS SELECTING SHARE OF GLOBAL SALES 1% 22% 15% 45% or more

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Approved Colors, 37% 41% 30–44%

40% 35%

15–29%

Share of global sales today

Less than 15% 7% Share of global sales in five years

Note: Percentages may not add up to 100 due to rounding. Source: Booz & Company analysis

The BRICMT group continues to be the economic leader among emerging markets, but second-tier countries and African markets are on the rise. The term “emerging markets” describes a dynamic, yet highly diverse group of countries and regions. This becomes apparent when one takes a closer look at individual economic

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41%

32.8% 30.1% 40% 15–29% Less than 15%

= =

35% 7% potential. In Exhibit 4, we have plotted the pharmaceutical markets by their size in 2012 Share of global sales in five years Share of global sales today against their growth in 2011–12. The population of the individual countries is depicted by the size of the bubbles.

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Exhibit 4 Pharmaceutical Market Potential of Emerging Markets and Mature Markets
PHARMACEUTICAL MARKETS PHARMA MARKET GROWTH (2011–12) VS. PHARMA MARKET SIZE (2012) 35 30 25 20 15 10 5 0 -5
Pakistan Ukraine Poland Egypt Nigeria S. Korea Saudi Arabia Mexico Argentina Canada India Brazil Germany Italy France Japan Spain Vietnam Algeria Indonesia S. Africa Thailand Venezuela

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Mature markets BRICMT
Russia China

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Growth (%)

Second-tier emerging markets African markets

Turkey

1

10

U.K.

100

U.S.

1,000

Pharma market size (in US$ billions)

Note: Bubble size reflects 2012 population from Global Insight in millions. Source: IMS Health Market Prognosis; Global Insight; Booz & Company analysis

We distinguish among three clusters of emerging markets in this study: • The BRICMT group (white bubbles), which comprises Brazil, Russia, India, China, Mexico, and Turkey, has demonstrated strong growth in the past. These countries are developing into markets that are comparable in size and nature to their mature Western counterparts. At the same time, these economies are becoming increasingly more stable, making them even more attractive. As a result, the BRICMT countries are occasionally referred to as “growth” markets, rather than “emerging” markets. • The “second-tier” emerging markets (light blue bubbles) are a diverse group of more mature economies in Eastern Europe and the CIS (Commonwealth of Independent States, formed from the former Soviet bloc), as well as in more dynamic “threshold” countries such as those in Southeast Asia. Based on the size of their populations and growth forecasts, their future potential is attractive, as was confirmed by Christopher Viehbacher, CEO at Sanofi, who recently said in an interview with the news agency Bloomberg (“Sanofi CEO Sees Opportunities for Deals in Vietnam, Colombia,” Susan Li and Albertina Torsoli, September 12, 2012): “Places like Vietnam, Indonesia, … Colombia have become extremely interesting in terms of growth.” • The third group is made up of African markets (dark blue bubbles), which are highly populous but have relatively smaller market sizes at the moment. They possess significant future potential. Africa does not yet play a significant role in pharmaceutical sales, since South Africa, Egypt, Algeria, and Nigeria are the only markets in the region where the volume of the pharma market exceeds $1 billion. However, in the coming years, as sub-Saharan Africa develops economically, the long-term potential offered by this vast continent will be huge. For this reason, we have devoted Chapter IV to Africa.

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PHARMA MARKET DEVELOPMENT 2006–16, IN US$ BILLIONS 1,190 956 20% 30%

To gain more insight into the industry’s perspective, Booz & Company asked top pharmaceutical executives to share their views on the current state of affairs and future prospects Emerging Markets in the individual markets.
Insufficient tailoring of approaches to local needs Lack of patience and long-term strategy

27% 25%

80%

70%

Which emerging markets are most relevant today? Where do executives expect to see Rest of World Poor HR management and hiring vs. partnering strategy 14% change over the next five years?
Underestimating challenges, risks, and investment needs Late/too slow decision making and execution 14%

2011

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ARKET SIZE (2012)

Our survey benchmarked “perceived present relevance” against “expected future relCentralization 5% evance,” on a scale from 1 (least relevant) to 5 (most relevant). Based on the responses, Others 7% Exhibit 5 maps the average perceived relevance today to the expected change in relevance over the next five years. This means that, for example, countries that are considered highly relevant today and whose significance is expected to strongly grow are depicted in the top right quadrant.
Guidelines:

9%

Mature markets BRICMT 2nd-tier emerging markets African markets

• Respondents 1%

agree that BRICMT markets are currently dominant in relevance. They 15% 45% or more further 22% expect the BRICMT regions to maintain their leading role until at least 2018, as indicated by a further increase of relevance by 0.2 points.
37% 30–44%

11.0 million aölkdfölka 32.8% 30.1%

= = = =

41% • The most relevant second-tier region is Latin America, while Southeast Asia’s relevance is predicted to increase the most. However, with the exception of Central/Eastern Europe, the relevance of all these markets40% is expected 15–29% to grow significantly. 35%

n U.S.

1 000

• Sub-Saharan countries are currently viewed as being the least relevant region, yet with Less than 15% 7% very positive prospects for future growth ( see Chapter IV, page 30). Share of global sales in five years Share of global sales today

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Exhibit 5 Estimated Relevance Increase of Emerging Markets in 2018 vs. Relevance Today

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WHICH EMERGING MARKETS DO YOU CONSIDER AS MOST RELEVANT TODAY AND IN THE FUTURE (2018)? 1= LEAST RELEVANT 5= MOST RELEVANT 0.8 0.7 0.6 Difference in 0.5 future and 0.4 current relevance 0.3 0.2 0.1 0.0 -0.1 0.0 Central/Eastern Europe 1.0 2.0 3.0 4.0 5.0 Sub-Saharan countries North African countries CIS Middle East South Africa Southeast Asia BRICMT Second-tier emerging markets African markets Latin America BRICMT

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Relevance today
Source: Booz & Company analysis

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Changing disease patterns in emerging markets will provide pharmaceutical companies with additional opportunities to market their existing and increasingly global and innovative product portfolios. Rapid economic development in any market has positive effects, such as increased prosperity, improved general health of the population, and increased longevity. But there are also 1,190 knock-on negative effects, including an increase in noncommunicable diseases such as dia956 Emerging Markets 30% betes and cardiovascular complaints. Statistics supplied by the World Health Organization 20% can be translated into 658 a global map of the expected development of disease patterns (see Exhibit 6). 14% The map illustrates that although infectious diseases still dominate in many emerging markets, noninfectious illnesses are expected to rise disproportionately fast. These illnesses 2011 2016 2006
Exhibit 6 Disease Patterns in 2008 Compared to Expected Pattern by 2030
86% 80% 70% Rest of World

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

=

DEVELOPMENT OF DISEASE PATTERNS MORTALITY RATES, 2008–30

=

=

2% 4%

10% 7% 20%

11% 6% 22%

2% 5% 2% 4% 4%

11% 12% 8% 35%

12% 6% 14% 12% 16% 39%

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3% 9% 8% 12% 9% 9% 13% 12% 15% 14% 35%

6% 51% 50%

2%

3%

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5% 7%

15% 10% 20% 12% 33%

16% 7% 7% 9% 20% 7% 35%

2008 2030 Europe

29%

32%

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2008 2030 Eastern Mediterranean
8% 14% 10% 3% 5%

28%

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2% 3% 5%

6% 8%

2008 2030 Southeast Asia
2% 8% 15% 9% 7% 20% 8% 23% 5% 35% 3%

2008 2030 The Americas

65%

40%

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Other Diabetes mellitus Respiratory diseases Injuries Malignant neoplasms and cancer Infectious diseases, maternal and perinatal conditions, and nutritional deficiencies Cardiovascular diseases

11%

19%

21% 11% 34%

2008 2030 Africa

2008 2030 Western Pacific Shift from infectious to cardiovascular diseases

Note: Percentages may not add up to 100 due to rounding. Source: WHO; Booz & Company analysis

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are characteristic of ones typically associated with more highly developed regions, which confirms that emerging-market lifestyles are beginning to mimic those of more Westernized markets. In our opinion, this development presents pharmaceutical companies with an opportunity to market their global products in an extended market, but also necessitates a change in their go-to-market strategies and operating models. The data in Exhibit 6 was confirmed by our survey participants when we asked them to name which therapeutic areas will grow the most over the next five years:
1,190 956 20% 30% Emerging Markets increase by far is expected in diabetes, followed by oncology and anti• The strongest Insufficient tailoring of approaches to local needs fourth (see Exhibit 7). infectives and antivirals, with cardiovascular diseases a close Lack of patience and long-term strategy 80% 70%

27% 25%

- Nearly Rest of Worldhalf

of Poor the study participants expect the number of diabetics in emerging marHR management and hiring vs. partnering strategy 14% kets to grow by more than challenges, 20 percent over the next five years. Underestimating risks, and investment needs 14%
Late/too slow decision making and execution 9%

2011

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ARKET SIZE (2012)

- A third of the respondents believe that oncological diseases will increase by more than Centralization 5% 20 percent. Others 7% - Nearly one in four pharmaceutical executives predicts that the volume of cardiovascular diseases will increase by more than 20 percent over the next five years. A similar trend is predicted for anti-infectives and antivirals.

Mature markets BRICMT 2nd-tier emerging markets African markets

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

• By contrast, the majority of respondents foresee a much smaller 15% 45% or moregrowth potential for 22% diseases of the central nervous system, presumably because instances of these diseases will become more apparent only as longevity increases.
37% 30–44%

1%

=

= =

n U.S.

1 000

In summary, our survey shows that the various emerging-market regions differ greatly, and that disease patterns are beginning to duplicate those of more mature markets, with 15–29% noncommunicable diseases (such as diabetes40% and oncology) growing strongest. Companies looking to exploit their full potential in emerging markets need to identify which of Less than 15% In the following 7% should be the key characteristics in these market segments addressed. Share of global sales in five years Share of global sales today chapters, we will consider some of these issues and illustrate the need for new, tailored business models.

