Unlocking Pharma Growth

Unlocking pharma growth

Navigating the intricacies of emerging markets

Unlocking pharma growth

Navigating the intricacies of emerging markets Contents

1. Introduction . . .

2. Rethinking the big pharma sales model: Thoughts from China As the ranks of China’s field forces continue to swell, pharma’s traditional commercial model is showing signs of strain. It’s time for multinationals to get smarter about how they sell. Bing Chen, Franck Le Deu, and Jin Wang 10. Winning in the emerging middle class: Findings from Brazil Global pharma companies are missing a chance to serve Brazil’s increasingly prosperous and growing middle class. Although wealthier segments spend more on drugs per capita, the scale of the underserved middle-class market is almost twice as big. Sanjeev Agarwal, João d’Almeida, Tracy Francis, and Paula Ramos 14. Using behavioral segmentation to boost salesforce effectiveness Many companies segment their customers by behavioral characteristics to increase sales, but segmenting the field force is a new approach. Early experience in India suggests that it could improve salesforce effectiveness in emerging markets. Kaustubh Chakraborty, Javed Kadir, and Sathya Prathipati 20. Counter strategies: Getting more value from the retail channel Most pharma companies operating in emerging markets gear their sales and marketing efforts to physicians and hospitals. It’s time they widened their horizons: building retail muscle could help them address a large and neglected opportunity. Sanjeev Agarwal, Putney Cloos, Alka Goel, and Mary Rozenman 28. Public–private partnerships: An untapped strategic lever Traditional approaches to PPPs have focused on their role in raising a company’s profile or improving its corporate image. Now pharma companies are entering partnerships with governments and global organizations that deliver solid business benefits too. Doan Hackley, Jorge Santos da Silva, and Lieven Van der Veken 36. How sustainable are branded generics? Branded generics are delivering great growth and profitability in emerging markets, but how much longer can they continue to do so? A new approach helps companies assess the prospects market by market. Sanjeev Agarwal, Andrew Cavey, and Ali Murad 42. Growth in Brazil’s branded generics market: Perspectives from Maurizio Billi, president of Eurofarma The leader of one of Brazil’s most eminent pharma companies talks about building a platform for growth and how local players can capitalize on their market knowledge. Nicola Calicchio and Tracy Francis 46. China’s digital healing The world’s biggest and most dynamic social media market is talking about health care. But are companies really listening? Cindy Chiu, Chris Ip, Ari Silverman, and Florian Then 52. Breakthrough R&D for emerging markets: Critical for long-term success? Pharma companies pursuing growth in emerging markets will increasingly need to adapt their portfolio to address local requirements. The right R&D strategy will involve reducing costs so that they can develop innovative drugs tailored to emerging market needs and still make a profit. Sanjiv Talwar, Shail Thaker, and Matthew Wilson 60. Cutting through the complexity: Insights into the future of clinical trials in emerging markets As investing in emerging market infrastructure becomes a pillar of pharma growth strategies, conducting clinical trials in these markets should be more attractive than ever. So why are such trials declining, and how should executives evaluate the opportunities in this increasingly complex environment? Jackie Hua, Shail Thaker, and Matthew Wilson 66. Managing pharma supply networks in emerging markets Before they rush to secure sources of supply in emerging markets, pharma companies should take care to ensure they have the right long-term strategy, the right partners, and the right organizational resources to manage their partnerships. Vikas Bhadoria and Jaidev Rajpal . . .

72. The outlook for China’s medical products industry Robust growth prospects are creating tailwinds for China’s medical products industry. However, multinationals should prepare for turbulence ahead as market access becomes more complex, pricing pressures increase, and local competition intensifies. Lifeng Chen, Yinuo Li, Rajesh Parekh, and Jin Wang 80. Winning in Russia pharma: The next growth horizon Over the next ten years Russian pharma will more than double in size. Companies seeking to capture a share of this growth must prepare to face the challenges of increasing pharma regulation and intensifying competition. Jan Ascher, Sean O’Connell, Shail Thaker, and Tim Züwerink 92. Helping Indian pharma reach its full potential What will it take for India to join the world’s leading pharma markets? As a period of flux brings proliferating opportunities, companies should quickly adapt their sales and marketing models, refocus their commercial investments, and collaborate within and beyond the industry. Vikas Bhadoria, Ankur Bhajanka, Kaustubh Chakraborty, and Palash Mitra 104. Tracking shifts and spotting opportunities in Mexican health care Mexico’s health care has improved thanks to recent public initiatives, but rising costs, capacity constraints, and growing disparities pose new challenges. To keep pace with these shifts, pharma companies need to raise their capabilities to global standard and preserve the flexibility to update their plans as often as every quarter. Julio Dreszer, Pablo Ordorica, Lisa Ramon, Safa Sadeghpour, and Jorge Torres

. . . 110. About the authors Introduction 1

As pharmaceutical companies grapple with expiring patents and pricing pressures in developed markets, they are starting to expect more from emerging markets. Although the global economic environment is depressing near-term GDP growth, countries such as China, India, Russia, and Brazil have a bright medium- and long-term future as some of the world’s largest economies. Rapid growth can also be expected in some smaller economies in eastern Europe, Southeast Asia, Latin America, and the Middle East. As GDP growth converts into greater personal wealth and higher disposable incomes, spending on health rises disproportionately, and drugs consumption even more so. Even in the near term, large emerging pharmaceutical markets are likely to grow more strongly than developed markets. The share of revenues and profits contributed by emerging countries is lower in pharma than in other global industries, and major multinationals have yet to tap these countries’ vast emerging middle classes. At a typical global consumer goods company, emerging markets account for a share 1.5 to 3 times higher than at a typical multinational pharma company. Such figures indicate that emerging markets are still emerging and offer significant opportunities for further growth. Such optimism must, however, be tempered by an awareness of the challenges and volatility that multinational pharma companies face in emerging markets. First, government intervention is increasing through both direct actions (such as price setting and compulsory licensing) and indirect measures (such as changes in manufacturing requirements and the terms of government tenders). Second, promotions are reaching saturation point, especially in the big cities where multinational and local companies have expanded their sales forces rapidly over the past few years. Third, as some multinationals shift their focus toward specialty products, managing portfolios of drugs with very different commercial needs is becoming considerably more complex. Fourth, the war for talent continues, and is intensifying in some countries. Looking ahead, we believe that emerging markets continue to offer attractive opportunities for growth, but pharma companies will need to navigate the intricacies of individual markets and tailor commercial models and approaches to their specific needs. In this compendium of articles, McKinsey practitioners share new perspectives on unlocking growth in emerging markets. The first section focuses on developing tailored capabilities and approaches in key functions such as sales and marketing, R&D, clinical trials, and the supply chain. The second section focuses on individual countries—China, India, Russia, Brazil, and Mexico—and describes models to tackle the challenges and capture the opportunities they offer. If you have any comments on these articles or would like further information, please feel free to contact the authors directly (see “About the authors” for details), or email [email protected].

Sanjeev Agarwal Andrew Cavey Raj Parekh Gokhan Sari Principal Associate principal Director Principal New Jersey office London office Shanghai office New York office Pharmaceutical and Medical Products Practice, Emerging Markets Group 2

Rethinking the big pharma sales model: Thoughts from China Unlocking pharma growth 3 Rethinking the big pharma sales model: Thoughts from China

As the ranks of China’s field forces continue to swell, pharma’s traditional commercial model is showing signs of strain. It’s time for multinationals to get smarter about how they sell.

Bing Chen, Franck Le Deu, and Jin Wang

Face-to-face selling may be on the wane companies need to consider other in developed markets, but it’s still the sales models and make better-informed channel of choice for pharmaceutical choices about staff deployment, sales companies in China. Walk down the and marketing initiatives, and resource corridor of a big hospital in Shanghai allocation. Below we explore how they or Beijing and you’re as likely to meet have achieved their recent growth, a sales rep as a nurse or doctor. This what the dominant sales model looks traditional sales model has enjoyed years like, why its effectiveness has probably of success, with leading multinationals peaked, and how companies could seeing their China revenues multiplying pursue a more sustainable model. five-fold between 2005 and 2011, adding $7 to $8 billion to their collective top line.

Beyond that, dozens of China blockbusters Bucking the global trend have emerged with annual revenues exceeding $100 million. We estimate The top 10 multinational pharma that 34 drugs attained that symbolic companies have added more than height in 2011, compared with just two 17,000 reps in China over the past in 2005. The largest prescription brand five years, with some adding as many in the market, Plavix, is set to break the as 1,000 in a single year. Pfizer now $400 million mark in 2012 (Exhibit 1). fields a sales force numbering over 4,000; Bayer, MSD, AstraZeneca, and But is this rate of growth sustainable? a few others are not far behind. In Novo The commercial model that underpins it is Nordisk’s field force of more than 2,000 starting to show signs of strain. Challenges reps, the vast majority cover a single in productivity and profitability and the need area, diabetes-related products. to get physicians’ attention in crowded This expansion stands in sharp contrast hospitals are prompting pharma companies to global trends. In the United States, to reconsider their sales approach. Many for instance, multinationals have shed continue to put more feet on the street, 33,000 sales jobs from a peak of 105,000 but some are calling a halt to expansion five years ago. They are moving to new until they work out the best next move. channels such as service reps and call centers, as well as new models To ensure that the next wave of growth that involve acting like an educational meets profitability expectations, pharma resource rather than making sales pitches. 4

Exhibit 1: China’s pharma boom

Cumulative sales of prescription Bestselling multinational Leading prescription brand drugs at top 10 multinationals prescription brands US$ billions Annual revenue in US$ millions; Annual sales, US$ millions number of brands

More than $200 million $100−200 million $50–100 million 9.7 69 brands 395 6

+ 7.3 x 4

2.4 10 7 35 8 brands 2 0 6

2005 2011 2005 2011 2005 2011 (Heptodin) (Plavix)

Note: At constant exchange rate of US$1 = 6.3 renminbi Source: press reports; interviews; CPA; McKinsey analysis

These approaches have cut costs and companies cover more than a hundred been welcomed by physicians who cities and thousands of hospitals. The resented the old hard-sell tactics.1 field force for blockbuster primary- care brands can easily reach 500 However, the new techniques have yet representatives, and teams of 130 to make real inroads in China, which still reps for one brand are not unusual in relies on face-to-face selling on a huge specialty care such as oncology. scale. There are several reasons for this: The stage of market development. The broad range of drugs being Because many therapeutic promoted. Many portfolios include not categories are still at an early stage of only innovative patented drugs—the development, companies need to invest mainstay of developed markets—but in educating physicians to improve also off-patent, mature brands that still diagnostics, establish standards of have room to grow in China despite care, and drive large-scale adoption of competition from generics. Both require therapies. It is reps who do the work face-to-face selling to physicians. of conveying medical and product The need to cover a vast territory. information during their frequent Most prescriptions are written in interactions with doctors. hospitals, and there are many large The use of single-line sales forces. hospitals for reps to visit. Most Most reps covering larger cities and multinationals derive the bulk of their hospitals sell only one product, and their business from the top 50 to 80 cities companies tie their monetary incentives and 500 to 1,000 hospitals, but leading to that product so as to maximize its Unlocking pharma growth 5 Rethinking the big pharma sales model: Thoughts from China

chances against heavy competition. This priority over training, defining account approach also meets physicians’ needs, potential, tracking performance, and since it helps them split their business building IT support systems. Reliable among multiple companies and reps so information on account potential, that they aren’t perceived as being too competitive dynamics, and customer close to any individual or organization. needs was in short supply. Investments The escalation in competitive in market research, voice-of-the- intensity. Increasing competition for customer studies, and on-the-ground share of voice, the need to respond to observation were limited, partly because expansion by competitors, and the fear sales came easily. Accurate data on of falling behind in market coverage doctor-level prescriptions and salesforce have all contributed to the growth in effectiveness barely existed. As a result, field forces. the deployment of field reps was patchy, with big performance gaps between one city or hospital and another. Expansion involved moving into Signs of trouble less productive accounts. Having covered the top hospitals and cities, If this traditional sales model has companies started to add lower-tier delivered attractive returns, why change hospitals in smaller cities and rural it? We believe that the way the Chinese areas to their customer base. These market is evolving is putting the model accounts cost more to serve and are under strain. The chief challenges it less productive, so each new rep must faces are a lack of productivity growth visit more of them to cover the same and intensifying cost pressures. potential. Many are located in territories with entrenched local competition and Productivity is declining limited access to the local formulary. As A crude measure of the average a result, penetrating new accounts calls productivity of multinationals can be for patience and strong cross-functional obtained by dividing total sales by collaboration—often difficult to achieve the number of reps. On this measure, in China. the annual productivity of the top 10 Staff turnover is high. Most companies multinationals has declined by 2 percent have staff turnover rates in excess of overall in the past five years. Although 20 percent per year. As well as direct some companies have managed to raise hiring costs, high turnover creates their headcount and their productivity at the indirect friction costs, such as the same time, many others found that taking damage caused by leaving a territory on more reps diluted their performance. temporarily open in a promotion- sensitive market. To reduce turnover, What accounts for this weak showing? companies are increasing employee We see three factors as key: benefits and providing better promotion opportunities, but we don’t expect a Companies focused on boosting rep dramatic improvement any time soon. numbers, not productivity. In the rush to scale up, multinationals paid too little Other factors also contribute to low attention to the skills, capabilities, and productivity. Because turnover and hiring support needed to drive performance are so rapid, few reps have more than two in the field. Recruiting and hiring took 6

Exhibit 2: Portfolios are exposed to price cuts

Share of off-patent brands in total sales remains high… …but with large variations between companies $ billions

100% = 10 Highest 98 Patented 20 Price pressures are expected to grow on Average 80 off-patent brands Off-patent 80 35 Lowest

2011

Share of EDL* drugs adds to exposure… …and also shows significant variations between companies $ billions 100% = 10 Highest 34 List of 307 EDL molecules is expected to expand to 400 in Non-EDL 87 13 2012 and 800 in the Average medium term EDL 13 Lowest 4

2011

* Essential drug list; currently comprises 307 molecules (205 western medicine molecules and 102 traditional Chinese medicines) Source: industry association; GBI Source; SFDA; McKinsey analysis years’ experience. Most enjoy considerable these companies, since on average freedom in deciding how to spend their about 80 percent of their revenues comes time and which doctors to visit, and from off-patent molecules (Exhibit 2). companies are seldom able to track their activities closely, so they can easily avoid In addition, the establishment of the the most competitive accounts in favor of essential drug list (EDL), which covers easier accounts with lower potential value. 205 western molecules, has created severe pricing pressures for some drugs. Revenue and cost pressures Its effect varies by molecule, depending are mounting on the availability of high-quality supply The economics of the business face from local companies, but its overall challenges on several fronts. impact has been to depress prices substantially. The government aims to Prices have taken a battering for extend it to 800 or more molecules in “innovative” drugs: molecules that have the medium term, although how this gone off-patent and been genericized will be implemented is still uncertain. globally, such as Adalat by Bayer and Losec by AstraZeneca. Having As prices have fallen, so costs have risen: benefited from a price premium for many the fully loaded cost of a sales rep has years, such drugs are still among the steadily increased to some $45,000 to bestsellers for most multinationals. The $55,000 per year. The rapid expansion government’s phasing out of the price of sales forces and the acute need for premium has had a dramatic effect on experienced reps continue to push up Unlocking pharma growth 7 Rethinking the big pharma sales model: Thoughts from China

salaries. We expect costs to rise by Take salesforce effectiveness seriously about 8 percent per year to an average and build systems, capabilities, and $80,000 by 2016. A slowing of the pace mindset to drive productivity gains. of field force growth will relieve some of Few multinationals have the data to show the salary pressure on multinationals, but which accounts and reps perform well and this may be partly offset by the increase what the reasons are. Sales, marketing, in competition from local companies. and market-access colleagues should work together to analyze why a given account is These productivity, quality, and cost doing well or badly, using common metrics issues will intensify in the next few such as share of new patients, preferences years, and pharma companies will of influential hospital stakeholders, and have to tackle them because the field frequency of activity relative to competitors. force is likely to remain the dominant Once the causes of performance become model in China for the time being. clear, companies should develop plans to raise lagging accounts closer to the level of high performers and put tracking mechanisms in place to monitor progress. Planning an effective response Revisit the single-line sales model. How can multinationals anticipate and This is the single biggest change lever, and respond effectively to these shifts? We some multinationals are already achieving have identified eight principles for them to encouraging results by moving to a new consider as they weigh their next steps. model. They face several challenges, from defining incentive structures to maximize sales of multiple brands to upgrading 8

sales reps’ capabilities. Running pilots in between the two were tenuous at best. individual cities or hospitals helps to limit But now that brands reach hundreds of risk and enables the new model to be millions of dollars in annual revenues and fine-tuned before it is rolled out nationwide. new launches face a more competitive and difficult-to-access environment, Choose your core footprint and marketing budgets can easily stretch focus your field force accordingly. to $30 million. Companies should take Many emerging opportunities, such as a hard look at how resources are being community healthcare clinics in large cities spent and decide whether to double and county hospitals in rural areas, require down or pull back on some initiatives. new sales models. Companies busy They should also consider how marketing addressing performance gaps and keeping can support the sales team effectively up with growth in the core business of and help implement brand strategy. large hospitals and big cities may not have the capacity to address lower-priority Embrace the power of price elasticity. markets. If they do, they should carefully Multinationals have largely overlooked or evaluate the tradeoffs, resources, and underestimated the power of price elasticity organizational changes needed. Success to boost demand. When local companies calls for a granular view of sources of launch a generic drug, they typically sell growth, clarity over resource allocation, it at a price 30 to 50 percent lower than and the decisiveness to walk away from that of the branded equivalent, spurring some opportunities. Half-hearted short- additional demand for the molecule at the term efforts are no way to win in China. lower price. For instance, Sino Biopharm has achieved impressive uptake for Allocate resources thoughtfully across Runzhong, its generic version of Baraclude brands. New product launches are (entecavir)—Bristol-Meyers Squibb’s likely to expand companies’ portfolios of drug for hepatitis B—since launching it in patent-protected drugs, while off-patent March 2010.2 To get ahead of this curve, drugs should continue to perform well companies could review price points for for many years. Both categories require mature brands every three to five years so heavy investment to create demand in as to tap latent demand and capture value a developing market. With profitability in that would otherwise go to local generics. mind, multinationals must choose which opportunities to pursue and which to Pilot new channels. Although China forswear. They should identify mature still lags some years behind developed brands that have limited appeal and markets, local companies have started to could be de-emphasized, low-demand offer services that allow multinationals to products that could be outsourced, target customers or communicate with new launches that will require heavy stakeholders in smarter, more efficient investment to build up capabilities in ways.3 New channels such as online unfamiliar therapeutic areas, and so on. learning modules won’t replace traditional channels any time soon, but companies Develop marketing as a key function. should start investing in them to strengthen For many years the sales function took prescribers’ loyalty, promote academic center stage in China while marketing activities, and expand their market reach. languished in the background. Links Unlocking pharma growth 9 Rethinking the big pharma sales model: Thoughts from China

Pursue partners while they are still available. Partnerships can help secure access to additional products, complementary capabilities, and field coverage. Several multinationals have already formed partnerships with local companies, such as the joint ventures between MSD and Simcere in the cardiovascular market and between Pfizer and Hisun in branded generics. With few attractive prospective partners available, speed is of the essence.

. . .

Pharma companies still need armies of local sales reps to cover China’s vast territories. But while this sales model is likely to remain dominant for the next few years, scale alone will no longer be an advantage. Before long, how many reps you have walking the hospital halls will matter less than how you deploy them and how you support them with better analytics, integrated marketing, and alternative channels.

Notes 1 See “Drug sales reps try a softer pitch,” Wall Street Journal, 10 January 2012. 2 Lefei Sun, Jinsong Du, and Iris Wang, Bottom-fishing Future Winners in China, Credit Suisse report, 6 October 2011. 3 See “China’s digital healing,” pp. 46–51.

This is an edited version of an article first published in China Healthcare: Entering uncharted waters, McKinsey & Company, 2012. Bing Chen is an associate principal and Franck Le Deu and Jin Wang are principals in McKinsey’s Shanghai office. 10

Winning in the emerging middle class: Findings from Brazil Unlocking pharma growth 11 Winning in the emerging middle class: Findings from Brazil

Global pharma companies are missing a chance to serve Brazil’s increasingly prosperous and growing middle class. Although wealthier segments spend more on drugs per capita, the scale of the underserved middle-class market is almost twice as big.

Sanjeev Agarwal, João d’Almeida, Tracy Francis, and Paula Ramos

Many multinationals are hungry to say that the middle class prefers to sell their goods and services to the rely on public health services, whose emerging markets’ growing middle physicians prescribe only generic drugs. class, comprising nearly 2 billion people Moreover, these executives believe that with $7 trillion in spending power. That even when physicians prescribe branded immense opportunity has put this group drugs, cost-conscious middle-class at the center of many global corporations’ patients ask pharmacists to switch their strategies. But the world’s leading medications to less expensive generics. pharmaceutical companies are holding back: the top five generate less than As a result, global pharma companies have 20 percent of their sales in these markets. concluded that they must focus on Brazil’s wealthiest consumers and can reach Our study of Brazil’s pharma market, the the middle class profitably only through second largest in the emerging world, generics and branded generics—a strategy confirms that global pharma companies that at least five of the top ten pharma are missing a significant opportunity to companies have recently announced. make profits serving a big part of the With local players as the driving force, country’s middle class—120 million strong the generic-drug market is growing at a and growing fast. Just as important, 28 percent compounded annual rate. expanding the reach of research-driven global pharma companies would give But a closer look at Brazil’s pharma market millions of Brazilian households access to suggests that it’s time to rethink this the highest-quality patented medicines. In approach. Over the past two decades, 2010, the value of the prescription drugs growing incomes have allowed the middle sold to Brazil’s middle class was $8 billion, class to satisfy not only its basic needs mostly for unpatented medications. but also its interest in beauty products, consumer electronics, and more upscale While global pharma executives services. Proprietary McKinsey research acknowledge the recent increase in the conducted during late 2010 and early disposable income of Brazil’s middle 2011 found that better health care and class, they think that this group is education are increasingly important to more interested in spending money on large segments of Brazil’s middle class.1 categories such as consumer electronics, Sixty-three percent of it considers brands cosmetics, and travel than on health very relevant for medicine and would pay care. In discussions with us, executives a premium for trustworthy ones—a finding 12

typical of the vast majority of Exhibit 1: Four segments among Brazil's middle class consumer goods categories. Willing to spend on healthcare Rely on public healthcare services Most global pharma companies haven’t invested in this Committed Self-assured SUS* compliant Struggling population segment, however, “I love my health “I’m confident about “I don’t have private “I rely on SUS and do insurance. I go out making my own health insurance. not see any value in so it has little or no awareness of pocket to avoid choices and getting I follow what my branded medicines.” lines and buy what the most value out SUS doctor of their corporate brands. my doctor tells me.” of my healthcare prescribes for me spending.” and currently spend little on drugs.” Three factors lead us to believe that high-quality Share of total 20% 27% 23% 30% patented medicines are a * Sistema Único de Saúde, Brazil’s universal healthcare system large, profitable opportunity. Source: 2010–11 McKinsey quantitative and qualitative surveys of >800 middle-class patients Our research identified four middle-class segments Meanwhile, the incidence of chronic (Exhibit 1). Two—SUS compliant diseases is rapidly increasing in this and (the Sistema Único de Saúde is Brazil’s other emerging markets; for example, universal healthcare system) and Brazil’s diabetes rate is expected to struggling—have views very much in become one of the highest of any major line with how pharma management country within the next two decades. tends to see the middle class: they Private health insurance, typically made rely on public services and purchase available through employers, is gaining less expensive generic drugs. But the traction among the middle class. In other two segments—committed and Brazil, it pays for hospital treatment self-assured, accounting for almost half and visits to physicians, but not usually of the middle class—would pay out of for drugs. We found that among the pocket to have access to better health 50 percent of the middle class that care (for example, to avoid waiting values and aspires to better health for a medical appointment or exam), care, the penetration of private health and believe even more strongly in a insurance is more than twice as high relationship between a medicine’s price as it is in the other two segments we and its efficacy than the upper classes identified. This finding suggests that a do. These two segments are willing to significant household health budget can make spending tradeoffs and pay extra be freed up for medications. Moreover, for more effective drugs, fewer or milder through private insurance, middle-class side effects, and well-known brands. patients gain access to physicians who Middle-class households with older are more open to branded medicines. family members who suffer from chronic diseases spend 15 percent more on For the two middle-class segments that health care and 10 percent more on value and are willing to spend on health medications than the middle-class care, physicians play a pivotal role. We average. Many of these men and found that 40 percent of physicians women take multiple medicines and serving the middle class perceive cannot always afford to buy the highest- branded medications as more effective quality drugs, and so need to make and appropriate for their patients. The tradeoffs. That’s an important factor for challenge, however, is that physicians pharmaceutical companies to bear in not surprisingly see affordability as a mind when developing their strategies. Unlocking pharma growth 13 Winning in the emerging middle class: Findings from Brazil

major barrier and tend to segment the Retailers and consumer goods companies, prescriptions they write by their patients’ especially local ones, can offer pharma perceived social status. In our research, companies valuable lessons in serving when physicians serving the middle class the country’s middle class. While it does are presented with profiles of different not spend as much per capita on out-of- people, the prescriptions they write are pocket drugs as the upper classes do, its determined by accent and appearance. sheer size translates into total spending Our research also showed that while almost double that of wealthier segments. physicians think that the ability of middle- class patients to pay for branded drugs has increased over the past three years, they continue to underestimate the . . . willingness to buy these medications among Brazilians who value health care. Global pharma companies would do well to take note of these findings and tailor Global pharma companies must think their strategies accordingly. We believe creatively about how to develop the that the lessons from our research apply middle-class segment of Brazil’s pharma not only to Brazil but also to China, India, market. As expected, pricing is an Russia, and other emerging markets important issue. The middle class, with that exhibit significant out-of-pocket an average monthly household spend spending on medications, an increase in of $38 on medications, cannot afford the penetration of private health insurance, the three top-selling patented drugs and a growing aspirational middle class. in Brazil, which average $60 each.

