In recent decades, the pharmaceutical market has expanded its geographic reach. This trend appears to be here to stay; in a survey of major pharmaceutical firms conducted by global consulting firm PwC’s Strategy& team, more than half of respondents anticipated that over 30% of their global sales would originate in emerging markets by 2018. Even in the most newly opened markets, drug companies have seen growth: forecasts for Myanmar, for instance, indicate that pharmaceuticals could quickly grow into a $1bn industry.
As governments and companies take note of this high potential, both are pursuing development in the face of cross-cutting challenges, particularly regarding the resources required to develop new products and accompanying intellectual property concerns.
As economies grow, and health care and insurance mechanisms expand, demand for local and imported pharmaceuticals is on the rise. Research from consultancy McKinsey & Company highlights that emerging markets have been outspending Germany, France, Italy, the UK and Spain (the EU5) on pharmaceuticals for several years, with a total market size of $281bn compared with the EU5’s $196bn in 2014.
Estimates also indicate that in 2015-20, emerging market spend will account for $190bn in sales growth. In Africa alone, the industry expanded from $4.7bn in 2003 to $20.8bn in 2013, with projections that the need for medicines and medical equipment will rise by 6-11% by 2020. The Strategy& survey highlighted that between 2015 and 2020, fast-growing markets like Turkey and Mexico were expected to see a 9.3% increase in sales.
Demand is rising and diversifying, as emerging markets increasingly deal with non-communicable diseases already prevalent in wealthier economies, including diabetes and hypertension, while communicable diseases that afflict many emerging markets – such as AIDS, malaria and tuberculosis – persist.
The incidence of diabetes in particular is expected to accelerate in many emerging markets and drive demand for pharmaceutical products. According to the World Health Organisation (WHO), the global prevalence of diabetes has nearly doubled since 1980 from 4.7% to 8.5%, growing most rapidly in low- and middle-income countries. On top of this, people are living longer, with estimates that the global population over 65 years old will increase by 8% between 2015 and 2020, to 604m.
Despite rising demand, production and innovation in less-developed markets is limited, due in large part to the resources required to establish and enforce intellectual property rights (IPR). McKinsey estimates that large-scale biotech facilities require $200m-500m and take four to five years to build, with high operating costs. The International Federation of Pharmaceutical Manufacturers & Associations notes that it takes 10-15 years to develop a new medicine or vaccine, and the cost can exceed $2.6bn. In established markets, governments typically grant IPR as an incentive to incur the costs of developing innovative products that can save lives and generate a return. The pharmaceutical industry invests more in research and development (R&D) than any other industrial segment.
In contrast, in many emerging markets the law and its enforcement have left players wary of entering. If patent protection is not guaranteed, the anticipated returns on expensive undertakings may not outweigh the costs. Furthermore, the strongest need for research in many emerging economies relates to diseases affecting populations that will not be able to pay for expensive medication. Known as the “10:90” gap by the Global Forum for Health Research, R&D has historically focused 10% of resources on diseases making up 90% of the global burden, including dengue fever and cholera, which primarily affect low-income populations in tropical environments.
Overall, the lower financial incentive to innovate has prompted debate over how to ensure these products are developed. Research from organisations like the OECD highlights that IPR reform – addressing patent protection, copyright and trademarks – is the way to drive positive economic results that benefit markets and provide the needed research. Others, including economist Joseph Stiglitz, argue there are other solutions that better balance the need to incentivise innovation with allowing for access to life-saving drugs, including increased support for research from centralised mechanisms or tax credits for innovative solutions.
Even if laws align with international norms, the practical enforcement of these rules remains a key challenge. Piracy and counterfeits, which are often difficult to track, are common in many markets. According to a November 2017 WHO report, an estimated one in 10 medical products in low- and middle-income countries is either fake or substandard, resulting in an estimated 10.5% failure rate. Unreliable dispute resolution mechanisms are another issue; even if counterfeits are identified, the resolution process can be long and unwieldy. In Nigeria, for example, drug producers complain of a long and bureaucratic adjudication process, and global consulting firm PwC describes the “lack of meaningful patent legislation or pricing and reimbursement” as one of the key challenges for the development of the country’s pharmaceutical industry.
