Big Pharma Bets on Emerging Economies
Andrew Jack
On the shelves of pharmacies across India, a new form of competition is taking hold. Patients long neglected by multinational drug groups are beginning to gain access to a wider variety of innovative medicines at more affordable prices.
In the past, even when newer drugs were physically available, they were typically charged at Western prices, too costly for most to buy. Now Merck is offering its diabetes drug Januvia at a fifth of the U.S. price, and GlaxoSmithKline (GSK) is charging different prices even within India to reach more of the population.
Such nuanced approaches to drug pricing that more closely reflect the ability to pay represent an attractive new trade-off for pharmaceutical companies: they provide greater sales to please their shareholders, while improving access to medicines for patients on lower incomes in the developing world.
“The pharma industry has realized that the vanilla solutions that were effective in the past now require significant differentiation,” says Todd Evans, director of the health-care advisory group at PricewaterhouseCoopers, the accountancy and advisory firm. “Pricing is going to be highly varied.”
While the U.S. remains by far the world’s largest single market for pharmaceuticals, GSK and a number of its rivals are increasingly betting on the fast-growing “emerging economies” of Asia, Latin America and Eastern Europe to compensate for increasingly sluggish growth in the developed world.
For many years, much of their action around “access to medicines” was essentially philanthropic. It focused on drug donations to treat the world’s neglected diseases, such as Merck’s provision of Mectizan for onchocerciasis, Pfizer’s Zithromax for trachoma, and GSK’s Albendazole for lymphatic filariasis.
Since the turn of the millennium, growing demands from AIDS activists – backed by political pressure and legal challenges – offered a new approach spearheaded by wider access to costly new antiretrovirals for HIV in the developing world.
A corporate desire to head off criticism, underwritten by fresh funding from donors and competition from generic drug manufacturers, helped reduce prices. Several began to experiment with differential or tiered pricing, through programs such as the industry-backed Accelerating Access Initiative.
Drawing on the principle of “Ramsey pricing” developed by an economist of the same name in the 1920s, the idea behind the initiative is to charge prices that only just cover marginal production costs in poorer countries, so long as higher prices in richer ones cover research and development costs and provide an adequate overall rate of return.
Emerging Markets Become Significant
Interest in extending such flexible pricing to other therapy areas and some of the larger emerging markets has been slow. In a report at the end of 2007, Oxfam, the British anti-poverty group, criticized pharmaceutical companies for “a failure to implement systematic and transparent tiered-pricing mechanisms for medicines of therapeutic value to poor people in developing countries, where prices are set according to a standard formula which reflects ability to pay.”
Novo Nordisk, the Danish pharmaceutical company, has been present for a decade in China, investing in research and manufacture as well aa marketing and distribution. But it sells its new generation of insulin products to diabetics at Western prices.
That is not simply a policy that suits the company. The Chinese authorities have imposed the system in order to stimulate innovation, investment and the creation of a domestic pharmaceutical industry. They have negotiated drug prices close to those paid by its far richer regional neighbors, such as Japan and South Korea.
Following a similar pattern in other industrial sectors, the situation may change once China’s domestic drug industry becomes stronger. The fact that so many of its citizens are uninsured and unable to pay such high prices may also provide pressure for change.
Elsewhere in the developing world, cancer medicines – by some estimates already the largest therapeutic category in the world and consuming a significant share of the pharmaceutical industry’s research funding – are generally allocated a single, high global price by their manufacturers.
Companies such as Novartis of Switzerland, developer of Gleevec, a pioneering treatment for leukemia, have kept prices high and fiercely defended their patents against generic copies, while operating patient assistance programs to offer the drug free to those on low incomes who need it.
Some executives argue that demand for their medicines is relatively inelastic, with no price low enough to significantly boost access. A small, wealthy population in poor countries can afford to pay Western prices out of pocket or through health insurance. Most of the rest are so poor and left uncovered by rudimentary state health care that even a very substantial discount would not allow them to buy innovative medicines.
Another reason more companies have not extended differential pricing widely in the developing world is fear is that discounts may undermine the higher prices they charge in the West. Re-importation is one way this occurs. Intermediaries buy drugs in countries where they are cheap, for resale with a mark-up in higher priced regions. The practice is illegal in the U.S., but difficult to control, and takes place from Canada. Within the European Union, such “parallel trade” has been upheld as legal in several recent court rulings.
