Pharma Futures 3

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Pharma Futures
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O00/134.)3)%2 (PF3) was a
collaborative venture that brought
together a range of stakeholders
to explore the challenges and
opportunities for the pharmaceutical
industry of working in emerging
markets. Emerging markets are
significantly different to mature
markets and more complex to
manage. When managing complexity
not only yields lower returns, but also
potentially undermines profitability in
richer markets, it is not surprising that
many global companies have come
slowly and somewhat reluctantly to
the table. However, this is no reason
to sidestep the vital importance of
these markets. Or to fail to note that
the greatest opportunity they offer is
to allow the pharmaceutical industry
and its investors a chance to refocus
their businesses to become part of
a collaborative effort to massively
expand access to healthcare. The
pharmaceutical industry has a noble
purpose. Its products intimately touch
peoples lives they can prevent or
alleviate (sometimes excruciating)
pain and discomfort. They keep loved
ones alive or aid a more peaceful
death. It is an industry that offers
both relief and hope.
That pharmaceutical companies
know this well and it is reflected in
the mission statements of all PF3
participants. AstraZeneca describes
its business as being focused on
turning good ideas into innovative,
effective medicines that make a real
difference in important areas of
healthcare. Dr. Reddys aims to
provide affordable and innovative
medicines for healthier lives.
GSK seeks to improve the quality
of human life to enable people to do
more, feel better. J&J has operated
from a strong Credo for many years,
which the company says challenges
us to put the needs and well-being
of the people we serve first. And
Novartis wants to discover, develop
and successfully market innovative
products to prevent and cure
diseases, to ease suffering and to
enhance the quality of life as well as
provide a shareholder return that
reflects outstanding performance and
to adequately reward those who invest
ideas and work in our company.
And it has been enlightening to see
how strongly the representatives of
these companies wish to translate
these aspirations into a reality. As
one participant put it, it is unthinkable
that we fail to offer the full range of
all that is available to everyone.
P(!1-! F4341%2 3 has been
underpinned by George W Mercks
belief that remembering that medicine
is for the people, first, and that if you
get that right, the profits will follow.
The launch of this report is timely.
It is released into a world seeking
longer-term investment strategies and
one in which a number of new CEOs
constitute a significant change in
the leadership of the pharmaceutical
industry. This provides a powerful
opportunity for this new generation
to deploy the leadership and courage
that will be needed to transform both
companies and markets to deliver
healthcare more systematically to
more people. We hope this report
both inspires creative thinking about
next steps, and also offers ideas
and suggestions as to how to tackle
some of the more intractable
obstacles that may lie in the way.
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SustainAbility
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Executive Summary
Investor Statement
Introduction to Pharma Futures
1 The Siren Call
2 Creative Solutions
3 Implications for Investors
4 Conclusions
Acknowledgements
Appendices
1
4
6
8
22
38
42
44
45
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Emerging markets are now significant
players in global trade. The healthcare
industry though slower than others
to switch on is actively seeking to
realise the commercial potential of
countries such as China, Brazil,
Russia and India. Economic and
demographic growth has combined
with changing disease profiles to
present attractive new consumer
markets as well as potential research
and development hubs. These
countries especially India and
China are also the source of new
competition, particularly in generics,
which contests the dominance of
global healthcare players. But, despite
this surge of economic activity, these
countries remain home to millions of
people who live in great poverty and
who have little to no access to quality,
affordable healthcare.
How companies Western
multinationals as well as emerging
markets players address the critical
societal challenge of reconciling
commercial success and healthcare
outcomes will be a determinant not
only of the success of their efforts,
but also of globalisation more broadly.
Can companies and their stakeholders
find ways to ensure that the majority
of people and not just the wealthy few
prosper in this new environment?
Is it possible for the global healthcare
industry to respond to emerging
markets not as Rest of World
as it has traditionally done, but as
Most of the World as it in fact is?
P(!1-! F4341%2 3: E-%1').'
O00/134.)3)%2 (PF3) is the third in
the Pharma Futures series of investor-
led dialogues exploring the future
of the pharmaceutical industry.
In this iteration it brought together
representatives of the pharmaceutical
industry, investors, entrepreneurs
and global health experts to explore
the links between sustainable
pharmaceutical business models
and improved health outcomes in
emerging markets. Specifically,
the dialogue explored how other
industries have approached value
creation in emerging markets, and,
in particular, how companies have
successfully reached middle and
lower income market segments
through innovative approaches.
The group was clear that the market
alone cannot and will not solve the
needs of the poorest people. It,
however, concluded that through
partnerships and innovation much
more can be done by incumbent
pharmaceutical companies to help
deliver better healthcare outcomes
for people on lower incomes in
these markets.
1 Pharma Futures 3
We try to remember that medicine is for the
patient. We try never to forget that medicine is
for the people. It is not for the profits. The profits
follow, and if we have remembered that, they have
never failed to appear. The better we have
remembered it, the larger they have been.
G!+.#! W M!.c'
Richmond, Virginia, 1 December 1950
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Despite the growth potential of
emerging markets, only recently
has pharmaceutical activity in these
markets reached levels that has
piqued the interest of the investment
community. This slow lead time is due
to the complexity of working in these
new geographies and a concern about
the potential impact they may have
on mature, more profitable markets.
The following five key characteristics
of emerging markets are essential to
understanding the context.
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Emerging markets are immensely
complex. They are characterised by
extreme cultural and ethnic diversity,
marked income inequalities, a
significant rural-urban split, with large
percentages of the population with
very poor access to transportation,
infrastructure and other basic
services. This complexity is further
compounded by rapidly changing and
unpredictable operating environments
that require considerable skill to
manage well. And, of course, there is
no such thing as an emerging market
each country has its own unique
operating environment, which makes
managing a European portfolio seem
simple in comparison.
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The potential for massive sales
volume in emerging markets is
tempered by lower purchasing power,
which means patients cannot support
comparable prices to developed
countries. As most people in these
markets pay for medicines out of
pocket price sensitivity is acute.
The industry and its investors,
however, are wary of experiments
at least visible ones with significantly
different pricing models in emerging
markets because of the potential
effect of eroding margins in mature
markets.
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Poverty and chronic underinvestment
in health has resulted in the absence
of strong payers and corresponding
service providers and presents
extreme challenges to access, delivery
and distribution. This is particularly
true of rural areas. To access patients
and consumers in these markets
requires companies to understand
and support coordinated efforts to
create or strengthen health systems.
This is both a potentially expensive
and politically complex undertaking
of which investors and companies
alike are wary.
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Relations with governments are
complex. In part this is the result of an
uneasy history of interactions between
the pharmaceutical industry and
emerging market governments which
has been shaped by differences in
opinion over trade and health policy,
making relations unpredictable and, at
times, difficult.
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Around the world people relate the
responsibility to deliver healthcare
with the Hippocratic Oath of doctors
to treat people indiscriminately on the
basis of need. The expectation that
manufacturers of life-saving medicines
should make them available to people
who need them is one characteristic
of the unique social contract
between the pharmaceutical industry
and wider society. It has particular
implications for pharmaceutical
companies operating in markets
with weak government health
provision as, in essence, the private
sector is being asked to step in to
solve public sector problems.
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To understand the potential of these
markets PF3 researched examples of
companies across a diverse range of
sectors including regulated
industries such as water and finance
to highlight how others are profitably
and sustainably reaching middle and
low-income consumers. Early movers
in this field have recognised that by
playing an active role in compensating
for infrastructural, logistical or market
deficits, they not only can develop
new markets, but also can address
pressing societal challenges.
In addition to such approaches,
success in new markets requires a
healthy dose of patience, willingness
to experiment and determination.
PF3 reviewed ten cases in depth,
all available on the Pharma Futures 3
website (www.pharmafutures.org).
This report looks at a selection of
these, including Nokia, as an example
of a Western multinational which is
evolving its business model to reach
beyond the urban centres to rural
populations in India. It highlights how
two global firms based in emerging
markets, Cemex and Manila Water, are
proving adept at innovation solutions
to better align societal needs with
shareholder value. And finally its study
of the Aravind Eye Hospital and Fabio
Rosa illustrates the potential for social
enterprise models to leverage the
market to offer health and energy
solutions.
2 Pharma Futures 3
www.pharmafutures.org
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PF3 underscored the excitement
and interest of both pharmaceutical
executives and investors in the
potential of the emerging markets.
It stressed the importance for the
pharmaceutical industry of developing
and scaling up innovative business
models that are suited to emerging
markets. At the same time, it
emphasised the potential for the
investment community to improve its
understanding and support of these
efforts, which aim to deliver long-term
value. The dialogue identified the work
of social entrepreneurs and global
firms domiciled in these markets
as a critical source of learning and
inspiration. The core conclusions of
the dialogue were:
Investors need clearer signals from
industry about the nature of the
opportunities in the emerging
markets and the investments
such opportunities will require.
Pharmaceutical companies will
need to adapt their business models
from ones developed for Western
markets with robust health
infrastructure to models that
account for the realities of emerging
markets. New approaches to
distribution and pricing will be
required.
Improved communication, not just
between companies and investors,
but also between the industry,
governments, global health experts,
and local people will facilitate
effective emerging markets
solutions. The media, in particular,
has a role in the promotion of
accountability and transparency.
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Investors are increasingly interested
in how pharmaceutical companies are
positioning themselves in emerging
markets, but are hampered by a lack
of information. Investors would like
to see a clearly articulated business
strategy for these markets, supported
by key performance indicators,
including: share of sales in emerging
markets (and by country); the
percentage of profits; the number of
employees; the percentage of assets;
the share of capital expenditure; the
percentage of R&D spent; the
proportion of stock-keeping units
(SKUs) available; and the average
price of key products in emerging
markets versus developed markets.
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Investors would also benefit from
leading indicators that can help them
forecast future success. Metrics that
measure how well companies are
managing government relationships as
well as public expectations would, in
particular, provide invaluable insights.
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PF3 identified the opportunity to
leverage the funding and talent
of the investment community and
pharmaceutical companies through
their venture arms and foundations
to scale up social enterprise solutions.
In particular, the potential of new
hybrid (philanthropic capital paired
with mainstream venture capital)
financing vehicles to invest in a range
of healthcare ventures that support
extended healthcare access was
explored.
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Drawing on experiences in other
sectors, three elements of business
models that meet the needs of lower
income consumers in emerging
markets include: (1) they are human-
centred; (2) they take a new approach
to understanding affordability; and
(3) they actively seek new means of
achieving market penetration.
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Companies need to continuously
ensure that their products/services
meet customer needs. Pharmaceutical
companies expanding into emerging
markets must critically examine their
product offerings for individual
markets.
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Cost-cutting, volume-based business
models, customer aggregation and
other financing mechanisms will all
help to improve affordability.
Companies will have to implement
innovative pricing schemes for
emerging markets, without negatively
impacting their Western markets.
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Beyond greater affordability,
expanding access to low-income
populations depends on improved
distribution. Upfront investment
by companies, governments and
non-governmental actors involved
in the healthcare sector is vital.
And, partnerships, between a variety
of players who can help develop and
deliver solutions, will be a key
determinant of success.
3 Pharma Futures 3
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The pension fund investors
participating in the Pharma Futures
project represent approximately
225 billion AUM, of which 7.2
billion is invested in healthcare.
As long-term investors, we have
a clear interest in promoting a
sustainable and profitable pharma-
ceutical industry.
We have supported Pharma Futures
since 2003. We believe the structured
dialogue between large investors
and industry executives has offered
a unique and valuable channel of
communication and research. Earlier
phases of the project have dealt
with a broad set of challenges and
opportunities facing the industry.