However, there are some signs of progress. Jordan, for one, has seen intellectual property protection improve, as per the World Economic Forum’s “2016 Global Information Technology Report”, which ranked the country 35th out 139 on this metric. Furthermore, as highlighted by the ITA, Jordan’s drug industry generally abides by its TRIPS-consistent Patent Law and shows commitment to even stronger enforcement of IPR, particularly in pharmaceuticals. Meanwhile, “[In Myanmar,] counterfeit products represent a massive issue for firms selling premium or original products,” Girish Wadhwa, Myanmar office president of Thailand-headquartered Mega Lifesciences, told OBG. “However, in 2015-17 companies saw improvement due to the Ministry of Health’s involvement, and the increased strength of the Food and Drug Administration.”
Developing markets are increasingly focusing on clinical trials, which can serve as an entryway into R&D. According to a 2015 Deloitte Access Economics report, an estimated $320m was spent on clinical trials in Thailand in 2015, with more than 111,000 participants. Pharmaceutical companies sponsored 38% of the trials.
“Thailand’s growth in R&D is mainly in clinical trials, which contribute 0.05% of GDP and allow firms to go further in the upstream with drug discovery know-how and in the downstream from registration to the manufacturing global supply chain,” Busakorn Lerswatanasivalee, president of the Pharmaceutical Research & Manufacturers Association in Thailand, told OBG. “Particularly given the health issues of Thailand’s ageing population, clinical trials can be the starting point for tropical disease clinical research and innovative drugs.”
Mexico has also made clinical trials a key component of its pharmaceutical development strategy, with investment – currently around $250m – projected to triple by the 2020s. “In 2015, when we worked on the strategic plan with the government, we highlighted clinical trials as key to capitalising on the global annual $140bn in investment in health care, given that $8 out of every $10 spent is on clinical research,” Cristóbal Thompson, executive director of the Mexican Association of Pharmaceutical Research Industries, told OBG. “One of our studies even showed that for every additional $1 spent on research there is $1.64 in added value, and every new job in clinical research adds more than four jobs in the market. So when we saw that there were delays in getting clinical research protocols approved, we started working with the authorities to see how we could accelerate this, and have achieved huge progress. We have cut down approval time to 60-70 days, and within one year Mexico hopes to be in line with the top clinical trial hubs in the world.”
Gurulinga Konanur, CEO of Hetero Drugs Mexico, also highlighted how efficient the state has made the clinical research process. “Mexico has been opened to R&D by the government, which is highly supportive of any pharma company seeking to invest in research,” he told OBG. “This includes approval systems that provide the required permissions within an established and relatively short time frame.” Provided trials are conducted in an ethical and scientifically rigorous way, the potential benefits for firms in emerging markets are vast. Not only are operational costs lower, but the ability to work with untested populations on diseases specific to their market can yield life-saving results.
The generics industry can provide lower-cost alternatives for desperately needed medications, and production is on the rise. For example, Africa’s generics market is forecast to expand at a compound annual growth rate of 9% over 2013-20. While comprising the same active ingredients as their branded predecessors, generics do not bear the same development costs, allowing for lower sales prices and greater sales volumes. In Nigeria, for instance, currency fluctuations in 2017 made consumers more price sensitive, increasing demand for lower-cost, generic drugs. Similarly, in Tunisia, efforts to reduce health care expenditure and improve access to medicine have led to a rise in generic drug production. Some markets also see long-term opportunities for local pharmaceutical players as cost-effective producers of generics for export and local consumption. Several Egyptian pharmaceutical companies, for instance, are looking to export to less-developed markets in sub-Saharan Africa, as well as Yemen, Iraq, Sudan and Libya.
While increased access to medication is positive, the expansion of generics, including those produced legally – modelled on drugs for which patents have expired or those that were never patented – reduces the incentive for pharmaceutical firms to invest in R&D for new products. Thailand, which implemented its sweeping Universal Coverage Scheme in 2001, has been pursuing the production of generics. However, although affordable generics are appealing to customers in the short term, this slowdown in the development of innovative products could present future challenges, particularly in countries like Thailand with large, ageing populations.
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