Simply observing the lower prices charged elsewhere via the Internet may also trigger demands by middle-income and richer countries for similar discounts, undermining the prospects of subsidized sales for the poorest.
“We price globally,” says Angus Russell, chief executive of Shire, an Irish-based company, which sells drugs to treat very small groups of patients with extremely rare diseases who may pay as much as $300,000 a year per person. “Otherwise you would get parallel imports. These are tight-knit communities.”
But renewed commercial interest in emerging economies led by Brazil, Russia, India and China is also sparking a broader reflection on differential pricing. Among 50 top pharmaceutical executives polled last June by Roland Berger, the management consultancy, the single most significant commercial opportunity they cited was the “rising importance of emerging markets.”
As IMS, a global health-care consultancy, highlighted in its “Harbingers of Change” for 2008, “Asian (excluding Japan), Latin America and European markets (apart from the five major developed markets) grew collectively by more than 10 percent and are now the largest source of growth in the global market.”
As the World Health Organization has argued, with rising wealth and changing lifestyles, emerging markets are increasingly characterized by populations with the same health problems as more developed countries. Chronic diseases are becoming more important than infectious ones.
While the Bill & Melinda Gates Foundation, from its U.S. base, has focused on tackling infectious disease in the developing world, Carlos Slim, the Mexican billionaire who by some accounts has become the world’s richest man, has established a foundation in his home country which concentrates on chronic disease.
Pharmaceutical executives also recognize that if they do not act, others may take the initiative. Thailand and Brazil have in recent months issued “compulsory licences” permitted under World Trade Organization rules, which allow them to waive patent protection on costly drugs and buy alternative versions from generic companies of the same quality but far cheaper.
Public pressure is also rising. Wim Leereveld, a Dutch former pharmaceuticals marketing consultant, this year unveiled his Access to Medicines Index, which rates companies according to criteria including affordable pricing. It has already provoked an indignant response, notably from those companies that scored poorly.
Andrew Witty, the recently appointed chief executive at GSK, says: “We need to start thinking about new game rules for the emerging economies.” He has headhunted Abbas Hussein from Eli Lilly to a newly-created senior job in charge of emerging markets. “We already had the footprint. With Abbas, we have someone capable of creating the strategy.”
One of the projects that helped Witty win the top job at GSK was to develop experimental ways to sell medicines, with tests in India, South Africa and Morocco. He oversaw “internal tiered pricing” to sell at relatively high prices to richer patients who were insured or paid for themselves; and discounts to those on lower incomes with little or no coverage.
He is not alone. Allan Gabor, regional vice president for Asia at Pfizer, says: “Our objective is to make products more widely available, and be much more flexible than we have been on pricing.”
Some generic companies such as Cipla in India continue to fight against patents, arguing that competition is the only way to bring down drugs to affordable levels. They are backed by groups such as Doctors without Borders, which wants further easing of intellectual property rules to keep innovative drugs cheap.
Yet a report from the United Nations released just ahead of a special session on the Millennium Development Goals in September highlighted that one of the biggest gaps in access to medicines did not relate to patented medicines at all, but rather generic drugs with often very high prices.
That reflects factors, including import duties, taxes, networks of intermediaries and wholesalers with high margins, and small and inconsistent volumes which push up prices. It also highlights poor health systems and reluctance by many governments to sufficiently invest in medical care, including the purchase of pharmaceuticals.
Yet it may be commercial forces and the lure of emerging markets that ultimately do most to drive differential pricing, and boost access to many patients whose incomes still exclude them from so much care available to those in the world’s richer nations.
Andrew Jack is a journalist for the Financial Times of London since 1990, specializing in health and pharmaceuticals.
Differential prices has been shown to lead to profit maximization for vendors. So it’s not a surprise that this strategy is being tried by Pharma companies.
It was outlawed in the USA by legislation, now it appears to be reborn in the global marketplace and will lead to higher revenues for drug companies, if that is a good thing or not, hard to cipher.
— Christopher McDermott on 2009-02-19