PricewaterhouseCoopers (PwC) recommended, about three years ago, in mid-2007 that for sustainable business performance the research-based global pharmaceutical companies should move a part of their significant expenditure from marketing to research. They also recommended that the drug prices should be related to incremental efficacy that the products would provide.
The report titled ‘Pharma 2020: The Vision’ commented that the business model of the global pharmaceutical companies is “economically unsustainable and operationally incapable of acting quickly enough to produce the types of innovative treatments demanded by global markets.”
Undergoing a paradigm shift:
As we witness, the global pharmaceutical industry is undergoing a paradigm shift. More drugs are going off patent than what the innovator companies can replace with the new products. The research is undoubtedly failing to deliver.
At the same time, the business growth in the developed markets of the world has been declining over a period of time. The growth in the top two pharmaceutical markets of the world viz, USA and Japan had gone negative. IMS predicted in their recent ‘CEO Conclave’ in Mumbai that low growth trends in these markets will continue even beyond 2013.
In the same conclave IMS predicted that within ‘Pharmerging’ markets, China is expected to record highest CAGR growth of over 25%, followed by India and Turkey around 12-14% each. With such a scorching pace of growth China is expected to become third largest pharmaceutical market in the world in 2013 with India holding its 2008 ranking of no. 13.
Global pharmaceutical ‘Marketing Expenditure’ is increasing:
The publication titled “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States” co-authored by Marc-André Gagnon and Joel Lexchin estimated from the data collected from the industry and doctors during 2004 that the U.S. pharmaceutical industry spent 24.4% of the sales turnover on promotion, versus 13.4% for research and development. This was as a percentage of US domestic sales of US$ 235.4 billion in that year.
The researchers used 2004 as the comparison year, as this appears to be the latest year in which information was available from both IMS Health and CAM Group, the two international market research companies that provide the marketing and sales data together with those of consulting services. IMS obtains its data from pharmaceutical companies, while CAM obtains its data from the doctors. This study appeared in the January 3, 2008 issue of PLoS Medicine, an online journal published by the Public Library of Science.
The above findings though highlight that the US pharmaceutical industry is overall marketing-driven, also argues strongly in favor of a shift away from this direction.
Another publication named, the ‘Triangle Business Journal’ reported the findings from another study of ‘Cutting Edge Information’, a pharmaceutical research company based in Durham, North Carolina, USA. This survey reported, “the companies marketing the six blockbuster (turnover US $ 1 billion in the first year) drugs it studied spent an average of $238.5 million to market each product.”
The “Pharmabiz” of April 2, 2007 also reported, “The study of top 15 global pharma giants revealed that the marketing expenditure as percentage of total sales of these companies worked out to 30.5 as against the R&D expenses as a percentage of total sales of 15.1.”
Such high marketing expenditure is not sustainable in the long run – alternatives being explored:
As reported by IMS Health, in 2009 though the global pharmaceutical market recorded a turnover of US $ 837 billion with a growth rate of around 6.4% compared to 11.8% in 2001, the moot question remains, whether such type of marketing expenditure is sustainable during the era when the “patent cliff’ is pushing the global pharmaceutical industry to the brink.
This situation gets further aggravated when IMS Health reports, as the world’s 10 top selling prescription drugs go off patent, it will be difficult to replace them in terms of single-product value turnover. These brands are as follows:
- Lipitor, US$13.5 billion (Pfizer)
- Plavix, US$7.3 billion (sanofi-aventis)
- Nexium, US$7.2 billion (AstraZeneca)
- Seretide/Advair, US$7.1 billion (GlaxoSmithKline)
- Enbrel, US$5.3 billion (Amgen and Pfizer)
- Zyprexa, US$5 billion (Eli Lilly)
- Risperdal, US$4.9 billion (Johnson & Johnson)
- Seroquel, US$4.6 billion (AstraZeneca)
- Singulair, US$4.5 billion (Merck)
- Aranesp, US$4.4 billion (Amgen)
The business focus is now on the emerging markets like, India:
Thus the business focus of the global pharmaceutical majors are now on the key emerging markets, like India not only with their patented products, but more importantly by having a robust fast growing branded generic portfolio to more than offset the loss of revenue and profit from the blockbusters, as they go off patent.