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Exhibit 7 Development of Therapeutic Areas in Emerging Markets Within the Next Five Years

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IN WHICH THERAPEUTIC AREAS DO YOU EXPECT THE HIGHEST GROWTH RATE IN THE EMERGING MARKETS DURING THE NEXT FIVE YEARS? PERCENTAGE OF PARTICIPANTS SELECTING GROWTH CATEGORY 4% Diabetes 12% 3% Oncology 13% 3% Anti-infectives and antivirals 16% 10% 14% 35% 25% 23% 28% 33% 32% 49% N/A 0–4% 5–9% 10–19% Cardiovascular 16% 7% 22% 32% 23% 20% or more

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Central nervous system

16%

13%

29%

26%

16%

Source: Survey results; Booz & Company analysis

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II. BARRIERS TO GROWTH Pharmaceutical companies face market access constraints that include underdeveloped healthcare infrastructures, cost containment measures, and value-based product evaluations. Among the manifold challenges that pharmaceutical companies face in emerging markets, one hurdle stands out above the rest: market access. But all these challenges are reflected in the different healthcare development agendas across emerging markets (see Exhibit 8). They fall roughly into three categories: • “Infrastructure developers”: Some countries currently do not have well-developed healthcare infrastructures and thus focus on improving access to healthcare for the general population. For example, Nigeria is implementing its National Health Insurance Scheme. • “Cost containers”: Many countries put in place containment measures to manage the costs of their evolving healthcare systems. The simplest and most common method is

Guidelines: 11.0 million aölkdfölka

=

=

Exhibit 8 Examples of Healthcare Policy Changes for Selected Emerging Markets

32.8% 30.1%

=

=

In Russia, the price ceiling for “essential drugs” means a reduction in price for many products. The outpatient DLO reimbursement program is, therefore, expected to cover more of the population with its capped budget. China has introduced a more unified pricing measure to reduce the gap between local generics and off-patent international brands. Collaboration with the U.K.’s NICE could pave the way for economic analysis of new drugs.

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Nigeria wants to improve access by implementing the National Health Insurance Scheme to establish universal healthcare for all citizens by 2015. The strengthening of the National Agency for Food and Drug Administration and Control will reduce counterfeit medicines and increase consumer confidence in new drugs. In India, a further erosion of patent jurisdiction can be observed. An extension of direct price control to all drugs to stop free pricing is possible.

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In Brazil, the creation of an economic evaluation agency (CITEC) has become a big barrier to market access. New fast-track approval for biosimilars is expected.

Vietnam is implementing a centralized annual tendering program in 2013 and has introduced a price cap. The objective is to make drugs more affordable, given out-of-pocket payments of approximately 60% of the market’s healthcare spending.

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In South Africa, the introduction of national health insurance will lead to tendering of drugs with downward pressure on prices. A new reference pricing scheme will look at each therapeutic class as a whole and possibly take the lowest price instead of the average price.

Source: IMS Health; UNIDO; SCRIP; Booz & Company analysis

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to not provide (complete) reimbursement to patients. Other governments increasingly rely on tendering for hospital business. For instance, Vietnam is experimenting with an elegant approach: This second-tier emerging market is implementing a centralized annual tendering program in 2013. As out-of-pocket payments account for approximately 60 percent of the market’s healthcare spending, the goal is to make drugs more affordable for patients by introducing a price cap. As a consequence of this program, the cost of some products is expected to fall by 30 percent. Other emerging markets show similar approaches: high out-of-pocket payments (for example, 31 percent in Russia, 61 percent in India, and 14 percent in Thailand) for branded and non-branded pharmaceuticals, while governments support the use of generics and biosimilars, and introduce price restrictions.
Perceived Success • “Value Novartis Sanofi GSK Roche Pfizer MSD J&J 10% 8% Perceived Innovation maximizers”: Analogous to mature markets, some emerging markets are already Sanofi 21% moving toward value-driven drug evaluation and pricing. Good examples are38% China, Novartis 27% 15% which is collaborating with the British National Institute for Health and Clinical Pfizer 21% 15% Excellence (NICE), and Brazil, where an economic evaluation agency has been set up. 13% GSK 19% Sandoz Roche Teva 17% 15% 15%

12%

The Patent Cliff

10% Teva 6% A hot topic in the pharmaceutical industry is the “patent cliff.”Bayer The end of drug exclusivity is reaching the MSD 8% Bayer 6% emerging markets and putting a significant share of sales at risk. Abbott 6% AstraZeneca 8% 4% Sandoz 4% Although this challenge is often mentioned in discussions about J&J the prospects of mature markets, it will also hit Eli Lilly 4% AstraZeneca 4% the emerging markets. For example, between 2012 and 2016, the patent cliff will put sales worth a total of $21.4 Abbott 4% Novo Nordisk 2% billion in Asia-Pacific at risk. This corresponds to about 10 percent of the total Asia-Pacific market, which will by 4% Mylan Takeda 2% 2016 have reached a volume of $195 billion to $225 billion (see Exhibit A ). Stada 2% Eli Lilly 0% 2% Mylan 0% governments and payors are expected to extend the general As a result, use of generics and biosimilars across Takeda 0% Stada 0% emerging markets to newer treatments, thereby increasing competition and price pressure on ethical companies Watson 0% Watson 0% with a mature portfolio. Novo Nordisk Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

Exhibit A The “Patent Cliff” in Emerging Markets
VALUE OF PRODUCTS AT RISK, 2005–16 Constant US$ (in billions) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2005 1.5 0.2 0.5 2006 2.1 1.2 0.4 2007 0.6 2008 0.9 2009 0.5 0.4 2010 2.1 2.6 1.4 1.8 0.4 2011 2012 2013 2014 2015 2016 1.6 1.8 2.5 3.7 3.0 2.1 3.1

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Example: Asia-Pacific

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% of Prior Year's Sales 2015 Asia-Pacific Sales ~ $195 billion–$225 billion 14 12 10 8 6 4 2 0

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3.7

1.3

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% of prior year’s sales

Primary-care driven

Specialist driven

Source: IMS Asia-Pacific Insight, Issue 2, 2012, page 5: IMS Health MIDAS MAT, June 2011, Rx-only (markets included: Japan, India, Australia, New Zealand, Korea, Singapore, Hong Kong, China, Taiwan, and Philippines); LoE Planning & Life Cycle Management

ortance

14
74% 4%

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clining importance)

Pharmaceutical executives consider market access to be their foremost challenge. While both market access and the patent cliff present significant challenges, access is clearly the primary pain point for executives. Only markets with a relatively developed healthcare system can sustain a profitable pharmaceutical business. Unlike mature markets, where pharmaceutical corporations are accustomed to battling with health technology assessment agencies from very established positions, emerging markets have jumped the curve and are raising sophisticated hurdles to their markets before many players have even established themselves. Since healthcare policy is set by the central government, moving in early to work with officials to develop that policy is crucial. “We need to invest ahead of the market,” one executive said. “Then we can build the market and develop our commercial position.” Against this background, the challenges associated with the approaching patent cliff—such as price pressure and competition by local generics companies—appear secondary. This view is shared by our study respondents (see Exhibit 9).
Exhibit 9 Key Challenges to Further Growth in Emerging Markets

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

= =

=

WHAT ARE PHARMA COMPANIES’ KEY CHALLENGES TO FURTHER GROWTH IN EMERGING MARKETS? 1= LEAST RELEVANT 5= MOST RELEVANT PERCENTAGE OF PARTICIPANTS SELECTING SCORE Least relevant Lack of reimbursement and public funding Lack of healthcare infrastructure Lack of affordability Price pressure Local competition Lack of IP protection Challenging/nontransparent contracting and tenders Talent issues (e.g., recruitment, development, and retention) Compliance challenges Lengthy product registration processes Regulatory requirements Supply chain and distribution issues Competition from multinationals 68% 67% 64% 59% 54% 52% 51% 51% 49% 43% 36% 33% 19% Most relevant

TABLE HEADING Average Score 3.9 3.8 3.9 3.8 3.5 3.6 3.4 3.5 3.4 3.4 3.1 3.1 2.7

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N/A

1+2

3

4+5

Source: Booz & Company analysis

4% Diabetes 12% 3% Oncology 13% 3% Anti-infectives and antivirals 16% 10% 14% 35% 25% 23% 28% 33% 49% N/A 0–4% 5–9% 10–19%

15

Cardiovascular

16%

7%

22%

32%

23%

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20% or more

Central nervous system

16%

13%

29%

26%

16%

About two-thirds of the pharma executives identified a lack of public funding, a weak healthcare infrastructure, and a lack of affordability as the biggest challenges for growing their business. One example of these issues is the treatment of diabetic patients in China, particularly in rural areas, which demonstrates how the absence of a basic infrastructure hinders the appropriate use of medication, even when the medication is delivered to the point of application/sale. • Due to a lack of basic healthcare infrastructure, the number of undiagnosed diabetes cases is high. Furthermore, even when diagnosed with diabetes, patients from rural areas have to travel long distances to visit the nearest hospital. • Many physicians have not received basic training in the treatment of patients with diabetes. • The average Chinese citizen also faces problems affording insulin treatment, so many diabetic patients either receive suboptimal management with oral antidiabetics or are not treated at all. Other key challenges to growth: • While executives share a long list of concerns, each pharmaceutical company needs to evaluate them in the context of its specific portfolio. For example, a lack of healthcare infrastructure and affordability can be expected to be a bigger challenge for the producers of expensive specialty care than for those companies that manufacture primary-care products. • Price pressure is aggravated by domestic competition, as local companies typically receive support from their governments, a phenomenon also often seen in public tenders across emerging markets. This situation is further exacerbated by the fact that local companies are typically generics manufacturers that will also benefit from the approaching patent cliff. • Legal and regulatory issues are reflected in the lack of intellectual property (IP) protection (as can be seen in the following examples in the Indian market). The absence of transparency, lengthy processes surrounding tendering and contracting, and compliance challenges also are factors. • Talent management is known to be a significant hurdle for companies in emerging markets and will be examined more closely in Chapter V.