Note 1 The research included qualitative and quantitative elements and was conducted in five regions in Brazil. It covered 800 middle-class patients, more than 400 physicians, and pharmacy employees from both independent and chain stores.

This is an edited version of an article first published in McKinsey Quarterly in April 2012. Sanjeev Agarwal is a principal in McKinsey’s New Jersey office;João d’Almeida is an associate principal, Tracy Francis is a principal, and Paula Ramos is a consultant in the São Paulo office. 14

Using behavioral segmentation to boost salesforce effectiveness Unlocking pharma growth 15 Using behavioral segmentation to boost salesforce effectiveness

Many companies segment their customers by behavioral characteristics to increase sales, but segmenting the field force is a new approach. Early experience in India suggests that it could improve salesforce effectiveness in emerging markets.

Kaustubh Chakraborty, Javed Kadir, and Sathya Prathipati

In India, as in other emerging markets, the five years. In doing so, they have tried pharmaceuticals sector is getting crowded. to ensure consistency and effectiveness As companies put more feet on the street, by using traditional tools such as sales the demand for sales talent is outstripping reviews and exerting tighter control over supply, hindering pharma companies in effort metrics by, for instance, tracking their efforts to build effective relationships doctor visits through daily reports. Some with doctors. Reps are also spending less companies are investing in formal training time interacting with their line managers mechanisms to increase the effectiveness as sales organizations increase their of their sales managers; others are numbers of levels and spans of control. upgrading their incentive schemes to look beyond sales figures and track Even so, sales reps continue to play a metrics such as consistency and brand critical role in pharma sales in the absence performance. Leading companies are of other profitable and scalable commercial making more extensive use of technology; models, especially in emerging markets. some issue their sales reps with tablet Our projections show that the number computers so that they can track the reps’ of pharma sales reps in India is set to performance and activities in real time and increase threefold over the next ten years. take corrective actions when necessary. Given the shortage of sales talent and management time, companies will need Up to a point, these steps have worked: to improve the way they manage their companies deploying superior salesforce reps. A few leading pharma companies effectiveness practices have seen the in India are already making strides in this impact of their field forces improve direction by adopting a new approach noticeably. However, as sales divisions that involves segmenting and tailoring have grown beyond a few hundred incentive systems for their sales forces. medical representatives, national sales managers have started to encounter a fundamental difficulty. Most traditional field force effectiveness tools involve The problem with “one size making interventions across the whole fits all” sales force. Yet these interventions influence different people in very different Most large pharma companies in India ways. When incentives are redesigned, and other emerging markets have doubled for instance, some individuals respond their sales forces over the past four or positively, while others are indifferent. 16

Similarly, increasing pressure through Segmenting a sales force tough performance dialogues drives a by behavior few to greater efforts, but also hinders a few from performing as well as before. Behavioral segmentation involves two steps: identifying patterns by analyzing At the other extreme, recognizing individual data and using that information to differences and devising and implementing drive interventions. In turn, identifying a few hundred or so separate interventions segments has two main components: would be too complex a task to attempt. Even if an organization were able to Salesforce analysis and comparison develop and execute individually tailored with classic behavioral segments. incentives and plans, the extent of attrition, To understand what drives performance, which ranges from 15 to 30 percent it is necessary to analyze sales data for among pharma sales forces in India, the past 24 to 36 months alongside other would mean they would be too short parameters such as incentives earned, lived to make a difference for long. targets given, consistency of effort (such as number of doctor visits), and If standardized approaches are too inputs (such as number of training days). blunt an instrument to effect widespread Although every company’s sales force has change and individualized approaches some unique segments, there are eight are too complex to implement, how can classic behavioral segments that can be companies improve the performance used to categorize most sales reps and of their sales staff? Some companies managers in most field forces (Exhibit 1). in India are seeing promising results from a new approach: segmenting the field force on the basis of individuals’ behavior patterns and then devising interventions tailored to each segment. Unlocking pharma growth 17 Using behavioral segmentation to boost salesforce effectiveness

Exhibit 1: Classic behavioral segments in a sales force

Characteristics Appropriate interventions

Target chasers Committed to achieve 100% Set aggressive targets, backed with financial 1 of the target, whatever it is and other incentives Superstars The best performers, always Recognize in public forums or hall of fame mailers; 2 striving to come first develop through direct mentoring by senior managers; use them to train others

Incentive hunters Push very hard to achieve Simplify incentive structure to remove restrictive clauses; 3 financial incentives issue monthly personal communication on status of different incentives

Sales manipulators Create sales imbalances Exert strong senior manager control to prevent gaming; 4 by exploiting loopholes in use monthly reviews to look beyond the numbers incentive policy

ROI maximizers Experts in extracting the most Do bottom-up problem solving on where to invest 5 out of the marketing spend strategically; allocate disproportionate marketing resources with a commitment to achieving returns

Career aspirants Focused on career moves and Develop complete career development path with sales 6 aspiring to make it big in the milestones; commit senior managers’ time to help reps organization achieve and improve

Lazy laggards Underperformers who have Focus on efforts, maximizing activities, doctor visits, etc.; 7 practically given up plan to terminate if no improvement

Sentimentalists People with a strong emotional Design and communicate emotional hooks; give top 8 connection to the organization management recognition for achievement and managers

Methodology for behavioral segmentation

Sufficient data for segmenting individuals can be obtained from a period of 24 to 36 months. The data is typically available in a company’s performance management system, though it requires some cleaning up. Each individual’s data is tabulated and the patterns they exhibit are identified through the use of simple formulae. The basic criteria for segmentation are the consistency and quality of target achievement and the inputs that seem to drive it. Individuals are allocated to one of the eight segments illustrated in Exhibit 1 according to their performance against targets. For instance, target chasers hit their target almost every month but don’t push beyond that and achieve 110 percent of their target. On the other hand, ROI maximizers are great at maximizing the sales of brands that are featured in new marketing campaigns or given heavy promotional spending, but are not so good at driving sales of brands where a company has stopped investing so much. 18

Talent baselining. Once the analysis has analysis to track areas that may be at been completed, the results are shared risk. Depending on how the individual’s with the individual’s immediate manager, performance has correlated with who combines them with their own expectations over the past month or observations to create a personal dossier. quarter, the manager can then intervene The manager goes through this process for to help the individual improve their each of their reports in turn to understand performance in the next month or quarter. the factors that drive their behavior. A sample dossier is illustrated in Exhibit 2. Customized interventions. The Then the company holds a workshop to segmentation enables the sales manager sign off on the final segmentation, specific to devise the most effective tactical issues affecting individuals, and customized interventions for each individual’s development plans for each segment. behavioral type, as outlined in Exhibit 1. For instance, when dealing with a rep Once the segmentation exercise is who belongs to the ROI maximizer complete, the results can be used segment (number 5 in the exhibit), the to shape two main interventions: sales manager should spend time with the rep to explore where to invest the A monthly “look-ahead” analysis. promotional spend for a new launch to get After an individual has been categorized the greatest strategic return. For instance, as belonging to a given segment, their should they try to convert new doctors or sales manager can do a forward-looking maximize prescriptions from core doctors?

Exhibit 2: Part of a dossier for an area manager Hypothetical example

Strengths Development objectives Interventions

From To Intervention Owner Very willing to learn Volatile performer Consistent target Performance dialogue with national sales XX achiever manager explaining why quarter chasing Positive attitude would not lead to long-term success Quarter-chasing Better upfront Hard working and sincere; * behavior leading sales plans for Help area managers understand method XX ensures adherence to to variations each region for evaluating marketing spend in a guidelines territory to help overcome fear of Trustworthy underperformance Help conduct first 2 CRMs

Weaknesses Personal constraints

Not effective at upfront None planning and does not command leadership

Reluctant to take risks over investing in doctors (has foregone some Skill and will assessment Behavioral segment(s) opportunities to invest early on) 3 Average skill Sales manipulator Very mild and not hard in Lazy laggard pushing stocks with 4 High will distributors

* Manipulating sales to maximize incentives by alternating between excellent and poor performance in successive quarters Unlocking pharma growth 19 Using behavioral segmentation to boost salesforce effectiveness

In addition, this segment would be an ideal Finally, to achieve sustainable impact, trial audience for marketing investment companies need to develop mechanisms pilots, and should be allocated a higher to make the changes stick. Examples share of the marketing spend than other might include codifying the performance segments. On the other hand, incentive review process in a formal standard hunters (segment 3 in the exhibit) should operating procedure to speed up the be given a monthly personal bulletin training of new managers, and using explaining whether they are on track to the management information system achieve quarterly or yearly incentives, to generate templates automatically how their performance compares to for the look-ahead and risk analysis. that of peers, and so on. They should also be given a quarterly briefing on any new incentives being introduced.

Measuring the impact

Companies that have adopted behavioral segmentation as part of their sales management approach have been able to accelerate their sales growth within a relatively short period of time. In one case, a division of a leading Indian pharma company that was growing at 8 to 10 percent a year saw its growth rate rise to 18 percent for more than eighteen months following the adoption of a segmented approach. At another company, the average achievement rate among the sales force increased from 99 to 105 percent of targets even though the sales growth targets themselves increased from 17 to 25 percent.

Kaustubh Chakraborty is an associate principal in McKinsey’s Delhi office; Javed Kadir is a consultant and Sathya Prathipati is an associate principal in the Mumbai office. 20

Counter strategies: Getting more value from the retail channel Unlocking pharma growth 21 Counter strategies: Getting more value from the retail channel

Most pharma companies operating in emerging markets gear their sales and marketing efforts to physicians and hospitals. It’s time they widened their horizons: building retail muscle could help them address a large and neglected opportunity.

Sanjeev Agarwal, Putney Cloos, Alka Goel, and Mary Rozenman

Pharmaceutical companies have In the past, pharma companies have paid traditionally seen the retail channel— little attention to the retail part of the value pharmacy chains, independent drug chain. Looking for better ways to access stores, and supermarkets, along with this channel and building the necessary wholesalers and distributors—chiefly as a capabilities could help them capture what point of sale (POS) and logistics provider. could be a large untapped opportunity— However, retail pharmacies are starting or, if ignored, a significant threat. to play an increasingly important role in influencing the decisions customers make when they purchase prescription drugs. Deciding where to act Major global and local healthcare trends are contributing to this shift. At global level, Not surprisingly, there are considerable patent expiries, growing price sensitivity, differences from one emerging market and a shift to generics are combining to another in the way that the retail to grant the pharmacist a bigger say in channel operates and the level of determining script outcomes. Multinational influence it exerts on drug purchasing. companies are also expanding their Understanding the nature of these portfolio via acquisitions and through the differences is a prerequisite for any launch of generic and branded generic pharmaceutical company developing drugs. Meanwhile, retailer consolidation a strategy to identify and address key and vertical integration in the value chain retail channels in emerging markets. are giving retail more power in markets such as Brazil. The growing sophistication Exhibit 1 illustrates the relative size, of local pharma companies—which growth rate, and concentration of retail often play across the spectrum of over- in the pharma sectors of five major the-counter (OTC) drugs, generics, and emerging markets, along with two branded generics—has opened up new developed markets by way of contrast. possibilities for collaboration between Other factors that pharmaceutical pharma and retail and reinforced the status companies need to consider when of pharmacies as an important stakeholder. determining the attractiveness of Looking forward, the spread of mini-clinics, a given retail market include: loyalty cards, and other customer-focused The nature of the pharmacist’s initiatives will serve to strengthen the link role. In largely self-pay markets like between patients and pharmacies. those of India and Brazil, pharmacists 22

Exhibit 1: A variety of retail landscapes

Market share of Total pharma market Retail pharma market Retail pharma growth top 5 retail chains 2010, $ billion 2010, $ billion 2009–10, percent Percent

Brazil 33 21 20 29

China 10 4 25 14 10

India 16 11 18 1

Mexico 17 9 10 46

Russia 22 13 11 10

France 53 29 2 98

US 396 207 6 57

have considerable control over script more directive when prescribing acute outcomes. In India, for example, some treatments or drugs, such as anti- two-thirds of drugs are sold by a epileptics, because their effects may be recommending pharmacist or bought altered by excipients or differences in by a self-prescribing patient with little the manufacturing process. input from a physician. In Brazil, on The balance between players. In the other hand, pharmacists often some emerging markets, wholesalers prompt switching. A recent survey and distributors exert more influence indicates that more than 40 percent of on the retail channel than pharmacies Brazilian pharmacists suggest generic do. Mexico, for instance, has two major alternatives to prescription drugs wholesalers, Casa Saba and Nadro, that 1 without being asked by the customer. dominate the market with a combined By contrast, the majority of scripts in 70 percent share and have exclusive China are originated and filled at the contracts with some manufacturers. hospital, and retail pharmacists seldom Distributors play a leading role in Russia, question physicians’ recommendations where CV Protek, one of the country’s 2 or suggest substitution. largest distributors, is forward integrated The product type. The level of with Rigla, a leading pharmacy chain. influence exerted by retailers on drug The format and concentration of purchase also depends on the type of the retail channel. Some markets product involved. Pharmacists may feel are dominated by chain pharmacies, more comfortable switching lifestyle, others by independent stores. India, for primary care, or chronic scripts than example, falls into the latter category, specialty, acute, or curative scripts. with more than 800,000 pharmacies of This reflects physicians’ tendency to be which only 3 percent are chains. Turkey Unlocking pharma growth 23 Counter strategies: Getting more value from the retail channel

has an even smaller share of chains To understand and manage their retail among its 24,000 pharmacies. In Brazil, customer base, most consumer packaged by contrast, the top chains have been goods companies adopt a customer outperforming independent pharmacies segmentation strategy. At a basic level, and growing at 25 percent per year. this involves segmenting customers The largest chain, BR Farma, has almost by size and format, but best-practice doubled in size to more than 700 stores segmentation goes beyond this to classify in just three years. Russia is also retailers by attributes such as customer experiencing accelerating consolidation, demographics and types of location. In as seen in the recent merger of the A5 addition, best-practice segmentation pharmacy chain with Mosoblpharmacia is dynamic, with updates every year or to create a joint franchise with 1,300 two to capture changes in the market; stores to rival local leader Rigal. complete, covering all retailers and not just existing customers; action oriented, As this complex picture suggests, driving real differences in service levels pharmaceutical companies need to and investment; and forward looking, think carefully about the dynamics of reflecting the strategic and economic individual markets and the nature of the potential offered by different segments. products they are selling before launching their country-specific retail strategies. Segmenting the retail customer base in this way enables a company to identify priority segments and focus Learning from the consumer its strategy and resources on them. packaged goods industry Tailoring value propositions Consumer packaged goods companies to customer segments have spent decades refining their Consumer goods companies have approaches to working with retailers, and many options at their disposal to there is much that pharma companies can vary the value proposition they offer learn from them. In particular, there are to different retail customers: three best practices that are immediately relevant to the pharma retail context: Product portfolio. Consumer goods companies often tailor the SKUs and Understanding and segmenting merchandise they offer to particular customers outlets in response to local customer Global mass-market consumer goods needs. In Brazil, Unilever won market companies need to understand the share by offering small rural retailers diversity of their retail customer landscape. reduced-size packs of its ALA laundry In order to drive market share, they need detergent that were affordable for to ensure they are relevant to their entire customers on very low incomes. range of retail customers, from highly sophisticated retailers like Walmart to Trade terms and discounts. One leading “mom and pop” neighborhood stores, consumer goods company invests in and from bricks-and-mortar outlets to long-term growth by offering considerably online marketplaces. They also need to more favorable trade terms to the future understand the role of distributors and stars among its retail customers. By using wholesalers in each market. its insights into customer segments 24

and its ability to analyze tradeoffs serve lower-priority or harder-to-reach between value and volume, it is able to customers. These wholesalers can ensure that this retail strategy delivers provide payments and delivery only a positive return on investment. or offer value-added services such as marketing and inventory management. Service levels. Companies can offer gold-plated service for high-potential In India, Unilever adopted innovative customers by providing extra services strategies such as a fleet of rural promotion such as a representative on site or on vans and a dedicated direct sales network call, POS support, tailored promotional to reach remote rural areas. It also provided campaigns, support for customer micro-credit to grass-roots groups that outreach, collaborations on new eventually took on roles as direct-to- product development, and help with home distributors for the company. supply-chain improvements. Consumer goods companies like P&G, Pepsi, and Unilever rely on their account reps to be their eyes and ears on the ground, First steps to win identifying areas for improvement across the value chain and ensuring Our conversations with pharmaceutical flawless execution at the point of sale. companies indicate that they are becoming increasingly aware of the Capability building. Some consumer untapped potential in the retail channel, goods companies offer their retail especially in emerging markets. Capturing customers capability-building programs this potential will take a lot of work, to help them improve customer insights, but we believe pharma companies logistics, and inventory management, can kick-start their retail journey by as well as supporting them in installing following a simple five-step approach: software and tools to support these capabilities. Colgate, for instance, Step 1: Map the broad retail opportunity. identifies promising local players in The extent of retailers’ influence on drug China and sends in “SWAT teams” purchases varies dramatically from market to assess their needs and aspirations to market. With their product portfolio in before developing near-term growth mind, pharma companies need to identify plans that outline clear responsibilities the markets that offer them the greatest for both the retailers and Colgate itself. potential. A simple way to do this is to classify each market according to the Adopting innovative approaches to retail opportunities it offers: little or no reach customers opportunities, opportunities for a limited set The sheer size of emerging markets of products, or substantial opportunities such as Brazil, India, Russia, and China, across much of the portfolio. To set along with their relatively undeveloped priorities, companies should then make infrastructure, makes it difficult for rough estimates of the potential value at ambitious consumer goods companies to stake in the most promising markets. reach their full customer base. To tackle this challenge, companies often serve Step 2: Segment, segment, segment. their most important retail customers The retail channel can be segmented directly while relying on wholesalers to along multiple dimensions. The basic Unlocking pharma growth 25 Counter strategies: Getting more value from the retail channel

Exhibit 2: Using tailored value propositions to attract retailers

Value proposition Examples Appeal for retailers

Merchandising ▪ Innovative dosage forms ▪ Differentiated value proposition to and new products ▪ Customer loyalty and discount cards customers ▪ Convenience packaging strategies

Point-of-sale ▪ Patient education (e.g. educators or materials) ▪ Increased customer loyalty innovation ▪ Additional health services ▪ Improved customer experience overall

Co-branding ▪ Retailer brands of popular products ▪ Innovation support and enhanced value proposition for customers

Operations support ▪ Help with improving supply chain ▪ Greater profitability and ▪ Margin shift from wholesaler to pharmacist improvement in operations ▪ Wholesaler negotiation/vertical integration ▪ Disintermediation ▪ Additional discounts or OTC offerings

Account management ▪ Inventory management, supply chain, etc. ▪ Superior effectiveness and support ▪ Samples and training performance ▪ Deferred financing terms/locked-in supply

dimensions might include store format to fulfill orders instantly? Regular calls (supermarket, national pharmacy chain, from a representative who helps them regional chain, independent pharmacy, manage for stockouts and educate their wholesaler, stockist, and so on), volume pharmacists? Visits from physicians? of prescriptions sold, percentage of shelf space occupied by prescription Step 4: Define go-to-market models. drugs, and location. Armed with the Companies then need to decide how segmentation, companies can then to reach their priority retail segments. prioritize the segments they want to reach. Should they work through their physician sales force or does the retail channel Step 3: Develop a tailored value offer enough potential to justify setting proposition for each segment. up a separate dedicated sales force? By profiling the needs, capabilities, and If so, should it be organized by region, economics of target retail segments, retail format, or product portfolio? What pharma companies can identify the role should key account managers play? value propositions and products that will Do large customers and international resonate most with their priority customers chains warrant a global key account (Exhibit 2). Value-added services such as management team? What is the best marketing support, logistics, and account way to reach more fragmented retailers? management are powerful tools for Should some retailers be served through developing long-lasting retail relationships. intermediaries such as wholesalers, or is Different segments have different needs, it better to deal direct? Do some retailers so companies should establish which lend themselves to strategic alliances? services each target segment is likely to value most: software that allows them 26

Step 5: Maximize the effectiveness of Do we understand the needs, retail execution. Monitoring mechanisms priorities, and economics of our priority should be put in place to ensure effective segments? Can we identify the value execution in the field. When measuring proposition and value-added services performance, pharma companies could that will appeal to them? again borrow ideas from consumer goods Do we agree on the most effective companies. For instance, one leader go-to-market model to serve measures salesforce effectiveness in these customers? terms of sales volume, SKU coverage, If we have a dedicated retail sales percentage of stores with sell-in, display force in some markets, how well does quality, and promotion execution. it perform? Are there opportunities for improvement? Do we have central capabilities to build Getting started tools, frameworks, and approaches for embedding retail competencies The five-step approach outlined above in specific markets? is geared to pharmaceutical companies By working through this self-assessment that are designing their retail strategy exercise, leaders can start to plan a retail from scratch. However, some companies journey tailored to their company’s needs. have already taken a few steps to build retail competencies and have different needs. We suggest their best move is to assess their existing capabilities in priority . . . markets by asking a few simple questions: Although companies are waking up to the Do we understand the scale of the potential of retail as a lucrative channel retail opportunity in each market? for the pharma industry, most have yet to Do we have a list of the markets where focus on building their retail muscle. The we want to focus? few that have entered this space are still Do we understand the potential value taking baby steps. We believe that to thrive at stake in each market? Is our business in the next few years, companies should case robust? set to work now to forge relationships that Have we done a segmentation of the will enable them to win in the next industry retail channel? Have we prioritized the battleground: the pharmacist’s counter. segments where retailers exert the most influence on purchasing decisions?

