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Partnering to maximise rewards in pharmerging markets

Facing dwindling growth opportunities in more developed markets, it is no surprise that multinational biopharma companies turned their attention to promising emerging regions. But success has been mixed and nearly all top global biopharmaceutical companies are under-performing in these markets. According to IMS, while pharmerging markets accounted for 17% of the global pharma market in 2009, the top 15 companies derived only 9.4% of their sales from them.

Succeeding in these markets depends on moving quickly and adapting global strategy through local insights and experience. No defined strategic blueprint exists that can be applied uniformly across these extremely heterogeneous countries. Allying with a partner with local expertise is often the best approach to establish a presence. Alliances enable companies to gain regional expertise in a short amount of time while limiting resource commitments and risks.

Geographical shift in drug spending
According to IMS Health, global drug spending will reach nearly $1.1 trillion by 2015, reflecting an annual sales growth rate of 3-6%. Hidden behind this overall number are unprecedented dynamics at play, which are shifting the mix of spending between branded products and generics and between mature and pharmerging markets.

Mature western markets are seeing slowing growth due to market saturation, economic slowdown, health care cost containment efforts, patent expiry of key blockbuster drugs and increased generic competition. Pharmerging markets, on the other hand, are expected to grow quickly, driven by a large population base with unmet medical needs, economic growth and increased prevalence of chronic diseases.

These dynamics will result in a significant geographical shift in drug spending. The US’s share of global drug sales is expected to drop to 31% in 2015, down from 41% in 2005. The share of the top five European countries, which accounted for 20% of spending in 2005, will make up only 13%. But 17 pharmerging markets, led by China, will account for 28% of total spending by 2015, up from only 12% in 2005. No surprise then, that biopharma wants to tap these markets where the growth potential could offset stagnating sales in mature markets, ensure further growth and cover increasingly expensive R&D cost.

Challenges of highly diverse markets
Although pharmerging markets offer tempting opportunities, they are associated with huge challenges. Market opportunity is scattered among a host of countries and to take full advantage of growth, drug makers will have to enter numerous, enormously diverse markets.

Pharma companies need to ensure their product portfolios match local needs and understand all the subtleties that go with pharmerging markets, and create market entry strategies with balanced portfolios of branded, patent-protected products and lower cost generics.

Despite a growing middle class, per capita income remains significantly lower than in developed markets and the ability to pay for medicines varies significantly. This forces companies to tailor pricing strategies and product mix. The majority of drug spending is out-of-pocket, margins are often low and biopharma is facing stifling competition with power often in the hands of local companies familiar with the operating environment. Negotiating or lobbying for price or reimbursements is often a necessity and constitutes a huge challenge for an outsider.

Modes of market entry
No single strategy can be successfully applied to entering all countries. Developing true understanding of the markets is a process which takes time. Fundamentally, there are only three ways to enter new markets: organic internal growth (build), mergers/acquisitions (buy), or partnerships (ally). No approach is inherently superior and the best option depends on the specific market and company situation.

Most pharmerging markets are characterised by high environmental uncertainty, competition, and complex distribution systems. Biopharma companies that want to enter these markets often seek speed to profit from the remaining patent life. These are all circumstances that indicate the corporate development mode. Allying with a partner who has an established presence and regional expertise allows a company to accelerate market access and an understanding of local conditions while limiting resource commitments and risks.

Strategic alliances can create synergy effects; they offer benefits in addressing local government concerns about foreign ownership and the tendency for local firms to receive preferential treatment. They can provide on-the-ground experience of non-transparent state or country regulatory systems and of the most appropriate infrastructure to build.

Variety of alliance structures
Alliances are defined as any voluntarily initiated and enduring relationship between two or more companies that involves the sharing, exchange, or co-development of resources for mutual gain. Partners remain separate businesses. Alliances can be either equity or non-equity based and typically start with one cooperative agreement that evolves into a portfolio of arrangements built over time. The choice of legal structure should be driven by strategy. Some common types of strategic commercialisation alliances are:

• Co-promotion or co-marketing: an alliance focused on the best commercialisation of an already approved product.
• Licensing: form of partnering with local expertise. “Out-licensing” involves the transfer of marketing and distribution rights from the licensor to the licensee. The licensor usually receives a combination of an up-front licensing fee and royalties based on sales.
• Equity strategic alliances: two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.
• Risk-or investment based alliance: contractual relationship to share some unique resources, capabilities and capital to create a competitive advantage.
• Joint ventures: entail the creation of a new entity by two or more partners who retain equity in the new entity and exercise control.

The choice of alliance structure depends on the development phase of the market a company wants to enter. According to McKinsey, emerging markets typically evolve through four evolutionary stages: nascent, frenzied, turbulent and mature. The nascent stage is characterised by strict government regulations with alliance activity often limited to licensing agreements. Countries that start to deregulate enter the frenzied stage with companies forming many joint ventures to comply with local ownership provisions. Further deregulation leads to a period of turbulence where joint ventures are dissolved as alternative structures become available. Eventually, as markets stabilise, they reach the mature stage, which is similar to developed markets with a full set of available alliance structures.

Chosing the right alliance partner
Careful partnership selection is crucial. The winners will be companies that select their alliance partners based on the experience of emerging markets and cross-functional depth. Equally important criteria are adeptness in alliance management and demonstrated ability to overcome pitfalls. Ideal partners will have an extensive network of relationships and established presence in several markets, allowing entering different countries with one single contact. They should be able to leverage local expertise while maintaining the same international standards across all countries.

Shorter-term contracts allow companies to test new markets and business models with the flexibility to respond to new market conditions. Ideal partners would have complementary skills and offer flexibility in partnership design. They would be open to arrangements where the biopharmaceutical company retains IP rights and full brand control. Working with a partner who is not a current or potential competitor helps avoid competing interests.

Importance of alliance management
One of the most important criteria for partner selection is expertise in managing alliances. Many alliances fail because of a lack of uniformity or a scattershot approach to governance. Working with an experienced partner with a formalised approach to alliance management can alleviate the risk of failure. The practice of alliance management benefits the partnership by introducing more rigour to the decision-making process and improving communication. This practice applies systematic elements across all relationships, allowing the alliance to be driven forward aggressively and effectively, which in turn accelerates commercial opportunities.

Committed leadership and resources is the key to the success of any alliance. A joint governance framework with integrated operational control ensures a successful execution, keeping the long-term objectives in mind. Meeting in person on a regular basis allows clear oversight, issue escalation and continuous improvements.

Partnership success relates but to the cultural framework in which it is delivered. Organisations need to have a collaborative alliance mindset and culture. An alliance-enabled culture is built on trust, open communication, and a singular focus on achieving results.

Emerging markets represent a growth opportunity for the biopharmaceutical industry, but entering new regions requires a comprehensive strategy that includes much more than a sales force. A successful strategy will incorporate a balance of market access considerations, regional outcomes data, physician and pharmacist buy-in and knowledgeable sales reps familiar with the local distribution channel. Only then can a biopharmaceutical company create an effective campaign within an emerging market.