In this phase we have focused on the
risks and opportunities associated
with expansion into emerging markets.
In this statement USS and APG
wish to:
Re-affirm our view that how
companies tackle emerging markets
will have a material bearing on the
industrys future health and
prospects; and
Call for improved disclosure to
investors about its activities in
emerging markets.
Firstly, however, we would like to
express our sincere gratitude to the
participating representatives of the
pharmaceutical companies all of
whom directly oversee emerging
market business activities for
sharing their thoughts and
experiences with us during the
discussions. We deeply appreciate
the effort the representatives have
invested in the process and their
openness.
Through these discussions we
have gained a better understanding
of the challenges the pharmaceutical
companies face and it has
strengthened our beliefs about the
potential that emerging markets
represent for the pharmaceutical
industry.
C+*0!40
As long-term investors with a
significant stake in the healthcare
sector, we constantly strive to deepen
our understanding of how the
pharmaceutical industry is dealing
with a range of operational and
societal challenges that weigh heavily
on current valuations. In this series
of Pharma Futures discussions the
focus has been on emerging markets,
not because we believe that the
significance of the pharmaceutical
industrys main markets will diminish
in the short term, but because we
expect emerging markets will shape
the industrys future.
Currently, however, the market does
not believe the industry is in a position
to reinvigorate earnings growth in
the West. And despite efforts by an
increasing number of companies to
highlight attractive prospects in
emerging markets, the market has
not yet priced these in. In order
for investors to start valuing the
opportunities, emerging market
strategies need to be backed up with
hard data and information provided
concerning their implementation.
We hope that that this report will
encourage enhanced communication
between the industry and its investors.
4 Pharma Futures 3
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Most information provided to
investors on pharmaceutical
companies activities in emerging
markets is focused on philanthropic
activities. Whilst important, we would
like to learn more about how the
industry is making the shift towards
scalable and sustainable, long-term
profitable business models in these
regions. Moreover, the pharmaceutical
industry faces specific challenges
associated with changing societal
expectations. Of key importance is
the industrys approach to expanding
access to medicines amongst
poorer communities.
As part of the dialogue we looked
at other sectors and concluded that
it is possible to develop profitable
business models that reach large parts
of the population including lower and
middle-income consumers. Some of
the success factors we identified are:
Understanding affordability and
willingness to pay;
Differentiating product offerings
by developing services alongside
basic products;
Working with local partners or
social networks to deliver products
or provide ancillary services;
Investing in effective channels
for distribution; and
Rationalising process and
cost structures.
In sum, for companies that are
sensitive to societal expectations
and willing to experiment with new
business models, we believe emerging
markets offer significant opportunities
to boost sales growth and earnings.
We do not, however, expect all
companies to succeed.
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Many pharmaceutical companies
are already experimenting with
different business models in emerging
markets, and have done so for years.
Few, however, are conveying their
experiences, or how these feed into
their longer-term emerging market
strategies, to investors.
Information on emerging market
sales, margins, earnings and capital
expenditure are essential for analysts
to be able to evaluate what these
markets mean for company
valuations. In addition to financial
guidance, investors need more
information about business models
and on short and medium term
implementation. We would also
encourage pharmaceutical companies
to give guidance on when specific
emerging markets businesses are
expected to become profitable, how
levels of profitability are likely to
evolve over time and what impact
emerging market sales will have on
more established markets. This will
allow investors to critically examine
common assumptions that lower
profitability in emerging markets
will undermine profitability in the
West.
Without more information, the
market will be reluctant to reward
management for moving into emerging
markets, and may instead punish
management for risking shareholder
equity.
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In the context of recent market
turbulence it is possible to lose sight
of longer-term value drivers. Indeed,
market turbulence and economic
downturns have historically favoured
healthcare companies share prices
as investors seek the comfort of
relatively stable cash flows and the
security of lower levels of debt.
Nevertheless, over the longer term,
the markets concerns over the
industrys sustainability will re-surface.
For long-term investors like APG
and USS, it is clear that the industry
needs to rethink its old Western-
oriented blockbuster dependent
business model. Alongside efforts to
respond to growing pricing pressure
in Western markets, companies need
to convey a convincing narrative of
how they plan to deliver sustainable
returns in rapidly growing emerging
markets. Part of the strategy must
address the emotive issue of access
for poorer people. It must also,
however, persuade investors that
their investments will continue to
deliver competitive returns.
5 Pharma Futures 3
The structured dialogue between large
investors and industry executives has
offered a unique and valuable channel
of communication and research.
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Pharma Futures was set up by a
group of pension funds in 2003 to
better understand the potential impact
on their investments of the serious
challenges facing the pharmaceutical
industry. These include a wave of
patent expiries; demographic
changes; pressures to reduce
healthcare costs; challenges to
intellectual property rights; unmet
health needs in developing countries;
and societal anger at corporate
priorities and behaviour.
From the start, this investor-led
dialogue has aimed to validate the
business case for adjusting the
pharmaceutical industry business
model to more effectively balance
changing market realities and societal
expectations. Put simply, Pharma
Futures explores the links between
sustainable shareholder value and
patient health, particularly for under
or un-served populations. The
initiatives overarching aim is to build
trust and foster an environment in
which collaborations and partnerships
between industry and key stake-
holders can flourish, leading to
improved health outcomes and
increased commercial opportunities.
The first in the three-part series,
Pharma Futures 1 was a scenario
planning exercise undertaken by the
pharmaceutical industry and its
investors which concluded with the
publication in 2004, P(!1-! F4341%2:
A L/.'-3%1- V!,4% O43,//+. This
report identified three plausible
futures, each of which represented
significant change for the industry.
Scenario 1 the Producers Scenario
focused on an operating environment
in which emerging markets come to
the fore. Scenario 2 The Patients
Scenario highlighted patients as
consumers and individualised
medicine. Finally, Scenario 3
Politics and Public Health Scenario
described how a global flu pandemic
led to greater government and
industry cooperation and negotiation.
Pharma Futures 2 moved from
hypothetical futures to explore current
real-world challenges. Published in
2007, P(!1-! F4341%2 2: P1%2#1)03)/.
&/1 L/.'-3%1- V!,4% concluded that
three trends will determine the
industrys future value: (1) R&D
productivity; (2) agreement between
society and industry on what
constitutes value for money; and (3)
the emerging markets. The report
reviews these trends, their social
consequences and how industry and
investors might address them so as to
meet both shareholder and societal
needs. The dialogue focused on how
the industry communicates with
investors and how investors in turn
signal what they want to know.
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The dominant pricing and distribution
models of the pharmaceutical industry
were developed for a world in which
reimbursement and healthcare
infrastructure could largely be taken
for granted. This is not true of the
emerging markets, where the industry
has come under intense pressure to
develop different models of both
pricing and distribution in the absence
of state provision.
6 Pharma Futures 3
Pharma Futures explores the links
between sustainable shareholder value
and patient health, particularly for under
or un-served populations.
P(!1-! F4341%2 3: E-%1').'
O00/134.)3)%2 (PF3) was set up to
explore what sustainable pharma-
ceutical business models in middle-
income markets might look like and
how they could contribute to improved
health outcomes for people on
low incomes.
As with previous Pharma Futures
initiatives, PF3 was designed as a
structured dialogue, this time between
industry, investors, entrepreneurs and
global health experts. Discussions
focused on whether and how
innovative financing, business models
and partnerships might lead to
increased business value and
improved health for millions of people
who currently have little to no access
to affordable, quality healthcare. The
synthesis of these discussions as well
as the research conducted to support
them is captured in this report.
P(!1-! F4341%2 3 took as its starting
point five key challenges of operating
in emerging markets: (1) complexity;
(2) affordability; (3) accessibility; (4)
government relations; and (5) the
social contract. Through the prism of
these challenges PF3 examined both
novel approaches to value creation in
emerging markets and considered
what the market could and could not
be expected to deliver in the current
paradigm. Building on feedback from
industry executives that they face
significant challenges reaching
beyond the affluent minority in
emerging markets, PF3 sought
potential insights from other sectors.
It looked across a broad range of
companies including Western
multinational and national companies
as well as smaller, entrepreneurial
ventures to understand the relevance
of their emerging markets approaches
to the pharmaceutical industry.
The research findings, described in
this report, point to the opportunity
for the pharmaceutical industry to
consider a more full-service market
offering. Case examples across a
diverse range of sectors, including
regulated industries such as water
and finance, highlight the ability of
corporations to profitably and
sustainably reach low-income
consumers in emerging markets.
Early movers in this field have
recognised that by playing an
active role in compensating for
infrastructural, logistical or market
deficits, they not only can develop
new markets, but also can address
pressing societal challenges. PF3
identified three common elements to
emerging markets business models
that appear to be most successful in
meeting the needs of lower income
consumers: (1) they are human-
centred; (2) they have taken a radically
new approach to address affordability;
and (3) they have sought new means
of achieving market penetration, by
taking a much more active role to
ensure that their offering is accessible.
While the research uncovered
tremendous potential for the
pharmaceutical industry to revisit
its approach to delivering value in
emerging markets, it also came to
two clear conclusions about the
limitations of the market.
First, there are things about the
pharmaceutical industry that are
genuinely different. While it suffers
from typical challenges of incumbent
companies, such as a rigid adherence
to the existing business model and
emphasis on short-term share price,
it also is a highly regulated industry.
The products it makes so valuable
for so many people can, when
administered in the wrong way, be
highly toxic.
This results in a strict process of
clinical trials for safety, efficacy and
quality before being launched onto
the market, and continued controls
afterwards, such as the involvement
of a learned intermediary (doctor or
pharmacist) in defining who gets
what treatment and constraints on
where it is sold and to whom. These
distinctions should be kept in mind
when considering how lessons from
consumer products companies and
others can be applied.
Second, the problem of access to
medicines for very poor people is
a problem of chronic market failure
that even the most creative of market
solutions will not solve. There was
consensus amongst PF3 participants
that although the industry can and
should be doing more to address this
systemic issue and to ensure that
these efforts support the development
and consolidation of health systems
the market alone cannot and will not
solve the needs of the poorest people.
What PF3 did do, however, was to
explore what the pharmaceutical
industry could reasonably be
expected to do within the constraints
of the market and exposed a range
of views in the process of doing so.
This report focuses on those findings.
This report is divided into four
sections. Section 1 presents the five
key challenges facing the industry in
emerging markets. Section 2 explores
emerging market approaches from
other sectors and uncovers insights
relevant for the pharmaceutical
industry. Section 3 presents an
assessment of how the investment
community might respond to these
challenges. Section 4 summarises
the conclusions of the PF3 dialogue.
7 Pharma Futures 3
Section 1
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The commercial importance of
emerging markets* is now well
established. Multinational enterprises
across a range of consumer products
sectors have found considerable
success there. And the discoveries are
reciprocal. As Western multinational
enterprises consolidate their presence
in emerging markets, so too are
emerging market companies gaining
a firm foothold on the global stage.
While the commercial opportunities
are relatively uncontested, the extent
to which globalisation will result in
successfully meeting the basic needs
of millions of poor people across the
world is a matter of considerable
debate.
1
And on no issue is this more
true than in healthcare. Since the
beginning of this millennium, real time,
global and instant communications
technologies have taught the
pharmaceutical industry lessons about
doing business under continued
public scrutiny.
And the test is not simply about
making commercial sense of new
markets. It is also about the extent to
which the industry is able and willing
to be part of equitable solutions to
meeting basic human healthcare
needs.