Notes 1 Perceptions of Drugs, IBOPE Inteligência for Interfarma, October 2011. 2 Retail pharmacies account for about one-fifth of scripts in China, although they are gaining ground on hospital pharmacies.

Sanjeev Agarwal is a principal and Putney Cloos is an associate principal in McKinsey’s New Jersey office; Alka Goel is a principal and Mary Rozenman is an associate principal in the New York office. Unlocking pharma growth 27 Counter strategies: Getting more value from the retail channel 28

Public–private partnerships: An untapped strategic lever Unlocking pharma growth 29 Public–private partnerships: An untapped strategic lever

Traditional approaches to PPPs have focused on their role in raising a company’s profile or improving its corporate image. Now pharma companies are entering partnerships with governments and global organizations that deliver solid business benefits too.

Doan Hackley, Jorge Santos da Silva, and Lieven Van der Veken

Participating in public–private partnerships growth rates, sizeable patient segments (PPPs) is nothing new for pharma that can afford innovative “out of pocket” companies; many have taken part in (OOP) medicines, and governments that global PPPs for R&D, or local partnerships have the means to provide health services in lower-income markets. However, and medicines for their citizens. To date, they have traditionally treated these most MNCs have focused their efforts on partnerships as one-off corporate social providing government-reimbursed drugs responsibility initiatives to improve their and serving high-income populations image among stakeholders, rather than as usually concentrated in cities – the “top of an integral part of their business strategy. the pyramid” in these countries. However, MNCs are now seeking to increase their We believe that companies operating penetration in emerging markets as a in emerging countries have much to cornerstone of their growth strategy. gain from adopting PPPs as part of an innovative commercial approach Achieving this goal will involve moving instead.1 These partnerships can act as down the pyramid to less affluent and a means to increase productivity, boost harder-to-reach customer segments, demand, facilitate joint investment and risk expanding the range of existing and new sharing, deepen market understanding, products that are commercially viable for and establish valuable networks for OOP or government-reimbursed markets, future business development. Seen in and venturing into the next horizon of this light, PPPs can create a virtuous emerging markets. Up to now, most circle of benefits for all concerned. MNCs operating in emerging markets have relied mainly on conventional commercial models, such as distributors or sales reps, and standard interfaces Growing in emerging markets with government, such as regulatory, reimbursement negotiations, and In recent years multinational companies commercial licences. However, these (MNCs) have significantly increased their models are relatively expensive, which investments in emerging markets, and limits their reach and restricts the number especially the large middle-income markets of products that can be viable in these of Brazil, Russia, India, China, Mexico, markets. Finding lower-cost models that Korea, and Turkey. What makes these are able to reach suburban and rural markets particularly attractive is their high populations will be critical to going down 30

the pyramid, whether in current priority establishing or enhancing their corporate markets or in next-horizon markets. image. In new countries or market segments a PPP can be a means to create In addition, reimbursement systems a company profile, whereas in established often favor companies that have built markets it can help to pre-empt and strong relationships with the government, mitigate the repercussions of unforeseen so companies that seek to drive events such as product launch failures, reimbursement for their portfolio will recalls, manufacturing accidents, or pricing need to cultivate these relationships. criticism. At a time when attracting and They should do so urgently because retaining talent in emerging economies is emerging economies are growing fast becoming more competitive, a PPP can and starting to focus on the quality and also serve an important purpose by helping sustainability of their health system. to create a desirable employer image.

Public–private partnerships could provide As emerging market activities make a powerful strategic lever for MNCs larger and larger contributions to overall seeking to drive growth in emerging business performance, the potential markets. They will benefit from taking impact of PPPs on a company’s active steps to establish collaboration bottom line is growing. They can and anticipate how the market can be help executives to meet a number of unlocked, rather than simply reacting to important business goals, including: local requests as and when they occur. Reaching financial targets, either by increasing revenue in the short term (as with GlaxoSmithKline’s deal to supply Brazil’s Oswaldo Cruz Foundation with Designing successful PPPs its Synflorix pediatric pneumococcal vaccine and access to the underlying Many pharma companies are already technology) or by positioning the involved in PPPs in emerging markets, but company for future revenue streams we believe that these partnerships are not (as with Eisai’s partnership with Apollo yet as effective as they could be. Nor do Hospitals and HelpAge India, a non- they deliver as much value as they could profit, to address Alzheimer’s disease for all the partners, particularly the MNCs. in India through public education on treatment options and the building of a To ensure the best outcomes, companies site for R&D and manufacturing in a tax- need to develop PPPs that are designed advantaged economic zone). to align with both their own strategic objectives and those of the government Creating a competitive advantage as the key public sector partner. by developing and testing new local go- Experience shows that there are also to-market models, such as partnerships tactical steps companies can take to hedge some of the risk of moving to to ensure that a PPP is not only well large markets with low profitability. An designed but also operates effectively. example is Novartis’s Arogya Parivar, a social business working with village Serving company objectives leaders and NGOs to provide healthcare Historically, pharma companies have for the rural poor in many Indian states. embarked on PPPs with the main goal of Unlocking pharma growth 31 Public–private partnerships: An untapped strategic lever

A brief history of PPPs

Few of the major PPPs in existence today are more than ten years old, yet many have already achieved an impact beyond anything that the public or private sector could have achieved alone. They have raised awareness for causes, made these causes a priority on national and international agendas, secured funding, and spurred the development of new products.* Many have succeeded in infusing a private sector mindset and culture—especially a focus on performance and outcomes—into areas long dominated by the public and civil sectors. The private sector now provides about half of all health services in many African countries, making a major contribution to public efforts to improve service delivery and health outcomes.† Although PPPs can generate substantial benefits, they also carry real costs. Substantial resources may be required to create and maintain the infrastructure needed to serve the partnership. All partners must invest time and effort in learning how to work together and understand each other’s priorities. In addition, coordinating multiple partners can frequently lead to delays in decision making.

Changing models

In the past, companies entered into PPPs for largely philanthropic reasons, shaping their partnerships around donation or sponsorship programs undertaken as part of a corporate social responsibility effort. Some of these partnerships progressed to a social investment model, where companies share their capabilities, knowledge, and technology to improve local health and expect that some indirect and long-term business opportunities will be created in the process, such as access to patients or manufacturing capacity. Our focus in this article is on the third type of PPP, a business partnership model where a company works with local public partners to develop products, commercialize them, access new channels, and so on, undertaking activities that are central to its strategy and intended to create near-term business value and competitive advantage. The business partnership model is gaining traction as public and not-for-profit institutions in emerging countries seek to implement long-lasting change in their local health systems. This means forming partnerships that go beyond low-cost or free drug provision, financial support, and capability building to focus on creating local supply chains, manufacturing capacity, R&D knowledge, and market innovation. MNCs are well positioned to participate in these partnerships to create fully fledged markets by supporting the development and commercialization of products, building new channels, and monetizing services. A few early movers are already pursuing this strategy with the aim of generating new business and gaining competitive edge.

* Kent Buse and Andrew Harmer, “Seven habits of highly effective global public–private health partnerships: Practice and potential,” Social Science & Medicine, volume 64, 2006, pp. 259–71.

† The Business of Health in Africa: Partnering with the private sector to improve people’s lives, International Finance Corporation, World Bank Group, December 2007. 32

Driving R&D on specific diseases Serving public objectives to secure future revenues.2 Some To design a PPP that is fit for purpose, companies partner with local technology MNCs must understand how it can serve platforms in high-incidence areas; not only their own business objectives Roche’s partnership with ChemRar but also the needs of the government on anti-thrombotics in Russia is an or other public sector partner involved. example. Others help to address local Government objectives can vary from needs while developing technology country to country, within a given country, with the potential to be applied globally: by disease type, or by specific area for example, Genzyme is working within the healthcare value chain, and with ChemRar to develop vaccines may evolve over time. In our experience, for orphan diseases in Russia, using governments most often seek to: genetic modification technologies to Increase access to medicines. deliver personalized medicine. Many PPPs are designed to increase the nation’s access to health therapies As MNCs apply more rigorous business in a way that the government and evaluation to their investments in emerging patients can afford. Brazil, for example, markets, many are concluding that PPPs has set up a comprehensive portfolio should not require a blank check but rather of 24 PPPs designed to cut the cost of should provide good value for money 29 active pharmaceutical ingredients by comparison with other investment (APIs) by two-thirds. choices. With this in mind, they look for measurable business outcomes in terms Drive economic development. of financial benefits, employee retention, PPPs can create jobs, enable market share, and so on, and expect to be technology transfer, help build R&D able to share risks with partners instead capabilities, and generate manufacturing of bearing them alone. Defining such and export revenues for a government. business expectations clearly up front Boehringer Ingelheim and BMS have will be critical to avoiding disappointment set up five-year partnerships with the for company and partners alike. Brazilian government to provide APIs, with goals that include establishing Unlocking pharma growth 33 Public–private partnerships: An untapped strategic lever

local manufacturing and transferring scheme subsequently spread to other technology and knowhow to local employee sectors in Nigeria. public labs. Although none of these public objectives Strengthen health systems. PPPs necessarily conflicts with MNCs’ business can also address infrastructure and goals, it is important that PPPs should capability issues such as health service be designed not only to meet the delivery, supply chain, procurement, primary objectives of all partners but regulatory, medical needs, epidemiology also to recognize openly any tensions assessments, and management arising from trying to achieve these capacity. Some donation programs for goals, such as the balance between neglected tropical diseases, such as a company’s need to meet financial Pfizer’s Zithromax program for trachoma targets and the government’s need or Merck & Co.’s Mectizan program to reduce spending on drugs. to prevent river blindness, go beyond philanthropic drugs provision and play Understanding success factors an active role in identifying regions Individual emerging markets and regions where the illness is most prevalent, have their own idiosyncrasies, which creating supply chains, and delivering are often highly specific in healthcare. drugs to target populations. In other There can be pronounced differences cases, MNCs take part in holistic in disease burdens and unmet needs, approaches to build local healthcare political and economic risk profiles, and infrastructure and capacity across a local manifestations of global healthcare particular region. An example is the trends such as cost of care, changing partnership between Pfizer, USAID, and demographics, and population mobility. the Arpana Research and Charities Trust In most emerging markets, there is also to strengthen health care in 100 villages a shortage of the skills and resources in the state of Haryana in India, and the needed to address complex issues. partnership between Merck & Co. and the Chinese government to develop a Although best practices in establishing and model to address HIV/AIDS prevention, operating PPPs in general should not be patient care, treatment, and support. overlooked,3 PPPs in emerging markets Improve delivery. Some PPPs with a pharmaceutical or healthcare focus are prompted by a government’s present a particular set of challenges. efforts to reduce costs, increase Companies should pay close attention to: speed, and improve outcomes by Clarifying ground rules during shifting responsibility for delivery to set-up. When partners are mapping private partners with the necessary out their expectations, they may well expertise to increase the efficiency be operating under the influence of and success of specific projects. An different cultural norms, so defining the example is the partnership between ethical boundaries under which the PPP the Nigerian government and Hygeia will operate is vital. Health partnerships to provide healthcare services. When are typically complex, costly multi-year the government introduced a health efforts, so all partners need to be in insurance scheme for its employees, agreement on an operating principle Hygeia, originally a private hospital and communications approach along chain, became an HMO (health the lines of “be transparent, go slowly, maintenance organization) and the and ensure sustainable success.” 34

In addition, the set-up stage is the best This will help not only to ensure that time to instill a performance culture the partnership meets all its objectives by having all parties agree to clear but also to mitigate some of the milestones for delivery and assessment. inherently higher risks of operating This sets the tone for the partnership in emerging markets. and defines the standards against which the PPP, its activities, and its partners will be judged. It is equally important to . . . discuss and define the exit strategy for all partners. If the PPP has time limits, Every year emerging markets move the partners need to agree on them and further up the MNC agenda, and their put triggers in place for any renewal of contribution to overall revenues and the partnership. margins has reached a record high. With Taking steps to identify and seize this greater prominence comes more opportunities. As competition increases investment in these markets, but also in emerging markets and PPPs become a more rigorous focus on performance, more widespread, companies need to risk, and sustainability. PPPs can play an be constantly alert to opportunities that important role in translating the ambitions can help them achieve their strategic of companies, governments, and non- aspirations. A proactive approach can profits into working relationships that achieve faster impact by helping to satisfy the objectives of all sides. They position the first mover as the preferred operate as more than a vehicle for social partner. For example, in Russia, Novartis contribution, increasingly representing a worked directly with members of the powerful tool for companies to improve cabinet to understand their needs. It their market access and grow their was then able to raise its public profile business. When designed for purpose and market visibility with a $500 million and set up skillfully, PPPs can attain the pledge to invest in new R&D centers next level of impact and performance, in Skolkovo, in a direct response to delivering lasting benefits for both the President Medvedev’s plan to create a countries and the companies involved. world-class biotech cluster. Creating a strong governance structure. Partnerships can be complex, especially in emerging markets. Different players have different objectives, and academic centers, global institutions, governments, and companies all operate in different ways and according to local cultural and business norms. A strong governance structure is essential for keeping partnerships on track, and must be developed in close conjunction with governments and their legal structures. Unlocking pharma growth 35 Public–private partnerships: An untapped strategic lever

Notes 1 From an emerging market perspective, we define PPPs as any form of collaboration with public or not-for- profit institutions that goes beyond a customer/supplier relationship and focuses on a goal such as economic development, disease awareness, or capability building while providing short- or long-term benefit for the private partner. 2 For more on this subject, see “Breakthrough R&D for emerging markets: Critical for long-term success?,” pp. 52–59. 3 See Public–Private Partnerships: Harnessing the private sector’s unique ability to enhance social impact, McKinsey & Company, 2009, at http://mckinseyonsociety.com/public-private-partnerships-harnessing-the- private-sectors-unique-ability-to-enhance-social-impact/.

Doan Hackley is a principal and Lieven Van der Veken is an associate principal in McKinsey’s Geneva office; Jorge Santos da Silva is an associate principal in the Zurich office. 36

How sustainable are branded generics? Unlocking pharma growth 37 How sustainable are branded generics?

Branded generics are delivering great growth and profitability in emerging markets, but how much longer can they continue to do so? A new approach helps companies assess the prospects market by market.

Sanjeev Agarwal, Andrew Cavey, and Ali Murad

Over the past five years, generic and identify those markets where branded branded generic (BGx)1 drugs have generics will remain a sustainable continued to grow strongly in emerging proposition and those where conditions are markets, often at a pace two to five likely to become more challenging. In this times faster than branded originals. article we outline an approach to assessing In those emerging markets where brands markets that leaders can use to establish are seen a proxy for quality, and where a fact base to inform their discussions physicians retain considerable control over on investing in branded generics. prescriptions and patients over purchasing decisions, branded generics have been more successful than their unbranded counterparts, and have maintained Recent investments and their prices for longer. Recognizing new challenges this opportunity, many global pharma companies have announced plans to Global pharmaceutical companies have boost their emerging market business by adopted a variety of approaches to investing in branded generics, whether enter the branded generics segment by launching their own portfolios or by in emerging markets: acquiring those of other companies. M&A. Many multinationals pursue an acquisition strategy to build their However, the landscape for branded branded generics business. For generics is far from uniform, with individual instance, Sanofi-Aventis expanded its markets evolving in markedly different portfolio and footprint by acquiring the ways. In some markets, such as Turkey, Czech Republic–based Zentiva and governments are implementing cost- Brazil’s Medley in 2009. Similarly, Abbott reduction measures. In other markets, acquired Belgium-based Solvay and such as South Africa, payors are putting India’s Piramal in 2010, and in the same pressure on prices. By contrast, some year Pfizer acquired a stake in Teuto markets, such as Brazil, are continuing in Brazil. to see rapid growth in branded generics as the emerging middle class acquires Long-term partnerships. Several increasing purchasing power.2 global pharma companies have embarked on joint ventures with local Given such differences, multinational players. For instance, GSK set up a pharma companies need to examine their partnership with Aspen, a South Africa– portfolios and geographic footprints to based generics manufacturer, in 2009 38

to expand in sub-Saharan Africa. Requirements for local investment. Similarly, Merck partnered with India’s Several markets are facing a balancing Sun Pharma in 2011 to develop and act between the desire to support commercialize new formulations and local companies and the need to fixed-dose combinations, and in 2012 manage government spending on the company embarked on a three- pharmaceutical products. In Turkey, way joint venture called Supera with multinationals have had to invest heavily Eurofarma and Cristalia in Brazil. in local manufacturing or partnerships Licensing and supply agreements. with local players in order to meet local These deals are another mechanism good manufacturing practice (GMP) used by global companies to expand requirements. Similarly, the Russian their branded generics business in government’s Pharma 2020 plan emerging markets. Examples include encourages local manufacturing by Pfizer’s in-licensing deals with India’s requiring regional authorities to buy a Aurobindo in 2009 for several branded certain percentage of locally produced generics and AstraZeneca’s supply drugs. The Brazilian government has agreements covering several therapeutic also announced that it will create a price areas with Aurobindo and another Indian advantage of between 8 and 25 percent manufacturer, Torrent, in 2010. for locally manufactured products in government tenders. Through these steps, global Increasing consolidation and pharmaceutical companies have secured assertiveness among wholesalers access to a large and fast-growing and distributors. In markets where market segment. To achieve the best major multinational retailers have started results from this access, they need to to establish a significant presence or understand and address some core where retailers have consolidated, as in challenges presented by emerging Brazil, global and local drug companies markets. The most important of these are: have faced growing pressures in building their brands and competing Price pressures from payors. As against the new entrants. Retailers are institutional payors—governments and also creating a new product segment in private health insurers reimbursing the form of private-label brands, which patients for drugs—face economic barely existed in emerging markets pressure, they tend in turn to exert until recently. pressure on prices. In South Africa, for instance, payors have recently started to use international benchmarking across the private sector to drive down prices. Assessing sustainability At the same time, the public sector has been investing heavily in broadening Given the complexity of a landscape with healthcare coverage within the national such substantial differences between health insurance scheme, a plan that markets, it is vital for pharma companies involves purchasing large volumes of to understand how sustainable branded inexpensive, mostly generic medicines. generics are likely to be on a country- Elsewhere, the Turkish government has by-country basis. Below we describe followed a path of regular and significant an approach for assessing the long- price reductions over the past few years. term sustainability of branded generics Unlocking pharma growth 39 How sustainable are branded generics?

in a particular market.3 The approach measuring the strength of brand preference provides a fact-based analysis of two in that market, which we could then index key criteria for evaluating a market: how against the scores from other markets. strong is the local preference for brands, and what is the likelihood of the market To measure the likelihood of payor price escaping price intervention by payors? intervention in a market, we analyzed the pressures payors were under to reduce Our hypothesis was that a market healthcare spending and the strength with a strong intrinsic preference for of the government’s desire to support brands and a low likelihood of price the local pharmaceutical industry. intervention by payors should be able to sustain an attractive branded generics segment. On the other hand, if patients in a market perceive brands The prospects in key markets as less important and payors are likely to cut back on drug spending, branded The results of our analysis of several generics will be less sustainable. major emerging markets are shown in In order to assess brand preference in a Exhibit 1, which demonstrates how much given market, we used surveys among the branded generics picture changes physicians, pharmacists, and patients from market to market. Two established to measure four criteria: the market’s markets, France and Germany, are (meaning physicians’ and patients’) intrinsic included as a point of comparison. preference for brands, its willingness to pay a price premium for them, its trust in India, Brazil, Mexico, and Russia are the the healthcare infrastructure, and its trust markets where we see the best long- in the regulatory system (and hence in term prospects for branded generics. the quality of drugs). By combining these India, with its majority out-of-pocket factors, we arrived at a composite score segment and limited government price 40

Exhibit 1: Long-term sustainability of key branded generics markets

High What is the Brazil India likelihood of the Mexico market escaping lity bi Russia price intervention ina sta by payers? su rm -te ng r lo Algeria he Assessed through: Hig Saudi Arabia ▪ Limited pressure to reduce healthcare spend ▪ Strong desire to Romania Turkey support local pharma companies Poland South Africa Czech Republic Germany France Hungary Low Low High

How strong is the preference for brands? Assessed through: ▪ Intrinsic local preference for brands ▪ Patients’ willingness to pay price premium ▪ Lack of confidence in ability of regulatory system to safeguard drug quality

Source: interviews; “How half the world shops,” McKinsey Quarterly, November 2007; EGA Medicines Association; Economist Intelligence Unit; BMI; WHO; OECD; McKinsey analysis

intervention, looks set to sustain a as announced in Pharma 2020, we strong preference for branded generics, believe it still holds good prospects. although they are likely to stay at today’s low prices. Brazilian consumers have In Algeria, Saudi Arabia, Turkey, and consistently displayed a very strong South Africa, the picture is more varied. preference for brands in many product The preference for brands remains categories, including pharmaceuticals. strong in Algeria, a fully reimbursed Although the Brazilian government has market. However, the attractiveness of recently enabled access to one of the branded generics is being dampened by world’s largest health insurance schemes, stringent price controls that favor pure the country’s largest segment is still generics, under the influence of a payor the patient-paid retail market, which system similar to the French system. is expected to continue to grow. Although Saudi Arabia retains a strong Physicians and patients have a strong preference for brands, branded generics preference for brands in Mexico too, are losing their appeal, a trend that is and we believe it will remain an attractive likely to continue as the government market for the foreseeable future. introduces measures to reduce prices. Finally, Russia also has a pronounced Government tenders have become more bias toward branded generics, and systematized thanks to NUPCO (the although the government plans to National Unified Procurement Company for reduce the market share of this segment Medical Supplies), price reductions have Unlocking pharma growth 41 How sustainable are branded generics?

become sharper following the introduction That said, the preference for brands in of international price benchmarking, and eastern Europe is expected gradually regulatory standards have risen as the to weaken as the introduction of EU Saudi Food and Drug Authority evolves. standards leads to a rise in quality across the board. Over time, these markets could In Turkey and South Africa, meanwhile, begin to resemble those of France and government pressures to reduce Germany, where strong regulatory systems pharmaceutical costs are making have combined with austerity pressures the branded generics markets less to limit the appeal of branded generics. attractive despite the strong preference for brands in these countries.

Across eastern Europe, trends are . . . emerging that have drastically reduced the appeal of branded generics. Faced The branded generics segment with tight austerity budgets, government continues to deliver fast growth and payors are making efforts to reduce strong profits in emerging markets. their spending on drugs. For example, Although we can’t offer a crystal ball, an Hungary’s 2011 economic reform package analytical approach to forecasting how requires OEP, its national health insurance markets are likely to evolve can help fund, to make significant savings in its pharmaceutical companies plan their drug reimbursement budget. However, investments to capture maximum value. this trend does not affect all countries in the region in the same way. For instance, in Romania, which still has a strong out- of-pocket segment, the government’s share of spending on branded generics remains small and consumers continue to demonstrate a strong brand preference, meaning that sustainability is higher.

Notes 1 Branded generics are off-patent products sold under a trade name and usually at a price premium by companies other than the originators. Formulations and dosages are modified in some cases. 2 See “Winning in the emerging middle class: Findings from Brazil,” pp. 10–13. 3 The approach is not predictive and does not take into account every aspect of sustainability.