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VALUE OF PRODUCTS AT RISK 2005–16

Constant US$ Defining (in billions) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

the Addressable Population

Most public discussions of affordability are characterized by rather generalized statements about how it limits 12 we drug consumption and market growth. In a recent study of affordability in India (see Exhibit B), however, found that this debate needs to be held on an indication level (since the propensity to spend on healthcare 10 depends strongly on the severity of the disease) and requires the consideration of two key factors that limit 2.1 3.0 3.1 the “addressable” population: 3.7 8 1. Access to healthcare, which is almost 100 percent in urban areas, but strongly decreases in rural 6 regions to 1.3 3.7 2.5 25 percent; and
2.6 but also by savings, family support, 2. Adjusted net worth of an individual as determined not only by income 1.2 1.5 1.8 1.8 2 1.6 and insurance coverage. 1.4 0.5 0 Of India’s total population of 1.2 billion, only about 46 percent have access to healthcare. Of those, the 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 “affordable” population varies strongly by indication; for example, we estimate that for a life-threatening % of prior year’s sales Primary care driven Specialist driven cancer, with a treatment cost of $10,000 annually, the addressable population would be 23 million people. For anemia, with a comparatively low treatment cost of $270 a year, as many as 290 million people would have access to and could afford treatment. Although rheumatic diseases are a lot less costly to treat than oncological ones, we expect the addressable population to be smaller, since the “propensity to spend” for a non-life-threatening condition will be significantly lower. These numbers illustrate how important it is to consider the addressable population for each disease and factor in both access and affordability. 0.2 0.5 0.4 0.6 0.9 0.4 0.4 2.1 2.1 4

% of Prior Year's Sales 14 2015 Asia Pacific Sales ~ $195 billion–$225 billion1

Guidelines: 11.0 million aölkdfölka 32.8%

=

=

=

Exhibit B Affordability of Medication in India

30.1%

=

TABLE HEADING INDIAN HOUSEHOLD INCOME PYRAMID, 2012 Annual Disposable Household Income (in rupees) >25 1M Lacs* (7M) Globals $46,000 11M 10–25 Affluents (57M) Lacs $18,400 5–10 18M Strivers Lacs (97M) 100% $9,200 3–5 25M Seekers Lacs (131M) $5,500 1.5–3 54M Aspirers Lacs (284M) $2,750 <1.5 Bottom of 118M Lacs (637M) Pyramid # Households (# Population) 1 Access 2 Affordability 100% 100% 4.2% 100% Ø 46% 70% 50% 1.6% 52% 6.7% Ø 1–24% Addressable Population 2012 Oncology ) ($10,000 Virology ($6,000) Rheumatology ($3,900) Anemia ($270) 23M 37M 9M 290M

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Approved Colors 25% Population with access to healthcare Population with access that can afford products

*Lac is an Indian unit (1 lac = 100,000). Note: These figures represent the theoretical number of people who would have access to and could afford treatment for each indication. The actual number of patients requiring treatment will depend on the prevalence, incidence, and treatment rate of each disease. Source: Indicus; EIU; Booz & Company analysis
# Households Population with ccess to healthcare Population with access that can afford products

(US$)

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IP protection issues can significantly influence the go-to-market strategies and tactics of pharmaceutical companies. India is a good example of how tough the situation can be with regard to intellectual property protection. The subcontinent is known to legally support generics companies in order to provide the Indian population with affordable medication. This support is given even when it goes against existing patent laws and corresponding rules of the World Trade Organization (compulsory licensing). • Despite valid patent protection, Bayer’s Nexavar, a treatment for hepatocellular carcinoma, is facing competition from Natco Pharma. Due to the inability to afford Nexavar among the general population, the Indian government granted Natco manufacturing and marketing rights for the drug. Natco pays only 6 percent in royalties and is able to provide Nexavar at therapy costs of around $170 per month, while Bayer’s Nexavar therapy costs amount to $5,500 per month. Bayer eventually offered patients a reduced product price (about 10 percent of original therapy costs), but on the condition that reduced prices are available only to those patients diagnosed by licensed oncologists. This stipulation has two advantages: It enhances the quality of healthcare for patients and reduces the risk of parallel trade. • Boehringer Ingelheim (BI) markets its patented HIV drug Viramune in India, although it faces competition from local generics manufacturers. To protect its brand, BI made a commitment not to pursue lawsuits, as long as local manufacturers adhere to good manufacturing practice (GMP), to ensure a level of quality for the marketed product. • In order to increase affordability and access to some of its blockbuster products, Roche entered a partnership with India’s Emcure Pharmaceuticals in 2012: The latter would produce Roche’s breast cancer drug Herceptin and its lymphoma and rheumatoid arthritis treatment MabThera for domestic sale—under different names and at significantly lower prices. However, the Indian government nevertheless started the process of granting a compulsory license on Herceptin in January 2013; it had already stripped the patent from Roche’s hepatitis C therapy Pegasys the previous year.

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In line with the dynamically evolving challenges, the relevance of different stakeholders is changing. To better understand the dynamics among the key players in the health system, Booz & Company analyzed the role of the individual stakeholders by establishing their consolidated “net growth in importance.” This value is defined by the relative difference between the percentages of respondents who anticipate an increase in the importance of a certain group and those who expect a decrease (see Exhibit 10). • Given that basic medical care in emerging markets is typically provided by public hospitals, pharmaceutical executives expect payors and hospitals to continue to increase in relevance: - Of our respondents, a large majority (78 percent) consider payors to be of growing importance, with only 4 percent dissenting from this view. - Fifty-eight percent of our respondents consider hospitals to be of growing importance. • Specialists, regulatory authorities, and patients are also expected to become more influential, reflecting the dynamics of an evolving health system in which specialists gain in relevance, cost containment measures are introduced, and patients are increasingly better informed about diseases and still pay a large part of the bill.
Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

Most relevant

Average Score 3.9 3.8 3.9 3.8 3.5 3.6 3.4 3.5 3.4 3.4 3.1 3.1 2.7

%

%

4%

52%

51%

51%

49% 43% 36% 33% 19%

Exhibit 10 Expected Shift of Importance across Stakeholders in Emerging Markets in the Next Five Years

TABLE HEADINGS

WHICH STAKEHOLDERS DO YOU EXPECT TO GAIN AND DECREASE IN IMPORTANCE FOR PHARMA COMPANIES IN EMERGING MARKETS OVER THE NEXT FIVE YEARS? PERCENTAGE OF RESPONDENTS SELECTING STAKEHOLDERS Importance Growing Declining – – – – – – – – 4% 3% 1% 1% 6% 19% 19% 16% Net Growth in Importance (% growing importance - % declining importance) Payors Hospitals Specialists Regulatory authorities Patients Pharmacists Distributors GPs 7% 6% 6% 46% 45% 42% 55% 74%

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4+5

78% 58% 47% 46% 48% 26% 25% 22%

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Source: Booz & Company analysis

4% Diabetes 12% 3% Oncology 13% 3% Anti-infectives and antivirals 16% 10% 14% 35% 25% 23% 28% 33% 49% N/A

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5–9%

0–4%

• Study participants are divided with respect to pharmacists, distributors, and general practitioners (GPs), with similar numbers expecting either an increase or a decrease in importance. - Focus on pharmacists: A large number of patients in emerging markets pay for their medication themselves. This may significantly influence their choice—particularly for over-the-counter (OTC) or quasi-OTC products, which are dispensed at pharmacies without a prescription. Thus, a pharmacist can carry increased weight in the sale of a particular drug. However, it is important in this context not to generalize: In India, for example, pharmacies are legally required to be run by professional pharmacists. Even so, in an effort to save costs, the stores are often staffed with salespeople who are not in a position to provide medical or therapeutic advice to patients. - Focus on distributors: In lower-tier markets, the role of distributors differs from that in more mature emerging markets. In these regions, pharmaceutical companies are likely to collaborate with local partners instead of building a full-blown infrastructure (see Chapter III). They are therefore more likely to expect the importance of distributors to grow. In BRICMT countries, however, pharmaceutical companies are more likely to localize their operations, and hence do not expect a material increase in the importance of distributors. - Focus on physicians—specialists and general practitioners: As noted earlier, the prevalence of “specialist” diseases, such as diabetes or tumors, is anticipated to increase significantly. In this context, the importance of medical specialists and hospitals will increase. However, as health systems and their infrastructure progress, the training of physicians improves and GPs will receive a higher level of education. Hence, they will be able to treat diseases that are today typically under the regimen of specialists, such as internists. Therefore, some experts expect GPs to gain in influence over time. As a result of the specific dynamics in emerging markets, pharmaceutical companies must adapt their business strategies to the specific demands of the different healthcare agendas, the individual restrictions for market access, and the shifting role of the stakeholders involved. We explore the need for a new look at go-to-market models in the next chapter.

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III. CONQUERING EMERGING MARKETS WITH NEW STRATEGIES For most industry executives, bolstering top-line growth in emerging markets is the number one priority and best achieved by progressive penetration of their existing markets and channels. Yet, since traditional strategies have often failed to deliver, executives are now turning old thinking on its head. Three out of four executives we interviewed foresee that, in the future, fully fledged models with local operations ranging from manufacturing and R&D to marketing and sales will be implemented in BRICMT countries.
Average Score 3.9 3.8 3.9 3.8 3.5 3.6 3.4 3.5 3.4 3.4 3.1 3.1 2.7 WHAT ARE YOUR COMPANY’S KEY STRATEGIC PRIORITIES IN EMERGING MARKETS OVER THE NEXT FIVE YEARS? 1= LEAST RELEVANT 5= MOST RELEVANT AVERAGE SCORE GIVEN BY PARTICIPANTS Strategic Priorities Grow top line 4.3

Most relevant

What are the strategic priorities of pharmaceutical executives in emerging markets? How should integrated business models be adapted to meet those priorities? • Survey participants confirmed that top-line growth is the main strategic priority for emerging markets (see Exhibit 11). On a scale from 1 (lowest priority) to 5 (highest priority), this issue scored an average of 4.3. • Gaining market share is also considered important, with an average score of 4.0, while optimizing the bottom line is currently less of a priority. • However, a score of 3.5 for bottom-line optimization indicates that pharmaceutical executives are monitoring their cost base closely and will almost certainly reprioritize their focus in the future.