Publicly expressed expectations of some Governments of the emerging markets:
Governments of some of these emerging markets expect local benefits out of the evolving growth opportunities of the global pharmaceutical companies from their respective countries. Various reports indicate that there could be following two key issues in these markets:
• Local manufacturing of products
• Pricing
Local manufacturing:
Out of these emerging markets, Indonesia has clearly spelt out its intention by specifying that the pharmaceutical companies marketing their products in Indonesia will need to establish local manufacturing facilities. The new rule is directed towards local job creation.
The Health Minister of Indonesia had commented, “If they want to get licenses (to sell their products) they have to invest here also, not just take advantage of the Indonesian market.” The Minister further added, “They can’t just operate like a retailer here, with an office that’s three meters by three, and make billions of rupiah. That’s not fair.” It has been reported that India and China may ultimately come out with similar requirements for their respective countries.
U.S. Chamber of Commerce has registered a strong protest in this matter with the President of Indonesia and has urged a reversal of this decision. However, the country appears to have taken a firm stand in this matter. This is evident when in response to the report that some global pharmaceutical companies have threatened withdrawal of their business from Indonesia because of this reason, the Health Minister retorted, “If they want to go away, go ahead.”
Pricing:
Anticipating such moves in the emerging markets, some global companies like, GlaxoSmithKline (GSK) and MSD have already started implemeting differential pricing strategies for their patented products in the emerging markets like India.
Some visionary global CEOs like, Andrew witty of GSK strongly believes that such differential pricing will enable more patients in the emerging markets to afford his company’s products. Consequently the increased sales volume will not only offset the sales value loss but will also create a substantial goodwill for the company in these markets, over a period of time.
Quoting Andrew Witty the ‘Wall Street Journal’ (WSJ) reported that in Philippines, GSK had reduced the price of 28 products by 30% to 50%. In other emerging markets of Asia including India, Malaysia and Thailand the company has reduced the prices of Cervarix, its cervical cancer vaccine, substantially.
India has also witnessed such differential pricing strategy by other innovator companies for their patented products in the country.
Prescribing four new key strategic changes in the new paradigm:
In the new paradigm, almost in tandem, four new key strategic changes, in my view, will gradually unfold in the Indian pharmaceutical market. These are as follows:
1. An integrated approach towards disease prevention will emerge as equally important as treating the diseases.
2. A shift from just product marketing to marketing of a bundle of value added comprehensive disease management processes along with the product will be the order of the day.
3. Over the counter (OTC) medicines, especially those originated from natural products to treat common and less serious illness, will curve out a sizable share of the market, as appropriate regulations are expected to be put in place adequately supported by AYUSH.
4. Most importantly, the country will move towards an integrated and robust healthcare financing system, as already articulated just in the last month by Mr. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission of India, which will usher in the following changes:
- Doctors will no longer be the sole decision makers for prescribing drugs to the patients and the way they will treat the common diseases. Ministry of Health/ Healthcare providers/ Medical insurance companies will start playing a key role in these areas by providing to the doctors well thought out treatment guidelines.
- For a significant proportion of the products that the pharmaceutical companies will sell, tough price negotiation with the healthcare providers/ medical insurance companies will be inevitable.
- Health Technology Assessment (HTA) or outcome based pricing will gradually play an important role in pricing a healthcare product.
- This could well mean lesser role of the Medical Representatives in the demand generation process for the pharmaceutical products, which could possibly have a positive impact on the cost of marketing and sales promotion, incurred by the respective pharmaceutical companies.
Conclusion:
With all these changes within the Indian pharmaceutical industry, it may not be easy for the local players to adapt to the new paradigm sooner and compete with the global players on equal footing, even in the branded generic space. In my view, those Indian Pharmaceutical companies, who are already global players in their own right and relatively well versed with the nuances of this new ball game, will have a significant competitive edge over other domestic players. The global-local companies, in my view, will offer a tough competition to the local-global players, especially, in the branded generic space and at the same time will be able to bring down their marketing expenses significantly.
So far as other domestic players are concerned, the fast changing environment could throw a new challenge to many of them, accelerating the consolidation process within the Indian pharmaceutical industry.
We all should be well aware, just as today’s pharmaceutical business dynamics in India are not replica of what these were in the yesteryears, tomorrow’s pharmaceutical business dynamics of the country will not be a replica of what these are today.
By Tapan Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.