Sanjeev Agarwal is a principal in McKinsey’s New Jersey office;Andrew Cavey is an associate principal and Ali Murad is a consultant in the London office. 42

Growth in Brazil’s branded generics market: Perspectives from Maurizio Billi, president of Eurofarma Unlocking pharma growth 43 Growth in Brazil’s branded generics market: Perspectives from Maurizio Billi, president of Eurofarma

The leader of one of Brazil’s most eminent pharma companies talks about building a platform for growth and how local players can capitalize on their market knowledge.

Nicola Calicchio and Tracy Francis

Founded in 1972, Eurofarma has secured a Aspirations for growth position among the most admired Brazilian pharmaceutical companies, largely thanks Billi pins his aspirations on “regional to its success with branded generics. internationalization”: expansion beyond Accounting for 62 percent of sales in Brazil into other Latin American countries. Brazil’s large and growing pharma market, Eurofarma launched this strategy in branded generics face a rosy future. In 2009 by acquiring a local company in this interview, Eurofarma’s president, Argentina, and Billi plans to stay on this Maurizio Billi, shares some thoughts on course because “I believe there are still that future for his company and for the many opportunities for consolidation, rest of the industry in Latin America. perhaps not so many in Brazil, but many in Latin America. There are many family businesses, many companies without succession perspectives.” Foundation for growth Getting more tactical, he adds, “We do Billi believes that Eurofarma has built a not need to make very significant strong platform for growth and highlights acquisitions. What we really need is a three specific actions: “We consolidated base. We don’t have to buy the market our presence with doctors, getting them leaders—just a company with a median to prescribe our products more. We position to serve as a base for us to created a good research department build our culture and our products.” for new products. We specialized in the art of copying a product, which is The growth strategy set in 2005 called difficult. We showed all our employees for Eurofarma to acquire five companies what we need—to be more agile, more in five countries, but as the Latin questioning, and have more drive to do American market evolves, so does the things faster because we are very small strategy. “Our original concept was to compared to the large multinationals.” cover 90 percent of the Latin American market,” Billi volunteers, “but Venezuela Billi also recognizes that Eurofarma faces now represents 15 percent, so if it stays challenges to growth: “We often don’t have out, we will never have 90 percent. Peru the internal knowledge of how to make the was not on our radar, but now it is.” company grow. We know what we want, He continues, “I believe we will end up but don’t know too well how to get there.” buying a bit more than originally planned.” 44

To date Eurofarma has made four Competing for growth acquisitions outside Brazil and has taken a consistent approach to Billi expresses respect and even admiration integrating them: “We are keeping for major multinational pharmaceutical their management because it makes companies: “They are extremely efficient. I sense to do so. They understand more would give God knows how many years of about those markets than we do.” my life to have access to the research into new molecules to be able to do the work like Pfizer, like AstraZeneca. I greatly admire the work these companies do in R&D.” Financing growth But Billi often cites the need to know a Executing a growth strategy predicated market in order to succeed there. This on acquisitions can be expensive. But belief leads him to dismiss multinational Billi outlines a clear financing strategy: pharma companies as an immediate “Our route is, use our own cash and bank competitive threat for branded generics indebtedness. There are some lines one in Brazil: “The multinationals don’t have can access at a reasonable cost. Then our heads. Until they understand how do an IPO. That we are going to do an the market works, they are going to IPO is certain. We just don’t know when. take a long time and leave space for Our current position is, we will do it when us. I’m not worried about this type of all the alternative financing possibilities competition. I’m worried about the have run out.” He excludes private equity competition from the Brazilian companies. from the mix: “If we have to go for private This group of five or six Brazilian equity, it’s best to do an IPO directly.” companies, they are very good.” Unlocking pharma growth 45 Growth in Brazil’s branded generics market: Perspectives from Maurizio Billi, president of Eurofarma

Billi takes these competitors very seriously, “Getting closer to some multinationals admitting: “They have the same problems and even being an arm of them in we have – they need to win space. They these markets.” have access to the same technology in product development and in marketing. Creating a culture of agility “without They know where the good physicians much bureaucracy, without exchanging are. We are determined to do things the too many emails, without too many right way, but the others also are.” PowerPoint presentations.”

For Eurofarma, doing things the right Success also requires motivated way means: leadership. What motivates Maurizio Billi? “To work and be able to work. Remembering that “the major business Be able to face challenges, risks, and of a company like ours is to develop problems and have happy outcomes. products that are losing patent and One doesn’t get motivated by financial be one of the first to arrive in the values. Motivation comes from what market. A good example is sildenafil, we conquer, and having very good the generic of Viagra. Since it lost its competition is even more motivating.” patent, consumption of this pill in Brazil has multiplied by five. This is a sexual revolution. Our strength lies with this emerging Brazilian class that is getting access to medication.” “Launching new products faster and faster; investing very strongly in marketing.”

This is an edited version of an article first published in Perspectives on Healthcare in Latin America, McKinsey & Company, 2011. Nicola Calicchio is a director and Tracy Francis is a principal in McKinsey’s São Paulo office. 46

China’s digital healing Unlocking pharma growth 47 China’s digital healing

The world’s biggest and most dynamic social media market is talking about health care. But are companies really listening?

Cindy Chiu, Chris Ip, Ari Silverman, and Florian Then

Even without Facebook, Twitter, and insights represents one of the largest YouTube, China’s voracious appetite for untapped opportunities for healthcare all things social has spawned a dizzying companies in the Chinese market. array of social media platforms, many with tools more advanced than those in the west (Exhibit 1). Chinese users were able, for example, to embed multimedia A matter of trust content in social media 18 months before Twitter users could do so in the United Social media began in China in 1994 States. That’s helped to turn the world’s with online forums and communities, and biggest internet user base—513 million migrated to instant messaging in 1999. people, more than twice the 245 million User review sites emerged around 2003, in the US1—into the world’s most blogging in 2004, and social networking active environment for social media. sites such as Tencent’s QZone in 2005. Sina Weibo launched in 2009, offering More than 300 million people use blogs, microblogging with multimedia. Location- social networking sites, and other online based player Jiepang appeared in 2010. communities.2 And they are active and engaged: 91 percent have visited a China’s social media users are not just social media website in the past six more active than those elsewhere; more months, as against 67 percent in the than 80 percent have multiple social US and 30 percent in Japan. Moreover, media accounts, compared with just three-quarters of users are creators 39 percent in Japan.4 They increasingly of content—active posters rather use social media on the move too, than mere spectators—compared to with mobile users expected to grow at just a quarter in the US. They spend about 30 percent per year from a base more time on social media too: over of more than 100 million in 2010.5 20 percent more than users in the US, and six times the average for Japan.3 This explosive growth shows few signs of abating, given the increasing affordability Chinese users tend to get quite of broadband, the proliferation of mobile personal, talking in detail about their devices with internet access, and the condition, treatment, and standards fact that the government cannot censor of care, and naming the products and social media as easily as other information brands that feature in their treatment channels, which leads users to put regimes. Mining this wealth of more trust in social media content. 48

Exhibit 1: A complex social media environment

Create personal profiles to keep in touch, meet new people, and share interests

Social 2 7 networks Sign up for a personal feed to Micro- broadcast activities and Evaluate and rate Reviews blogs receive real-time updates on products and services news, friends, celebrities, etc.

6 Social 3 media

Media Create individual blogs Blogs sharing to discuss opinions Upload, share, and comment and experiences 5 on photos, videos, and audio 4

Social Communities gaming

Register for communities to Connect with friends seek advice and discuss to play and discuss topics of mutual interests popular games

Source: CR Net; NM Incite; McKinsey analysis

Yet untrustworthy sources do exist, notably Patients reach out to new “friends “artificial writers” that seed positive and and family” negative content in the hope it will go viral. Chinese users greatly value the advice of In some cases, negative publicity about opinion leaders in social networks, in part companies—such as allegations of product because of doubts about the credibility contamination—has prompted waves of of formal institutions. One survey found microblog posts from competitors and that 66 percent of consumers in China disguised users. Companies need to be relied on recommendations from friends on their guard against such situations and family when buying moisturizer, for when mining social media for insights instance, compared with just 38 percent lest they draw the wrong conclusions in the US. In effect, social media is serving about users’ behavior and preferences. as a digital extension of friends and family. Recent NM Incite research reported more than 1 million consumer posts about diabetes in just six months on Weibo and Stakeholders embrace other platforms, some of them highly social media specific: 18 percent mentioned individual products, and 6 percent named brands. To understand China’s social media landscape better, let’s look at the key Patients also use online sources to stakeholders: patients, professionals, make decisions about their health care. providers, and manufacturers. A McKinsey survey revealed that when Chinese patients are selecting a hospital, Unlocking pharma growth 49 China’s digital healing

they are less likely to seek information account, announced in February 2012 from traditional sources such as print that it will integrate the microblog media (chosen by fewer than 10 percent accounts of hospitals, hospital of patients) than the internet (17 percent). departments, and physicians into a Younger patients are much more likely to single account. It also mandated more use online information than their elders than 50 hospitals, the Beijing medical (28 percent of under-25s, compared authority, local health bureaus, and with 8 percent of over-45s). Similarly, other agencies to open accounts. 12 percent of younger consumers look to social media for information Manufacturers test the waters about treatment and medication. Although many multinational pharma companies have been building an Medical practitioners take up integrated digital presence in their home microblogging markets, progress in China has been Social media has been widely adopted mixed. Some companies have set up by medical practitioners as a platform Weibo accounts much as they would for professional interaction. One establish a Facebook or Twitter presence prominent site for healthcare workers, elsewhere; the Mercilon contraceptive DingXiangYuan, is used by 3 million and Acuvue disposable contact lenses professionals including almost 900,000 both have their own sites, for instance. doctors, with 30,000 new users joining As yet, though, companies have made every month. It offers information on limited use of social media to bring drugs and other topics, blogging, content to physicians and patients. career services, and an online store. There is a large untapped opportunity Most doctors are aware of microblogging, for companies to listen carefully to and more than half use Weibo themselves.6 physicians and patients to understand their Some leading physicians have hundreds preferences and identify their unmet needs. of thousands of followers. Oncologists and doctors who treat chronic diseases tend to be the most popular. Listening for social Providers move online media insights Healthcare providers are migrating online to recruit and retain patients, improve Listening to conversations between patient–physician relationships, and patients, caregivers, and healthcare expand the influence of their key opinion professionals helps companies understand leaders. Some set up social media who is talking about which treatments, accounts for their medical staff, mandate products, and brands, what they are saying physicians to use them to communicate about disease management and treatment, with patients, and help to maintain and what their needs are. Leading the microblogs of popular doctors. companies are already taking steps in this direction: for instance, in March 2012 Government departments are supporting GlaxoSmithKline signed a multi-year, this trend too. For instance, Beijing’s multimillion-dollar global deal with Infosys municipal health department, which and Fabric Worldwide to monitor and boasts 40,000 followers on its Weibo 50

analyze social media discussions to inform How can we draw out actionable its marketing and promotion strategy. insights from the wealth of information available? How will Companies should strive to identify all these insights change the way we the needs and priorities of their target engage with physicians? patient groups, including what information How well do we understand the rules they find valuable and where they get of the social media game? Do we know it. Listening and monitoring trends can how to listen to stakeholders properly? help companies shape their strategies How far should we go in engaging and business decisions and inform customers? How can we mitigate product design, brand campaigns, and regulatory risks? rapid responses to customer concerns. How does social media fit into our However, patient privacy rules are still planning processes? Who in our evolving, so companies need to be organization should take responsibility careful about how they use patient- for it? What capabilities do we need? specific information from social media.

Some companies are going a step further by providing medical information for . . . opinion leaders and physicians via social media. Such approaches should be crafted No pharmaceutical company operating carefully with an eye to potential regulatory in China can afford to ignore social issues. For example, some multinational media. Although some regulatory pharma companies have closed their questions remain unanswered, that Facebook pages because of concerns shouldn’t deter companies from moving that they may be seen as spreading ahead. Investing in understanding and false information posted by patients. learning from China’s digital conversation should prove well worth the effort. Making a start As executives look to generate value from this opportunity, they need to address a few important questions: Where do our key stakeholders tend to have their discussions? What do they say about therapeutic areas, treatment paradigms, products, and brands? What are their unmet medical needs? How do they feel about specific products and brands, and why? Unlocking pharma growth 51 China’s digital healing

Notes 1 Internet World Stats data as of December 2011; US figures from March 2011. 2 McKinsey’s 2012 iConsumer survey on Chinese consumers also finds that 91 percent of internet users in tier I to tier III cities use social media. Tier I cities include Beijing, Guangzhou, Shanghai, and Shenzhen; tier II comprises about 40 cities and tier III about 170. The tiers are defined by urban population and by economic factors such as GDP and GDP per capita. 3 McKinsey’s 2012 iConsumer survey. 4 McKinsey’s 2012 iConsumer survey. 5 IDC and iResearch. 6 DingXiangYuan survey, June 2011.

This is an edited version of an article first published in China Healthcare: Entering uncharted waters, McKinsey & Company, 2012. Cindy Chiu and Florian Then are consultants and Ari Silverman is a principal in McKinsey’s Shanghai office; Chris Ip is a director in the Singapore office. The authors would like to acknowledge the contributions of NM Incite, TC Chu and Davis Lin to the development of this article. 52

Breakthrough R&D for emerging markets: Critical for long-term success? Unlocking pharma growth 53 Breakthrough R&D for emerging markets: Critical for long-term success?

Pharma companies pursuing growth in emerging markets will increasingly need to adapt their portfolio to address local requirements. The right R&D strategy will involve reducing costs so that they can develop innovative drugs tailored to emerging market needs and still make a profit.

Sanjiv Talwar, Shail Thaker, and Matthew Wilson

With cost pressures in established medicine of the herb artemisinin was pharmaceutical markets set to continue exploited by Coartem to treat malaria) or into the foreseeable future, emerging by necessity (as with the identification of markets will soon start to contribute the ethnic sub-populations where drugs are largest share of industry growth. This effective, for instance in the case of Iressa). rising share is driven by a large and growing unmet medical need and by an In the past five years, pharma companies improvement in these markets’ ability to have received a great deal of publicity pay for drugs that is driven by increasing for their investments in R&D sites and affluence among patients and expanding partnerships in emerging markets. As and deepening government coverage. As an example, more than 20 sites have a result, many leading pharma companies been built by global pharma companies have committed to ambitious growth in China,1 and some emerging markets plans for these markets and are placing have seen rapid growth of up to material investments to back them up. 30 percent per year (compared with However, the success formula for these 7 percent in the US) in the number of markets has yet to be firmly established clinical trials initiated.2 However, these and we believe that a new approach investments have generally been focused to R&D will be a critical component. on supporting the global portfolio by sourcing services and patients for trials at low cost, or developing capabilities in incremental product innovation Approaching the tipping point? such as fixed-dose combinations.

In the past, multinational corporations This approach is implicitly underpinned (MNCs) have approached emerging by the belief that developing innovative markets as an opportunity to capture products specifically for emerging additional revenue for existing products markets does not make economic rather than as a diverse set of markets sense. However, several factors are with unique needs of their own. Even now challenging this viewpoint: when successful innovative products have been created for local markets, they have There is evidence that tapping unmet come about either through leveraging needs provides a credible revenue existing breakthroughs (for example, when opportunity. Local companies in India, the understanding in traditional Chinese China, and Korea have had success 54

Exhibit 1: Innovative molecules from emerging markets go global

Number of molecules discovered in India or China in EU or US Molecule Originator registration process in 2011 (pharmocology activity) company Indication P1736 Piramal Diabetes Revamilast Glenmark Rheumatoid arthritis India GBR 600 Glenmark Acute coronary syndrome GBR 500 Glenmark Multiple sclerosis

Chidamide Shenzhen Chipscreen Oncology Biosciences China Retagliptin Jiangsu Hengrui Diabetes Phase I 6 SUN-1334H Sun Pharma Allergic rhinitis Oglemilast Glenmark Asthma, COPD (chronic obstructive pulmonary disease) India WST11 Wockhardt Biliary cancer; macular degeneration GRC 15300 Glenmark Pain (osteoarthritic, neuropathic) Phase II 8 Sulcardine Sulfate Jiangsu Furui Pharmaceutical Premature ventricular contractions Huperzine A Shanghai Institute of Alzheimer's China Materia Medica Dan Shen Di Wan Tianjin Tasly Angina Hypocol Shandong Luye Pharma Hyperlipidemia 3 Phase III

Balaglitazone Dr Reddy's Diabetes India NAB001 Dr Reddy's Onychomycosis

DP-b99 Jiangsu Wanbang Stroke China

in developing products to meet local Early evidence of the quality of local work needs. They go beyond duplicating or can be seen in the innovative products reformulating global drugs and develop developed in emerging markets that genuinely innovative drugs. Examples are beginning to reach global markets. include Simcere’s innovative cancer As Exhibit 1 indicates, there are at least drug Endu in China, Hanmi’s novel 11 such drugs from China and India combination Amosartan in Korea, and alone in Phase II and III at the moment. CP Guojian’s pipeline of innovative monoclonal antibodies, again in China. Another indication of improving local capabilities is the growing number of Local R&D capabilities are improving. new partnerships in which multinationals Academic, government, and private sector seek out innovation from local emerging investments into life science research are market players. Examples involving Indian beginning to pay off. If we take publication companies include Sanofi’s deal with as a measure, China now ranks fourth Glenmark on an immunology monoclonal in the world for medical publications in antibody, Pfizer’s pact with Biocon for general3 and is not far behind Japan its insulin portfolio, and Merck’s joint for publication in top journals.4 Other venture with Sun Pharma for innovative countries are not far behind, with formulations. The alliance between Roche average citations for papers produced and Russia’s TeaRx for the development in South Korea, Singapore, and Russia of Factor Xa inhibitors is another example running at levels comparable to those of a global company pursuing innovation of many western European nations.5 with the help of a local partner. Unlocking pharma growth 55 Breakthrough R&D for emerging markets: Critical for long-term success?

Local R&D can help to secure access to for the local market. However, such some key growth markets. Governments efforts are still in their infancy and do not are increasingly rewarding local R&D efforts represent a general trend as of yet. that go beyond including local patients in global clinical trials. Many countries have identified the development of local pharma R&D as a strategic priority and Where is the real opportunity are aligning their policies to support it. for innovative R&D?

As an example, the Russian government As emerging markets develop and start has outlined a strategy for long-term to share common health challenges innovation as part of its Pharma 2020 with developed markets, we can vision. Its aspiration is to replace expect to see a broad convergence 50 percent of imported innovative in epidemiology, particularly in chronic branded drugs (that is, those other than diseases such as cardiovascular and generics and branded generics) with metabolic diseases. Consequently, locally developed ones. This strategy, many emerging market needs can like Russia’s local manufacturing be met by means of R&D focused on policy, is likely to be underpinned by developed markets, as the historic global legislative and regulatory mechanisms success of many major drugs from the US and Europe would suggest. In response to such initiatives, MNCs are showing early signs of movement to However, there are unique opportunities develop innovative products specific to specific to emerging markets that exist emerging markets. For instance, Lilly’s alongside these shared needs. We have new R&D center in China focuses on identified five types for multinationals to developing diabetes products exclusively consider, as itemized in Exhibit 2. All could

Exhibit 2: Attractive areas in emerging markets for innovative R&D

Examples of therapeutic Area areas and products Considerations for multinationals

Diseases 1 Previously neglected ▪ Malaria ▪ Emerging mechanisms to foster additional R&D specific to widespread indications ▪ Tuberculosis (e.g., product development partnerships) emerging that may become ▪ Zoonotic diseases (e.g., ▪ Molecular genomic approaches (e.g., for malaria, markets commercially viable Chagas disease, Dengue) zoonosis) to reduce discovery and development costs ▪ Drug resistance patterns

2 Genotype-specific ▪ HCC (hepatocellular ▪ May be able to access government funding to reduce costs diseases carcinoma) ▪ Innovation approaches could filter to developed regions ▪ Myopic CNV (choroidal neovascularization)

Global 3 Opportunities created ▪ Diabetes ▪ May involve research in different areas (e.g., gene diseases by differences in local polymorphism in diabetes) with local standard of care or ▪ Alternative target product profiles may be needed to meet nuances epidemiology local prescribing preferences

4 Diseases with high ▪ COPD (chronic obstructive ▪ Must be well recognized by payors or prescribers incidence in emerging pulmonary disease) (e.g., depression has high incidence in emerging markets markets but low priority ▪ HPV (human papillomavirus) but is often not diagnosed or treated) at global level ▪ Hepatitis

5 Differences in consumer ▪ FDCs (fixed-dose ▪ Substantial variations from country to country preferences combinations) ▪ May require more than simple bioequivalence ▪ Devices ▪ May include branded generics, generics, ▪ Heat-stable formulations biosimilars, biobetters ▪ Cheaper versions 56

address substantial unmet Exhibit 3: Conservative calculation of R&D cost threshold needs and all have the potential Illustration using standard assumptions, with adjustment for attrition to generate material revenues, NPV calculation though these might be at Revenue: $250 million different margin levels from peak sales* those currently enjoyed by the × industry. However, traditional NPV at launch Attrition-adjusted R&D costs‡ must Margin: 30% excluding ROI hurdle R&D approaches have yet to R&D costs = rate of 10%† be no more than target or capitalize on these ~$400 million $275 million areas in any significant way. × Lifetime and discount rate So what’s stopping the 15 years: 10% industry? The most common * Following normal revenue growth decline curve objection we hear is “Emerging † Assumed to be roughly equal to cost of capital ‡ That is, including costs of failed drugs market opportunities are too small—the numbers won’t add up.” No doubt scale does pose a challenge. Peak potential What do MNCs need revenues of a successful product in to do differently? emerging markets are in the region of $300 to $500 million, with lower To capture the opportunity, global pharma margins than in established markets. companies would need to do three However, the longer product lifecycles things: choose the right opportunities, and significant growth in these markets change their approach to R&D, and have a positive impact on the calculation adjust their NPV equations. of the drug’s net present value (NPV). Choose the right opportunities If we make a conservative set of basic We see five broad areas of opportunity, as assumptions about the development laid out in Exhibit 2. The relative weighting costs of a drug focused on key emerging of these opportunities differs by country, markets and factor in attrition, the depending on local needs. To find the implication is that an MNC will need to right targets, an MNC will require deep be able to develop such a product for local knowledge about both the nature of no more than $275 million. Exhibit 3 these needs and the willingness of payors lays out the calculation for an illustrative to support them. This in turn will typically product under these assumptions. require its R&D organization to form partnerships with high-performing local The analysis does not take into account medical and market access functions. the possible benefits of conducting targeted R&D in terms of improved access Change the R&D approach to the market concerned. Such benefits are Applying a traditional approach to the difficult to quantify, but could be material. development of a drug for emerging Even without them, we believe that markets would incur high costs that pharma companies could deliver profitable would exceed the drug’s projected net products if they were willing to modify their present value on an attrition-adjusted classic developed-world R&D approach. basis. However, focusing exclusively on emerging markets allows companies to: Unlocking pharma growth 57 Breakthrough R&D for emerging markets: Critical for long-term success?