Prior to the rapid global slowdown
caused by the credit freeze and
recession, the economic growth in
emerging markets had already created
a sizeable middle class, which
despite significantly lower individual
purchasing power than Western
counterparts offers tantalising sales
potential. The McKinsey Global
Institute projects Indias middle class
will grow from 50 to 583 million people
in the next two decades [and that]
Chinas middle class will grow to
612 million by 2025.
2
Mexicos middle
class (families with incomes of
between US$7,200 and US$50,000)
now accounts for over 30% of
Mexican households or 10 million
families.
3
In Indonesia, the middle
class is expected to grow to 45 million
by 2010.
4
And in Brazil the middle
class is now said to represent about
52% of the population, or just under
100 million people.
5
These trends are as important for the
pharmaceutical industry as for other
sectors. Economic and demographic
growth in emerging markets has
combined with changing disease
profiles to present new opportunities
to tap new consumers, able and eager
to pay for access to medicines. IMS
Health estimates that the emerging
markets will account for 30% of total
global pharmaceutical sales and 50%
of pharma sales growth by 2020.
The Chinese pharmaceutical market
is currently valued at US$17 billion
and is growing at 13.3% a year as
a percentage of overall health
expenditure.
6
It is expected to become
the fifth largest pharmaceuticals
market in the world by 2010 from its
current position as the eighth largest
in the world.
7
And other emerging
markets are notable too. The Egyptian
pharmaceutical market is the largest
in the Middle East region, worth an
estimated US$2.2 billion in 2008,
with a projected annual growth rate of
5%, while the Indonesian market is
projected to reach US$3.75 billion in
2012, reflecting a growth rate of
around 56% per year.
8
9 Pharma Futures 3
We know these markets require a different
approach, but the existing business model
is very strong. Its like trying to change the
wheels of your car while driving at 40 mph.
S!*%+. ,$a.)ac!10%ca( !4!c10%2!
May 2008
The term emerging market was
originally coined by International
Finance Corporation to describe a
fairly narrow list of middle-to-higher
income economies among the
developing countries, with stock
markets in which foreigners could
buy securities.
The terms meaning has since
expanded to include more or less all
developing countries, defined as those
with a Gross National Income (GNI)
per capita of $9,265 or less.
Pharma Futures 3 emphasises
countries such as India, Brazil, Russia,
China and Mexico characterised by a
growing middle class with increasing
disposable incomes and a majority
population living on low incomes.
*
10 Pharma Futures 3
T$! U*!.0+3
Given the enormous growth potential
of emerging markets, it is perhaps
surprising that the Western
pharmaceutical industry has, in the
eyes of some analysts, been relatively
slow to consolidate its presence there.
Although most companies have had
some operations in some markets in
the past few decades, it is only in the
past two years that investment in
R&D, human resources and sales
force has reached levels that draw
significant interest from the investment
community. There are a number of
reasons for this toe-dipping approach:
C+),(!4%05
The emerging markets are immensely
complex. They are characterised by
extreme cultural and ethnic diversity,
marked income inequalities, a
significant rural-urban split, with large
percentages of the population with
very poor access to transportation,
infrastructure and other basic
services.
This complexity is further
compounded by rapidly changing and
unpredictable operating environments
and requires considerable investment
to manage well.
A""+.ab%(%05 a* L+3
P1.c$a/%*# P+3!.
The potential for massive sales
volume in emerging markets is
tempered by lower purchasing power,
which means patients cannot support
comparable margins to developed
countries. Reaching this potential
would require price differentiation and
segmentation between and possibly
within countries. The industry and its
investors are wary of experimenting
at least visibly with significantly
different pricing models in emerging
markets because of the potential
effect of eroding margins in mature
markets.
Acc!//%b%(%05 a* W!a'
H!a(0$ca.! I*".a/0.1c01.!
In particular, the absence of strong
payers and corresponding service
providers presents extreme challenges
to access, delivery and distribution.
This is particularly true of rural areas.
To access patients and consumers in
these markets requires companies
at a minimum to understand and
support coordinated efforts to create
or strengthen health systems. This is
both a potentially expensive and
complex undertaking of which
investors and companies alike are
wary.
U*c!.0a%* G+2!.*)!*0 R!(a0%+*/
Relations with governments are
complex. In part this is the result of an
uneasy history of interactions between
the pharmaceutical industry and
governments which has been shaped
by differences in opinion over trade
and health policy, making relations
unpredictable and, at times, difficult.
Figure 1A
G(+ba( P$a.)ac!10%ca(
Sa(!/ G.+30$ F+.!ca/0/
Compound Annual Growth Rate
(CAGR) %
Sources: IMS Health, Market
Prognosis, March 2008
16
15
14
13
12
11
10
09
08
07
06
05
04
03
02
01
2
0
0
6
2
0
1
1
North
America
Latin
America
Europe Asia +
Africa +
Australia
Japan
T$! S+c%a( C+*0.ac0
The final intangible and yet highly
significant reason for the cautious
approach to these markets is a result
of industrys awareness of the
immense challenge of reconciling the
high societal expectations that
surround pharmaceutical companies
with the limited ability of millions of
people to pay for medicines. More
even than water or food industries,
the pharmaceutical sector is held to
an unwritten, but widely understood
social contract that stems partly
from the fact that people do not
become consumers on a completely
discretionary basis they are
propelled into it by health problems.
In exchange for being permitted to
pursue profit, society expects industry
to deliver affordable, accessible
medicines to the population according
to need. And even though this
expectation is not expressed in all
emerging markets, in a globalised
world it is articulated in highly
influential international health
debates.
While real, these challenges also
present opportunities. Although rural
areas might be difficult to access, the
competitive environment is less fierce
than in the large cities. Per capita
heath spending may be lower than in
Western markets, but the power of
numbers can generate significant
markets. Underserved rural areas and
weak healthcare infrastructure are
currently limited but as infrastructure
develops and wealth increases new
markets will emerge. Especially if
catalysed by public private partner-
ships, these could present significant
opportunities over time.
Below, we take a closer look at
these five key challenges of the
emerging markets and examine the
reservations they give rise to about
the scale and pace of investment
by the pharmaceutical industry. Will
the investment required to develop
stratified offerings to meet the needs
of societys many tiers yield returns
adequate to satisfy investors?
What can society reasonably expect
from the pharmaceutical industry?
And how far into the economic
pyramid can experimentation take
profit-maximising enterprises?
The PF3 dialogue preceded the
global economic turmoil resulting
from the collapse in the financial
markets. Although it is not yet
possible to assess the full impact of
the downturn, it is safe to say that
the fallout of the credit crisis will be
felt in economies across the globe
for a long time to come. Healthcare
is more recession-proof than other
sectors, but it is not altogether
immune, particularly when it comes
to personal discretionary
expenditures. China and India have
proved less decoupled from US and
European economies than they had
hoped a situation that is likely to
slow considerably the vertiginous
growth of the last few years.
Recession in the developed
economies is, however, likely to lead
to reinvigorated attempts to make the
most of new markets. The pressure to
manage societal expectations well
and an increasingly nuanced approach
to affordability and accessibility are
only likely to increase.
11 Pharma Futures 3
Figure 1B
G(+ba( P$a.)ac!10%ca(
Sa(!/ G.+30$ F+.!ca/0/
US$ Billions
Sources: IMS Health, Market
Prognosis, March 2008
500
450
400
350
300
250
200
150
100
050
2
0
0
6
2
0
1
1
North
America
Latin
America
Europe Asia +
Africa +
Australia
Japan
Figure 2A
R1.a(-U.ba* P+,1(a0%+* D%2%!/
Total Population in Millions (2008)
Sources: World Health Organisation
(2007), USA Census Bureau (2007),
Goldman Sachs Research
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
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Rural
Urban
12 Pharma Futures 3
Challenge 1
C+),(!4%05
No Such Thing
as an Emerging
Market
There is no such thing as an emerging
market, any more than there is a single
European pharmaceuticals market.
Managing European markets is
notorious as being one of the more
complex portfolio requirements of
senior pharmaceutical managers due
to the multiple payers, multiple
regulatory systems and the parallel
trading which result from the absence
of a single market. Europe is multi-
lingual and multi-cultural with differing
approaches to the role of the state in
healthcare provision. Research
priorities and pricing policies are
determined at the level of the member
state. Even though there is broad
acceptance of socialised medicine
of some sort, different governments
respond with different policy
approaches including price controls
and registration requirements.
Furthermore, per capita health
spending also varies widely across
the region.
Such complexity pales when it is
compared with managing what this
and many other industries traditionally
described as the Rest of World (ROW)
portfolio reflecting the relatively
small size of the markets there.
Each of the countries with the greatest
market potential India, China and
Brazil, for example present
unparalleled geographic, political,
cultural and linguistic complexity, not
to mention their sheer physical size.
Add to that a recent history of chronic
underdevelopment, as well as a
continuing rural-urban divide, and the
challenge of managing these markets
can sometimes seem overwhelming.
The linguistic complexity is well
illustrated in India. There are 22
languages recognised by Indias
Constitution. The Census of India
2001 revealed that 29 languages are
spoken by more than a million people
and a further 122 by more than
10,000. In China too, the countrys
varied ethnic groups speak many
languages which are divided into six
often mutually incomprehensible
linguistic classifications.
Figure 2B
R1.a(-U.ba* P+,1(a0%+* D%2%!/
Percentage of Total Population (2008)
Sources: World Health Organisation
(2007), USA Census Bureau (2007),
Goldman Sachs Research
100
90
80
70
60
50
40
30
20
10
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Rural
Urban
13 Pharma Futures 3
The geographical location of potential
consumers is important. Though for
the first time in human history more
people live in cities than the
countryside, many countries still retain
a significant rural population. 60%
of Chinese and 70% of Indians, for
example, still live in rural areas.
This situation poses massive
challenges to invest and maintain
logistical and transportation routes
across complex geographies and vast
distances. Many rural communities
still lack paved roads and reliable
access to electricity. Accessing this
market is highly complex.
And the cities themselves pose huge
challenges. Of the worlds largest
20 megacities in 2006, 16 were in
developing countries predominantly
in Asia and the number is projected
to rise. These cities each home to
over 10 million people are
characterised by their rapid growth,
density of population, formal and
informal economies (12% of Russias
population works in the informal
sector, a number that rises to 45% in
Egypt and 56% in India
9
) as well as
poverty, crime and high levels of social
fragmentation.
Most of the demographic growth
projected to increase from 6 billion
today to 9 billion by 2050 is set to
take place in the cities of these
emerging markets.
Inequalities of wealth distribution are
marked. In many emerging economies
including India, Russia, Mexico,
Brazil and South Africa the richest
10% of the population own more
than 30% of the wealth, and the
bottom 10% struggle with between
2% and 3%.
10
And this wealth
disparity extends across geography.
Chinas affluent coastal regions
are the location of much export
manufacturing and attract extensive
foreign direct investment, in sharp
contrast to the countrys poverty-
stricken rural interior. The north-east
of Brazil suffers from chronic under-
development, drought and poverty,
while urban centres of Sao Paulo and
Rio house some of the worlds
wealthiest people.
Emerging economies healthcare
markets share certain characteristics:
weak (but growing) articulated
demand relative to mature markets;
enormous wealth disparity; high price
sensitivity; weak, patchy and largely
urban healthcare infrastructure; and
low government healthcare provision
for those who cannot pay. Managing
the complexity of these markets
is a significant task requiring local
knowledge, management skill and
up-front investment. Creating a
successful business from such a
complex environment requires more
than business as usual. Given that
these markets still make a relatively
limited contribution to global sales
the dilemma for the industry is when
to start investing significantly to
realise future potential. They require
companies to decide whether
discrepancies between rich and poor
peoples ability to pay should lead to
market segmentation. And if so,
how is this achieved within national
borders? To what extent should the
industry wait for government to further
develop healthcare infrastructure?