%

%

4%

Guidelines: 11.0 million aölkdfölka 32.8% 30.1% =

59% 54% 52% 51% 51% 49% 43% 36% 33% 19%

= = =

Exhibit 11 Strategic Priorities of Pharmaceutical Companies in Emerging Markets

TABLE HEADING

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4+5

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Gain market share

4.0

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g importance) 74% 55% Optimize bottom line 3.5

46%
Source: Booz & Company analysis

5%

%

4% Diabetes 12% 3% Oncology 13% 3% 23% 28% 33% 49% N/A 0–4%

21

Anti-infectives and antivirals

16%

10%

14%

35%

25%

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10–19%

5–9%

Cardiovascular

16%

7%

22%

32%

23%

Respondents say that there are various ways to achieve these strategic priorities. • One common strategy is the ongoing penetration of existing markets and channels. Many ranked this as the highest priority, resulting in an average score of 4.4 (see Exhibit 12). • Geographic expansion is also considered to be an important initiative, with an average score of 3.7, and is viewed by respondents as slightly more important than the expansion or diversification of the portfolio, which rated 3.4. To understand how pharmaceutical executives can transform their traditional approaches into ones that maximize top-line growth in emerging markets, we asked study participants to evaluate a set of growth levers that cross the value chain, including R&D, manufacturing and supply, distribution, market access, and marketing and sales. Based on the replies, we first analyzed which levers and strategies actually drive business in emerging markets, and then examined how these go-to-market models affect a company’s internal structures and operating model (see Chapter V). Three groups of key levers stand out: • Local operations: local research, local development, and local manufacturing • Sales excellence via local sales force • Close collaboration with governments All these factors have one characteristic in common: They advocate being on the ground locally. The majority of our respondents agree; more than 60 percent consider investments in local research, local development, and local manufacturing to be the most significant
Exhibit 12 Growth Initiatives of Pharmaceutical Companies in Emerging Markets Strategic Priorities
Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

Most relevant

Average Score 3.9 3.8 3.9 3.8 3.5 3.6 3.4 3.5 3.4 3.4 3.1 3.1 2.7

8%

7%

64%

59% 54% 52% 51% 51% 49% 43% 36% 33% 19%

=

=

=

=

TABLE HEADIN

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WHAT ARE YOUR COMPANY’S TOP INITIATIVES TO DRIVE GROWTH IN EMERGING MARKETS OVER THE NEXT FIVE YEARS? 1= LEAST RELEVANT 5= MOST RELEVANT AVERAGE SCORE GIVEN BY PARTICIPANTS

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4+5 Increase penetration in current markets and channels 4.4

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Expand geographically

3.7

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ng importance) 74% 55% 46%
Source: Booz & Company analysis

Approved Colors Diversify and expand product portfolio 3.4

45%

2%

22
Diabetes 12%

4% 49%

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levers for commercial success in BRICMT markets (see Exhibit 13). “We are moving from made in China to created and discovered in China,” Sanofi CEO Christopher Viehbacher recently told Bloomberg. Although the same cannot yet be said for second-tier markets and Africa, a surprising % of Prior number of respondents felt that these levers were also important for these regions. In the Year's Sales case of second-tier countries, this figure was more than 30 percent; possibly, 14 these respon2015 Asia Pacific Sales ~ $195 billion–$225 billion1 dents are already looking ahead to the increased significance of these markets in the future.
12

Constant US$ (in billions) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2005 1.5 0.2 0.5 2006 2.1 1.2 0.4 2007

In developed markets, executives have been focusing for the past few years on improving 10 2.1 efficiency and driving out costs. This has often led to significant layoffs, particularly in the 3.0 3.7 8 marketing and sales departments but increasingly also in R&D. In 3.1 many cases, the savings were used to build up local operations in emerging markets. This, in turn, resulted in an 6 1.3 3.7 2.5 increasing number of fully fledged go-to-market models (which include local R&D, manufacturing, and significant sales forces). Thus, in some companies, a considerable share of 2.1 4 2.6 funds and resources has already been reallocated to emerging markets. In 2011, 47 percent 1.8 1.8 2 16 percent in 1.6 up from of AstraZeneca’s 0.5 workforce a mere 1.4 was based in emerging markets, 0.9 0.6 2002. This is a significant change, occurring over less 0.4 0.4 than a decade—and in our view, just 0 the beginning. 2008 2009 2010 2011 2012 2013 2014 2015 2016 In this context of the trend toward localization, it is worth starting off with a closer look at the BRICMT countries, since they have developed into serious competition for Western industrial locations. Though close collaboration with governments ranks at the top of the executive priority list (83 percent), sales excellence via your own sales force (77 percent), local manufacturing (67 percent), and local R&D (about 65 percent) also received strong support (see Exhibit 13).
Primary care driven Specialist driven

% of prior year’s sales

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

Exhibit 13 Strategic Levers along the Value Chain across Emerging-Market Clusters

TABLE HEADIN WHICH LEVERS/STRATEGIES DO YOU CONSIDER MOST IMPACTFUL FOR COMMERCIAL SUCCESS PER MARKET/REGION? R&D 90% Agreement of Respondents 80% 70% 60% 50% 40% 30% 20% 10% 0%
pl y ch st Dis ai rib tri n b ut u Di or tio re s/ n ct wh vi di ol a lo st es c rib al al ut er io s n to ho sp Di ita re ls ct re d ta ist il rib ph u ar tio m n Cl ac to os ie e s wi co th lla di b st or rib at Cl ut ion os or wi e c s th o go llab ve or Co rn at lla m io b en n lo ora ts ca tio lo n rg wi an th iza ot tio her Se ns co nd br O an ut di co ng m eba se d Pr pr ic ic e in re g du ct gr io ea ns te to ra g Sa cc ain le es s s ow exc n elle sa n c le e Ta s rg fo via et rc ed e k m ey an a ag cc em ou en nt t rc en ea m es op el ac tu rin g h t

Manufacturing & Supply Chain

Distribution

Market Access

Marketing & Sales

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Additional proposed approaches: special access partnering; direct to physician or patient model; low-price strategy (malaria, tuberculosis); improved packaging; patient access programs with certain amount of free goods and information

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Approved Color

lr

uf

ca

ev

an

Lo

ld

lm

ca

ca

Lo

Lo

lp

ac

ka

gi ca

ng

/s

up

Lo

di

Majority agree on high importance BRICMT

Respondents divided Second-tier emerging markets

Majority agree on low importance African markets

Note: Percentages refer to the consolidated confirmations of a lever as relevant by the respondents. Source: Booz & Company analysis

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Local manufacturing partnerships, for example, are already a common and effective tool for companies to enhance their position, as is illustrated by a number of examples: • Brazil: Bristol-Myers Squibb has announced that the manufacturing and distribution of its HIV drug Reyataz will be transferred to a local company, Farmanguinhos laboratory, a unit of Fiocruz. A previous agreement in 2003 meant that Reyataz was included in a government-funded AIDS program and ensured a guaranteed sales volume over two years at a discount of 76 percent. • Russia: In an effort to become a part of the national immunization calendar, GlaxoSmithKline supplies bulk vaccines and provides technology and expertise to Binnopharm, which then undertakes the filling and packaging. The agreement includes oncological drugs, medication for rotavirus, and pneumococcal vaccines. Pursuing the same goal, Pfizer and NPO Petrovax Pharm have been co-manufacturing pneumococcal vaccine since 2011, and Pfizer provides technology transfer and expertise to increase production quality among local producers, in accordance with GMP standards. • India: As mentioned in Chapter II (see page 18), Roche has formed a partnership with Emcure Pharmaceuticals to enable affordable versions of its oncology drugs Herceptin and MabThera. The repackaged and rebranded products are expected to launch in 2013. This trend is also spreading to second-tier markets. Although only a small number of respondents today believe in the prospects of localization, first initiatives can already be observed: • The Japanese generics producer Nipro has announced plans to build a wholly owned generics production facility in Vietnam. • In November 2012, Sanofi laid the foundation for an industrial facility in King Abdullah Economic City in Saudi Arabia. It would be the first global pharmaceutical company to establish a manufacturing plant with 100 percent foreign direct investment in the country. This project highlights how important Sanofi considers the rapid expansion of its presence in emerging markets in order to maximize revenue-earning opportunities. The corporation also recently received a land concession for a planned investment of $93 million in Sidi Abdellah, near Algiers, the largest French pharmaceutical complex in the Middle East and North Africa region. Medicine production should begin within three years. A prerequisite for being on the ground locally is the establishment of good relationships with regional governments. Although this is especially true for the BRICMT countries, our respondents were clear that such relationships are also decisive for success in second-tier countries and Africa (see Exhibit 13, page 23). • Governments are expected to become the primary points of contact for pharmaceutical companies in emerging markets. Though, as mentioned previously, 83 percent of respondents take the view that building such relationships is essential for a successful go-to-market approach in the BRICMT region, 67 percent felt this was also a priority for second-tier markets. • Although less than half currently share this view for the African continent, cooperation with governments is still considered to be one of the top four levers for Africa.

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Several recent cases show that collaboration with governments and quasi-governmental institutions can take on many different forms. For instance, public–private initiatives in manufacturing and R&D generally help to improve the chance of success in tenders. Specific examples include the following: • Sanofi formed a joint venture with a firm owned by the Algerian government and now produces generic drugs for the local market. As a result, Sanofi has boosted its previous market share of 14 percent by seven percentage points. • GSK struck a deal with the Brazilian government. In exchange for knowledge and technology transfers, the state guarantees GSK both a set price and set volumes for its pneumococcus vaccine for children. • Bayer entered into an R&D collaboration with Tsinghua University in China. • MSD initiated a research program with St. Petersburg State University. • In the Asia-Pacific region, Novartis is focusing on cooperation with governments for developing specific drugs for Asian genetic diseases.