Explore new drug development India and elsewhere suggest that they may paradigms. Leveraging adaptive be able to shave even more off this cost. trial design to reduce the powering of trials and rethinking trial arms offer Target filing with regulators in emerging opportunities to depart from the markets only. In the past, regulators in traditional drug development approach. emerging markets have been unlikely to approve products from multinationals Take advantage of low-cost local R&D that target only emerging markets. capabilities. Conducting all aspects of the However, the SFDA (State Food & Drug R&D process in emerging markets—for Administration in China) and DCGI (Drugs instance, using local patients only, rather Controller General of India) have shown than those from Europe or the US—and increasing willingness to make independent taking advantage of lower labor and per approvals, and pathways such as EMA patient costs will help save money across Article 58 and WHO prequalification offer the entire value chain. Factoring in lower potentially cheaper and faster alternatives costs for internal clinicians and forming to a traditional FDA or EMA filing. partnerships with large hospitals to recruit patients rapidly and at lower cost per As Exhibit 4 illustrates, rough estimates patient would enable a Phase II trial to be indicate how these approaches could run for $8 to $16 million as opposed to cut risk-adjusted R&D costs from the usual $30 to $50 million in developed traditional levels of $750 million to markets. Interviews with local companies in $1.3 billion down to as little as $220 to

Exhibit 4: An alternative R&D paradigm

Lead Target Hit to Pre- Regis- optimi- Phase I Phase II Phase III to hit lead zation clinical tration

Traditional Cost 1–2 3–5 6–12 7–15 10–20 30–50 80–150 20–30 ($ million) Total risk- western adjusted cost R&D per NCE*: Success rate 80% 75% 85% 70% 60% 33% 60% – $750–1,300 million

Alternative 1 2 3 model Total risk- Focus Source Conduct all R&D in emerging markets to leverage savings in adjusted cost cost base (e.g., in per patient costs) mainly on leads from per NCE*: published, low-cost validated HTS† 4 6 $220–475 million targets providers Leverage adaptive trial File only design to reduce powering with EM of trials regulators 5 Focus on local standard of care for trial arms (e.g., arms against traditional medicine, not expensive comparators)

Cost 0–1 0.5–2 2–4 3–5 4–8 8–16 25–50 4–8 ($ million)

* New chemical entity † High-throughput screening 58

$475 million, assuming attrition rates that Brazil: billions of dollars of funding in are comparable with those in traditional FINEP, FAPESP, and other institutes, as drug development. That means that MNCs well as tax breaks of 160 to 180 percent may be able to meet the required cost Russia: funding and preferential access hurdle for profitable drug development in exchange for local investments at purely by changing their R&D approach. Skolkovo, the R&D “city” near Moscow China: local R&D capability development Moreover, the cost could come down given priority and funding in the even further if attrition proves not to be twelfth five-year plan (at least $6 billion as high as it is in traditional areas (for committed to local R&D up to 2015), instance, if there are fewer failures due to as well as through national biotech lack of differentiation since the standard zones Malaysia: healthcare industry of care is limited) or if novel techniques development agency with standing like adaptive trial design are fully applied. budget for co-investments.

Adjust the NPV equation In addition, foundations and product To shift the economics in their favor, development partnerships are taking companies can seek out new sources more and more interest in investing of funding, capitalize on low-cost in emerging markets, particularly in manufacturing, and pursue alternative the area of neglected diseases. commercial models. Capitalize on low-cost manufacturing Seek out new sources of funding. to support margins. There are multiple Substantial pools of government and business models that can be adopted other institutional funding have emerged to reduce capital and operating that companies could access to conduct expenditure while still maintaining MNC R&D in emerging markets. Governments standards for quality and compliance in increasingly view R&D as a core capability active pharmaceutical ingredient (API), that they want to have in their country, and formulation, and packaging. Options they are offering a variety of incentives. range from captive manufacturing plants Funding opportunities include: (like those of Sanofi-Aventis in India) Unlocking pharma growth 59 Breakthrough R&D for emerging markets: Critical for long-term success?

to tactical short-term one-off contract . . . manufacturing deals (like that of Jubilant and GlaxoSmithKline). There is some Success in emerging markets is a strategic variation from region to region, but pillar for many pharma companies, but the opportunities for cost savings go beyond increasing complexity of these markets lower manufacturing labor costs to means that players are likely to need a include improvements in cost of goods portfolio of mutually reinforcing initiatives in sold through a reduction in overhead and order to achieve it. The approach outlined capital costs, lower API sourcing cost, above could be a powerful ingredient and other benefits such as tax shields. in this mix, and a useful complement to the portfolio expansion and branded Integrate alternative commercial generic deals we see today. Companies models. The rapidly evolving commercial that aspire to long-term leadership landscape in emerging markets presents in emerging markets need to invest incremental opportunities to broaden considerable effort to get this approach the revenue base via options such as right. However, the winners could reap new distribution models, a multi-channel considerable rewards in the form of a approach for the emerging middle class, high-growth emerging markets portfolio and partnerships for joint promotion or and a major boost in the value of their marketing. There is also an opportunity to global portfolio in these markets as well. broaden the accessible patient base by developing effective pricing approaches.

Notes 1 For more on China, see “Debunking the myths about R&D talent in China,” Evolution or revolution? McKinsey perspectives on drug and device R&D 2012, McKinsey & Company, 2012, pp. 96–105. 2 “Clinical trials submitted in marketing authorization applications to the EMA,” EMA, November 2010. 3 SCImago Journal & Country Rank, October 2010. 4 PubMed; the top journals are Science, Nature, Cell, New England Journal of Medicine, and PNAS. 5 Robert D. Atkinson and Scott M. Andes, “The Atlantic century: Benchmarking EU and US innovation and competitiveness,” Information Technology & Innovation Foundation, February 2009.

This article was first published in Evolution or revolution? McKinsey perspectives on drug and device R&D 2012. Sanjiv Talwar is an associate principal in McKinsey’s New Jersey office,Shail Thaker is a principal in the London office, andMatthew Wilson is a principal in the New York office. The authors would like to thank Ajay Dhankhar, Matthias Evers, Sumin Koo, Martin Møller, Charles Sekwalor, and Navjot Singh for their contributions. 60

Cutting through the complexity: Insights into the future of clinical trials in emerging markets Unlocking pharma growth 61 Cutting through the complexity: Insights into the future of clinical trials in emerging markets

As investing in emerging market infrastructure becomes a pillar of pharma growth strategies, conducting clinical trials in these markets should be more attractive than ever. So why are such trials declining, and how should executives evaluate the opportunities in this increasingly complex environment?

Jackie Hua, Shail Thaker, and Matthew Wilson

The pharmaceutical industry has long global pharma companies to conduct recognized the value of clinical trials clinical trials in emerging markets. in emerging markets. Since the late 1990s, trials have spread to Asia, Latin Cost advantages. As R&D budgets America, eastern and central Europe, continue to be squeezed, the lower cost the Middle East, and Africa. Most of the per patient incurred in emerging markets factors that prompted this shift remain represents a compelling advantage. relevant today, yet over the past two Savings can be as high as 70 percent years there has been a decline in trial of the developed market cost and are numbers in all of these regions except most pronounced in certain elements of eastern Asia. To explore recent trends the cost structure, such as investigator and likely future changes, McKinsey grants. In addition, some countries, held in-depth discussions with heads such as Brazil, offer R&D tax credits of clinical operations at leading pharma that can be used for clinical trials. companies.1 Below we offer insights into what is happening, what is in store, “Ticket to play” in emerging markets. and how executives can prepare their Some governments in emerging markets, organizations to capture the most value. such as China, Russia, and Vietnam, require companies to use local patients in trials before they can register products locally. Others, such as Brazil, appear Compelling advantages to offer faster approval times for drugs when trials are conducted with local Three main factors have made emerging patients. These regulatory requirements markets attractive for clinical trials in the reflect the need to understand how the past, and continue to apply today: effects of a drug vary across ethnicities and genotypes, but they are also driven Availability of patients and speed by the desire to promote local biomedical of recruitment. The large populations R&D development, as prioritized in of target patients and relatively low China’s twelfth five-year plan and concentration of clinical research in many Russia’s Pharma 2020 strategy. More emerging markets can make finding and and more general managers in global recruiting qualified patients easier and pharma companies now view local clinical quicker than in the crowded landscape trials as part of a portfolio of initiatives of developed markets. This was and alongside local manufacturing and remains the most important reason for 62

Exhibit 1: Clinical trial initiatives decline except in east Asia CAGR Number of clinical trials initiated*

˗5% 1,650 ˗4% ˗6% 1,350 728 6 11

340 270

2007 2011 2007 2011 2007 2011

US Western Europe Eastern and central Europe (France, UK, Germany) (Poland, Romania, Czech Republic)

˗7% ˗8% +6% 234 251 17 4 19 3 14 0 200

2007 2011 2007 2011 2007 2011

Latin America Middle East and Africa East Asia (Mexico, Argentina, Brazil) (Israel, South Africa, Kenya) (China, Korea, Singapore)

* Phase II and Phase III trials sponsored by industry; 2011 number annualized based on January to October count Source: Clinicaltrials.gov; McKinsey analysis product enhancement to demonstrate The numbers are even starker at the commitment to key emerging markets. country level, with Russia, India, and Argentina showing the steepest drops (Exhibit 2). The exception that proves the rule is east Asia, where rapid Recent shifts growth in the pharma markets of some countries have made them a priority Following decades of steady increases, for global companies. While the data the number of clinical trials initiated set is admittedly partial—not all trials globally took a downward turn in 2008 outside the US are reported to the FDA and has continued on this trajectory, with and included in the ClinicalTrials.gov a particularly steep drop in 2011. No doubt database—it is enough to indicate a this trend reflects the reduction in R&D reversal in direction that disproportionately pipelines resulting from megamergers, affects emerging markets. cost-saving programs, and low productivity, but it has not affected all countries equally. It is not yet clear whether these changes represent a short-term blip or a long- As Exhibit 1 shows, trial numbers have term trend. Some of the underlying declined in western Europe and the US, challenges driving the changes, such as but they have fallen even more sharply the uncertain regulatory landscape, are in eastern and central Europe, Latin institutional but have become more evident America, and the Middle East and Africa. in the last few years as multinational corporations gain experience in emerging markets. Other challenges, such as the Unlocking pharma growth 63 Cutting through the complexity: Insights into the future of clinical trials in emerging markets

Exhibit 2: Some markets suffer more than others Number of clinical trials initiated,* indexed to 2005

225

CAGR 200 2005–08 2008–11

17 5 China 20 1

15 0 India 29 ˗26

Russia 18 ˗17 12 5 Poland 12 ˗14

10 0 Brazil 13 ˗19 US 4 ˗10 75 Worldwide 0 ˗9

50 Argentina 7 ˗26

25 2005 2006 2007 2008 2009 2010 2011

* Phase II and Phase III trials sponsored by industry; 2011 number annualized based on January to October count Source: Clinicaltrials.gov; McKinsey analysis availability of qualified investigators, have Uncertain regulatory landscape. been exacerbated by the exponential Regulators in emerging markets growth of trials in the years up to sometimes change regulations with 2008. The main challenges include: little or no warning, as seen in Russia’s 2007 ban on the export of human Long and sometimes unpredictable biological samples. Such changes can timelines for approval. The clinical disrupt trials. trial approval process required in some countries—for instance, by the Scarcity of investigators trained in State Food and Drug Administration good clinical practice (GCP). The (SFDA) in China and the national health shortage of investigators with previous surveillance agency Anvisa in Brazil— clinical experience to global standards can cause unacceptable delays in means they can be a bottleneck to clinical trials with competitive timelines, scaling up trials in emerging markets. as is the case with many oncology trials. For instance, China has only 333 SFDA- approved GCP compliant sites. Lingering compliance concerns. The liability and reputational damage Eroding cost advantages. Although associated with breaches of clinical substantial differences remain, the conduct in a number of trials conducted overall cost gap between emerging in emerging markets in recent years has markets and the US and EU is highlighted the risks associated with narrowing because of economic these trials and the need for constant growth and policy changes in some diligence even stronger than that emerging markets. For example, exercised in developed markets. Brazil requires pharma companies to 64

supply lifelong medical supplies for This transition is likely to happen against patients participating in trials. In some a backdrop of considerable evolution other countries the cost of cross- over the next five years. Many challenges border drug and biosample delivery in the clinical development ecosystem has soared and is now higher than in will ease as regulatory capabilities developed markets. advance and the investigator base matures. As global contract research Collectively these factors add up to organizations (CROs) gain scale in many a significant complexity challenge emerging markets, they will be better for global pharma companies. able to support local trials. In addition, some local CROs, such as TigerMed and Fountain Medical in China and the What next? Sino-Japanese joint venture Rundo, are developing their capabilities to meet the needs of global pharma companies. Our discussions with heads of clinical operations at major global pharma companies revealed that there are We also foresee a growing emphasis substantial variations between companies on the role of clinical trials within a in the proportion of patient trials conducted portfolio of initiatives demonstrating in emerging markets and the strategies commitment to local markets. Regional adopted to pursue them. As Exhibit 3 and local trials focused on market- illustrates, there is a cadre of companies specific needs will continue to grow, that are yet to shift significant trial volumes and will include outcomes research to emerging markets, but plan to do so and investigator-initiated trials to in the next five years to catch up with help engage opinion leaders and key their peers. A consensus seems to be institutions on local medical needs. emerging that the “right” allocation of trials in emerging markets is about 40 percent.

Exhibit 3: Company portfolios shift toward emerging markets Emerging market trials as a percentage of global trials Sample: 30 companies, representing 70% of global spending on clinical trials

Current allocation (2011) Projected allocation in 5 years

35 30 29

20 18 15

0–15% 16–30% 31–40% 41%+ 0–15% 16–30% 31–40% 41%+ Unlocking pharma growth 65 Cutting through the complexity: Insights into the future of clinical trials in emerging markets

To capture the most value from trials Objectives. Clinical objectives need to in emerging markets, companies need be aligned with enterprise-wide strategic to get the following things right: objectives, not emerge out of ad hoc decisions by study teams. To develop Global footprint. To ensure an efficient a thoughtful strategy on global trial and streamlined approach, companies allocation, companies need to establish need to strike a balance between a genuine dialogue between their R&D breadth of exposure to emerging and commercial people and weigh up markets and focus in key markets. the challenges and benefits of each Most of the clinical leaders we spoke to market. The needs of individual trials will are exploring the possibility of reducing always vary substantially, but decisions the number of countries where they on where to invest and how to balance conduct trials by giving lower priority the often conflicting goals of speed, to second- and third-tier emerging quality, cost, and commercial potential markets. For instance, one company call for an independent holistic analysis has reduced its clinical trial footprint to align the organization and provide from 60 countries to just 25. strategic guidance to teams. Investment. The winning formula is likely to involve investing heavily in a few key markets in order to secure access, mitigate compliance risk, and retain . . . talent. Companies will need to build solid relationships with investigators In this rapidly evolving landscape, each and institutions, work with regulators company will need to revisit its approach to drive quality standards, and develop to clinical trials in the light of its commercial world-class local talent. This could aspirations for emerging markets, its mean investing in captive centers in overall cost requirements, and its existing the near term, as Pfizer did with its footprint. Companies need to be clear Phase II supercenters in India and about their strategic objectives and about Argentina, or pursuing a virtual model the scope for industry-level actions to help via local partners, as Merck did through unlock opportunities. For those companies its relationship with Fuwai hospital in that are able to navigate the growing Beijing, China. complexity of this landscape, the next five years continue to offer great potential. Collaborations. Companies should develop creative collaborations with their peers to tackle key local challenges such as the availability of GCP-trained investigators. These collaborations should also be used to address compliance concerns and provide a uniform view for regulators.

Note 1 Our discussions took place during McKinsey’s annual conference for heads of clinical operations in November 2011.

Jackie Hua is a consultant in McKinsey’s New Jersey office,Shail Thaker is a principal in the London office, and Matthew Wilson is a principal in the New York office. 66

Managing pharma supply networks in emerging markets Unlocking pharma growth 67 Managing pharma supply networks in emerging markets

Before they rush to secure sources of supply in emerging markets, pharma companies should take care to ensure they have the right long-term strategy, the right partners, and the right organizational resources to manage their partnerships.

Vikas Bhadoria and Jaidev Rajpal

For global pharmaceutical companies, generics company experienced a six- emerging economies are becoming month delay in active pharmaceutical increasingly important both as rapidly ingredient (API) supply from a large growing markets and as sources of supply. supplier. Another pharma company Ninety percent of the incremental growth had to suspend API supply because of in the global pharmaceuticals market over poor supplier compliance with technical the next five years is expected to come and quality standards, adding cost and from emerging economies. Moreover, delays to a critical product launch. manufacturing sources in these regions already account for 15 percent of the For many companies, however, the formulated drugs sold in the US. principal challenges in their emerging market supply networks have been Developing and managing sources linked to commercial and management of supply in emerging markets is a issues rather than technical ones. Some challenging process for any company, but it companies have found that their supply is uniquely difficult for pharma companies, arrangements don’t deliver the cost with their highly regulated, quality-focused benefits they are looking for, or that manufacturing processes and history of lack of transparency in the relationship vertically integrated production. Pharma makes it difficult to ensure that suppliers executives frequently ask us about their are complying with quality, cost, and emerging market supply strategy. How delivery targets. Others have spent time should they select the right supply partners and effort identifying and engaging many in a complex and highly fragmented market individual suppliers, only to find that environment where accurate data on these suppliers lack the organizational supplier capabilities is not always available? capabilities to work smoothly together. How do they pick the right governance and contract models? How do they manage quality, product safety, and delivery risks? How do they ensure their intellectual Avoiding the external supply trap property is appropriately protected? Having worked with the emerging market Some big companies that have made supply networks of more than a dozen substantial investments in emerging pharmaceutical companies over the past markets supply are struggling with three years, we have seen that companies exactly these issues today. One top-five can avoid many of the most common 68

issues by doing some smarter thinking up some types of manufacturing process front. Rather than taking tentative steps entirely in order to focus their attention on and adopting a piecemeal approach, they others? Do they have the organizational should think about their emerging market resources to manage multiple vendors efforts in an integrated way. In particular, and complex supply chains, or would we recommend three important departures they do better to outsource that activity from today’s common industry practices: to an organization with more capacity and experience in the region? Do they 1. Plan the end state of the network first, have an appetite to make investments considering internal capabilities as in assets in emerging markets? well as those of potential suppliers.

2. Take a more comprehensive One top-ten pharma company chose to approach to supplier qualification invest in long-term partnerships with two and selection, considering cultural principal suppliers, fulfilling any additional issues and commercial as well requirements through a few select as technical capabilities. deals with other suppliers as needed. 3. Actively manage supplier relationships, with particular emphasis on the first six to 12 months with a new supplier. Selecting the right partners

Once they understand exactly what Defining the end-state design they need from their supply partners, companies can make smarter decisions As pharma companies build their external about which suppliers to select. Although supply networks, they can opt for a a clear vision of the end state will help to number of different designs. The network focus the search on companies with the design can be based on straightforward right basic qualifications, our experience vendor relationships, sourcing either a indicates that there is no shortcut for small number of products from multiple a comprehensive and time-consuming vendors or a wider range of products supplier assessment process. Companies from one or two large vendors. It can should ensure that this is completed even be built on a collaborative model, with if it means delaying the start of supply. joint ventures, long-term partnerships, or technology transfer deals. Alternatively, For companies used to sourcing suppliers companies may choose to outsource in developed markets, the lack of an entire value chain, with external available data on their emerging market suppliers handling every stage of counterparts can be a shock. Many production from API manufacturing potential suppliers may be privately or to packaging and final distribution. family owned, making access difficult even to straightforward financial data, let The right model for any company depends alone accurate information on production on its commercial objectives and its own capabilities and quality performance. capabilities. Companies must decide To enable pharma companies to build how emerging market capabilities will be and then prune the best possible list integrated into their overall networks, for of potential suppliers, we recommend example. Are they willing to outsource they adopt a structured approach using Unlocking pharma growth 69 Managing pharma supply networks in emerging markets

Exhibit 1: A structured approach to selecting suppliers

>500 50–75 15–20 5–10

Potential Preferred suppliers partner(s)

Supplier Outside-in Detailed capability Partnership shortlist assessment assessment fit assessment ▪ Prune the list ▪ Undertake detailed ▪ Evaluate and confirm ▪ Generate list of ▪ Keep suppliers with evaluation of capabilities potential and cultural fit quality suppliers relevant capabilities (e.g., (e.g., manufacturing, as partner ▪ Use proxy criteria product market match) product development, ▪ Use criteria such for quality such as and manufacturing (e.g., supply chain, partnering, as aspirations (e.g., size and experience approvals by FDA) talent pool) using visits interest in creating in supplying ▪ Eliminate vendors with and questionnaires “win-win” partnership, regulated markets issues (e.g., financial, ▪ Begin to understand growth) and values legal, or environmental) interest in partnership (e.g., focus on quality, professional management)

proxy information—such as the share of capabilities can it determine the best overall sales to developed markets as possible allocation of resources between a proxy for quality, or overall size as a itself and that supplier, and put the right proxy for stability—combined with visits risk management and governance clauses and detailed questionnaires (Exhibit 1). in place to ensure that the arrangement works as expected. Even the best-planned As the characteristics that make or break supply relationship can go wrong, so a successful supplier relationship in the contracts must also include an ordered, long term are as likely to be commercial multiple-level exit process to allow the as technical, supplier selection should arrangement to be terminated at the be a truly cross-functional process, with product, market, or partnership level. leadership from the top. Are the senior management team happy that they can have constructive relationships with their counterparts at the supply partner? Actively managing Are the supply chain, manufacturing, supply relationships and quality functions satisfied that the partner can provide what they need Outsourcing capacity does not mean to make the relationship work? outsourcing responsibility. In practice, the management of external supply capability The outcomes of these cross-functional requires a different approach to that supplier negotiations should also inform needed if the same capacity were sourced the design of any eventual supply contract internally. Even if well-designed contracts (Exhibit 2). Only when a company has a stipulate detailed performance criteria and detailed understanding of its supplier’s reporting requirements, companies must 70

Exhibit 2: Eight partnership dimensions to cover in contract design

Structure ongoing Set scope of partnership management Exit ▪ Define conditions for exit at multiple levels such as products, Portfolio/ markets, and whole partnership market ▪ Outcomes of 8 1 defining end-state Risk management design and selecting products ▪ Define and agree on overall risk management Value framework and specifics (e.g., action in the 7 2 chain event of sale, quality issues) Partnership model Governance Structure partnership ▪ Define day-to-day management 6 3 ▪ Define communication flows, cadence of review, KPIs, penalties, change Exclusivity management process, etc. ▪ Select full, partial, or no exclusivity ▪ Define methods for resolving disputes 5 4 based on strategic and business case (e.g., performance, payments) analysis as it affects cost of goods sold and license fee Compensation Partner resources structure ▪ Choose dedicated Specify what will ▪ or shared resources and will not be ▪ Choice affects cost paid for structure ▪ Choose fixed, variable, or mixed model ▪ Base choice on product’s strategic and business potential ensure they have the right mechanism in size, complexity, and strategic importance place to monitor ongoing supplier behavior of the deal. At minimum, it could be an (such as right-time delivery and quality), account manager within the purchasing and they should be able to respond function, but such a light approach quickly to correct issues as they occur. In should be limited to the very simplest, our experience, this is the step that most non-strategic supply arrangements. Most often trips up pharma companies. What substantial ventures require a dedicated they need is a proactive approach to the cross-functional management team management of new supply contracts. based either at corporate HQ or, ideally, One top-ten pharma company seconded on the ground in emerging markets so a supply executive to its partner to that staff can build strong relationships manage the relationship early on. Another with their counterparts at the supplier and scheduled monthly supplier reviews respond quickly when things go wrong. involving senior management from both sides at the beginning of the relationship. In most cases, there will be a handover between the cross-functional team that Managing supply relationships effectively negotiated and established the new supply involves establishing rigorous procedures relationship and the one that will run it. for performance management and issue Companies must manage this process resolution as well as designing an effective with great care, particularly as it happens organization to support the external supply during the early stages of supply when network. The size and nature of this problems and disputes are common organization will naturally depend on the as company and supplier iron out their Unlocking pharma growth 71 Managing pharma supply networks in emerging markets

working relationship. It is vital that the . . . pharma company ensures it has resources in place—whether in the transition The cost, capacity, and market-access team or in the supply management benefits of supply networks in emerging organization—to take a proactive approach markets will be critically important to most to managing the situation, insisting on large pharma companies over the next thorough root-cause analysis of any decade. The performance of these global quality or delivery problems, for example, networks tomorrow will be rooted in the and calling the supplier to task for late decisions companies make at home today. or missing management information.