And to what extent should business
seek to tap the fortune at the base
of the pyramid?
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14 Pharma Futures 3
Challenge 2
A""+.ab%(%05
Understanding
Ability and
Willingness
to Pay
The greatest challenge the emerging
markets pose to the Western
pharmaceutical industry is how to deal
with recently approved and, therefore,
patent-protected drugs. The industry
gleans most of its value from these
medicines in mature markets where
reimbursement systems are structured
so as to pay high prices to reward the
innovation involved in the discovery
and development of these medicines.
This approach does not work in
emerging markets where ability and
willingness to pay is entirely different,
yet the medical need is, if anything,
greater.
Pharmaceutical industry financial
value is largely generated by on-
patent medicines in mature markets
and particularly in the US. These
established markets dwarf in
absolute sales terms any emerging
market (see Figures 1A and 1B,
pages 1011). As a result, companies
and investors alike are more
concerned about the potential that
emerging markets have to erode this
value today than the potential they
have to offer growth tomorrow.
Many people in industry recognise
that to make real the promise of new
middle-class consumers requires an
approach to pricing based on local
affordability. They have been deterred,
however, from visibly pursuing this
strategy by fears of price erosion
elsewhere.
It is possible to argue that the
industrys best long-term interests
would be served by a transition from a
price to a volume-based business
model. Some analysts point out that
the market has already accounted for
the likely erosion of developed country
margins and that this view is reflected
in the current share price. Still, there is
much debate about the way forward.
For the industry to move away from a
discussion of price/margin to volume
would require the development of
compelling emerging market
strategies and the introduction of new
metrics before the investment
community was convinced that such a
transition would deliver long-term
value for the sector. And the reasons
for this are clear.
Figure 3
S+1.c!/ +" H!a(0$ca.! E4,!*%01.!
% of Total Healthcare Spending 2005
Source: World Health Organisation 100
90
80
70
60
50
40
30
20
10
Out-of-Pocket
Other/Private
Government
First, per capita expenditure on health
in these markets remains woefully low
Russia US$583, China US$277,
India US$91.
11
As a result, the bulk of
health spend is out of pocket payment
by patients with relatively little
purchasing power. And with poverty a
recent memory, there is no guarantee
that even those emerging market
consumers who are able and willing to
pay will behave in the same way as
Western consumers. According to
Knowledge@Wharton, Wharton
marketing professor, Z. John Zhang,
suggests, Even though millions of
individuals are now reaching middle-
class status in their own countries,
they still do not have the same levels
of income as their counterparts in
mature economies. To capture
customers in these markets,
companies must create new products
that take into account price
sensitivity.
12
Second, of the options open to other
industries to disaggregate product
offerings within markets e.g. product
reformulation or service-bundling
many are either too expensive, or
simply not permitted to pharma-
ceuticals. Strict regulatory require-
ments determine what you can sell, in
what formulation and packaging and,
should you wish to change this, there
are expensive and time-consuming
regulatory procedures that need to be
followed.
Even where price points are better
understood and appropriate
adjustments made, limited availability
of information and market
inefficiencies such as mark-ups and
tariffs drive prices significantly higher.
A particular difficulty faces companies
selling innovator products which are
still on-patent in mature markets and,
therefore at a global price. Even
wealthier consumers in emerging
markets have limited experience of
paying for innovation in
pharmaceuticals. Other than a small
minority at the top of the social
pyramid, to date, patients in emerging
markets have largely relied on generic
medicines. This means that any new
product to market will struggle to
command a premium significantly
higher than a generic benchmark.
Finally, on affordability, although the
ability to pay is absolutely a
prerequisite to increase access to
medicines, alone it is not sufficient.
India, which has arguably the most
competitive pharmaceuticals market in
the world with some of the lowest
prices to be found anywhere, is still
plagued by enormous deficits in
access to medicines, with millions of
poor Indians failing to receive the
treatments they need. The health
systems which would help provide for
their needs here as in so many other
countries are simply not in place.
The industry is under strong pressure
from institutional investors to continue
to deliver high returns. The impact of
the financial crisis on pension and
insurance premiums in the short and
medium term means that this pressure
is unlikely to diminish any time soon.
At present, returns are premised on
being able to retain current price
levels and rigorously defend
intellectual property, a situation which
presents a series of challenges to
companies seeking to determine
prices that capture the volume
potential in emerging markets. Is this
possible to achieve without
undermining high margins in
established markets? If not, what are
the consequences of a global
adjustment and how would it be
received by investors? Is it possible to
determine an acceptable mark-up in
markets where the concept of paying
for innovation is unfamiliar to the
majority of consumers? If so, can it be
done in a manner that meets societal
expectations and business desire
that the industrys business model
should actively contribute to an overall
increase in access to medicines?
15 Pharma Futures 3
The bulk of health spend is
out-of-pocket payment.
Challenge 3
Acc!//%b%(%05
Operating in a
Market with Weak
Health Systems
A third area of debate concerning the
appropriate role for pharmaceutical
companies in emerging markets arises
as a result of the absence of a well-
functioning and well-resourced
healthcare system into which to sell
products and services. The World
Health Organization identifies reliable
health systems as one of four factors
that need to be in place to ensure that
people have access to medicines
wherever and whenever they are
needed.*
And its definition of a good health
system is one that (1) includes the
delivery of effective, safe and quality
interventions when and where needed;
(2) has a well-performing workforce;
(3) has a well-functioning health
information system; (4) ensures
equitable access to essential medical
products; (5) raises adequate funds for
health; and (6) provides the leadership
and governance to ensure a strategic
approach to healthcare delivery.
The achievement of this gold standard
is very far from reality in emerging
markets where government
commitments to health are often
inadequate and chronically under-
funded, leading to very limited public
service provision. Health financing is
typically a very low proportion of
overall budget spend, though this
varies from 10% of total government
expenditure in Brazil to 3.9% in India.
This in turn translates into low
numbers of trained personnel and
poor healthcare infrastructure. There
are many extremely dedicated health
personnel operating in the public
health system in difficult
circumstances, but the number of
physicians, nurses, pharmacists and
lab physicians critical for the
diagnosis and treatment of patients
is typically low. In Brazil, there are 12
doctors per 10,000 people, in India 6
and in China 14. And the existence
even of this small number of
professionals does not necessarily
translate into public provision.
16 Pharma Futures 3
The four pre-requisites to access to
medicines are (a) a medicines
selection process based on national or
local essential drugs lists and
treatment guidelines, (b) affordable
prices, (c) fair and sustainable
financing to ensure that poor people
do not have to pay more than others
due to a lack of public or private
health insurance and (d) reliable health
and supply systems. WHO
www.who.int/trade/glossary
*
The absence of efficient public health
systems has many implications, the
most serious being for the patients
who struggle to access high-quality,
timely and appropriate treatment.
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17 Pharma Futures 3
The result is that in most countries by
far the most people buy diagnosis,
treatment, care and medicines on the
private markets and in all countries
they mostly pay for this out of their
own pocket. Responsibility for public
health budgets is typically divided
between federal and regional budgets,
which results in uneven service
provision. Because of their
inaccessibility and low political profile,
rural areas often fare worst.
The private sector is extremely active
in healthcare in most emerging
markets, but quality controls and
regulatory standards are either weak
or unenforced. In some cases
provision is world class, but there is
no uniformity of service. Nor does
private health insurance fill the funding
gap, though attempts are being made
to introduce it in many places.
Mandatory health insurance is being
introduced in some countries The
Russian Federation for example and
voluntary health insurance is being
encouraged in others e.g. India and
Mexico, but nowhere does it
satisfactorily cover the needs of the
insured.
The regulatory processes involved in
registering, selecting, procuring and
distributing medicines are time-
consuming and expensive. This is true
of all markets and oversight of this
market is essential for safety reasons
but a lack of transparency in these
processes in many countries can
result in markets being inefficient and
uncompetitive and at times corrupt.
Whether in the public or private sector,
distributors and procurement agencies
tend to be powerful and play a critical
role in determining the efficiency of
markets and price of medicines. One
of the greatest challenges facing
governments in these national often
highly complex markets is to
undertake adequate quality control of
the medicines available on the private
and public markets. Although many
governments are actively attempting
to tackle the problem, the resources
available to those entrusted to
undertake this work tend to be limited
and the technology and manpower fall
far short of what is needed. And the
challenge of quality control is made
even greater by the growing trade in
counterfeit medicines.
The absence of efficient public health
systems has many implications, the
most serious being for the patients
who struggle to access high-quality,
timely and appropriate treatment. It is
worth noting too that there are risks
and opportunities to commercial
players operating in a market with
vastly different rules about how, when
and where health and medicine is
accessed. What role might they
usefully play in ensuring local quality
and safety standards are met while
reducing the bureaucracy involved in
the selection, procurement,
distribution and delivery of medicines?
And, what role should companies play
in developing functioning health
systems in these markets?
Figure 4
P$5/%c%a* D!*/%05
Doctors per 10,000 people
Source: World Health
Organisation
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18 Pharma Futures 3
Challenge 4
G+2!.*)!*0a(
R!(a0%+*/
Navigating
Uncertainty
The nature of the relationship between
the branded pharmaceutical industry
and governments is also significantly
different in emerging markets from the
one in mature markets. The Western
pharmaceutical industry has evolved
in markets characterised by a largely
predictable business environment
and relatively straightforward
governmental relations. Pricing
models were developed on the
assumption that both infrastructure
and reimbursement mechanisms
existed. In recognition of the value the
industry is perceived to offer in terms
of contribution to the knowledge
economy, jobs and revenues,
developed country governments have
provided a package of incentives and
rewards and provided a robust
defence of the industry in international
trade negotiations.
In emerging markets, however, it is
generics firms which have played a
more significant role both in terms
of industrial development and in
providing lower-priced medicines.
Like their counterparts in the West,
emerging market governments seek
to support the development of their
domestic industrial capabilities
through policies relating to foreign
investment provision, taxes and
intellectual property protection.
Some, like India and South Africa,
(and again like their Western
counterparts) encourage generic
procurement and impose price
controls. Generics are hugely
important in these markets
e.g. accounting for 62% of market
share in China and 75% in India.
13
India often referred to as the
worlds pharmacy produces an
estimated 20% of global generics,
which are increasingly directed to
the export market.
Governments also encourage generics
because of their lower prices in
highly resource-constrained markets.
Patents, which are designed to allow
companies to recoup investment
costs and reward innovation, also
keep prices higher than they would
be in a fully competitive marketplace.
As a result, newer medicines remain
priced out of reach for millions of
people. The most significant challenge
regarding patents going forward
relates to new therapies for which
there is no generic equivalent and
for which under the new rules of
20-year protection there is unlikely
to be one any time soon.
This government desire to support
national industries and access
to needed medicines has a direct
effect on Western multinationals
and domestic generic firms and
on disputes between them and
undertaken on their behalf.
Because the industry provides both
industrial development as well as
health benefits, one of the thorniest
points of contention has been the
degree to which recent global
intellectual property provisions will
undermine or enhance national
industrial capabilities. The point at
which a country institutes intellectual
property provision used to be
determined by the government in
question and was a function of the
point at which the government
deemed that national industry to be
able to handle international trade
competition. This is no longer the
case, and compliance with global
intellectual property rules is now
a condition of World Trade
Organisation membership.
Although the major emerging
markets have all signed up to
WTO membership and adjusted
national legislation to be consistent
with these requirements, periodically
a demonstrable unease about the
wisdom of doing so becomes
apparent.