Second Branding Another strategy that is increasing in importance, especially in second-tier markets, is second (or dual) branding. It can help to leverage the cost benefits that arise from local operations and/or manufacturing and result in benefits, particularly in local tenders. Though existing brands are used in higher-priced segments, companies are introducing “follower” brands to serve lower-priced segments. They are usually manufactured locally and with a different name, packaging, or cover. This helps, at least in the short term, to secure market share and achieve differential pricing. Typically, this strategy is very effective in markets with high patient co-payments. To quote Jon Pender, vice president, government affairs, intellectual property, and access, at GSK (FirstWord Publishing, February 2012): “A major challenge [is] to try and segment the market in a way whereby we can responsibly take advantage of the real commercial opportunities that exist in the growing middle classes in the countries, but at the same time try to expand access amongst the poorest communities.” Sanofi has successfully implemented this dual brand strategy with Clopidogrel in Indonesia, following the loss of its exclusivity.

Partnerships that involve localized brands are very important in second-tier regions and Africa. One interesting point arising from our survey is that our respondents see partnerships within the existing infrastructure to be more important in second-tier and African markets than in BRICMT countries. The strategy for second-tier and African markets can really be summed up in one word: collaboration. Close collaboration with local distributors can be critical, as these partnerships allow firms to leverage the distributor in order to increase market coverage: Forty-nine percent of respondents prefer this go-to-market strategy, making it more popular than engaging with either hospitals or retail pharmacies (see Exhibit 13, page 23).

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Having ascertained which levers are most important, we explore how they are implemented and backed up with investments in local infrastructures—and what best practice looks like. Based on the survey findings about the impact of different strategies in the individual emerging-market clusters, study participants were asked to evaluate which local infrastructure characteristics they consider to be most relevant (see Exhibit 14). This can be used as an indication of how serious executives are about adapting their go-to-market models and % of Prior Year's Sales in what areas real investments are to be expected.
2015 Asia Pacific Sales ~ $195 billion–$225 billion1 14

Constant US$ (in billions) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2005 1.5 0.2 0.5 2006 2.1 1.2 0.4 2007

Local infrastructure is generally considered to be of great relevance in12 emerging markets, but particularly in the BRICMT countries, where economies are more stable. For 10 facilities. many executives, this includes local manufacturing/packaging and R&D • Respondents agree on the positive prospects of local subsidiaries (78 percent) and retaining their own sales forces (75 percent) in BRICMT countries. 6
2.5 3.7 1.3 3.7 3.0 2.1 3.1 8

• Opinions on the relevance of local manufacturing/packaging facilities4 (58 percent) and 2.6 local R&D departments (41 percent) are not as clear-cut, though players have 1.8 1.8 some 2 1.6 1.4 0.5 already 0.9 staked a lot in these areas. 0.6
0.4 0.4 0 2009 was 2010 2011pioneers 2012 in Brazil, 2013 first 2014 2015 a presence 2016 - Sanofi one of the establishing as far back as % of prior year’s sales Primary care driven Specialist driven 1955. With sales of €1,522 million ($2,008 million) in 2011, this region is today the company’s fifth-largest country by sales. Sanofi maintains manufacturing capabilities at four sites, with a staff of more than 5,200 employees; over 95 percent of the company’s products sold in Latin America are produced locally. Sanofi is also well established in China, with a fully integrated presence: Eleven regional offices and about 7,000 employees, more than 4,000 of them in the sales force. In addition, the company maintains a network of six manufacturing sites and a regional R&D platform. 2008

2.1

Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

Exhibit 14 Relevant Local Infrastructure across Emerging-Market Clusters

TABLE HEADING

WHICH LOCAL INFRASTRUCTURE DO YOU CONSIDER MOST RELEVANT FOR COMMERCIAL SUCCESS IN DIFFERENT EMERGING MARKETS? BRICMT 78% 75% 58% 41% 29% 46% 43% 41% 19% 1% 42% 28% 22% 16% 0% Second Tier Africa

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b co sidi m ary m /i er nd ci e al pe pr nd es e en nt O ce wn sa le s fo O rc w e pa n m ck a ag nu fa i n O g ct wn fa ur ci ing R& lit ie / D s de pa rtm en Pa ts lo rtne ca rs l c hi om ps pa wit ni h O es wn sa Su le s b fo co sidi rc e m ary m /i er nd ci e al pe pr nd es e en nt Pa ce r lo tne ca rs l c hi om ps O pa wit w ni h pa n m es ck a ag nu f i ng ac O wn fa tur ci ing R& lit ie / D s de pa rtm en Pa ts lo rtne ca rs l c hi Su om ps b pa wit co sidi ni h m ary es m /i n er d ci e al pe pr nd es e en nt O ce wn sa le s fo O rc w e pa n m ck a ag nu f in ac O g wn fa tur ci ing R& lit ie / D s de pa rtm en ts

Approved Colors,

Su

Majority agree on high relevance
Source: Booz & Company analysis

Respondents divided

Majority agree on low relevance

26
R&D Manufacturing & Distribution Market Access

Booz & Company
Marketing &

- Novartis invested $1 billion in an R&D site in Shanghai. Furthermore, the Swiss company was already conducting nearly two-thirds of its clinical trials in emerging markets by 2011 (see Exhibit 15). - Other multinational corporations have also taken the plunge and are running local R&D facilities. For example, Johnson & Johnson operates R&D hubs in Brazil, Russia, India, and China, while AstraZeneca is present in China, Russia, and India. The jury is still out when it comes to second-tier markets. The pharmaceutical industry has not yet developed a clear local infrastructure strategy for second-tier emerging markets. The smaller volume of these markets and their alleged greater instability pose a challenge for many executives. • Respondents are clearly divided. Nearly half of them consider their own sales forces to be essential and just slightly fewer affirm the importance of local subsidiaries. Forty-one percent claim that partnerships with local companies are critical (see Exhibit 14). • The idea of running local manufacturing/packaging and R&D departments has very few advocates, with only 1 percent voting for the latter. Investments in local infrastructure are considered to be least relevant in Africa. • Partnerships with local companies appear to be the most promising approach, with 42 percent of interviewees being in favor. • Since many see the continent as the “final frontier” of emerging markets, we have dedicated the entire next chapter to the significant opportunities and challenges this vast and heterogeneous region offers.
Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

=

=

=

Exhibit 15 Novartis’s Clinical Trials by Region

TABLE HEADIN

A4 format: - width for 3 colum - width for 2 colum BY REGION, 2011 (±% 2010)

Letter format: - width for 3 colum - width for 2 colum Central Europe (-25%)

21%

Lines: 0,5 pt Lines for legend: 0

Asia-Pacific, Middle East, and Africa (+235%)

44%

12%

Eastern Europe (+15%)

Note: Please always del otherwise InDesig file. These colors can’

11% 3% Japan (-44%) 8% North America (-64%) Latin America (-1%)

Approved Colors

Note: Percentages may not add up to 100 due to rounding. Source: Company information; Booz & Company analysis

3% 8%

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The challenges in the pharmaceutical industry are further aggravated by the rapid pace at which the markets are changing. Consequently, our study participants expect go-tomarket models to change in the very near future. In less than a decade, executives expect to see BRICMT countries targeted with go-to-market models that are comparable to those in mature markets. Two-thirds anticipate similar marketing and sales approaches, while 58 percent expect similarities in market access (see Exhibit 16). However, our interviewees are more skeptical when it comes to models for second-tier markets and Africa.
1,190 • The development in second-tier markets is expected to be somewhat slower. Again, 956 Emerging Markets 30% pharmaceutical marketing and sales and market access are the areas in which executives 20% expect the most movement. The other aspects lag behind—and only 3 percent believe 658 that R&D activities will play as big a role as in developed markets. The results empha14% Rest of World size again that these regions require a80% more individually 70% tailored approach. 86%

• Only a minority of respondents believe that traditional go-to-market models will be 2011 2016 2006 applied in Africa anytime soon (see Chapter IV for more detailed analysis).

Guidelines: 11.0 million

=

Exhibit 16 Expected Similarities of Go-to-Market Models in Emerging Markets vs. Mature Markets in the Next Five to 10 Years

aölkdfölka 32.8%

=

=

DO YOU EXPECT PHARMA COMPANIES TO APPLY SIMILAR GO-TO-MARKET MODELS IN EMERGING MARKETS AS IN MATURE MARKETS DURING THE NEXT FIVE TO 10 YEARS?

30.1%

=

Africa 67% 22% 16% 58%

BRICMT

TABLE HEADIN

54%

52%

51%

38%

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10%

9%

6%

1%
R&D Marketing Market Distribution General and sales access setup Manufacturing R&D

Marketing Market Distribution General Manuand sales access setup facturing

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43%

Approved Colors

38%

29%

20%

14%

3%

Marketing Market Distribution General and sales access setup

Manufacturing

R&D

Majority agree on high likelihood of similarity

Respondents divided

Majority agree on low likelihood of similarity

Source: Booz & Company analysis

Majority agree on high importance Respondents divided Majority agree on low importance
28 Booz & Company

The findings described in this chapter illustrate that seismic change is taking place. Companies are struggling with a complex range of factors, from the patent cliff to the many challenges associated with market access. In an effort to maintain or even drive their margins, companies are cutting costs in mature markets and reinvesting in less developed regions that promise better cost-benefit ratios and higher growth potential. Yet reallocating funds and resources is not as simple as it seems, since traditional go-to-market models need to be adapted to meet local conditions. In terms of promise, the BRICMT countries are the most advanced of the three clusters, and our industry experts expect to apply strategies in these regions that are similar to those used in mature markets—ranging from the buildup of local R&D and manufacturing operations to marketing and sales approaches. The result will be fully integrated go-tomarket models. Our interviewees are more divided with regard to second-tier markets and, for the time being, are feeling their way carefully, concentrating on networking in the region. The first initiatives for localization are taking place but are still of an experimental nature. Executives are still some way off from committing resources in Africa. Strategies remain at the exploratory level: • Leveraging local distributors • Forming collaborations with government • Using pricing strategies to drive the top line They show less enthusiasm for the following: • Committing long-term resources • Investing in local research, development, and manufacturing • Building local sales forces But is this view justified? And will early movers gain a serious competitive advantage in Africa in the long run? We explore the situation in Africa more closely in the next chapter.