This is an edited version of an article first published in Pharmaceutical Manufacturing, October 2011, pp. 29–30, and reprinted with permission of Putnam Media. Vikas Bhadoria is a principal and Jaidev Rajpal is an associate principal in McKinsey’s Delhi office. 72

The outlook for China’s medical products industry Unlocking pharma growth 73 The outlook for China’s medical products industry

Robust growth prospects are creating tailwinds for China’s medical products industry. However, multinationals should prepare for turbulence ahead as market access becomes more complex, pricing pressures increase, and local competition intensifies.

Lifeng Chen, Yinuo Li, Rajesh Parekh, and Jin Wang

China’s medical products industry We used McKinsey’s proprietary is enjoying rapid growth thanks to industry database, interviews with demographic changes, increasing experts, and external reports to affordability, healthcare reform, and analyze the market’s size, product government investment. This strong segments, and competitive structure. growth looks set to continue for at least the next five years. However, multinational Size. China’s medical products market companies can expect to meet turbulence is worth about $20 billion.1 It has grown as well as tailwinds as they grapple at about 20 percent per year over with the complexity and fragmentation the past five years and is now one of of market access, increasing pricing the three biggest medical products pressures, and intensifying competition markets in the world, as well as one from local and multinational companies. of the biggest growth opportunities.

Below we explore the state of the market Product segments. For multinational today, the opportunities and challenges companies, the key segments of the it is likely to present in the next few market are capital equipment (worth years, and the issues that multinational $5 billion), personal medical equipment companies need to consider as they ($3 billion), implantables ($2 billion), in vitro develop their China strategies. diagnostics ($2 billion), and other high- value medical devices or consumables ($1 billion). The remaining third of the market ($7 billion) is made up of low-end The market today consumables and equipment such as surgical dressings, drug delivery systems, To understand the growth prospects of and standard diagnostic equipment. China’s medical products market, we need a clear view of its size and structure. Competition. Multinational companies This is not easy to obtain, for several face strong local competition in all market reasons. The market is heterogeneous segments. Overall, local companies and fragmented, with more than command 40 percent of the $13 billion 6,000 manufacturers; the channels for market addressable by multinationals—that distributing products to hospitals and is, all major segments except low-end other treatment centers are complex; consumables and equipment. However, and reliable data is in short supply. the balance of market share between 74

multinationals and locals varies greatly from urbanization is continuing: the number segment to segment. Local companies of city dwellers reached 680 million have a majority share of 60 percent in in January 2012, outnumbering the personal medical equipment, and large rural population for the first time. shares of 40 percent in capital equipment and implantables. On the other hand, Scope for market development. multinationals have a 65 percent share There is still plenty of scope for growth in in vitro diagnostics, and a 75 percent in the market, especially in complex share in other high-value medical products therapies, but even for more mature such as top-end surgical tools. therapies too. For instance, the use of coronary stent implants among urban Similarly, there are marked differences Chinese patients with acute coronary within subsegments such as orthopedic syndrome was only about 9 percent in implants. For instance, a few large 2009, lower than India, with 11 percent, multinationals—Medtronic, Johnson and much lower than Germany (44 & Johnson, Stryker, and Synthes percent), South Korea (60 percent), (acquired by Johnson & Johnson in and Switzerland (71 percent). April 2011)—collectively account for more than 70 percent of the market Increasing affordability. Along with for spinal implants, with the remaining rising disposable incomes, an expansion 30 percent split between some 50 local in medical insurance is making medical companies. By contrast, local companies devices more affordable. Government- such as Trauson and KangHui Medical sponsored insurance coverage extended currently have about 60 percent of to more than 95 percent of the population the market for trauma implants. in 2011, affecting rural as well as urban dwellers.2 The government’s focus will shift from expanding coverage to increasing insurance subsidies, with Drivers of future growth the aim of bringing out-of-pocket spending—which stood at more than In the next five years we expect China’s 60 percent in 2006 and had come down medical devices market to continue to 35 percent by 2011—below 30 percent growing at 15 to 20 percent, more than of total health expenditures by 2015. doubling in size. This growth will be driven by steady increases in patient Healthcare reforms. The mandate for flows, the scope for market development, developing a system of primary healthcare the increasing affordability of treatment, services has boosted demand for medical and the effects of healthcare reforms. products, particularly for capital equipment for lower-tier medical service providers. Growth in patient flows. Two main Central and local government spending demographic changes will affect the on refurbishing equipment in county and market for medical products. First, township hospitals and clinics has brought China’s population is aging rapidly. the total national expenditure for medical Between 2010 and 2020, the over-50 products to about $6.2 billion. Over the population will grow by about 150 million, next five years, the priorities set out in roughly the population of France and the government’s Twelfth Five-Year Plan Germany combined. Second, massive should help the sector to sustain healthy Unlocking pharma growth 75 The outlook for China’s medical products industry

Exhibit 1: Government priorities for the industry As outlined in the Twelfth Five-Year Plan for the medical products industry, announced 18 January 2012

Themes and goals Policies and measures

Scientific ▪ Obtain 200 core patents ▪ Develop 50 to 80 key items of medical equipment ▪ Establish 10 national engineering and science research centers and key laboratories ▪ Build 8 to 10 national scientific industrial bases ▪ Build 20 to 30 technology research platforms

Technological ▪ Focus on prevention studies through disease screening and early warnings in order to achieve early diagnosis and improve cure rates ▪ Develop 50 to 80 diagnosis and treatment technologies, health promotion technologies, and innovative products for rural areas

Economic ▪ Improve export value beyond 5% of the global medical products market ▪ Form 8 to10 large medical products companies with revenues exceeding 5 billion renminbi (US$800 million)

Source: industry reports; McKinsey analysis

growth, although their real impact will not overcome hurdles such as new product be seen until more specific implementation registration, distribution, and tendering. plans are put in place (Exhibit 1). Registering new products is a complex endeavor. Since the publication of the first guidelines for medical device registration The challenges ahead in 1996, the government has released about ten revisions and addenda of Most companies competing in the medical increasing stringency. For instance, local products market in China have been clinical trials are increasingly required reasonably successful for the past 5 to 10 for imported Class III products (such as years, but from now on we expect to see implantable medical devices). As a result, an increasing separation between winners although the number of registered medical and losers. The three main challenges for products has steadily risen, the number of multinationals are the complexity of market registered Class III products has remained access, mounting pressure on prices, largely unchanged for the past five years. and the growing intensity of competition. The distribution system is another Market access remains fragmented source of complexity. There are more and complex than 15,000 medical products dealers, Market access for medical products mostly small, regional, and focused on companies in China has never been a few products. To reach the market straightforward. Decision-making efficiently, multinationals have to make processes differ from place to place, even use of multiple distribution models based among hospitals within the same city. on product, geography, or both, and As multinational companies penetrate deal with hundreds of distributors either more deeply into China, they will need directly or via intermediary distributors. to invest in building capabilities to 76

The complexity of market access and containment measures will put indirect but pricing pressures are magnified by real pressure on medical product pricing. another distinctive feature of the Chinese market. Tendering for medical products Competition hots up has historically been chaotic, and in its In the past, there was a clear distinction search for a better model, the government between multinational and local companies recently moved tendering to the provincial in terms of market segments, product level. In 2011, tenders in Guangdong quality, and technical sophistication. and Henan led to price cuts of 20 to More recently, though, boundaries 30 percent. The status of the ongoing have blurred: for example, locals have Beijing tender is unclear, but the capital taken over the coronary stent market city government is said to be aiming for a created by multinationals and now similar level of price reduction on high-value command a 75 percent share (Exhibit 2). consumables such as drug-eluting stents. The midrange market—the segment between the premium market and the The fragmentation in the tendering economy market in which multinational process is echoed by China’s system and local companies respectively have of service charges and reimbursement, the majority share—is set to become a where policies are formulated and applied major battleground as companies expand at local level. This leads to considerable their product portfolios and cater to variations: for example, the usage fees broader needs among Chinese patients. for one surgical procedure range from 200 renminbi in Yantai to 30 renminbi Local companies have mostly focused in Changzhou, and are not chargeable on “easier” categories, including low- in Shenyang. The process for obtaining end capital equipment in relatively well- approval for service fees is also quite developed markets with established cumbersome, and can take more than procedures. We do not expect to see them a year. Similarly, reimbursement for spearheading major market developments medical products varies by city, and and therapy introductions in the next few the processes for obtaining it vary years, but with the support of government significantly at local level, with some policy and capital markets they are likely to hospitals operating their own policies. move into more sophisticated categories.

Pricing pressure intensifies Meanwhile, multinationals are tailoring As noted, recent changes in the tendering their approach to compete in the system have intensified pricing pressures. midrange segment. Leading companies The government is also exploring policies such as GE, Philips, and Medtronic are to control mark-ups in the channel that planning or have launched products are likely to affect the ex-manufacturer with a more attractive price-to-value price. In parallel, the government is proposition, and they are adapting their piloting measures to move away from commercial model to reach deeper into the current payment-by-item scheme to China and exploring partnerships and contain medical costs more effectively, acquisitions to expand their presence. and has set clearly defined policies with real teeth. As hospitals pay more attention to their spending, such cost- Unlocking pharma growth 77 The outlook for China’s medical products industry

Exhibit 2: Local players overtake multinationals in some segments Estimates of value share, %

Multinational 25 companies 30

45 50

Local 75 companies 70

55 50

Coronary stent Molecular Trauma Hematology analysis diagnosis

Source: industry reports; McKinsey analysis

Key questions for leaders hospital classes and city tiers, inaccurate predictions about the rate of change in To address these opportunities and medical standards (which may be faster challenges and sustain a winning strategy or slower than experience in the US or for China, multinationals need to ask Europe would suggest), or a lack of insight themselves a few key questions: into the motivations and incentives of key stakeholders involved in the procurement Which opportunities and segments and usage of medical products. should we focus on? The attractiveness of opportunities How do we navigate the complexities varies considerably by segment and of market access? product category. Aiming for broad- A well-conceived market access strategy based leadership in China in every and the ability to leverage scale matter segment in which a company participates more than ever, particularly for companies globally is likely to prove futile. Unless with multiple business units. Multinationals companies have a deep understanding need to build strategic partnerships of the dynamics of a given medical and relationships with central and category, it is easy for them to over- or provincial governments. At a local level, underestimate the likely scale of an they need to develop capabilities and opportunity and their ability to capture a involve distributors as partners to deal share of it. Misunderstandings may arise with issues such as tendering, service because of a failure to recognize the fees and pricing, and reimbursement. differences in rates of adoption across 78

How can we accelerate growth in development cycles poorly suited to the premium segment? producing midrange products that are fit for For most multinationals the premium China. Their first priority is to work out how segment will continue to be the most to go from ideas to marketable products relevant opportunity. Though its market with the cost, technical features, and share may decline over time, it will continue development timeline to enable effective to grow in absolute volume and value competition against local players. They across most medical product categories, will also need to design the right business so multinationals will need to invest in model for commercializing their midrange gaining share from their peers. Since products, and should consider setting the market is underpenetrated in many up independent sales and distribution categories, leading companies need channels and a low-cost service model to to take steps to accelerate the growth reach this highly dispersed customer base. of the premium segment overall by, for instance, increasing the capacity of trained What organizational capabilities physicians for implants, raising patients’ do we need? awareness of the benefits of particular Companies in the medical products medical procedures, and helping to create sector, as in other fast-growing industries referral flows between classes of hospitals. in China, face a challenge in developing They should resist the temptation to milk the capabilities they need to keep pace their rapidly growing China business by with a highly dynamic market environment. focusing excessively on near-term share They are often so busy scaling up their gain, and instead continue to invest organization that they devote insufficient to secure sustained market growth. attention to capability development. In particular, they should concentrate on How do we compete effectively in salesforce effectiveness, distributor and the midrange market? channel management, market access, Competing in the midrange market is a and the development of therapies. critical part of China strategy for many multinationals, though the experience of early movers suggests this will be no easy task. Many multinationals have long Unlocking pharma growth 79 The outlook for China’s medical products industry

. . .

In the next few years, China is set to become the world’s second-largest market for medical products. It offers the biggest growth opportunities across categories from large imaging equipment to cardiac stents and surgical devices. However, as competition from both multinational and local competitors intensifies, companies that aspire to lead in China need to ensure they have strategies tailored to the product categories and market segments they compete in, and build the organizational capabilities they need to execute these strategies effectively. Only then will the strong tailwinds in this dynamic and growing market take them where they want to go.

Notes 1 The market sizes quoted in this article have been calculated using ex-manufacturer prices and thus do not reflect the channel markup that results in significantly higher purchase prices for hospitals and patients. 2 Official government statistics put coverage at 95 percent of the population, but the double-counting of people with multiple types of public health insurance means that the actual figure is likely to be lower.

This is an edited version of an article first published in China Healthcare: Entering uncharted waters, McKinsey & Company, 2012. Lifeng Chen is a consultant, Rajesh Parekh is a director, and Jin Wang is a principal in McKinsey’s Shanghai office;Yinuo Li is a principal in the Beijing office. 80

Winning in Russia pharma: The next growth horizon Unlocking pharma growths 81 Winning in Russia pharma: The next growth horizon

Over the next ten years Russian pharma will more than double in size. Companies seeking to capture a share of this growth must prepare to face the challenges of increasing pharma regulation and intensifying competition.

Jan Ascher, Sean O’Connell, Shail Thaker, and Tim Züwerink

Russian pharma offers substantial Growth is likely to be broad based across opportunities over the next ten years all channels. State-funded channels will as the value of the market grows from grow fastest, with their share of the market $15 billion to $41 billion by 2020. increasing from 36 to 42 percent by 2020. However, the environment will also A key driver of increased government become much more challenging as the spending will be the introduction in the state regulates market access, pricing, next three to five years of a new state- and compliance more extensively through funded national drug insurance (NDI) Pharma 2020, and competitive pressure program for the general population. intensifies from both multinationals and local pharma companies. Below Out-of-pocket (OOP) segments could we analyze the drivers of growth, the also grow quickly, driven by the rapid new challenges that companies will expansion of the middle class: the face, and what it will take to win in this proportion of households with annual increasingly complex environment. incomes above $10,000 is expected to rise from 35 percent to roughly 50 percent by 2015 (compare this to Brazil, for example, with 30 percent by 2015). A major growth market... Brand awareness and the preference for high-quality western drugs will remain Almost non-existent a decade ago, critical as Russian consumers continue the Russian pharma market has to trade up to more expensive branded grown rapidly to its current value of generics or originals as their incomes rise. $14.8 billion, attracting many multinational pharma companies. Fundamental growth drivers continue to be strong, but doing business remains a challenge ... but the easy days are over because of high levels of bureaucracy and perceived corruption: the country However, capturing growth opportunities is ranked 143rd in Transparency will require substantially sharper strategy International’s 2011 corruption and greater management skills than in perceptions index. The market is forecast the past. Ramped-up state support and to grow at an annual rate of 11 percent finance for local producers (especially to $41 billion by 2020 (Exhibit 1), making in high-tech areas such as biologics), Russia one of the top three growth intensifying regulation, and steadily markets in the emerging world. increasing competition from multinational 82

Exhibit 1: Market history and outlook Government-financed segments Evolution of market size by segment Forthcoming national US$ billions at wholesaler prices drug insurance (NDI)

+9% p.a. ~41 +12% p.a. 3 7N* 4 DLO/ONLS† Introduction DLO reform; of co-pay 4–5 NDI introduction ~26 6 Hospital Introduction of 7N* 2 of DLO 3 2–3 15 4 13 Retail OTC 1 2 2 7 6 5 11 Retail Rx 3 1 1 8 1 2 5 1 1 2 Early 2000 2005 2010 2015‡ 2020‡ (post crisis) (after DLO (after DLO reform introduced) and 7N introduced)

State spend as percent of 21 36 36 ~42 ~42 market

* “Seven nosologies”: rare and expensive-to-treat diseases (multiple sclerosis, Gaucher’s disease, haemophilia, hypophisial nanism, mucoviscidosis, myeloid leukemia, transplantation) † A state reimbursement program ‡ Projected values Source: Thomson Reuters Web of Science; McKinsey analysis

corporations (MNCs) will make Russia has again increased in complexity. The a more challenging market to win in. government is also making a strong push to improve transparency and ethics The ministry of industry and trade’s in the market, with new regulations for development strategy, known as Pharma fairer and more effective public tenders 2020, signaled the government’s intention and a proposed law for imposing to increase local presence substantially constraints on promotional activity that in a market dominated by foreign MNCs, are much more in line with compliance with their 94 percent share of value and requirements in the west, such as no 59 percent share of volume in 2009. gifts, limited travel for education, and Pharma 2020 sets clear though often very restrictions on the hours when company aspirational goals for massive development representatives may call on physicians. in local manufacturing and R&D by 2020. The strategy stipulates that MNCs must As regulation has increased, so has make serious commitments to localization the level of competition. Over the past in exchange for stable market access. five years all major multinationals have formulated ambitious growth strategies Moreover, the degree and pace of and invested heavily in their field forces. regulatory changes are increasing: prices What was once a “penetration game” has for drugs deemed essential by the state turned into a fierce “share of voice battle” are now regulated and the process in the most attractive territories. On top for obtaining marketing authorizations of this, Pharma 2020 has fueled the rise Unlocking pharma growth 83 Winning in Russia pharma: The next growth horizon

of Russian pharma companies such as Where the growth is Pharmstandard and Binnopharm that coming from compete aggressively for top spots in the most attractive state-funded programs. The The growth in the pharma market is net effect of these developments is that driven by strong fundamentals. Russia succeeding in the Russian pharma market is already the eleventh largest economy will become much more challenging. in the world, and its real GDP is forecast to grow strongly, making it one of the First, MNCs face a series of tough strategic world’s five fastest-growing economies. choices and will need to reassess their desired risk profile and channel mix. Out-of-pocket segments} Future market leaders must win not only The fast-growing middle class is likely in out-of-pocket segments but also in to fuel the next stage of growth in state-funded segments, which pose the OOP segment, with estimated greater risks given the need for substantial growth of 9 percent per year to 2015. investments in access (through local Brand awareness and a preference manufacturing and R&D) and exhibit for high-quality western drugs should higher sales volatility than the relatively remain a major source of value growth stable out-of-pocket segments. Second, at least for the medium term. MNCs will need to upgrade several of their functions, including government affairs The OOP segment offers many examples management and market access, field of how large markets can be built on force effectiveness, and human resources. strong branding tailored to local needs Third, general managers in Russia will see and mindsets. Exhibit 2 features six their roles become much broader and brands that have achieved impressive the challenges they face become much sales in this segment. Linex is a probiotic more complex. On top of their traditional that Sandoz-Lek has successfully sales and marketing mandates, they will positioned as the leading treatment for also need to manage local manufacturing disbacteriosis (imbalance of bacteria in and R&D, act as chief ambassadors to the gut). Occilococcinum, the biggest government authorities, and get used success story in the Russian OTC to closer scrutiny from headquarters. market in recent years, is a homeopathic preparation of sugar-coated micro-balls sold in small plastic cylinders. Arbidol is 84

Exhibit 2: Some successful OOP brands Exhibit 2: Some successful OOP brands Exhibit 2: Some successful OOP brands Sales, US$ million* Sales, Brand (manufacturer) Rank 2005 2010 Retail price† Therapy US$ million* Sales, † Brand (manufacturer) Rank US$2005 million2010* Retail price Therapy Arbidol (Pharmstandard) 1 22.7 126.5 $6.70 Influenza Brand (manufacturer) Rank 2005 2010 Retail price† Therapy Arbidol (Pharmstandard) 1 22.7 126.5 $6.70 Influenza OTC Linex (Sandoz-Lek) 3 16.1 55.2 $10.30 Disbacteriosa Arbidol (Pharmstandard) 1 22.7 126.5 $6.70 Influenza OTC Linex (Sandoz-Lek) 3 16.1 55.2 $10.30 Disbacteriosa Ocillococcinum (Boiron) 5 3.3 47.3 $10.90 Influenza OTC Linex (Sandoz-Lek) 3 16.1 55.2 $10.30 Disbacteriosa Ocillococcinum (Boiron) 5 3.3 47.3 $10.90 Influenza

Ocillococcinum (Boiron) 5 3.3 47.3 $10.90 Influenza Actovegin (Nycomed) 2 23.3 66.3 $30.80 Memory enhancement

Actovegin (Nycomed) 2 23.3 66.3 $30.80 Memory enhancement Rx Detralex (Servier) 6 11.8 39.8 $25.90 Varicose vein therapy Actovegin (Nycomed) 2 23.3 66.3 $30.80 Memory enhancement Rx Detralex (Servier) 6 11.8 39.8 $25.90 Varicose vein therapy Heptral (Abbott) 9 8.4 34.6 $61.60 Hepatoprotection Rx Detralex (Servier) 6 11.8 39.8 $25.90 Varicose vein therapy Heptral (Abbott) 9 8.4 34.6 $61.60 Hepatoprotection

Heptral (Abbott) 9 8.4 34.6 $61.60 Hepatoprotection

* At ex-manufacturer prices † Price per pack (most common dosage and pack size)

*Source: At ex-manufacturer Pharmexpert prices † Price per pack (most common dosage and pack size) Source:* At ex-manufacturer Pharmexpert prices † Price per pack (most common dosage and pack size) anSource: antiviral Pharmexpert sold only in Russia, where it is developed-country diseases such as the best-selling OOP drug on the market. cardiovascular diseases and cancer, coupled with diseases typical of developing Actovegin, Detralex, and Heptral show how countries such as tuberculosis and prescription drugs with strong branding HIV, is creating a healthcare crisis. In can develop into bestsellers in Russia. For addition, hazardous lifestyles and a example, Heptral is an amino acid complex culture of indifference lead to high levels (SAMe) sold as a hepatoprotector at more of alcohol and tobacco abuse, the than $60 per pack. cause of almost 40 percent of deaths.

Future pockets of growth in OOP segments As a consequence, life expectancy in are likely to be found in the continuing Russia stands at 68 years overall—only growth in high-acuity indications, the slightly above Bangladesh, at 65 years— increasing use of prophylactic treatments, and just 62 years for men. Unsurprisingly, and the penetration of lower-income the government has made health care regions. In addition, carefully selected one of its principal policy themes. The lower-price branded generics or second- ministry of health’s Healthcare 2020 brand portfolios should open up attractive development strategy sets out ambitious growth opportunities in lower-income improvement plan and targets, such as tier III regions such as Kaluga and a life expectancy of 75 years. Matching remote regions such as Chukotka. words with action, the government is boosting funding and seeks to double State-funded segments its healthcare budget to $166 billion by Despite the increase in OOP spending 2015. This would increase government on drugs, the very high incidence of Unlocking pharma growth 85 Winning in Russia pharma: The next growth horizon

spending on health care from today’s ten to 12 regions that will be instrumental 4.3 percent of GDP to roughly 7 percent. in defining the characteristics of the NDI.1 Pharma companies should follow these As expected since 2007, the government pilots closely over the next few years. aspires to improve access to medicine through the introduction of a new Given the attractive growth outlook for national drug insurance (NDI) scheme both OOP and state-funded channels, for the general public. At present drug winning companies will need to maintain reimbursement is limited, with only well-balanced portfolios. In the prescription 10 percent of the population covered by drug market, three different models have federal and regional programs (Exhibit 3). been successful: a branded play in off- patent products with focus on the OOP The shape and mechanics of the NDI will segment (as pursued by Servier, Berlin- have important implications for pharma Chemie, and Nycomed); growth through companies. Key factors will include the acquisitions (Novartis/Lek, Sanofi/Zentiva, intensity of OOP cannibalization and Teva/Ratiopharm, and Abbott/Solvay); the degree to which patients will chose and growth through leading positions in to co-pay for more expensive branded state-funded channels (Roche and J&J). drugs (co-payments are likely to fall under However, given the rising importance of state influence). One important unknown the state, companies with strong track is the extent to which the government records in state-funded channels are likely will succeed in driving a shift toward to have an advantage, while purely OOP- unbranded generics through the NDI. focused players need to rapidly build skills Starting in 2012, it is launching pilots in at managing government relationships.

