“Heads up” is a apt and memorable phrase from my years rowing crew at MIT, used by the cox to alert those engaged in conversations on the dock that we were doing a 180 with our fifty-foot shell before stowing it a bay and they risked a whack in the head or worse if not attentive to their surroundings. I think Big Pharma is getting a “heads up” and they may be listening. The gloomy doomy forecast for the pharmaceutical industry is well-known: patent expirations and generic competition, the accelerating cost of r and d and declining productivity, downward price pressure by payers, the adoption of cost effectiveness criteria for approval in the EU, and the increasing cost of capital, not to mention a dismal reputation as a result of being a favorite punching bag for health care reform activists. (see Analytica).
In addition to cutting costs through mergers, out-sourcing, and off-shoring, buying up promising biotech companies and their early stage products, increasing direct-to-consumer ads, and greasing the wheels of government with cash, what’s the industry to do? Clearly, they are looking to expand their sales in emerging markets like in Brazil, India, and China (BRIC) which currently have the higher growth rates than US/EU/Japan markets (a summary is at Chemistry World). But what about selling into the rest of the world (ROW) markets, which, of course not only include treatment of the infectious scourges, but also the noninfectious diseases like cancer, heart disease, and diabetes, which now account for 40% of the mortality?
About two years ago, a team at Oxfam International noted Pharma’s ROW opportunity as part of their assessment of the progress the industry has made since 2002 in increasing developing world access to essential medicines for treating HIV, TB, and malaria (Oxfam International). In addition to reporting the good news was that progress was made (and according to a yet-another-Gates-funded organization which is aimed at increasing investor pressure, progress is continuing [Access to Medicines Index]), the Oxfam authors stated:
The growth opportunities in emerging markets have been seized on by investors as representing the panacea to flagging performance by the pharmaceutical industry. For this potential to be realised however, investors recognise that serving these markets requires companies to adapt prices, to employ flexible distribution systems, to abandon the blockbuster model in favour of developing drugs for niche makrets and if necessary, a high-volume, low profit margin model.
Unfortunately, they do not provide much support for this statement. More useful would be an evaluation of the multiple challenges to ROW market entry, like weak distribution systems, major chance of diversion, unreliable governments, and the real potential that the cost of making and selling a product will exceed the acceptable price. Is there a Frost and Sullivan type of analysis of the market opportunity for pharma products in the developing world? I’d start with vaccines as the model.
At least one major pharma seems to have come to the conclusion that developing world markets are worth selling into and, moreover, worth investing in. Andrew Witty, GlaxoSmithKline CEO, announced in a speech at the Harvard Medical School in February 2009 that the company will try to make its meds affordable in 50 low income countries by capping its prices at 25% of what it charges in the high income countries and will help build out the health care infrastructure (including pharmaceutical distribution) in these countries by committing 20% of its profits from these sales to such projects (Wittty Speech). The absolute numbers are small. A Wall Street Journal article pointed out that the GSK annual sales in the 50 countries is about $43 M (WSJ article), so at the industry average 35% profit margin, the amount available for investment would be only $3 M. But GSK’s plans are refreshing and may be other Big Pharma have their heads up and are thinking creatively.