It could be argued that the most
recent acrimonious disputes in
South Africa, Thailand, India and
the Philippines all demonstrated
concerns as much about national
industrial development and in the
case of constitutional challenges
national sovereignty as about prices.
Would an industry approach that
was more receptive to the economic
development needs of the emerging
markets result in better outcomes
and, if so, what would it consist of?
Is such an approach reconcilable
with the industrys own needs?
And would a significant increase
in the industrys role in healthcare
delivery make a difference?
19 Pharma Futures 3
Like their counterparts in the West,
emerging market governments seek
to support the development of their
domestic industrial capabilities.
Need
Provision
33,000,000
3,000,000
2,000,000,000
32,000,000
3,300,000,000
36,000,000
20 Pharma Futures 3
Challenge 5
T$! S+c%a(
C+*0.ac0
The final challenge posed by these
promising markets concerns
management of industrys strong and
complex social contract. In exchange
for awarding industry the freedom
to pursue profits, society (patients,
health workers, government health
providers, payers and insurers)
expects pharmaceutical companies
to develop and deliver affordable
and relevant medicines accessible to
those who need them. Recognising
that the industry plays an important
role in delivering health outcomes
and industrial development, society
provides rewards and incentives
most notably intellectual property
provision.
But the benefits provided by the
Western pharmaceutical industry are
not as clear in emerging markets as
in the West. A smaller percentage of
the population has access to these
products, the industrial development
benefits are fewer and the contribution
to the national economy less clear.
There is one thing, however, that is
just as clear in emerging markets.
The expectation that industry must
do more to facilitate greater access to
its products exists as it does in mature
markets. In some places it is even
more marked in these markets due
to the gap in existing provision. Even
where expectations of industry may
be low, the gap between health need
and health delivery is so severe that
the global health community and the
industry itself have been asking what
greater role the industry can play in
contributing to unmet need and this
has led to active engagement by
some companies in public-private
partnership initiatives such as the
Medicines for Malaria Venture and
The Global Fund to Fight Aids,
Tuberculosis and Malaria.
However, even these concerted
and unprecedented efforts are
dwarfed by the scale of the problem.
(See Figure 5).
Figure 5
E/0%)a0! +" G(+ba( N!! V!./1/
G(+ba( F1* "+. H!a(0$ P.+2%/%+*
Billions of People
Sources: The Global Fund, UNAIDS,
World Health Organisation
ARV/
Antiretroviral Drugs
Number of people receiving HIV ARV
therapy in low- and middle-income
countries at the end of 2007
DOTS
Directly Observed Treatments,
Short-Course
Number of TB patients treated under
DOTS between 1995 and 2008
LLIN/
Long-Lasting Insecticidal Nets
Number of LLINs supplied to
countries in the African Region
(which account for 86% of malaria
infections) in 2006
Societal expectations are underscored
by a deep unease at the fact there is
a profit-seeking entity at the heart
of drug delivery and development.
Sometimes, as in the case of recent
controversies in India, Thailand and
the Philippines, this manifests itself
as the expression of a combination
of government and strong civil society
voices. In other instances it is
expressed by global health activists.
Either way, it appears to be a
consistent, if uncomfortable, truth that
the broader public not only does not
understand market pressures, it
doesnt want to. The pharmaceutical
industry and the practice of medicine
are muddled in the minds of many
people who believe that the industry
exists to make available medicines to
those who need them, much the same
as a doctor takes the Hippocratic
Oath to serve his or her patient.
Events or issues that draw attention to
the fact that industry is under fiduciary
obligation to maximise profitability
only serve to highlight this unease.
The industry alone should not be held
responsible for solving global
inequalities in health. Any company
competing in mainstream global
markets however well intentioned
is likely to struggle and ultimately fail
to sustainably meet the needs of
millions of people on very low
incomes due to low ability to pay.
This means that provision for these
people must remain the domain of
the public sector. There are however,
many shades of grey when it comes
to potential partnerships between
public and private players.
It is clear that the industry could not
avoid these societal expectations,
even if it wished to do so. Some
companies clearly want to be part
of the solution but how precisely to
manage expectations successfully
is unclear.
How broad and how deep can
companies realistically go in terms of
solving unmet health needs? How can
society measure and reward industry
leaders? How can the market be
persuaded of the value of company
involvement in not-for-loss ventures?
How might generics and innovator
firms collaborate on access initiatives
to best effect?
Taken together, these challenges
certainly are reason for the industry
to be scratching its head. Yet, in
the spirit of PF3, the participants
wanted to consider the possibilities
that co-exist alongside these barriers
(real and perceived) to the delivery
of improved value to both companies
and communities. The next section
looks at several models developed
in other sectors as a guide for
Pharma.
21 Pharma Futures 3
Around the world people relate the
responsibility to deliver healthcare with the
Hippocratic Oath of doctors to treat people
indiscriminately on the basis of need.
Section 2
C.!a0%2! S+(10%+*/
A local man inspects his newly-
installed solar panel, which provides
electricity to light his home in the
Patarasi, Karnali Zone, Nepal
Taking as a starting point the five
key challenges of operating in
emerging markets outlined above:
(1) complexity; (2) affordability; (3)
accessibility; (4) government relations;
and (5) the social contract, PF3
undertook research into how other
companies in other sectors have
developed successful models for
operating in these markets. The intent
was to investigate whether innovative
ways to address affordability and
accessibility can extend the reach of
the market to meet the needs of
greater numbers of consumers.
The research did not address what
will still need to be done to meet the
needs of the poorest who simply
cannot afford to pay, though the PF3
Working Group was in agreement that
this pressing issue should receive
urgent attention, and all expressed
their willingness to be involved in
finding solutions to this systemic
market failure.
PF3 reviewed ten cases in depth,
available on the Pharma Futures 3
website (www.pharmafutures.org).
This report looks at a selection of
these, including Nokia, as an example
of a Western multinational which is
evolving its business models to reach
beyond the urban centres to rural
populations in India and China.
It highlights how two global firms
based in emerging markets, Cemex
and Manila Water, are proving adept
at innovation solutions to better align
societal needs with shareholder value.
And finally its study of the Aravind Eye
Hospital and Fabio Rosa illustrates the
potential for social enterprise* models
to leverage the market to offer health
and energy solutions.
While PF3 did not conduct in-depth
research into current pharmaceutical
approaches in emerging markets,
the project identified evidence that
the industry is undertaking various
initiatives to reach low-income
consumers with affordable, accessible
medicine. Select case studies of
PF3 pharmaceutical participants can
be found on pages 3637.
These efforts are a positive signal that
some companies are actively
exploring solutions to extend the
reach of needed medicines and
healthcare services in these markets.
What follows below is an attempt to
uncover possible lessons from other
sectors to shed light on how current
experiments with new business
models can be developed and scaled
to achieve much greater impact.
In reviewing the case studies, PF3
identified three common elements to
the business models that appear to be
most successful in meeting the needs
of lower income consumers: (1) they
are human-centred; (2) they have
taken a radically new approach to
understanding affordability; and (3)
they have sought new means of
achieving market penetration, by
taking a much more active role to
ensure that their offering is accessible.
In addition to these guiding principles,
success in new markets requires a
healthy dose of patience, a willingness
to experiment and a can-do mindset.
23 Pharma Futures 3
It is only when you can sit down
and have a beer with your customers
that you can truly understand
their hopes and fears.
L1%/ S+0a
Patrimonio Hoy
Social enterprises are defined by
Wikipedia as: social mission driven
organizations which trade in goods or
services for a social purpose. Their
aim to accomplish targets that are
social and environmental as well as
financial is often referred to as having
a triple bottom line.
Social enterprises are profit-making
businesses set up to tackle a social or
environmental need. Many commercial
businesses would consider them-
selves to have social objectives, but
social enterprises are distinctive
because their social or environmental
purpose is central to what they do.
Note: social enterprises can be for-
profit or not-for-profit; its the mission
rather than the legal structure that
distinguishes them.
*
24 Pharma Futures 3
H1)a*-C!*0.!
The ability of companies to see
beyond demographics to human
needs and behaviours is resulting in
relevant and profitable businesses.
This approach known as human-
centred design places the local
consumer, patient or human at the
centre of the research and product
development process. Companies
using this approach do not assume
that existing products or delivery
models will suffice, and so they focus
on understanding the aspirations of
consumers, which enables more
effective solutions development.
A prime example of a human-centred
approach is that of CEMEXs
P!31)-/.)/ H/7 programme described
below. The idea for a new service-
based business model for low-income
customers sprung out of deep insights
gained when the management team
spent several weeks living next to its
target customers in the shantytowns
of Guadalajara, Mexico. It is only
when you can sit down and have a
beer with your customers that you
can truly understand their hopes and
fears, notes Luis Sota, key developer
of the P!31)-/.)/ H/7 initiative.
IDEO, a leading product design and
innovation firm, suggests What
people say (and think) they do and
what they actually do are not always
the same thing. Putting yourself in
someones shoes enables you to get
beyond what people say and to what
they think and feel.
15
A""+.ab(!
As evidenced by the income data in
Section 1, middle-income consumers
in emerging markets have vastly
different capacities to pay than their
counterparts in Western markets.
To reach these customers requires
going beyond cost-cutting to thinking
about approaches such as volume-
based business models and customer
aggregation. Other companies are
experimenting with financing
mechanisms that tap consumer
willingness and ability to pay despite
limited or no access to credit.
Organisations, such as Aravind Eye
Hospitals, have also learned to
address hidden costs, especially for
customers/patients living in rural
markets. These are the costs of travel
to patients or their families from rural
to urban areas to purchase goods or
services, often incurring lost wages in
addition to travel expenditures.
Human-centred
Affordable
Accessible
Figure 6
T$.!! D%)!*/%+*/ +"
E)!.#%*# Ma.'!0/ M+!(/
Product
Price
Distribution
Incremental Company Approach Transformational
25 Pharma Futures 3
Acc!//%b(!
A major challenge for companies
attempting to increase penetration
in emerging economies is poor
transport and other inadequate
infrastructure for massive rural
populations, Companies, such as
Nokia, however, have worked to build
out their own networks and have
designed mobile retail environments
that can reach people where they
live. Aravind Eye Hospitals likewise
reaches million of patients by sending
out technicians and medical staff to
remote rural areas and diagnosing
them there. If they require surgery,
Aravind provides free transport to take
them to hospital. They use advanced
technologies to enable outreach
doctors facing complicated symptoms
to receive a second opinion from a
specialist consultant based at one of
the main hospitals.
Not surprisingly, these characteristics
map closely to the challenges
identified in Section 1. Specifically,
complexity (ability to understand local
markets, consumers), affordability and
accessibility are all critical challenges
facing pharma in emerging markets.
In what follows we highlight how the
novel approaches of five of the
companies we researched Nokia,
Cemex, Manila Water, IDEAAS and
Aravind Eye Hospitals to complexity,
affordability and accessibility in
particular appear to have been critical
factors in the companys success.
These examples demonstrate that
innovative ideas are emerging from
a range of businesses from global
multinationals to social entrepreneurs.
Riders for Health is a social enterprise
providing reliable transport to health
professionals throughout Africa.
Example 1
M+b%(!
T!(!,$+*5
Nokia
Indias mobile phone market is
among the fastest-growing in the
world. The country has around 170
million subscribers and adds 8 million
more each month; by contrast, the US
adds 2 million subscribers a month.
17
Several global telecom giants have
been battling to capitalise on this
growing opportunity since 1994, when
the country opened up the telecom
market to private enterprise.