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IV. AFRICA: THE NEXT BIG OPPORTUNITY? As mentioned in the introductory chapter, two African clusters (sub-Saharan Africa and the North African states) are expected to be among the three groups of emerging markets with the highest increase in importance. “We’re thinking hard about what happens when those emerging markets start to slow because they are not going to continue growing at the rate that they’re growing forever,” Joseph Jimenez, chief executive officer of Novartis, recently told the news agency Reuters, “and a place where we’re putting a lot of our attention is Africa.” Many consider Africa to be the final frontier of emerging markets. The continent is vast, highly diverse, and full of great potential—but it also presents great challenges. Although sub-Saharan markets are currently embryonic, their expected relative increase in importance is significant and not far behind that of Southeast Asia. This evolution of the continent is defined by a multitude of factors: • In 2009, the United Nations stated that the population of Africa had hit the 1 billion mark, making it the most populous continent after Asia. This means that around 14 percent of the world’s population lives in Africa. • With a combined GDP of $2.9 trillion, Africa as a whole ranks fifth in the world— behind Germany, but ahead of France and Brazil. • Although Africa obviously starts from a lower baseline than other continents, the United Nations Conference on Trade and Development predicts an 82 percent growth in direct foreign investment in Africa between 2012 and 2014, compared with a significantly lower figure of 36 percent in Asia. • In addition, Africa is attempting to strengthen its economy by leveraging its own resources: The infrastructure ministers of the 15 Southern African Development Community countries have approved an investment program of $500 billion for the transport, water supply, communications, and tourism sectors, to take effect by 2027. • Africa has a growing middle class, with an expected annual disposable income of more than $1 trillion by 2023. • As is the case with second-tier markets, South Africa and Northern African countries boast GDPs per capita between $6,000 and $11,000. Of course, doing business in Africa poses its own challenges: • Africa comprises 54 countries in various stages of economic evolution, medical care facilities, healthcare policy, and population wealth. Sub-Saharan nations, in particular,

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have a limited economic base from which to kick-start their development, and thus a considerable way to go before they can match the economic pace of the wealthier areas of the continent (see Exhibit 17). • Nearly 70 percent of HIV/AIDS patients live on the African continent. This is a huge burden on a growing economy and an impediment to more rapid economic development. An estimated 14 million children in Africa have been orphaned as a result of HIV/ AIDS. In addition, infant mortality rates are the highest in the world, at about 109 per 1,000 in some parts of sub-Saharan Africa. All these factors are reflected in the growth forecast for the African pharmaceutical market (see Exhibit 18): • As part of the anticipated general economic growth, the African pharmaceutical market is expected to achieve a year-on-year growth rate of 10.6 percent by 2020, resulting in pharmaceutical sales of $45 billion in 2020.
Exhibit 17 GDP across African Countries

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

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=

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TABLE HEADIN

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GDP (in US$ billions) 450 400 350 300 250 200 150 100 50 0 422

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63
Sudan

49
Tunisia

39
Ghana

36
Kenya

31

26

24
Ivory Coast

23
Tanzania

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South Africa

Nigeria

Egypt

Morocco

Angola

Libya

Ethiopia Cameroon

Approved Colors 32.8% = 30.1% =

11.0

2.5

6.3

8.4

6.6

10.0

1.9

9.2

3.0

2.3

2.1

4.0

2.4

1.0

GDP per capita (in US$ thousands) Source: World Bank; CIA Factbook; Global Insight; UNIDO; Booz & Company analysis

TABLE HEADING

Exhibit 18 Development of the African Pharmaceutical Market
2011–20 Pharma Market (in US$ billions) 45 40 35 30 25 18 20 15 10 5 0 2011 Asia Pacific, Middle East, and Africa (+235%) 44% 45 CAGR 10.6% 30

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Central Europe (-25%) 21% 2016 12% 2020 Eastern Europe (+15%)

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Approved Colors,

Source: IMS Health; UNIDO; African Development Bank; Booz & Company analysis

GDP (in US$ billions)

31

450 400 350 300 250 200 150 100 50

422 11% 247 232 Japan (-44%) 102 99 93 63 49 3% 8% North America (-64%) Latin America (-1%)

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26 24 23

39

36

31

• Above and beyond the general economic development, pharmaceutical growth is also driven by governments striving to improve access to healthcare for their citizens. For example, Nigeria, Africa’s most populous country, is aiming to implement its National Health Insurance Scheme to provide universal healthcare for all citizens by 2015 (see Exhibit 8, page 13). Taking these factors into account, leading participants in the pharmaceutical field consider South Africa and the Northern African economies to be as important for their businesses as second-tier emerging markets. Although sub-Saharan markets are currently awarded the lowest priority, their expected relative increase in importance is the second highest among all of the emerging-market regions, after Southeast Asia (see Exhibit 5, page 10). As a result of the improving standards of living and the more Westernized lifestyle, the World Health Organization predicts that disease patterns in Africa will shift significantly. • Infectious diseases, maternal and perinatal conditions, and nutritional deficiencies currently account for nearly two-thirds of Africa’s overall disease burden. The incidence of “basic” health issues, such as infant mortality, will decrease (see Exhibit 19). Pharma Market (in US$ billions) •



45 45 CAGR Lifestyle 40 diseases, particularly cardiovascular 10.6% diseases, are expected to increase, and will 35 30 gain noticeably in importance by 2030 (from 11 percent in 2008 to 19 percent in 2030). 30 25 18have a knock-on effect on the rates of oncological diseases, which 20 spans will Longer life 15 are expected to double over the next two decades, from 5 percent of all diseases to 10 10 percent. 5 0 2016 2020 2011

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

Exhibit 19 Forecasted Development of Disease Patterns in Africa, Long Term

MORTALITY RATES, 2008–30 2% 3% 6% 8% 5% 8% 3% 5% 14% 10% Other Diabetes mellitus Respiratory diseases Injuries Malignant neoplasms and cancer

TABLE HEADI

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65%

40%

Infectious diseases, maternal and perinatal conditions, and nutritional deficiencies

11% 2008
Note: Percentages may not add up to 100 due to rounding. Source: WHO; Booz & Company analysis

19% 2030

Cardiovascular diseases

Note: Please always d otherwise InDesi file. These colors can

Approved Colo

4

GDP (in US$ billions)

450 400 350 300 250 200 150 100 50 0

422

247

232 102 99 93

63
Sudan

49
Tunisia

39
Ghana

36
Kenya

31

26

24
Ivory Coast

23
Tanzania

South Africa

Nigeria

Egypt

Morocco

Angola

Libya

Ethiopia Cameroon

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6.3

8.4

6.6

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Booz2.4 & 4.0

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GDP per capita (2011, in ‘000 US$)

Top executives are already factoring this development into their business plans. While anti-infectives and antivirals demonstrate strong short-term growth, they will be overtaken by treatments for lifestyle diseases in the long term. Respondents agree that pharmaceutical growth rates are expected to differ significantly across therapeutic areas and time horizons (see Exhibit 20): • As the wealth of the general population increases, affordability of medication will rise similarly. This means that healthcare that was previously denied on the grounds of cost, such as that for HIV/AIDS patients, will be increasingly taken up. Most of our survey participants expect anti-infectives and antivirals to retain their dominant market position and continue to demonstrate strong growth over the next five years. Our survey shows that 32 percent of our respondents expect annual growth rates to 20 percent or more, with a further 30 percent of respondents expecting growth rates in the range of 10 to 19 percent. This exceeds the prospects for anti-infectives and antivirals in other emerging markets (see Exhibit 7, page 12). • Increased wealth and a more Westernized way of life within a population go hand in hand with an increase in lifestyle diseases, such as diabetes and cardiovascular indications. Reflecting a similar trend in other emerging markets, these negative side effects of social change are predicted to increase significantly in Africa. Nearly half of all those surveyed expect the number of cases of diabetes to grow by 10 percent or more, and 22 percent expect an increase of 20 percent or more. • The market for oncological products is not expected to grow as fast in Africa as in other regions during the next five years. Though 51 percent expect this therapeutic area to increase by 10 percent or more across all emerging markets, only 25 percent foresee such a rate for Africa, highlighting that the growth prospects in such specialized therapeutic areas need to be regarded as longer-term opportunities.

er

Guidelines: 11.0 million aölkdfölka = = = =

nd perinatal encies

Exhibit 20 Expected Growth Rates in the African Pharmaceutical Markets by Therapeutic Area, Short to Medium Term

32.8% 30.1%

IN WHICH THERAPEUTIC AREAS DO YOU EXPECT THE HIGHEST GROWTH RATE IN THE AFRICAN MARKETS DURING THE NEXT FIVE YEARS? PERCENTAGE OF PARTICIPANTS SELECTING GROWTH CATEGORY 3% Anti-infectives and antivirals 25% 10% 30% 32%

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Diabetes

26%

6%

22%

25%

22%

Cardiovascular

30%

12%

19%

28%

12%

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Oncology

28%

19%

29%

13%

12%

Central nervous system

33%

20%

29%

9% 9%

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Approved Colors, T

N/A

0–4%

5–9%

10–19%

20% or more

Note: Percentages may not add up to 100 due to rounding. Source: Booz & Company analysis

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• Diseases of the central nervous system such as dementia or multiple sclerosis are expected to follow a development pattern and time frame similar to that of oncological diseases. • Interestingly, more than a quarter of all respondents do not have a view on expected pharmaceutical growth rates in Africa. This may reflect a certain level of “nonfamiliarity,” accompanied by the typically low priority of African markets for many pharmaceutical executives. The lack of healthcare infrastructure and the unaffordability of medication are the biggest hurdles to growth in the African markets. Survey participants foresee a number of basic challenges for pharmaceutical companies arising from the economic situation in African markets: • Lack of healthcare infrastructure emerged as the primary challenge in Africa, as 74 percent of all participants consider it to be a limiting factor in their business (see Exhibit 21). This highlights the fact that challenges in Africa tend to be more basic than anywhere else: Only 67 percent regard lack of infrastructure to be a key challenge across all emerging markets (see Exhibit 9, page 15). • Lack of affordability came second, with 72 percent of all respondents seeing it as a major limitation to business growth.