Exhibit 3: Drug reimbursement coverage Population covered, 2010 Millions (share of population, percent) ~127 (90%)

▪ Current reimbursement system underdeveloped ▪ New national drug insurance (NDI) expected to fill the space ~6 ~9 ~0.1 (4%) (6%) (0.1%)

7N ONLS* Regional programs† Uncovered‡

Total funding 816 1,142 831 US$ million

Funding per capita 10,885 208 92 US$

* All diseases for selected groups (e.g., veterans, Chernobyl accident victims, children under 3 years, disabled) † Selected socially important diseases (e.g., diabetes, cancer) ‡ Currently out-of-pocket retail market (Rx and OTC); in 2010 approximately US$8.1 billion at ex-manufacturer prices (US$57 per capita) Source: 7N auction result documentation; Ministry of Health and Social Development; RosStat; market experts; press reports 86

Among the current top 20 companies, be required, depending on the degree of only Roche and AstraZeneca are competitive intensity for each molecule. successful without an OTC portfolio. As a consequence, all of the top 15 players except two—Roche and MSD—have announced that they intend to create local How the game is changing manufacturing footprints in the near future, or expand them. Local manufacturing Pharma companies planning for growth has effectively become a must-have for in Russia must also take account pharma companies aspiring to occupy of major changes in the market as leadership positions, and an expensive Pharma 2020 is implemented and one too: investments typically range from competition becomes fiercer. $100 million to $150 million. The state is also providing clear guidance on its Pharma 2020 priorities, which are not always well aligned The government’s vision for the pharma with MNCs’ portfolios or strategies. For industry makes local manufacturing example, the ministry of industry and trade increasingly a prerequisite for access has published a list of 57 strategically to state funds (Exhibit 4). Regional important drugs that it wants produced governments and officials receive strong in Russia until 2015.2 A strongly worded guidance about minimum quotas of locally statement from the prime minister on the manufactured drugs in state tenders government’s website warns that “There (currently about 30 percent), although will be restrictions for [global drugmakers] the precise definition of “local” remains in the Russian market if they do not launch open. Market experts assume that local production and transfer technology.” primary packaging is sufficient until about 2014, after which local formulation may

Exhibit 4: Pharma 2020 objectives

Phase 1: 2009–12 Phase 2: 2013–17 Phase 3: 2018–20

Localize drugs development Replace foreign pharma Develop pharma export industry and production companies and imports ▪ Develop and produce innovative ▪ Support competitiveness of local ▪ Push full-cycle production drugs with 50% local production pharma companies ▪ Improve effectiveness of state – Substitute domestic for ▪ Promote education and procurement foreign drugs innovation investments – Substantial exports ▪ Drive modern domestic generics ▪ Modernize pharmacopoeia – Pure generics market with ▪ License domestic generics of fewer branded generics ▪ Spread good manufacturing exclusive innovative drugs practice ▪ Ensure adequate domestic ▪ Reduce corruption supply of strategic drugs

Source: Russia Ministry of Trade and Finance, “Strategy for development of pharmaceutical sector until 2020” (Pharma 2020) Unlocking pharma growth 87 Winning in Russia pharma: The next growth horizon

As this suggests, local R&D is the next to take effect in recent months as prices horizon. The link between R&D investment come under detailed review as part of and access benefits is less clearly recurrent re-registrations of all drugs. In defined than that for local manufacturing, time it could have a major impact given but local R&D represents a critical that prices in Russia have been higher opportunity to demonstrate commitment than in Europe and other CIS countries. to Russia and thus to ensure continuing access to state-funded channels. It is Changes to the registration process hardly surprising, then, that the early Some of the changes that the government R&D movers are successful players in has introduced in the registration process government channels. For example, have increased its complexity and given Roche has announced the development Russian pharma companies certain of 10 HIV compounds in partnership with advantages over MNCs. A requirement ChemRar, and GSK the development of a for local trials has been introduced, but vaccine in partnership with Binnopharm. is waived if at least two investigational Clearly, local R&D is an area that still sites in Russia were included in a global allows MNCs to differentiate themselves development program. MNCs must run by moving quickly and decisively and local clinical safety and bioequivalence establishing close relationships with the and therapeutic equivalence studies. best scientists and the most influential stakeholders close to government officials. Draft law on ethics The government has also drafted a law New price regulation to improve ethics in health care. Although As well as implementing Pharma 2020, market experts initially questioned whether the government is also tightening it would ever be passed, an emerging existing regulation. Since April 2010, new consensus suggests it will become maximum price regulations apply to all effective during 2012. One of the biggest drugs included on the essential drug list changes will be a ban on representatives (EDL) of drugs eligible for state purchases. visiting doctors during the hours when they These regulations differentiate between see patients. Pharma companies will need imported and locally manufactured to find ways of interacting with physicians drugs, and between those new to the outside the workplace or outside patient market and available previously. hours. Lead physicians and hospital and polyclinic managers will become more Among the important implications for important, since they will be responsible for pharma companies are that manufacturers monitoring compliance with the new law. will bear inflation and currency devaluation risks because prices have Increased competitive intensity to be registered in rubles. In 2011, only Especially since the introduction of locally managed drugs were eligible for targeted drug coverage through the ONLS, compensation for inflation. With inflation a state reimbursement program, in 2004, running at around 8 percent, the impact many MNCs have treated Russia as a on profitability could be significant. priority market. Making large investments in field forces, combined with building a The new price regulation dictates that few strong brands, was a winning strategy. drug prices must be referenced to a The result has been a raging battle for basket of 21 countries including the share of voice that has led to intense country of origin. This rule has started market competition even as the prospect 88

of restrictions on promotional activity Priorities for MNCs raises questions as to the profitability of medical representatives in the future. To capture some of the growth in the Russian market and navigate the Moreover, local Russian players are challenges, pharma companies must gaining substantial share. Pharmstandard, make tough strategic choices, upgrade for example, moved from ninth place key functions, and find new ways of in 2005 to third in 2010, largely thanks managing complexity. to the rapid expansion of its OTC sales force. Russian companies are also Make tough strategic choices pushing into reimbursement channels Creating a local manufacturing footprint and more innovative products. For entails either making substantial example, in 7N, a national reimbursement investments or entrusting carefully built program covering medicines for seven brands to a third (often Russian) party diseases that are expensive to treat, for packaging or even formulation. Pharmstandard introduced an analogue Products funded from state channels of Novo Nordisk’s NovoSeven and took can be notoriously difficult to make, as 70 percent of its business in 2010. with high-potency active pharmaceutical Pharmstandard has also set up a joint ingredients and biologics. Venturing into venture, Generium, to produce some of bricks and mortar exposes MNCs to its largest biologics, such as alteplase, by the risks involved in undertaking real- 2015. Other Russian players are active estate projects in an emerging market. as well: Biocad has launched a biosimilar In addition, it takes a great deal of of Bayer’s Betaferon, and Pharm-Sintez commitment from senior management is launching a generic of Janssen-Cilag’s to motivate technical operations or Velcade, the bestselling drug in 7N. R&D to consider Russia seriously as an addition to their global networks. Unlocking pharma growth 89 Winning in Russia pharma: The next growth horizon

Against this backdrop, pharma companies given the race for share of voice and need to redefine their risk appetite notoriously high staff turnover rates. and possibly adjust their ambitions: is Pharma companies often try to retain there really a solid business case to rep talent by offering early promotions support capital investments of $100 to first-line sales manager positions, to $150 million? Companies that but this leads to a lack of sufficiently already have critical mass will have experienced and trained leaders in the an advantage over smaller players. field and is the first issue that companies need to address. Disease and product Further investments in share of voice knowledge needs to be continuously need to be analyzed rigorously. Pharma upgraded, as do reps’ sales skills. companies should pressure-test Segmentation and targeting remain a their deployment models and their challenge in this huge and diverse country investments in the last increment of in which little physician data is available. 20 to 30 percent of reps and ask: is the ROI really attractive enough or are there Innovating the marketing mix will alternative channels (call centers, the become more important given the likely internet, part-time reps) to reach lower- limitations on access to physicians potential customers in remote places? and the need for more cost-effective channels to reach remote customers. Reaching critical mass and utilizing sales For example, companies could start assets effectively will become even more testing call centers and using web important as drivers of profitability. In- and broadcasts as part of local meetings. out-licensing, second brands, partnerships, The government’s push for ethics in and acquisitions should be on the strategic health care and price regulation also agenda for all pharma companies that demands a greater focus on compliance are struggling to fill open call slots in their monitoring and a strong pricing function. sales lines, or that cover only a fraction of the market with their current portfolios. Manage complexity Pharma companies operating in Russia Upgrade key functions will see substantial growth in the breadth While a broad portfolio of strong brands of their roles and the complexity of and a competitive field force will remain the challenges they face. As well as key assets, real differentiation will focusing on sales and marketing, it is probably come from local embedding likely that they will also need to manage and distinctive stakeholder management. local manufacturing and R&D, act as an The market access and government ambassador to government authorities, affairs function will need to position the and cope with greater attention company as a preferred partner for the from headquarters. Meanwhile, their government in pursuing its healthcare organizations will be growing, and more policy goals. Pharma companies need to business issues—such as regional market design a well-orchestrated set of market- access—will require a cross-functional access initiatives and an integrated approach. Companies will therefore need corporate communications campaign. to build more organizational capacity, perhaps by introducing general managers Field force effectiveness is becoming an for larger regions, creating a COO role, even more important driver of profitability, or reorganizing local management. 90

In addition, central functions must Staff turnover is high and poaching contribute strong hands-on support. widespread. Losing key talent because of In particular, local manufacturing and a poor life/work balance is highly disruptive R&D cannot be driven by country and stops companies delivering on key organizations alone and need senior strategic initiatives. patronage at board level. Russia country organizations need strong capability- building support not just in medical areas but in field force effectiveness, innovative . . . marketing, and other functions. Visits from a delegation are not helpful enough; Russia remains one of the most attractive what’s needed is support from full-time growth markets for multinational pharma secondments of experienced experts. companies. However, regulatory changes and increasing competitive intensity are Finally, companies need to define a multi- making it harder for them to succeed. To year strategic agenda that is carefully build sustainable growth platforms, they tuned to their capabilities and bandwidth. need to take steps now to rethink their strategies and invest in building capabilities. The number of challenges to address is huge, so they must choose priorities carefully so as not to overburden their organizations. Experienced talent is rare in a market that is only 10 years old.

Notes 1 The pilot regions are likely to include Moscow, the Moscow region, St Petersburg, and Bashkortostan. 2 Decree 1141-p, 6 July 2010.

Jan Ascher is a principal in McKinsey’s Geneva office,Sean O’Connell is a principal in the Moscow office, Shail Thaker is a principal in the London office, andTim Züwerink is a consultant in the Frankfurt office. Unlocking pharma growth 91 Winning in Russia pharma: The next growth horizon 92

Helping Indian pharma reach its full potential Unlocking pharma growth 93 Helping Indian pharma reach its full potential

What will it take for India to join the world’s leading pharma markets? As a period of flux brings proliferating opportunities, companies should quickly adapt their sales and marketing models, refocus their commercial investments, and collaborate within and beyond the industry.

Vikas Bhadoria, Ankur Bhajanka, Kaustubh Chakraborty, and Palash Mitra

The Indian pharmaceutical market past few years, it is now facing a period presents a unique set of opportunities and of flux. The broader healthcare sector challenges that arise from its distinctive is witnessing rising public spending, nature. Branded generics account for a increasing patient awareness, expanding huge share—more than 80 percent—of insurance coverage, and the emergence the retail market. Local players dominate of new hospital formats. Within the thanks to their early investments and pharmaceutical industry, the leader board capabilities in formulation development. has changed out of all recognition in And intense competition has kept prices the past few years, with new entrants low, which explains why India ranks in the occupying four of the top ten places, top three markets in the world in terms of including the number one slot. In addition, volume yet only in the top fifteen in value. sources of growth are changing: we expect that new products will no longer Most of all, though, India’s story is one drive growth, and existing large brands of growth, with an annual growth rate will need to make up the gap. Meanwhile, of 13 to 14 percent over the past five the distinction between local players and years—a sharp rise from the 9 percent multinational companies has become CAGR recorded between 2000 and 2005. increasingly blurred, to the point that they Our analysis shows that the market is will all face the same set of imperatives in likely to grow to $55 billion by 2020, the next few years, as we explain below. driven by a steady increase in affordability and a step-change in market access. This growth would make the Indian market comparable to all developed The drivers of growth markets except the US, Japan, and China. The analysis also indicates that As the market becomes more diverse, India should achieve an impressive level the drivers of growth are proliferating of penetration that makes it a close and becoming more nuanced. They second to the US market in volume fall into four main categories: terms. This growth in value and volume should be accompanied by an upgrading Epidemiological factors. Population of therapy and treatment levels. growth of around 1.3 percent per year and a steady rise in the prevalence Despite the Indian pharma market’s of disease (with an increase of 25 to enormous gains in confidence during the 40 percent in diabetes and cancer, 94

for instance) are expected to Exhibit 1: Health insurance expands Millions of people covered increase the patient pool by Penetration: nearly 20 percent by 2020. 45%

655 Growth Affordability. As incomes 14 0 Percent continue to grow and insurance Penetration: 2 26% coverage increases, drugs 240 will become more affordable. 300 22 State BPL Insurance* With real GDP growing at † 110 RSBY 12 0 8 nearly 8 percent over the next ESIC‡ 80 Private insurance 14 55 35 13 0 decade, income levels should Government employee 20 25 3 insurance rise steadily, elevating 73 million 2010 2020 households into the middle * Andhra Pradesh’s Aarogyasri, Tamil Nadu’s Kalaignar, Karnataka’s Yeshasvini and upper income segments.1 † Rashtriya Swasthya Bima Yojana ‡ Employees' State Insurance Corporation As health insurance spreads in Source: Employee State Insurance Corporation; Rashtriya Swasthya Bima Yojana; McKinsey analysis parallel, more than 650 million people should enjoy coverage by 2020 (Exhibit 1). Private Exhibit 2: Government spending rises insurance coverage is expected Total healthcare spend by central and state government US$ billion to grow by 14 percent a year, 11.7 +18% but the largest impact is likely CAGR to come from government- 9.2 sponsored programs such 7.7 6.7 8.4 as the national Rashtriya 6.4 5.6 Swasthya Bima Yojana (RSBY) State 4.9 program and state-specific 2.8 3.3 programs such as Aarogyasri Central 1. 8 2.1 in Andhra Pradesh and 2005–06 2006–07 2007–08 2008–09* Kalaignar in Tamil Nadu. Share of GDP 0.84 0.84 0.88 0.93 Percent * Actual spend for central government; budgetary estimates for state government, Accessibility. The growth adjusted for historical performance of budget versus actual Source: Ministry of Health & Family Welfare; Central Bureau of Health Intelligence; in medical infrastructure, Reserve Bank of India State Finances; McKinsey analysis increased government spending on health care, new business models for tier II towns and rural areas, and launches government’s public health spending. This, of patented products should make combined with new business models such drugs accessible to more people. More as Sanofi’s Prayas and Novartis’s Arogyra than $200 billion is likely to be invested Parivar, should translate into greater in creating and upgrading medical access in tier II and rural markets and infrastructure, with more than 160,000 reduce the wide gap in per capita spending hospital beds added every year, a total between these markets and urban areas.2 increase of 1.9 million by 2020. The annual Finally, although relatively few patented growth of 18 percent in government products have been launched since spending on healthcare since 2005–2006 2005, the recent successes of Januvia (Exhibit 2) should create a $4.5 billion and Galvus indicate that they could drive segment of pharma products within the tremendous growth in a few disease areas. Unlocking pharma growth 95 Helping Indian pharma reach its full potential

Exhibit 3: Three growth scenarios A $55 billion Projected size of Indian pharma market in 2020 market by 2020 US$ billion

17% CAGR Thanks to these drivers, 70 Indian pharma is expected 14.5% CAGR to grow more than fourfold, 55 from $12.6 billion in 2009 10% CAGR to $55 billion by 2020. With 35 more optimistic assumptions, it could reach $70 billion; 12 . 6 under a pessimistic scenario, the value would fall to $35 billion (Exhibit 3). 2009 Pessimistic case Base case Optimistic case

The base-case scenario Our base case relies on strong growth in GDP, insurance coverage, and government Acceptability. Modern medicines and private sector healthcare spending, and treatments should become more as outlined above. Under the base-case prevalent as a result of therapy-shaping scenario, the government increases its investments by pharma companies, a healthcare spending to 1.5 percent of growing acceptance of biologics and GDP by 2020, while pharma companies vaccines among patients and physicians, step up their investments in consumer and patients’ increasing propensity to health care, biologics, and vaccines self-medicate. Companies are likely and increase awareness and treatment, to invest in physician education and boosting the patient pool by 15 percent. patient awareness campaigns to improve At least 25 percent of patented products diagnosis, treatment, and compliance launched worldwide are launched rates, especially for chronic therapies such in India in this scenario, resulting in as cardiovascular and neuropsychiatry. seven to nine launches per year. Vaccines are expected to grow by more than 20 percent per year, while biologics The contribution made by different growth should become a $3 billion segment drivers undergoes a shift in this scenario. by 2020. As self-medication becomes Our analysis in 2007 showed that between more widespread, consumer healthcare 2005 and 2015, rising affordability should could grow at more than 14 percent a account for 60 percent of the incremental year if companies are able to make larger $14 billion market opportunity,3 but over-the-counter brands easily available between 2009 and 2020, accessibility and differentiate their products through should become equally important. Together deeper connections with patients. these two factors should account for some 70 percent of the incremental $42 billion market opportunity, while increased acceptability should account for another 25 percent (Exhibit 4). 96

The pessimistic scenario Exhibit 4: Affordability and accessibility drive growth Under the pessimistic scenario, Contribution of drivers to incremental growth Percent, estimated price controls, economic 100% = US$14 billion US$42 billion slowdowns, and other external Acceptability 5 shocks would limit growth. Accessibility 20 25 Pricing controls could dampen investments and wipe out a $10 billion market opportunity 35 by 2020. Add to that an Affordability 60 economic slowdown and another $10 billion could be 35 Epidemiological lost. Growth would slow to 15 10 percent per year, resulting factors 5 2005–15 2009–20 in a $35 billion market in 2020. incremental growth incremental growth (base case) The optimistic scenario On the other hand, external Traditional segments expand conditions and purposeful industry and fragment actions could produce a more favorable scenario in which GDP grows at around Changes in the relative importance of mass 8.3 percent, insurance coverage is and specialty therapies, metro and rural extended to the entire BPL (below the markets, and hospital and retail channels poverty line) population, providers invest are likely to have major implications for in an additional 500,000 beds beyond the pharma companies in the next few years. base level, and government health care spending reaches 2 percent of GDP by Mass therapies remain important as 2020. Spurred by greater affordability and specialty therapies increase share infrastructure, industry players would focus Mass therapies are likely to grow at a few even more sharply on new opportunities percentage points below the market rate, such as biologics, vaccines, and consumer though they should still account for half of health care, as well as on driving diagnosis the market in 2020. They offer two distinct and treatment rates, producing an opportunities. The first is acute indications, additional 20 percent increase in the where patients’ greater awareness and patient pool. In the optimistic scenario, willingness to self-medicate is driving them the market grows at 17 percent toward OTC (over the counter) and OTX CAGR to reach $70 billion in 2020. (initiated or supported by prescription but largely self-medicated) routes, as illustrated At this scale, India’s pharma market would by the case of the proton-pump inhibitor be comparable to Japan’s today. More (PPI) category. The second segment than half of the $15 billion gap between comprises older therapies in chronic the base case and the optimistic scenario indications such as diabetes, hypertension, would be filled by additional growth in and epilepsy. Growth in this segment is the five “non-traditional” opportunities we being driven by percolation down the describe below; the remaining $7 billion physician pyramid to general practitioners could come mainly from market-shaping (GPs) and consulting physicians (CPs). activities to drive diagnosis and treatment. Unlocking pharma growth 97 Helping Indian pharma reach its full potential

Specialty therapies for chronic and Metro and tier I markets drive growth niche acute conditions have grown at while rural markets increase share well above the market rate and should Metro and tier I markets account for command half of the market by 2020. about 30 percent of the market each. They We see three developments in this area: should grow in line with the overall market the upgrading of therapies, sometimes to produce a market worth $33 billion by in response to the launch of patented 2020. Growth is likely to be driven by three products, as with the dramatic rise of the factors. First, urbanization should see DPP IV category in diabetes; growing 250 million people moving to towns and awareness and treatment of nuanced cities over the next two decades. Second, medical indications, as in the case of medical infrastructure should expand, metabolic disorders; and the firming with corporate hospital chains extending up of treatment protocols, particularly their networks in the top 70 cities and for critical and life-saving treatments. innovative formats plugging gaps in healthcare delivery in tier I markets. Third, Super-specialty therapies are niche organized initiatives could sharply push areas such as oncology, urology, and up compliance, which is comparable to nephrology where fewer than 20 percent that in rural areas even though diagnosis of prescriptions come from generalists. and treatment levels are higher. They represent only a small segment, but the momentum they have acquired from Rural markets are likely to grow by a growing at nearly twice the market rate is few percentage points above the overall likely to increase their value to more than market as a result of income growth and $5 billion by 2020. We expect growth to be greater penetration, and their share should driven by private investments in tertiary and rise from 20 to 25 percent by 2020. By quaternary care capacity in the metros, contrast, tier II markets are likely to get the introduction of new molecular entities marginally squeezed, though they will stay (NMEs), and increases in private insurance relevant.4 Increased affordability is likely coverage enhancing the affordability of to be the single biggest driver of growth. high-cost therapies such as biologics. More than 28 million households—nearly 20 percent of all rural households—should These trends have two major implications climb out of the deprived income class for pharma companies. First, they can’t in the next decade. Health coverage confine themselves to increasing their through RSBY should enable rural share in existing markets but must patients to be treated for serious illnesses actively shape market evolution if they and with more expensive procedures. want to maintain a leadership position. These markets could grow further if the In mass therapies, for instance, they need shortage of medical staff is addressed. to move down the physician pyramid to drive growth in chronic segments, a Players will need to adapt their business step that will involve tradeoffs between models in response to these changes: greater scale and near-term dips in for instance, in urban areas, they need profitability. Second, companies need to build customized models to serve to develop new capabilities such as the hospital segment and undertake collaborating with payors and providers targeted programs to drive compliance, to reduce the total cost of treatment whereas in rural areas, they need to create in super-specialty therapies. completely new business models, including 98

partnerships to increase Exhibit 5: Emerging opportunities reach scale access to modern treatments. Estimated market size, 2020 US$ billion 1. 7 25 1. 7 The hospital channel 3.0 becomes more influential, 4.5 though retail remains 14 . 0 important Retail accounts for up to 85 percent of today’s market and should retain the largest share even as hospitals grow Consumer Public health Biologics Patented Vaccines Total at well above 20 percent a health care year to reach an expected Growth rate 2009–20 14 15 22 33 19 25 to 30 percent share Percent worth $14 billion by 2020.