One company, Finland-based Nokia,
however, has clearly stood out from
its rivals and today commands a 62%
market share for mobile phones (70%
for GSM handsets).
18
The company
has invested more than US$1 billion
in India, and in 2007 it realised more
than US$4 billion in revenues.
19
It has
now surpassed Unilever as the largest
consumer products brand in India.
20
The company realised these incredible
results while simultaneously
establishing itself as a trusted brand.
Nokia India was ranked the most
respected consumer durables
company in 2007 by B42).%22/1,$
and in 2006, Nokia ranked as the most
trusted brand in Asia according to a
Media-Synovite survey.
21
Central to Nokias leadership in this
market are a number of key strategic
decisions, such as a sharp focus on
the mobile phone market, without the
distraction of other business units,
and early investments in local
manufacturing.
22
Of particular
relevance to the pharmaceutical
industry, however, are the product
development, brand and distribution
dimensions of Nokias approach.
A""+.ab(!, Ta%(+.! P.+1c0/
The Nokia story in India is not about
grafting a model that has worked
abroad. In fact, some of its products
are unique to India. The Nokia 1100
has a torch built into the mobile phone
to target customers who live in areas
with no access to electricity or where
there are frequent power cuts.
The product, manufactured in
Chennai, has been a runaway success
and is now also being exported.
Another product innovation is focused
on developing a shared phone.
For reasons of affordability, in rural
areas a phone may be shared by
several people. The models being
launched to cater to this need will
have separate address books,
individual billings and other features
useful for rural customers.
26 Pharma Futures 3
This case is based on material
originally published by Knowledge@
Wharton, the online research and
business analysis journal of the
Wharton School of the University of
Pennsylvania.
16
The key to this product innovation is a
focus on gaining deep insights about
local customer needs and behaviours.
In India, a cell phone is much more
than a communication device. For the
majority of Indian consumers, a cell
phone is a statement about style, just
like a watch or a handbag. For women
in small towns, it is used as a safety
device: you are accessible and in
touch day and night. And, for many,
the cell phone has become a driver of
economic activity connecting service
providers, such as plumbers and
tailors, to their customers.
B1%(%*# 0$! B.a*
Another crucial aspect of Nokias
investment strategy focused on
building its own mother brand and
extending it across a wide variety of
market segments, rather than
promoting separate sub-brands.
As a challenge to conventional
marketing wisdom which holds that
a brand cannot be all things to all
people Nokia opted to extend itself
across the full Indian market range
from price points of Rs1,499 (US$37)
to Rs45,000 (US$1,125).
23
While such a move could prove
detrimental in other sectors, Nokias
ability to straddle its brand across
multiple segments helps the company
maintain relevance in a market with
extremely short product lifecycles.
Constantly promoting various models
and sub-brands every 1524 months
would prove highly cost inefficient.
An additional benefit is that Nokia
has created an aspirational product
ladder: consumers can upgrade their
products knowing that they will
continue to remain with the mother
brand Nokia.
24
*
Acc!//%b%(%05 T$.+1#$ D%/0.%b10%+*
Nokia initially tapped existing
distribution through a partnership with
HCL formerly (Hindustan Computers
Ltd) to reach Indian consumers. More
recently, the company has expanded
distribution through its own efforts,
now boasting approximately 95,000
outlets that sell its mobile phones in
India, with over 50% selling only Nokia
brand phones.
25
To reach rural India,
Nokia has deployed a fleet of blue
Nokia-branded vans that turn up on
market or festival days, explaining the
features benefits of mobile phones.
26
The company has also benefitted from
political support to expand telecom
infrastructure in India. Unlike debates
over energy, roads and healthcare, the
path to expanding access to mobile
telephony has been a relatively
smooth one. Boston Consulting Group
(BCG) suggests that the success in
telecom infrastructure development is
attributable to the ability of the federal
government to set national policy
(and therefore circumvent local policy
debate) and to the existence of an
effective regulatory body; and the
limited power of incumbent telecom
companies and the perception that
telecommunications is a luxury good
and not a right, which limited political
pressure on pricing.
27
27 Pharma Futures 3
Despite this success, it is worth
noting that the trend toward frequent
product replacement, particularly in
the ITC sector, is resulting in a
significant waste stream, particularly
in developing countries.
We would encourage all companies
considering these case studies to bear
in mind triple bottom line approaches
that not only meet economic and
social considerations, but
environmental as well.
*
Example 2
C+*/0.1c0%+*
CEMEX
In 2007, for the first time in human
history more people lived in urban
than rural areas signalling a trend
that seems set to continue as the
majority of these people are born into
or move to cities. Vast numbers of
them live in shanty towns or the peri-
urban outskirts of megacities (with
more than 10 million inhabitants) and
have an urgent need for safe and
decent housing.
CEMEX is a global building materials
company that provides products and
services to customers and
communities throughout the
Americas, Europe, Africa, the Middle
East, Asia and Australia. Its operations
network produces, distributes and
markets cement, ready-mix concrete,
aggregates and related building
materials in more than 50 countries,
and it maintains trade relationships
with more than a hundred countries.
Founded in Mexico in 1906, the
company has grown from being a
local player to one of the top global
companies in the industry, with more
than 60,000 employees worldwide.
F.+) C!)!*0 0+ H+1/%*#
Proud of its strong history of
innovation, in 1999, CEMEX
developed a customised construction
service to low-income households
in Mexico using microfinance
mechanisms to help customers move
into home ownership. Convinced of
the potential at the low end of the
market, the company sent a team
of managers to spend time living in
low-income neighbourhoods in
Guadalajara, Mexico. In the course
of the assignment the CEMEX team
discovered that ownership of a well-
built house was of central concern to
many lower-income families, but lack
of assets meant that financing,
construction services and building
materials were all out of reach.
As a result, CEMEX developed a
targeted offering and called it
P!31)-/.)/ H/7. Local markets
were targeted on the basis of a
number of variables: income, income
concentration (concentration of
poor people), population growth,
existing construction and housing
development, and distribution
network. This new programme, in
addition to offering core construction
products, provided microfinance
support coupled with architectural
and technical advice to customers.
28 Pharma Futures 3
29 Pharma Futures 3
P!31)-/.)/ H/7s customers were
known as 2/#)/2 or partners.
Modelled on 3!.$!2 low interest
credit associations the 2/#)/2
formed a group of three, each of
whom was required to make a
commitment to pay on average 120
pesos (US$12) per week for a defined
period (usually between 70 and 86
weeks). Though the price CEMEX
charged for cement was higher than
that of the competition, the 2/#)/2
found that the value of the additional
services offered by the programme,
combined with the assurance
of consistent prices during the
construction period, more than
offset CEMEXs price premium.
28
Ta,,%*# 0$! R%#$0 D%/0.%b10+./
CEMEX was early to realise that to be
a success P!31)-/.)/ H/7 would need
to partner with distributors who
shared the companys commitment to
expanding access to their services.
Traditionally, cement distributors had
focused exclusively on pricing and
discounts, realising in the process
average margins of 15% on building
materials. P!31)-/.)/ H/7, however,
was careful to choose distributors
who understood and were committed
to the new business model and who
had existing delivery facilities which
could reach the more inaccessible
localities of low-income groups,
provide sufficient storage capacity,
and enter into exclusive relationships
with CEMEX.
Of the more than 30 distributors
of CEMEX products, only a handful
were selected to participate in the
programme. And, although their
margins dropped, distributors reaped
the benefits of the steady demand for
the non-cement materials (where
margins could be as high as 45%)
created by the programme.
29
B1/%*!// I),ac0
P!31)-/.)/ H/7 has helped CEMEX
to triple its cement sales in places
where the programme operates: from
2,300 pounds of cement consumed
once every four years per family to
the same amount being consumed
in 16 months. In the next five years,
the programme is projected to reach
1 million families. CEMEXs flexible
approach makes a strong business
case. First it has contributed to market
share. By targeting low-income
consumers, CEMEX has been able to
reach over 200,000 families in Mexico
and is rolling out the service to
customers throughout Latin America.
Second, it has contributed to stable
growth and profitability. This segment,
made up of low-income homebuilders,
provided CEMEX with stable growth
through economic crises and was
CEMEXs most profitable segment in
Mexico, representing 35% of the total
market for cement and a similar
percentage of CEMEXs annual sales.
And finally, CEMEX was able to
differentiate itself from its competitors.
After launching P!31)-/.)/ H/7,
CEMEX noted a significant increase
in its brand warmth. The company
achieved a brand index rating of
4.6 out of 5, while most of its
competitors achieved an index
rating of less than 2.
30
CEMEXs highly unconventional
approach to understanding its target
consumers has paid dividends,
allowing it to succeed where others
failed, and has gained the company
both kudos and customers. The
flexibility that the company has
displayed in meeting the needs of
low-income consumers is likely to
be required in future to tackle the
serious problem of emissions from
the production of cement.
Example 3
U0%(%0%!/
Manila Water
Access to water and sanitation,
like access to medicines, is a major
determinant of peoples health.
And like pharmaceuticals, the water
industry is highly regulated. Over a
billion people in the world lack access
to sufficient, clean water for their basic
needs. As more people move into
cities, the need for affordable water
and sanitation services is becoming
more acute. Despite this, water
services are notoriously poor in
emerging markets, particularly for
people on low incomes who face a
bewildering array of service providers
including public utilities, private stand-
pipe operators, water trucks, vendors
in kiosks and agents.
In 1997, the Philippines Government
privatised the capitals Metropolitan
Waterworks and Sewerage System
(MWSS), granting two 25-year
concession contracts. One of them,
awarded to Manila Water, has been
an outstanding success, the other,
awarded to Maynilad, was terminated
in 2003. Manila Waters understanding
of both the complexity and need to
enhance access for the poor appears
to have been a major factor in its
success.
31
The water distribution network in
Metro Manila before 1997 was poor.
Unregistered (and illegal) connections
were tapping into the citys aging
mainlines all over the network. Access
to water supply within the growing
metropolis was patchy, with only the
wealthier areas experiencing 24-hour
supply. And infrastructure was weak,
with serious problems of waste and
leakage.
Manila Water Company, a joint
venture between Ayala Corporation,
the largest conglomerate in the
Philippines, and United Utilities
successfully bid for the Eastern
Manila concession. With an estimated
population of just over 5 million
residents, the East Zone accounts
for approximately 40% of the total
population in the Metro Manila area.
Within three years the number of
people with access to water 24 hours
a day quadrupled and within 10 years
the percentage of people in Manila
with clean drinking water had risen
from 26% to 92%.
32
More specifically,
the number of poor people with legal
and affordable access to water has
soared to 214,000 families up from
1,500 families in 1998.
33
Manila Waters financial performance
has been impressive. The company
became profitable for the first time in
1999 and has been growing since,
realising a 35% net margin in 2007.
34
In 2003, net income doubled and its
financial record allowed the company
to secure favourable financing terms
from international financial institutions
such as the DEG (German
Development Bank) and the
International Finance Corporation.
The rehabilitation of a largely
dilapidated network and provision of
services across a range of population
segments was a massive task, and
one which survived a number of
internal and external shocks: the Asian
currency crisis of 1997, the El Nio
phenomenon in 1998, an arduous
arbitration process and domestic
political challenges that increased
regulatory pressure on the company.
30 Pharma Futures 3
Manila Water conducted strict
financial discipline, which under-
pinned its success. In addition,
two key elements of its approach
empowering its workforce and
engaging with stakeholders hold
possible insights for the
pharmaceutical industry.
E),+3!.%*# 0$! W+.'"+.c! 0+
Wa(' 0$! A""+.ab%(%05 L%*!