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

= =

Exhibit 21 Pharmaceutical Companies’ Challenges in African Markets
WHAT ARE PHARMA COMPANIES’ KEY CHALLENGES TO FURTHER GROWTH IN AFRICAN MARKETS? 1= LEAST RELEVANT 5= MOST RELEVANT PERCENTAGE OF PARTICIPANTS SELECTING SCORE Least relevant 3.9 3.8 3.9 3.8 3.5 3.6 3.4 3.5 3.4 3.4 3.1 3.1 2.7 Lack of healthcare infrastructure Lack of affordability Lack of reimbursement and public funding Supply chain and distribution issues Challenging/nontransparent contracting and tenders Compliance challenges Talent issues (e.g., recruitment, development, and retention) Price pressure Lack of IP protection Lengthy product registration processes Local competition Regulatory requirements Competition by multinationals 16% 16% 16% 17% 17% 19% 17% 17% 17% 17% 17% 17% 20% 74% 72% 59% 55% 54% 51% 48% 46% 35% 22% 17% 16% 12% Most relevant

=

TABLE HEADING Average Score 3.7 3.6 3.4 3.2 3.1 3.1 3.0 3.1 2.7 2.5 2.1 2.4 2.2

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%

%

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4%

59% 54% 52% 51% 51% 49% 43% 36% 33% 19%

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Approved Colors

N/A
Source: Booz & Company analysis

1+2

3

4+5

34
Diabetes 12%

4% 49% 3%

Booz & Company
N/A

• Across all emerging markets, a lack of reimbursement and public funding surfaced as the most important constraint to growth (see Exhibit 9, page 15). For Africa, this factor only ranked third, well behind the top two factors. • Supply chain and distribution issues are much more crucial in Africa than in other regions: This factor was rated fourth, selected by 55 percent of the respondents. On average, only 33 percent of respondents considered this to be an industry-wide problem in emerging markets. Given executives’ objectives and the numerous challenges they face in Africa, it is only natural that they are approaching these markets tentatively and, for the moment, relying on collaboration with the government and local partnerships. Exhibit 22 demonstrates that pharmaceutical executives are not entirely of one mind with regard to the most impactful levers and strategies for their African business: • The majority of respondents recognize the need to build relationships with local NGOs, foundations, and associations—and 42 percent see a further need for close collaboration with governments—in an effort to establish the infrastructures required to sell or apply Pharma Market (in US$ billions) pharmaceutical products (see “Collaborations with Local NGOs and Foundations,” 45 45 page 36). CAGR •
40 10.6% 35 30 30 Economic considerations, such as market size and economic and sociopolitical stability, 25 as well as the state of the healthcare system and quality of medical care, lead to caution 18 20 among pharmaceutical executives with regard to longer-term investment in local infra15 10 structures. Instead, they seem to prefer working with local distributors (49 percent). 5 0 Forty-three2011 percent of respondents reductions help to address issues of 2016 feel that price 2020 Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

= =



affordability and “social responsibility.”
Exhibit 22 Levers for Success in Africa

=

TABLE HEADING

WHICH LEVERS OR STRATEGIES DO YOU CONSIDER AS MOST IMPACTFUL FOR COMMERCIAL SUCCESS IN AFRICA? TOP FOUR LEVERS, IN PERCENTAGE OF RESPONDENTS

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Majority agree on high importance 54%

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49%

43%

42%

Respondents divided

Majority agree on low importance

Note: Please always dele otherwise InDesign file. These colors can’t

Approved Colors Collaboration with local NGOs, foundations, and associations Distribution via local distributors/ wholesalers Price reductions to gain greater access Close collaboration with governments

Source: Booz & Company analysis

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Collaborations with Local NGOs and Foundations Collaborations with local NGOs and foundations foster basic healthcare developments, such as training programs for healthcare professionals, screening programs, and drugdistribution programs. • In 2012, the United States Agency for International Development and MSD each invested $4 million in the newly launched Zambia Management and Leadership Academy. More than 360 healthcare managers have already been trained in the delivery of high-quality healthcare; a further 900 are expected by 2014. • Pfizer partnered with the Lagos State University Teaching Hospital in Nigeria in 2012 and organized event-based patient education, which included instruction on the basic principles of blood pressure, weight, cholesterol levels, and sugar levels. The event reached more than 300 members of the community. • MSD, Qiagen, and the government of Rwanda launched a comprehensive national cervical cancer prevention program in 2011. MSD provided more than 2 million doses of the vaccine Gardasil at no cost. In exchange, MSD was included in the publicly funded routine vaccination scheme. • Qiagen supplied HPV tests to women between 35 and 45 years of age in Rwanda. There are plans to roll out similar initiatives in other developing countries. Pharma Market (in US$ billions) 45 45 CAGR 40 10.6% 35 30 African 30 markets require tailored approaches. Executives are reluctant to follow a long25 term investment strategy in these markets, and in a reflection of their skepticism, they 18 20 prefer 15 flexible solutions and commit themselves only for the short term. 10 5 • During the next five to 10 years, a clear majority of survey respondents do not expect 0 to employ the same market approaches in Africa that 2016 2020they favor in mature markets (see 2011 Exhibit 23).

Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

=

=

=

=

Exhibit 23 Go-to-Market Approaches in Africa vs. Mature Markets
DO YOU EXPECT PHARMA COMPANIES TO APPLY SIMILAR GO-TO-MARKET MODELS IN AFRICAN MARKETS AS IN MATURE MARKETS DURING THE NEXT FIVE TO 10 YEARS?

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Majority agree on high likelihood of similarity

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Respondents divided 22%

16%

10%

9%

6% Manufacturing

Majority agree on low likelihood of similarity 1% R&D

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Approved Colors

Marketing and sales

Market access

Distribution General setup

Source: Booz & Company analysis

54%

49%

43%

42%

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• This contrasts strongly with marketing and sales strategies in BRICMT markets, where 67 percent of respondents expect to apply models similar to those employed in mature markets over the next five to 10 years (see Exhibit 16, page 28). Africa is vast, with a massive population across 54 highly diverse markets that pose many basic challenges, such as a lack of healthcare infrastructure and affordability. Thus, few pharmaceutical companies are currently prepared to commit themselves to significant investments in local infrastructure. Instead, a pragmatic partnering approach involving local NGOs, governments, and distributors is preferred and will continue to be the most common strategy during the next five years.

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V. FINDING THE RIGHT OPERATING MODEL AND THE RIGHT TALENT TO SUPPORT IT This study has so far reviewed what respondents believe to be the most promising strategies across emerging markets, and a clear picture has emerged: • With regard to BRICMT countries, the majority of respondents agree that it makes sense to localize certain functions, including R&D, manufacturing, market access, and marketing and sales. • In second-tier markets, a large number of study participants favor cooperation with local distributors and governments, as well as price reductions. • Our interviewees see Africa, and especially the sub-Saharan countries, as a longer-term opportunity. Their approaches focus on local partnerships and only limited investment in building local infrastructure. Regardless of which go-to-market strategies companies choose to implement, there are two main internal questions: • Which governance model allows the company to manage emerging markets most effectively? • How can companies recruit, train, and retain the best talent in emerging markets? It is essential to empower regional and local offices. We distinguish among three archetypical governance models (see Exhibit 24) defined by varying interaction and “balances of power” at global, regional, and local levels: • “Strong regionalization with empowered regional headquarters”: Regional offices are the main drivers of local decisions.
Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

TABLE HEADING

Exhibit 24 Strategic Priorities Effectiveness of Regional Organization and Management Setups
WHICH REGIONAL ORGANIZATION AND MANAGEMENT SETUP DO YOU CONSIDER AS KEY ENABLERS FOR SUCCESS IN EMERGING MARKETS? WHY? 1= LEAST EFFECTIVE 5= MOST EFFECTIVE AVERAGE SCORE GIVEN BY PARTICIPANTS

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Strong regionalization of the business with empowered regional HQ Strong localization of the business with empowered local subsidiaries

Lines: 0,5 pt Lines for legend: 0,5 3.8

3.4

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Strong regional guidance from global HQ

2.5

Source: Booz & Company analysis

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• “Strong localization with empowered local subsidiaries”: Local affiliates are enfranchised to decide autonomously on the majority of issues, with only limited guidance from global and/or regional headquarters. • “Strong regional guidance from global headquarters”: The global headquarters, typically located in a mature market, is the key driver of local decisions. Most pharmaceutical leaders consider the “strong regionalization” model to be the most effective. It appears that many respondents associate proximity to local operations with a guarantee of “better” and more effective management decisions. This finding is supported by comments from respondents: “You have to be present in the region to understand the dynamics in emerging markets and to really be able not only to follow market development, but even to invest ‘ahead’ of the market by building local infrastructure and shaping health policy. Though this is a risky approach, it often works out and allows you to secure a significant market share—long term!” Another survey participant considers a “centralizing approach” the biggest mistake a company can make in this context, as it does not allow any tailoring of approaches to local/regional needs (see Exhibit 1, page 7). In practice, boundaries between the three archetypes are often blurred. Yet, different philosophies can be observed across pharmaceutical companies: • At Pfizer, emerging markets and established products are set up as a business unit with headquarters in the United States and a limited number of regional offices. Hence, the global influence on affiliates is considered to be quite strong compared to that of other pharmaceutical companies. • At MSD, the various emerging markets are broken into several country clusters with each regional headquarters in Switzerland. However, the company’s management is continuously “on tour” across emerging markets. • Roche’s commercial organization includes three emerging-market regions, two of which are headquartered in their respective regions (Latin America and Asia-Pacific). The third (Europe, the Middle East, and Africa) has its main office in Switzerland but is supported by local head offices in subregions. • At Bayer, the regional headquarters for emerging markets are all located in the regions, with strong local influence. China was granted a regional status comparable to that of the United States. Recognizing the disproportional relevance of emerging markets for primary-care products, and the necessity to be close to the markets, Bayer even relocated its primary-care business unit to Beijing in 2011. In the future, we expect to see more companies act like Bayer, with a power shift from global headquarters to stronger regional organizations. “Companies that want to stay innovative have to move toward leaner headquarters and smaller central functions,” Franz Humer, chairman of the board at Roche, stated (according to Scrip Intelligence, December 21, 2012). They need to trust their regional offices “to run their business” and “get away from the notion that headquarters knows best.”

