The Big Crunch: Price Pressures and Big Changes in Healthcare and Life Science Supply Chains - Part Two
on Feb 21, 2012
A major component of Life Science's transformation is the move to sell more into emerging markets. These have tremendous challenges around logistics, counterfeits, and (above all) extremely low price point requirements. But these markets are the dominant engines of growth for the next decades and so cannot be ignored.
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In Part One of this article, we discussed impacts of changes to payor strategies, evidence-based medicine, and the evolving, more incremental regulatory approval process. In this article, we look at what it means for life science companies to sell into developing economies.
Selling Into Developing Economies
Emerging markets, such as India and China, have huge, rapidly growing middle classes that have become prime target sectors for growth across virtually all industries. Automotive, fashion, high tech, retail, restaurant and many other industries are investing many billions of dollars to try and ride the wave of growth. Pharmaceuticals and medical devices are no exception. However, these markets are very different than traditional ones, and the challenges seem to be as big as the opportunities.
Extreme Price Sensitivity
For starters, the definition of middle class is quite different in these economies. Many are former peasant farmers who now are working in factories and receiving a wage that is perhaps a tenth of the equivalent income in developed nations. Further, although rising, the level of health care insurance coverage in these countries is still much lower than in the developed world. Nearly 80 percent of health care spending is financed ‘out-of-pocket’ in India, and around 60 percent in China. The result is that these markets will be extremely price sensitive in their buying of pharmaceuticals. To succeed, most drugs will need to be an order of magnitude less expensive than current markets.
Different Treatment Priorities
These markets have quite different treatment priorities from the markets that pharmaceutical companies traditionally sell into. There will be a greater emphasis on infectious disease and asthma, with less emphasis on cancer and heart disease (see Figure 1, at right). Further, there are neglected tropical diseases that are especially endemic in low-income populations, such as soil-transmitted helminthes (e.g. roundworms, whipworms, hookworms), Lymphatic filariasis (Elephantiasis), schistosomiasis (snail fever), Trachoma, onchocerciasis (River blindness), and a number of others.
In addition, developing countries tend to have much higher birth rates. These larger birth cohorts lead in turn to a higher emphasis on infant/childhood vaccines and treatments.
It’s Brand Formation Time
Many of the customers in the emerging economies are ‘first time consumers’ in the sense that this is the first time they or their ancestors have had a steady degree of disposable income. This means they are having their first experience with different brands of packaged foods, electronics, clothing, and yes pharmaceuticals. They are in the process of forming their opinions and tastes right now, based on their experiences, interactions, observations, and conversations with friends. Once solidified, these brand perceptions can persist even from one generation to the next. This is a critical period for companies to build their reputation. Smart companies are therefore giving extra importance to corporate responsibility and helping out the community. Some are investing in the healthcare infrastructure of these emerging countries, not only to build goodwill, but also to create improved access to their products. Some are also making a point to create and leverage production capabilities in developing countries such as India, Brazil, Mexico, China, South Korea, Russia, and Turkey.
Logistics and Security Challenges
Anyone who has done business requiring logistics in India or other emerging economies has probably experienced the tremendous challenges with the infrastructure. China still has many problem areas too, but has come a long way. In general, the lack of good roads, reliable transportation, reliable power, trained workers, and consistent services, as well as security concerns and the danger of theft in many areas, can make moving goods extremely difficult. This is especially true for temperature-sensitive drugs and biologics.
Counterfeits and IP Theft
The rate of counterfeiting in the developing world is much higher than in industrialized economies. In parts of Africa it is above 50 percent, whereas in the US it is below 1 percent. This can be a significant problem, not just because of lost revenue, but because of damage to the brand when people buy drugs they believe are genuine and find they are ineffective, or worse yet, receive counterfeit batches that are harmful or even fatal. Remedying this is an enormous undertaking that is difficult for any single company to accomplish alone.
Furthermore, some of these countries have significant corruption and IP theft problems. It is commonly known that there is IP risk in sourcing from some of these markets. But in addition, there is also risk in selling into these markets.
Serving and Surviving in Emerging Markets
In spite of seemingly insurmountable challenges, drug and medical device companies persist in attempting to succeed in these markets. These economies have too much growth potential to ignore. Brand loyalties are being formed. Local expertise and relationships are being developed. Many companies calculate that now is the time to strike.
Companies also must increase their anti-counterfeiting efforts through packaging, ePedigree, field monitoring, and selective enforcement. Joint efforts will be needed.
Learning from Other Industries
In many areas—such as lean production, dealing with compressed lifecycles, and mass customization—other industries have a decade or two lead on life sciences. Examples are high tech, apparel, automotive, and CPG. These industries have learned how to deal with extremely compressed product lifecycles, high levels of demand volatility, the need for mixed-mode and flexible factories, and more. They have also developed the virtual enterprise or multi-tier federated model to a much greater extent. They have made progress in managing across multiple tiers of the supply chain (lots of resources on this here). Manufacturers in these industries also have experience with offering services and a presence on their customers’ premises, such as Direct-Store-Delivery to retailers or Direct-to-Consumer services. No doubt there are critical differences between these industries and pharmaceutical manufacturing, which is much more highly regulated. Nevertheless, there are important lessons that can save years of painful and expensive trial-and-error learning. Pharmaceutical companies can do well by bringing some cross-industry talent into their operations.
It is a time of tremendous challenge and game changing opportunities for life science and healthcare. We must get a lot more efficient and affordable, yet provide much more personalized ‘micro-services’ and products. New ways of thinking and talking about the supply chain are emerging across the whole industry. Now is the time to identify the opportunities and strike while the iron is hot.
To view other articles from this issue of the brief, click here.