Manila Water inherited 90% of its
workforce from MWSS. The new
company recognised the importance
of the commitment to public service
to many workers and supplemented
it with new training and motivation,
thereby enabling the company to
nurture talent and skills.
A commitment to empowering middle
managers was vital. While the top
management provided general
policies and strategic directions,
middle managers were given a free
hand to plan and implement changes
in their respective territories.
Skilled workers were transformed into
knowledge workers. Cross-functional
teams called clusters were formed in
order to assist the management in
formulating key policies and decisions
as it focused on certain corporate
issues. As part of the companys
management decentralisation policy,
business areas were further
subdivided into smaller and more
manageable territorial boundaries in
order to allow greater focus and faster
response time to customer problems.
Of note is the policy of walking the
line, which requires employees at all
levels of the company to visit
customers in their neighbourhoods,
including low-income customers, to
listen to their needs and concerns.
Tubig Para sa Barangay
Wa0!. "+. 0$! P++.
The Philippines has a very strong civil
society. In many developing countries,
including the Philippines, privatisation
has been strongly opposed by people
who fear that the needs of the poor
cannot be adequately met by the
private sector. Manila Waters
approach to meeting the needs of
this least profitable sector has many
interesting lessons.
The company created a specific
programme targeting the poor, the
T4")' P!1! 2! B!1!.'!7 (Water for
the Poor) Programme, which had
two principal elements collective
accountability and livelihood
partnerships. The successful
application of the programme has
seen the number of poor consumers
served with clean and, crucially,
affordable water supply rise from
1,500 households in 1998 to 214,000
households in 2007.
35
The collective accountability approach
encouraged communities to decide
for themselves whether to opt for
individual or collective installation,
metering and billing. When
households band together, the
connection fee falls by as much as
60%. Sub-meters measure usage in
each household and everyone on a
group meter takes responsibility for
paying their share, an arrangement
which provides a form of assurance
for both the customers and the
company. And collective billing
ensures timely payment. All this effort
paid off in 2002, when Manila Water
asked for a rate increase, and found
the local government and the
community leaders supported its
request.
The companys livelihood partnerships
programme is designed to promote
community development. It employs
small-scale entrepreneurs as bill
couriers and pipeline contractors,
supports micro-lending, and ensures
that schools and hospitals have
affordable water. It has trained more
than 1,000 engineers; and disburses
a US$16 million annual payroll in
Eastern Manila.
Manila Waters experience was
different from that of Maynilad, which
was also a joint venture between a
multinational company, Ondeo, and a
Philippine business group. To finance
expansion, Maynilad, like Manila
Water, had to borrow heavily and
increase tariffs. At the critical
moment, the East Asian financial crisis
boosted debt liabilities, but unlike its
counterparts, Maynilad was unable to
persuade consumers and government
of the need to raise prices to cover
their losses. The combination of
external debt and lack of political
support meant the concession was
terminated in 2003. A similar water
privatisation effort in Bolivia, which
failed to understand the needs of the
poor, suffered a similar fate. In this
instance, in Cochabamba in 1999,
the imposition of a Western business
model onto a poor market left
customers paying more for their water,
and poor farmers in the surrounding
areas paying for water that had
previously been available free from
public standpipes. Massive public
protests ended in the collapse of the
private concession and a court case
against the government by one of the
companies involved.
36
31 Pharma Futures 3
Example 4
E*!.#5
Fabio Rosas
Energy for the
Poor
Access to safe, reliable and affordable
energy plays an important role in
economic and social development,
but this basic need is currently not
met for millions of people across the
globe. Throughout the 1980s, Fabio
Rosa, a Brazilian entrepreneur and a
former Secretary for Agriculture for
Palmares do Sul, in the state of
Pernambuco, had been working to
respond to the primary concern of
the rural poor access to electricity.
When Rosa carried out an extensive
consultation with the rural workers he
represented, he discovered that 70%
of them did not have this access. He
was told, Politicians always said that
building new roads would solve our
problems. But our top priority is
electricity. It allows us to educate our
children, give them comfort, and use
technologies to try to increase our
income.
37
Rosas initial soundings concluded
that electricity provision from the
existing utility companies then state-
owned would cost US$7,000 per
family an inconceivable expense.
So, in response and following intense
consultation within the communities,
Rosa developed, tested and installed
an affordable, Low-Cost On-Grid
Rural Electrification System that
transformed the lives of millions of
rural poor.
This technology, initially discovered
by the engineer Professor Amaral and
developed by Rosa, was approved
for scale up by the government and
resulted in Palmares becoming the
first municipality in Brazil with 100%
access to electricity. It brought
massive improvements to the lives of
the poor. Productivity for poor farmers
rose, emissions fell, health improved
as people no longer had to breathe
fumes of kerosene, and incidence of
hazardous waste dumping dropped.
The work spread to other states, most
noticeably Sao Paulo.
In 1995, Rosas efforts to extend
this work to the rest of Brazil were
severely hampered as a result of the
governments privatisation policy that
restricted energy distribution to large
utility companies. Unsurprisingly,
given their incentive structures, the
utility companies were most interested
in servicing locations with existing
grids or which were close to the
national grid. Plans to expand access
to the off-grid rural poor offered
limited financial return and Rosa had
to scrap his original plan.
32 Pharma Futures 3
But he did not give up. Entrepreneurial
to the last, Rosa concluded that if he
could not distribute on-grid electricity
then he would find alternatives.
He set his sights on innovating in the
area of solar energy systems and
decentralised generation. Following a
market survey, he concluded that
rather than selling individual units
solar panels, batteries, etc. he would
create an energy service offering with
a leasing structure through which low-
income consumers pay a monthly fee
for a basic home photovoltaic solar
system. Families leased the batteries
in exchange for an US$11 monthly
fee, on a four-year service contract
from which they can be released at
any time if they pay the cost of de-
installation.
The lease model was a brilliant
success. Prior research had shown
him that US$11 a month was what the
community was already paying on
energy. As a fillip, Rosas customers
were spared the 50% sales tax on
utilities. In a further twist, Rosas
research team discovered that the
leased batteries needed to be held
in a sealed container to prevent
tampering. Rosas solution was to
deliver the batteries in a clear plastic
container to which a small ceramic
figure of a saint was attached.
The message: both battery and saint
are sacred treat them with respect.
The impact on access to energy
has been huge by linking the
photovoltaic offering to agricultural
productivity, Rosa has addressed the
need for electricity in irrigation, electric
fencing and organic farming.
Rosa has founded two organisations,
Sistemas de Tecnologa Adequada
(STA) and Institute for the
Development of Natural Energy and
Sustainability (IDEAAS). Founded
1992, STA was created as a for-profit
social business that produces wires
for electric fencing, electric fence
machines, insulators, voltimeters and
other equipment needed to distribute
electricity to rural communities.
IDEAAS is a hybrid non-profit
organisation* set up in 1998, to
design, implement and scale
sustainable rural development models.
It focuses on sustainable biodiversity
management and use of energy,
especially decentralised options for
improving quality of life, generating
income and promoting social and
economic development. It is through
IDEAAS that the solar energy offering
was developed.
There are two outstanding critical
success factors for Rosa. First, in
common with all entrepreneurs, he
developed a sophisticated and correct
understanding of his target consumers
and responded to their hopes,
aspirations and capacity to pay.
Rosa talked to the community, found
links with local businesses identified
the right people in the community to
work with and champion the product.
This combination meant that an
unfamiliar offering, about which
people were initially very sceptical,
became widely accepted.
The second critical success factor
was the focus on innovation in
process over product. Though he
did not have the technology, logistics
and investment capacity of large
corporations, he was able to develop
a business model able to offer access
to people in low-income communities
previously seen as un-commercial.
Not only have companies rarely
considered these market segments as
a source of potential clients but there
is little formal market data available of
the kind that Rosa and his colleagues
collect. Interestingly this skill set
subsequently became highly valued
by energy companies which sought
IDEAASs advice and even training
when seeking a tiered pricing model
appropriate to the consumers living
close to the national grid whom they
were keen to acquire as customers.
33 Pharma Futures 3
The business model of a hybrid non-
profit venture includes a degree of
cost recovery through the sale of
goods and services to a cross section
of partnering institutions, public and
private, as well as to target population
groups. However, to sustain the
transformational activities in full and
address the needs of clients, most of
whom are poor or otherwise margin-
alised from society, the entrepreneur
must mobilise other sources of funds
from the public and/or philanthropic
sectors. Those funds can be in the
form of grants or loans.
*
Example 5
H!a(0$ca.!
Aravind Eye
Hospital
Aravind Eye Hospital has been
pioneering approaches to affordable
healthcare for over 30 years. Today,
it is the largest provider of eye care in
the world. It comprises patient care,
manufacturing (Aurolab), research,
training and capacity building. It has
a network of five eye hospitals with
3,600 beds, performs over 260,000
surgeries and handles over 2 million
outpatient visits annually. By 2007,
Aravind had performed more than
3 million surgeries, making a
tremendous impact, given that some
12 million people suffer from blindness
across India.
T$! S0a.0%*# P+%*0 7
T$! Ab%(%05 0+ Pa5
Two things make Aravind unique
among healthcare organisations.
First, it has a steadfast commitment
to eradicating unnecessary blindness
in India, which is underpinned by a
strong organisational culture of caring
for the patient. Second, the company
has proven a Robin Hood business
model, which provides high-end
surgical services to wealthy customers
to subsidise high-quality surgeries for
poor patients, and has proven to be
highly effective and scalable.
The basic premise of this model is
that its cost structure has to be
dramatically lower than that of other,
more mainstream medical service
providers. In order to achieve this,
Aravind designed something akin to
an assembly line surgery model, with
multiple beds in each room and an
average patient stay of half a day.
All staff at Aravind clinics have mobile
personal digital assistants (PDAs),
which ensures that the preparation of
facilities is done in a timely way, and
all prescription information is
transmitted digitally.
Patients self-assign to different
income groups, with a simple
outcome: the wealthier patients get a
higher standard of ancillary service
(private rooms, air conditioning, etc.)
and their fee helps to subsidise the
cost of surgery for the poorer patients
who, in turn, get a more basic patient
experience. All patients receive the
same level of quality medical services.
Currently, the breakdown of the
patient base is 45% paying, 55%
free. This split not only covers
Aravinds operational costs, but
provides the capital for further growth.
The organisations revenue in 2007-08
was nearly US$20 million, and its
costs some US$10 million, indicating
a strong (and growing) profit margin.
34 Pharma Futures 3
This model has also shown to be
transferable to other therapeutic
areas, such as cardiovascular
surgeries at the Narayana Hrudayalaya
hospital in Bangalore. Dr Thulsiraj
Ravilla of Aravind is currently working
with the Indian government to develop
a similar model for primary healthcare
services in 100,000 clinics across
the country. Moreover, low-cost
intraocular lenses and other
ophthalmic supplies produced by
Aurolab (Aravinds manufacturing
arm) are used in over 100 developing
countries.
In addition to working out how to
streamline costs, Aravind has
successfully identified and addressed
other patient concerns relating to
affordability, such as the significant
hidden costs in providing medicine
to patients. Costs resulting from lost
work and travel to urban centres all
play a factor in a patients decision to
seek treatment or fill a prescription.
Two examples illustrate how
addressing these hidden costs can
tap into a significant population with
an ability albeit limited to pay for
treatment.
The first example relates to eye glass
prescriptions. Aravind doctors travel
extensively to provide eye tests for
people in the rural areas. When the
service was first established they
used to write eye glass prescriptions
for patients to obtain at their
convenience, despite the fact that this
often required travelling to urban areas
sometimes a day or even two days
from their home. The costs of
travelling and lost work meant that
most of the prescriptions went
unfilled. Aravind changed its approach
to ensure its doctors travelled with a
limited range of low-cost, affordable
eye glasses which enabled people to
obtain the glasses prescribed on site.