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Talent Management is Key in Emerging Markets As companies evolve their governance models, they must address the challenge of how to recruit, develop, and maintain local talent. “In my 15 years of experience in emerging markets, it’s the number one issue,” one survey participant reported. With an increasing number of international organizations turning to emerging markets to fuel their growth, the demand for the limited supply of talent has driven an increase in employee turnover rates. In BRICMT markets, for example, turnover rates are now in the double digits, as talent is poached by competitors with promises of higher salaries. As a consequence, retaining talent is seen as the greatest human relations challenge in emerging markets. On a scale from 1 (least relevant) to 5 (most relevant), survey participants gave this issue an average score of 4.2 (see Exhibit 25), followed by recruiting talent (3.6). By contrast, developing talent (3.3) and maintaining a consistent corporate culture (3.2) are seen as slightly less of a problem. Executives consider local talent management to be far and away the most promising way to develop a stable local workforce (see Exhibit 26). As an example, at AstraZeneca Asia-Pacific, 88 percent of the leading executives on local management teams are from the respective local markets, while 91 percent are from the region. Knowledge of the local market seems to provide the “critical insight” needed to build longer-term commitment and development of skilled employees.

Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

TABLE HEADING Strategic Priorities Exhibit 25 HR Challenges in Emerging Markets WHAT ARE THE GREATEST HR CHALLENGES IN EMERGING MARKETS? 1= LEAST RELEVANT 5= MOST RELEVANT AVERAGE SCORE GIVEN BY PARTICIPANTS Retaining talent Recruiting talent Developing talent Maintaining a consistent corporate culture
Source: Booz & Company analysis

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Exhibit 26 HR Strategies in Emerging Markets

Strategic Priorities

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WHAT HR/TALENT MANAGEMENT STRATEGIES DO YOU CONSIDER TO BE MOST EFFECTIVE IN EMERGING MARKETS? 1= LEAST EFFECTIVE 5= MOST EFFECTIVE AVERAGE SCORE GIVEN BY PARTICIPANTS Effective local talent management, by developing talent in the market Effective global talent management, by getting talent from other markets (expatriates) Leveraging distributors’ talent and capabilities 4% Diabetes Source: Booz & Company analysis Oncology 12% 3% 13% 3% Anti-infectives and antivirals 16% 10% 14% 35% 25% 23% 28% 33% 49% N/A 0–4% 5–9% 2.5 3.3 4.2

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Cardiovascular

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7%

22%

32%

23%

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20% or more

10–19%

It is important to note that though this approach may sound simple, it actually requires a series of local solutions, including the following: • Recruitment at local universities • Development of talent through systematic training • Training tailored to the specific regional requirements In addition, the strategic location of facilities can serve as a lever to gain greater access to skilled local talent. Leveraging expatriates from other markets is considered to be a less powerful tool (average score of 3.3). Employing distributors’ talent and capabilities is regarded as the least effective strategy by far (2.5).

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VI. SUCCESSFUL PLAYERS AND CONCLUSIONS Why Sanofi and Novartis are considered front-runners in emerging markets Our survey has shown that there is no one-size-fits-all solution for building pharmaceutical business in emerging markets. Instead, go-to-market approaches need to be tailored to the specifics of each market and company. In this context, we have asked survey participants which companies they perceive to be market leaders with respect to their success and degree of innovation in emerging markets. • Exhibit 27 indicates that Novartis and Sanofi are perceived to be particularly successful and innovative. • This perception corresponds with their leading positions in terms of sales in emerging markets. As per moving annual total (MAT) for the third quarter of 2011, Sanofi generated $6.7 billion and Novartis $5.8 billion, making them the two largest multinational corporations in emerging markets.1 With their respective local growth rates of 13.6 percent (Sanofi) and 8 percent (Novartis), they are also two of the fastest-growing companies. • The success of these two companies may be attributed to the fact that they have made emerging markets a priority and devised specific, tailored approaches: - Emerging markets are one of Sanofi’s four strategic platforms, and the company follows a strict localization strategy. It was running a wide network of 48 industrial sites as of December 2011 and has established a commercial presence in about 100 emerging markets. “Early on, when building their presence in emerging markets, they
Exhibit 27 Perceived Success and Innovation of Pharmaceutical Companies in Emerging Markets
WHICH PHARMACEUTICAL COMPANIES DO YOU CONSIDER MOST SUCCESSFUL/INNOVATIVE IN THE EMERGING MARKETS? PERCENTAGE OF PARTICIPANTS SELECTING SUCCESS/INNOVATION Perceived Success Novartis Sanofi GSK Roche Pfizer MSD J&J Teva Bayer Abbott Sandoz AstraZeneca Novo Nordisk Takeda Eli Lilly Mylan Stada 0% 0% 0% 2% 2% 4% 4% 6% 6% 6% 8% 10% 12% 15% 15% 13% 21% Sanofi Novartis Pfizer GSK Sandoz Roche Teva Bayer MSD AstraZeneca J&J Eli Lilly Abbott Mylan Stada Novo Nordisk Takeda 4% 4% 4% 4% 2% 2% 0% 10% 8% 8% 15% 15% 17% 21% 19% 27% Perceived Innovation 38% Guidelines: 11.0 million aölkdfölka 32.8% 30.1%

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MAT Q3 2011 at ex-manufacturer prices, according to IMS Health.

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declining importance) 42 74% 55% Diabetes 12% 4% 49%

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tailored their approach to local needs and customers. They also did not shy away from developing ‘new’ approaches in emerging markets,” one participant said. Management is now reaping the rewards: Based on its sales, Sanofi maintains a leading position in most emerging markets—number one in Africa and the Middle East, number two in Central and Eastern Europe, number two in Latin America, and number four in Asia. - Novartis is also heavily investing in emerging markets, which is demonstrated by the company’s regional distribution of R&D activities. As outlined in Chapter III, emerging markets already account for two-thirds of the company’s global clinical trial activities. Independent of individual success examples, our study reveals a number of key similarities in how pharmaceutical executives approach emerging markets: - The majority of executives have a clear focus on top-line growth and geographic expansion. - Multinational corporations are confident that they can be successful by primarily using their own global products. - However, partnerships can be a promising add-on in second-tier and African markets. - Market access is the key challenge in all emerging markets. - Building mutually beneficial relationships with local governments is indispensable for success and helps companies to invest ahead of the markets. - It is no longer sufficient for executives to limit their activities to simply selling their products in emerging markets. A clear trend toward localization has become evident. At least for the most important markets, companies must create a local footprint, which in some cases should include R&D and manufacturing capabilities. - It is a widely shared view that regional structures are best suited to manage emerging markets. - Developing and maintaining local talent is critical for success. Each company needs to tailor its approach to its specific situation and needs. Many executives already have an appreciation for the complexity of this task. Leaders also need to evaluate their approaches regularly, since local conditions can change swiftly. Just look to the transformed political landscape of North Africa for evidence. Even amid all this change, executives must exercise patience. In less sophisticated markets, results do not happen overnight. Companies wishing to exploit emerging markets, and particularly Africa, need to be in the game for the long term. Overly optimistic expectations and short planning horizons are among the biggest mistakes that companies can make. Dipping in and out of such markets is a recipe for failure; local governments will be unforgiving of the inconsistent while supportive of those companies that demonstrate commitment and an interest in the good of the local market. The winners will be executives who thoroughly understand the challenges of their markets and define smart goals and levers that allow for flexibility. They will reap the rewards—not necessarily in the short term but certainly on a sustainable, long-term basis.

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Booz & Company is a leading global management consulting firm focused on serving and shaping the senior agenda of the world’s leading institutions. Our founder, Edwin Booz, launched the profession when he established the first management consulting firm in Chicago in 1914. Today, we operate globally with more than 3,000 people in 58 offices around the world. We believe passionately that essential advantage lies within and that a few differentiating capabilities drive any organization’s identity and success. We work with our clients to discover and build those capabilities that give them the right to win their chosen markets. We are a firm of practical strategists known for our functional expertise, industry foresight, and “sleeves rolled up” approach to working with our clients. To learn more about Booz & Company or to access its thought leadership, visit booz.com. Our awardwinning management magazine, strategy+business, is available at strategy-business.com.

About the Authors Dr. Matthias Buente is a partner with Booz & Company based in Zurich. He has more than 19 years of healthcare consulting and line management experience with a focus on growth strategies and go-to-market operating models, particularly in emerging markets. Before joining Booz & Company, he led Amgen’s entry into Eastern Europe and was the general manager for Poland and the Baltic states, based in Warsaw. Stephan Danner is a partner with Booz & Company based in Berlin. He works with global pharmaceutical clients on corporate strategies, effective operating models, and performance improvement programs along the entire value chain. Go-tomarket models in emerging as well as mature markets are one of his areas of expertise. Dr. Susanne Weissbäcker is a principal with Booz & Company based in Zurich. She is a member of the firm’s health practice and specializes in optimizing go-to-market models across commercial channels as well as enhancing operating models of pharmaceutical companies; she has designed and implemented commercial models for pharmaceutical clients across emerging markets. Christoph Rammé is a senior associate with Booz & Company based in Berlin. He has more than six years of consulting experience helping pharmaceutical companies develop strategies and implement organizational and process improvements.

©2013 Booz & Company Inc.

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