Hospitals are likely to become the first Non-traditional opportunities point of care, especially in metro and tier I reach scale markets. Because they issue such a large proportion of prescriptions for chronic As the market grows in size and diversity, ailments, they are likely to be increasingly several emerging opportunities should instrumental in building product brands. reach their full potential. The most Care delivery should evolve with the promising five—patented products, proliferation of special centers for consumer health care, biologics, vaccines, eye operations, removing kidney and and public health—are currently worth gallbladder stones, and other higher $5 billion and should grow to $25 billion secondary procedures. Hospitals are likely in the base case (Exhibit 5). They play to make the transition from focusing on a major role in the optimistic growth the top line to worrying about profitability. scenario too: more than half of the gap Corporate hospitals are likely to drive that separates it from the base case is the adoption of protocols for critical and predicated on growth at much higher life-saving procedures and treatments. than expected rates in these five areas.

In response to these developments, Patented products pharma companies will need to scale up An assessment of the global pipeline their sales forces, step up their activities, indicates that patented products are likely and change the way they engage with to be launched in four main therapies: hospitals, going beyond contracting and metabolics, neuropsychiatry, oncology, negotiating to supporting them in shaping and anti-infectives. Rising affordability treatment protocols. Companies also need should be the primary driver for growth, to expand their hospital portfolio beyond but uncertainty over the likely number critical-care products and thrombolytics of launches in India makes it difficult to to products such as newer molecules for estimate the likely size of the segment post-procedure cardiovascular care. in ten years’ time. If a healthy pace of launches is maintained—namely 25 percent of all global launches— patented products could reach $1.7 billion Unlocking pharma growth 99 Helping Indian pharma reach its full potential

by 2020, or as much as $3.2 billion in Biologics an optimistic growth scenario. Although The biologics market is worth in excess the segment would account for less than of $300 million and is growing at more 5 percent of the market, revenues would than 30 percent a year. It could be be concentrated on a few brands, making worth $3 billion by 2020, or much more them attractive for successful players. if companies took bold steps to build physician education and confidence. To capture the potential, players need to excel on four fronts: local pricing, taking a Therapies for the treatment of diabetes cue from models such as Iressa in China, (insulin), oncology (EPO and monoclonal which was offered free to patients who antibodies or mABs), autoimmune achieved a certain level of compliance in diseases, and cardiovascular dominate the first six months of usage; intensive the segment, and simple biologics like engagement with doctors at a national insulin and EPO command shares of and regional level, at times through more than 80 percent. Affordability and local trials; partnership with payors, access limit the market to metro and tier I including health economics studies; areas. Complex biologics such as mABs and direct engagement with patients. could account for up to 40 percent of the market by 2020 in the base case. Consumer health care With a market size estimated at above As elsewhere, affordability is expected $3 billion, consumer health care consists to drive growth. Reducing prices and of two segments. The first is Rx to OTC, creating a transparent pricing system meaning brands that have been built that benchmarks local prices against through the prescription route but then reference markets could dramatically moved on to self-medication use, such as increase the size of the market. Another Crocin and Volini. The second segment helpful step would be to build physicians’ comprises OTC brands marketed directly confidence in biologics, perhaps by to consumers, such as Eno and Pudin establishing efficacy through local trials. Hara, as well as the emerging category of condition-specific nutritional products such Vaccines as Glucerna and Slim-Fast. We expect the Despite the high burden of deaths from consumer healthcare segment to grow preventable diseases, the vaccine market at 14 to 16 percent a year to become is significantly underpenetrated, at just a $14 to $18 billion market by 2020. 2 percent. Its current value of $250 million, two-thirds of it in the private segment, Would-be leaders in this market face could grow to $1.7 billion by 2020. In three imperatives. They must innovate the optimistic scenario, active shaping constantly on the back of consumer by companies could boost growth insights, using research to understand in both private and public segments and formulate products instead of to take the market to $3.5 billion. indiscriminately launching “me too” products and extensions; they must Growth is likely to be driven by four enhance their channel management main actions: producing locally or and merchandising capabilities; and forming supply partnerships like that of they must accept lower margins to GlaxoSmithKline with Bio-Manguinhos scale up their brands dramatically. in Brazil for the HiB vaccine; conducting 100

studies on the economic impact of through sponsored research and efforts vaccination and establishing safety to design treatment protocols. and performance standards; extending coverage beyond paediatricians to general Aspiring winners in this market must practitioners, consulting physicians, and choose which segments to play in. gynaecologists; and enhancing supply- Focusing on states with more centralized chain reliability and reducing costs. buying can help. Enterprise selling capabilities are likely to be important, Public health particularly for government institutions. Direct government purchases from For high-value specialty and super- pharmaceutical companies are worth specialty products, health economics nearly $1 billion, a value that could studies should help to engage institutions. grow to $4.5 billion by 2020, or $6 billion in the optimistic scenario.

The largest segment in public health Implications for players is state hospitals, which account for around 45 percent of government To make the most of these proliferating purchases. However, this segment is opportunities over the next decade, hard to access because of its low price pharma companies should modify levels and fragmented procurement their business models and take part in processes. At the other extreme, multiple arenas. Most major multinationals central government hospitals account have already set bold aspirations for for just $30 million of spending, but are their India business, invested in their concentrated, accessible, and more local organization, and adopted a strategic in nature. Standards of care are local model that involves ramping high, comparable to those in the largest up their sales force and launching corporate hospitals. This segment’s branded generics. Meanwhile, leading importance lies not in its size but in the local players have invested in market access it affords to key opinion leaders creation, developed differentiated Unlocking pharma growth 101 Helping Indian pharma reach its full potential

business models, and maintained the ensure they are institutionalized instead momentum of new product launches. of relying on the senior management capacity that was adequate when the All these are steps in the right direction, but market was smaller and simpler. as competition intensifies and the market evolves, much more needs to be done. Adopt new salesforce practices Below we highlight the most critical tasks. To sustain high growth, companies will need to adopt innovative salesforce Rediscover the essence of marketing coverage models. Our research indicates Launch marketing and brand planning that representatives are getting crowded based on prescriber shifts and competitor out of doctors’ chambers, especially in strategies remain important, but metro and tier I cities. In addition, therapy three other areas need attention. and brand choices are increasingly being determined by hospital purchasing First, as new launch possibilities committees, payors, pharmacists, and dwindle, building big brands will be vital other influencers. Selling efforts must for profitable growth. As many as half change to reflect these new dynamics. of late-launch successes have been launched as brand extensions.5 To instil Traditional management approaches, a culture and mindset of building large such as doctor segmentation and brands, companies will need to actively targeting based on prescribing patterns, manage the portfolio, set high aspirations, are geared to capture incremental share and build competitive differentiation. and are not suitable for driving market growth. Companies will need to shift their Second, capabilities in disease focus to key differentiators that will help management and market creation will be them achieve salesforce excellence. crucial. Companies will need to work with doctors to shape therapy and undertake The first of these is enhanced performance direct-to-consumer activation in a way that management and dialogues. For instance, complements their efforts. An example instead of focusing on the previous month is the collaborations that orthopaedic or quarter, the top team should develop implant companies are entering into a forward-looking view of performance with key opinion leaders and other and drive interventions accordingly. physicians to increase awareness of joint replacements and reduce fear of surgery. The second differentiator is a sharper focus on people. National and regional Third, companies must sharpen their sales heads should identify where talent customer focus, moving away from can make the biggest difference. a standardized approach to provide more customized messages. Marketing The third differentiator is a readiness teams need to understand and engage to challenge entrenched views about distinct segments of physicians, what is possible. One example is the pharmacists, and patients instead of view that newly deployed sales reps using a one-size-fits-alll approach. need two to three years to become fully productive; in fact, with the right None of these capabilities are new to expectations and support they can ramp the industry, but leaders will need to up in as little as 12 to 18 months. 102

Top teams need to change the Exhibit 6: Importing talent nature of their engagement New New Likely marketing areas skills required sources of talent with the sales force too, ▪ Direct-to-patient promotion ▪ FMCG companies getting more involved, going Consumer (e.g., TV and print media ads) health care ▪ Tapping non-pharmacy channels beyond data and templates, (e.g., retail) and focusing on softer ▪ Running programs and campaigns ▪ Event Market shaping at scale management firms aspects to transform the and awareness ▪ Organizing events for patients and doctors sales organization’s mindsets, ▪ Ability to cultivate untapped markets ▪ FMCG companies, habits, and culture. Rural and tier II ▪ Selling large volumes at low cost cellphone companies markets ▪ Managing supply chain in difficult-to- access region Refocus on commercial ▪ Communicate and build knowledge ▪ NGOs, teachers Rural health in relatively undereducated regions operations awareness ▪ Build trust

Profitability should remain ▪ Making bulk sales ▪ Bank and insurance a major focus for leading Hospitals and ▪ Cultivating relationships with salespeople, business insurers key people process outsourcing experts companies. Margins are likely to come under additional pressure because of business- building investments in new opportunities, coupled with heightened will not supply the sheer numbers competition and the rising cost of talent. required, let alone new thinking and In response, companies will need to boost skills. Brand managers in fast-moving the productivity of their marketing and consumer goods (FMCG) companies are sales operations, especially in salesforce, experienced at building and managing promotional, and supply-chain spending. big brands in high-growth markets, for instance. Other potential sources Salesforce productivity can be improved of talent are illustrated in Exhibit 6. through differentiated models, better performance management, and Second, place multiple bets and create capability building. When it comes to a portfolio of opportunities. Go beyond promotional spending, clear linkages reviewing near-term financial metrics and need to be created between target place equal emphasis on input measures segments, marketing spend allocation, and non-financial outcomes. Over the past and expected returns. Companies five years, some cautious players have should also work on creating an lost ground: early entrants in hospitals that efficient supply chain that enables failed to invest in their product portfolio and them to reach previously inaccessible commercial capabilities ended up ceding markets. Even partial improvements their first-mover advantage, for example. in processes can increase margins by Other companies that delayed switching a percentage point, not including the their large brands from prescription to OTC benefit from the reduction in lost sales. saw competing brands surge ahead.

Adapt to proliferating opportunities Third, focus the top team’s attention on Companies have three main options the long-term health of the business. What for strengthening their organizations. are the major trends we need to exploit? Is our company taking enough bets in First, import talent and skills from other promising areas? What are the risks? Is our industries. Developing from within organization building the right capabilities? Unlocking pharma growth 103 Helping Indian pharma reach its full potential

Collaborate within and beyond Third, as the government becomes the industry more open to working with the private Enhancing access and shaping markets sector, players could enter public–private will require substantial investments. partnerships (PPPs).6 Partnerships Partnerships can help to spread could be formed, for instance, to launch risks and enable rapid scale-up. telemedicine programs such as the We envisage three main types. HMRI program, execute insurance schemes such as the Aarogyasri program First, pharma companies could partner in Andhra Pradesh, and establish with one another to shape the market, treatment protocols in tertiary and co-investing to launch, for instance, an quaternary government hospitals. independent joint venture to enhance access in rural areas. Although such ventures are almost unknown in India, they are starting to be discussed. . . .

Second, companies could partner India’s pharmaceuticals market has with other healthcare stakeholders to grown in confidence and moved onto an enhance access: with payors to provide accelerated growth path. The question coverage for costly life-saving therapies; is whether it can achieve its full potential. with device companies to expand into Backed by solid fundamentals, the tier II markets using common supply- market is giving rise to a multitude of chain infrastructure and information; with business opportunities. By pursuing hospital chains to establish treatment the right ambitions, making appropriate protocols and drive local clinical trials; and investments, and adopting the actions with diagnostics companies to enhance outlined above, companies should be able disease awareness and diagnosis rates. to underpin future growth and help take Indian pharma into the global top rank.

Notes 1 We define upper income households as those with annual incomes above $11,000 and middle income households as those with annual incomes between $4,500 and $11,000 at 2001 prices. 2 In 2007, per capita spending on pharmaceuticals was US$1.8 in rural markets and $15.6 in urban markets. 3 India Pharma 2015: Unlocking the potential of the Indian pharmaceutical market, McKinsey & Company, 2007, page 54. 4 Tier II markets provide critical support to access for rural markets by acting as sales headquarters, supply- chain stocking points, and centers for primary and secondary care. 5 We define “late launches” as brand launches that are not among the first five launches in a molecule or molecule combination. 6 For more on PPPs, see “Public–private partnerships: An untapped strategic lever,” pp. 28–35.

Vikas Bhadoria is a principal, Palash Mitra is a director, and Kaustubh Chakraborty is an associate principal in McKinsey’s Delhi office;Ankur Bhajanka is a consultant in the Mumbai office. 104

Tracking shifts and spotting opportunities in Mexican health care Unlocking pharma growth 105 Tracking shifts and spotting opportunities in Mexican health care

Mexico’s health care has improved thanks to recent public initiatives, but rising costs, capacity constraints, and growing disparities pose new challenges. To keep pace with these shifts, pharma companies need to raise their capabilities to global standard and preserve the flexibility to update their plans as often as every quarter.

Julio Dreszer, Pablo Ordorica, Lisa Ramon, Safa Sadeghpour, and Jorge Torres

Health care in Mexico is at an inflection Mexico has also become more point. Recent advances in public sophisticated at controlling healthcare policy have helped bring noticeable costs. For example, centralized price improvements in health indicators, but the negotiation and reverse auctions have system is under pressure. In this article, made public drug spending more effective. we first look at recent developments in health care in Mexico, focusing on shifts that are particularly significant to the pharmaceutical industry. Next, The challenges ahead we explore the pressures the industry faces, including capacity constraints, Although public policies have succeeded increasing costs, and growing disparities, in improving health in Mexico, new and outline some of the policy options. pressures have arisen that alter the Finally, we consider the implications challenges the system faces. of these changes for pharmaceutical companies operating in Mexico. Capacity constraints Demographic changes and other factors are putting increasing pressure on the Mexican healthcare system. Recent developments Mexico lacks the resources and capabilities to address these shifts. Mexico is one of the richest countries in Latin America. In 2011, the World Bank The population is aging rapidly and estimated its GDP per capita at just witnessing an increase in ailments over $15,000, and economic growth at more common in developed countries. 4.6 percent. The country’s healthcare For example, increased obesity priorities are typical of fast-growing is leading diabetes to expand at developing economies. In general, the three times the rate of population nation’s health has improved noticeably growth.1 Cancer and cardiovascular over recent years thanks to preventive diseases are also on the rise. medicine and a variety of public sector programs, including the creation in In addition, Mexico has only a third to a 2003 of Seguro Popular, a national low- half as many specialists as its OECD peers. cost health insurance program. Other Gustavo Nigenda of the National Institute of initiatives have focused on improving Public Health noted Mexico trains “too few the quality and availability of drugs. specialists for its epidemiological profile.”2 106

In addition, primary care practitioners say Cost pressures they would like more opportunities for While Mexico has been effective at continuing education on newly prevalent keeping the public cost of drugs down, diseases. Physical infrastructure is also the increased prevalence of diseases lacking: Mexico has only 16 hospital common in developed countries has beds per 10,000 people compared placed enormous pressure on the national with 41 in Argentina and 24 in Brazil.3 healthcare budget. Today more than half of public healthcare funds are spent Increasing the number of specialists and on non-communicable diseases, with hospital beds is expensive and likely to about 20 percent on diabetes alone. In take at least five to ten years. However, addition, national finances are declining there are several short-term low-cost because of the aging population and rising options that could offer quick relief: unemployment. In 2009, the Mexican national social security system, IMSS, Define protocols for managing common ran $2.9 billion in the red. The Ministry of diseases for non-specialists who Health has warned that unless obesity lack the resources or language skills rates slow, public health costs will double to access international guidelines. by 2017.4 Such a situation would lead to Institutions such as the Instituto greater rationing of care and ultimately Nacional de Salud Publica could to a deterioration in public health. publish domestic guidelines annually.

Promote continuing education The share of administrative costs in total opportunities for primary care health expenditure is three times higher in physicians. Mexico than in Canada, Spain, and South Regularly assess access to and quality Korea (Exhibit 1). Mexico has begun to of health care across cities, systems, tackle the problem by establishing task and providers (for instance, the forces to look at ways to consolidate percentage of type 2 diabetes patients the systems. But while integration would on metformin). enable more effective oversight and reduce Train a cadre of non-physician health costs, it is proving slow to implement. professionals—similar to nurse practitioners in the US—in specific A number of intermediate options could disease areas to address the need produce immediate benefits and set the for more specialized care. stage for future integration. Each system could separate the payor and provider Expand preventive efforts such as functions while retaining their current patient education on obesity and ownership structures. The payors could diabetes through programs such then institutionalize processes to lower as PrevenIMSS. provider costs, as they do in the US and To help prevent any perception among Europe. Payors could, for instance, fix physicians that these efforts represent payments for individual conditions to increased oversight or detract from their create incentives for providers to reduce authority, the government could frame their inherent costs. To reduce the the goal as to provide physicians with unnecessary use of healthcare services, better resources and help them improve the various systems could also utilize the care they offer their patients. demand-management mechanisms such as tiering medications (where, for Unlocking pharma growth 107 Tracking shifts and spotting opportunities in Mexican health care

Exhibit 1: Admin costs of national healthcare systems systems to create a uniform 2009 cost-reducing approach for setting payments for individual Country Administrative cost* diseases, rather as it convenes Mexico 10 . 8 the various systems today France 6.8 into a national council to United States 6.7 evaluate drugs for approval. Germany 5.3 Netherlands 3.8 Disparities Canada 3.5 Korea 3.4 Another challenge is presented Spain 3.1 by the disparities that have Poland 1. 3 developed in the Mexican healthcare system. Low- income groups are penalized * Administrative cost divided by total cost, percent Source: OECD Health Data 2011 because of the relatively high proportion of medical expenses that individuals in Mexico have to pay. For Exhibit 2: Share of spending by country Public funding Other private example, out-of-pocket Percent, 2009 Out of pocket expenses account for a

Share of total healthcare spending Share of pharma spending little more than 50 percent of total expenditures in India 33 17 50 10 90 Mexico, compared to just 48 83 Mexico 48 4 11 6 12 percent in the United China 50 9 41 30 5 65 States. Similarly, out-of pocket Brazil 46 23 31 15 5 80 expenses on drugs account Turkey 75 9 16 80 6 14 for 83 percent of total drug

US 49 39 12 24 41 35 expenditures in Mexico, compared with 65 percent in UK 84 6 10 75 25 China and 35 percent in the United States (Exhibit 2).

Source: World Bank, OECD Health Data, 2001; WHO National Health Accounts, 2009 Different systems also provide significantly different levels of care: for instance, Pemex instance, generics have the lowest co-pays spends almost nine times as much per and branded products the highest). capita as the Seguro Popular. There are major geographical differences too: The government could set the stage for rich states such the Federal District integration by developing a compelling have about six times more specialists case and creating political momentum. and three times more hospital beds It could also create a financial oversight than poorer states such as Chiapas.5 authority to mediate payments between payors and providers within a single system To address these disparities, the or across systems, helping to encourage government could consider developing the separation of payors and providers. initiatives for specific geographic settings. The government could also work with the In urban areas, the integration of health 108

systems could bring faster efficiency Implications for pharmaceutical improvements because of the higher companies density of services. In low-density rural Top-performing companies will begin by areas, the focus should be on programs getting the basics right. As they prepare that can be launched quickly and have to launch programs linked to the shifts a proven track record, such as mobile we have identified, they will implement health platforms. The government capability and organizational improvements could also offer targeted incentives to throughout their organization, as well as support patients in low-density areas, ensuring that relationships are maintained such as higher public payments and with all levels of government and key subsidized transport for patients requiring private and public stakeholders. hospital care. To alleviate out-of-pocket expenditures, private health insurance could be encouraged too, especially Successful companies will also sharpen for middle-income urban segments. their core functions to respond to the increased use of generics, provider Public health programs could reduce the consolidation, and cost pressures. need for trained physicians by specifying They will aspire to bring their local days of the month when entire villages capabilities to global standards rather than receive coverage from non-physician trudging on with practices that are “good healthcare workers on specific diseases, enough” for a developing market. This such as diabetes testing. Broad-based will involve understanding the nuances rural education should address prevalent and likely evolution of specific channels diseases, particularly those affecting such as public programs and mass retail. children, young people, and the elderly. These companies will take advantage of the global and regional expertise of their parent organizations but preserve sufficient autonomy to adapt the model Unlocking pharma growth 109 Tracking shifts and spotting opportunities in Mexican health care

Disparities. Pursue growth for Mexico, updating their plans every opportunities associated with programs quarter if necessary to follow the changes. to narrow the healthcare gaps between Beyond these broad strategies, we have regions, income levels, and care identified several specific efforts that can programs. Ensure participation in any help pharmaceutical companies keep expansion of the coverage of drugs and pace with the shifting environment: diseases by Seguro Popular. Public reforms. Bolster local R&D efforts—such as drug co-development with the government and better use . . . of local clinical trials—to help establish solid relationships with regulators Mexico is developing rapidly, boasting and other authorities and familiarize solid economic growth and one of Latin physicians with a company’s products. America’s highest GDPs per capita. But Seek opportunities to work with the economic success is also changing the government to understand the likely healthcare environment. New challenges evolution of reforms and drive change. are arising just as policy reforms deliver Capacity constraints. Expand clear improvements to national health marketing and sales strategies to indicators. Nimble pharmaceutical address the growing importance of companies will track and understand these non-specialists such as primary care shifts, mitigating any risks that develop physicians and non-physician healthcare and quickly identifying any opportunities. practitioners. Consider working with the government to develop disease guidelines, continuing medical education programs, or other outreach efforts. Cost pressures. Aspire to best-in- class stakeholder management in Mexico, with well-defined approaches to pharmacoeconomy, price negotiations, and reverse auctions.

Notes 1 Federacion Mexicana de Diabetes, INEGI. 2 Reforma, 2010. 3 WHO. 4 Milenio, 2010. 5 Mexican Ministry of Health, 2010.

This is a revised version of an article first published in Perspectives on Healthcare in Latin America, McKinsey & Company, 2011. Julio Dreszer is a principal in McKinsey’s New Jersey office;Pablo Ordorica is a director, Lisa Ramon is a consultant, and Jorge Torres is a principal in the Mexico City office; andSafa Sadeghpour is a consultant in the São Paulo office. 110

About the authors Unlocking pharma growth 111 About the authors

The authors of these articles represent a cross-section of McKinsey’s global Pharmaceutical Practice. We welcome your thoughts and reactions to the ideas presented here.

To share your comments or obtain more information, please email us at pharma_emerging_ [email protected] or contact the authors individually. The email addresses of McKinsey authors follow the pattern [email protected].

McKinsey & Company is a global consultancy firm that helps leading corporations and organizations to make distinctive, lasting, and substantial improvements to their performance. McKinsey advises companies on strategic, operational, organizational, and technological issues. Of our 8,000 consultants worldwide, 1,700 focus on health care, and nearly 30 percent of these hold PhD, MD, or masters degree qualifications. In the past five years we have completed more than 4,000 engagements in health care, spanning all major sectors and functions of the industry.

McKinsey’s Pharmaceuticals and Medical Products emerging markets sub-practice supports a wide range of clients on pharmaceutical emerging markets issues, including multinational, regional, and local pharmaceutical companies, biotechnology players, medical device firms, and government agencies. In the past five years McKinsey has conducted almost 500 engagements with more than 80 emerging market clients.

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