They now see a 90% conversion rate.
A second example of Aravinds
constant adaptability in the face of
affordability challenges was shown
in how they adapted a recently-
developed modern eye surgery
technique. The new surgery would
significantly decrease the healing
time for the patient, but the cost was
3040% greater than the traditional
technique. After launching the
offering, they saw very little patient
uptake.
When they explored further, they
realised that the counsellors
discussing the new surgery were
focusing on the technique and
technology and not the economic
and lifestyle benefits to the patient,
i.e. fewer days off work, less family
disruption, rapid healing, etc. Once
the counsellors started selling the
financial benefit of the surgery,
Aravind saw a significant uptake in
patients electing to pay the premium
for this benefit.
The insights and innovations
developed by Aravind result from a
laser-sharp focus on the mission to
eradicate avoidable blindness in India.
This clear purpose combined with a
strong sense of organisational culture
has made Aravind a model social
enterprise. And, despite the hybrid
nature of the company, the lessons
gleaned at all stages of the value
chain are being readily shared across
the spectrum, from non-profits in
India to for-profit institutions in the US.
Its also a commercial player in its own
right as the largest Indian customer of
global eye care company, Alcon.
35 Pharma Futures 3
P$a.)ac!10%ca(
Ca/! S01%!/
The following case
studies were prepared
by the pharmaceutical
companies participating
in PF3 and illustrate the
type of social innovation
they are undertaking.
D.. R!58/ P+(5,%((
Easing the Burden of
Heart Disease
In 2002, Wellcome Trust
one of the largest
biomedical charities in the
world and the World
Health Organization (WHO)
published a report
describing a number of
strategies to contain the
alarming increase in non-
communicable diseases,
including heart disease and
stroke. The report observed
that in treating people who
had suffered a heart attack
or stroke, the use of
multiple drugs might be
more acceptable if they
were to be combined into
a single pill containing all
four categories of drugs, for
example, aspirin, a beta-
blocker, an ACE inhibitor
and a statin, and taken once
a day. This came to be
widely described as a
polypill.
In 2003, Dr K Srinath Reddy,
head of the Public Health
Foundation of India,
suggested the polypill
concept to Dr Anji Reddy,
founder and chairman of
Dr. Reddys. He was deeply
concerned that cardio-
vascular disease (CVD) was
growing alarmingly in India
as well as in other parts of
the world. In India alone,
62 million people will be
suffering from heart disease
in 2015 nearly double the
level of 2005, according to
the National Commission
on Macroeconomics and
Health. CVD today is the
number one cause of death
globally, and 80% of these
deaths occur in developing
countries. Access to
affordable medicines and
timely care contribute to
morbidity and mortality.
Further, research has shown
that compliance decreases
with the number of pills
a patient must take.
Dr. Reddys believed that
a suitable combination drug
(a polypill) that could be
administered simply once a
day would have a significant
and measurable impact on
public health if made widely
accessible.
In collaboration with Dr
Anthony Rodgers, Professor
of Epidemiology at the
University of Auckland and
one of the principal authors
of the 2002 WHO Report,
Dr. Reddys developed
a single pill to address
multiple CV risks. The
polypill is a combination of
four drugs: a beta-blocker
or diuretic (atenolol or
hydrochlorothiazide); an
ACE inhibitor (lisinopril); a
cholesterol-lowering agent
(simvastatin); and an anti-
platelet (aspirin).
Dr. Reddys is in the process
of establishing the safety
and efficacy of the polypill
for both secondary
prevention (patients with
established CVD or those
at high risk) and primary
prevention (people with
moderate risk of heart
disease).
Apart from treating patients
with a history of heart
disease, a low cost inter-
vention that can potentially
reduce the risk of a first
cardiovascular event by
60% or more can be life-
changing. At Rs 100 (US$2)
per month per patient, the
polypills affordability will
ensure that greater numbers
of people have access to
medication. Dr. Reddys
expects that the low cost
of the medication would be
offset by volume of sales,
thus making the polypill a
viable and sustainable
product for Dr. Reddys,
and generating profits while
helping to ease the worlds
burden of heart disease.
G(a4+S)%0$K(%*!
Developing a
Malaria Vaccine
Malaria kills more than
1 million people a year
worldwide and makes
millions more sick, most
of them children living in
sub-Saharan Africa. The
international community
urgently needs a safe and
effective vaccine to control
the disease. A vaccine,
even with a partially
effective profile, is a
necessary component of
a comprehensive malaria
control program and could
potentially save hundreds of
thousands of lives a year.
GSKs malaria vaccine
candidate RTS,S/AS is the
most clinically advanced
malaria vaccine candidate
in the world and was
invented in 1987 by
scientists working in GSK
Biologicals laboratories.
Early development and
clinical testing of the
vaccine was part of an
ongoing collaboration
between GSK and the
United States Walter Reed
Army Institute of Research.
In January 2001, GSK and
MVI (PATH Malaria Vaccine
Initiative), with support from
the Bill & Melinda Gates
Foundation, entered into a
public-private partnership
to develop an RTS,S-based
vaccine for infants and
children living in malaria
endemic regions in sub-
Saharan Africa. The clinical
development of RTS,S/AS is
conducted by the Clinical
Trial Partnership Committee,
a collaboration of leading
African research institutes,
northern academic partners,
MVI and GSK with support
from the Malaria Clinical
Trial Alliance. To date GSK
has invested over US$300
million of its own resources
into the development of this
vaccine.
36 Pharma Futures 3
In October 2007, the
medical journal T(% L!.#%3
published results of a
study in infants, the most
vulnerable age group for
malaria in Africa. It
demonstrated for the first
time that African infants
exposed to malaria
transmission (P. &!,#)0!14-)
can be protected by a
vaccine. In December 2008,
data published in the N%6
E.',!.$ J/41.!, /& M%$)#).%
affirmed these findings and
also showed that the
vaccine candidate can be
administered as part of
existing African national
immunisation programmes
as it does not compromise
the immune response to
other vaccines in the current
World Health Organizations
schedule for the Expanded
Program on Immunization
(EPI).
These landmark results
substantially advance the
vision of a vaccine capable
of protecting young African
children against malaria.
In 2009 the vaccine will
enter large-scale phase III
clinical trials. If these prove
successful, we hope to be
able to file with regulatory
authorities in 2011. This
would be the first vaccine
ever developed for any
parasitic disease.
The partners involved in
the development of this
vaccine are committed to
work with governments and
supranational organisations
to determine demand and
to develop policies and
systems for financing the
procurement of a
prospective malaria vaccine
and the implementation
of vaccination programs.
Once RTS,S/AS is licensed,
GSK and MVI will work to
ensure that this break-
through vaccine reaches
the children and infants
who most need it.
GSKs investment in a
vaccine against malaria
is one example of the
companys approach to
developing world healthcare
issues. Helping to increase
access to lifesaving
medicines is not only the
right thing to do but it also
makes good business
sense. Efforts such as these
are a key element of a
sustainable business model,
helping to protect the
companys reputation and
its ability to attract and
retain talented employees.
Companies that respond
sensitively and with
commitment by changing
their business practices to
address such challenges
will be the leaders of
the future.
N+2a.0%/
A social business model
aimed at longevity and
scalability
In early 2006, two divisions
of Novartis, Generics
(Sandoz) and Consumer
Health, piloted a business
model in India addressing
the health needs of rural
populations. In this setting,
a main barrier to accessing
medicines is information
villagers often do not know
what ails them, nor what
could be used to treat them,
because they remain largely
undiagnosed. They are not
aware of the symptoms of
specific diseases and
frequently delay visiting a
doctor unless their disease
becomes critical due to the
cost and time involved in
seeking professional advice.
The Novartis team
recognised they had to
address these interlinked
challenges, particularly the
initial steps of making
villagers aware of prevalent
diseases and encouraging
them to seek treatment.
As mass communication
media is largely absent in
most rural parts of India,
Novartis developed an
approach that included
direct outreach to villagers.
The team worked with
local consultants to better
understand the unmet
needs, usages and attitudes
in different parts of India.
In late 2006, the A1/'7!
P!1)5!1 (healthy family
in Hindi) initiative was
launched in pilot sites in
the states of Uttar Pradesh
and Maharashtra. The
initiative aims to build a
sustainable, profitable
business that improves
access to healthcare among
the underserved millions
in rural India by creating
awareness, local availability
and appealing and
affordable health solutions.
This social business
approach represents a mix
of corporate citizenship and
creative entrepreneurship.
In the pilot phase,
A1/'7! P!1)5!1 focused on
diseases where Novartis
generics and consumer
healthcare businesses
could offer adapted
solutions. These included
tuberculosis, other
respiratory infections,
cough, cold, allergies,
skin and genital infections,
mother and childhood
malnutrition, diabetes,
intestinal worms and
digestive problems all
important health challenges
in these communities.
The basket of products
has since been expanded
to include products sourced
from partner firms covering
additional therapeutic areas
and items such as anti-
malarial bed-nets.
Products selected for the
initiative need to be simple
to use, relevant to villagers
and should have packaging
and educational materials in
local languages. Packages
are being reduced in size
so that out-of-pocket costs
are acceptable. Because
transportation and
communications in rural
India are a constant
challenge, a decentralised
model was adopted,
organising the field force
in autonomous cells.
Each cell has health
educators and supervisors
who collaborate with health
professionals, pharmacy
chains and NGOs to
address the whole patient
flow, providing education,
diagnosis, treatment,
delivery and making
medicines available and
accessible. A key element
of their role is prioritising
communication with
patients about integrated
solutions to their health
problems rather than selling
products to health
professionals.
In 2007, after an extended
pilot phase, Novartis
approved an ambitious
roll-out plan involving
year-on-year growth for at
least 5 years. By the end of
2008, A1/'7! P!1)5!1 had
increased the number of
cells to cover a population
of around 25 million
villagers, with numerous
additional cells in the start-
up phase. The aim is to
double this reach by 2010.
37 Pharma Futures 3
Section 3
I),(%ca0%+*/ "+. I*2!/0+./
View of the city of Rio de Janiero,
Brazil, from one of the favelas
on the surrounding hillsides
39 Pharma Futures 3
Pharma Futures is designed both
to analyse the opportunities and
challenges facing the pharmaceutical
industry and also to support the
investment community in its
understanding of how pharmaceutical
companies manage their complex
social contract. To realise the potential
of emerging markets requires
companies to take a long-term
approach. While the opportunities
are significant, the investments
required to develop necessary delivery
infrastructure, cultivate relationships
with key partners and stakeholders
and shift internal mindsets take time.
The case studies presented in
this report support this point; most
efforts took nearly a decade to gain
significant traction. Still, many
pharmaceutical companies have
already decided that the potential
opportunities are important, and have
been building up their investments in
these markets. This section reviews
the implications of this long-term view
for investors. What information do
investors need to understand if a
companys particular approach will
bear fruit? And if emerging markets
really do represent a profitable long-
term investment opportunity, how
can investors play a greater role in
encouraging and supporting these
investments?
At present the information available
to investors about company
performance in emerging markets
is limited. This lack of disclosure is
increasingly at odds with company
statements that emerging markets
are now a strategic priority. PF3
therefore identified a number of key
performance indicators which would
support the investment community
in its evaluation of the risks and
opportunities these markets offer.
The dialogue also concluded that
simply applying comparable metrics
to those used in mature markets is
unlikely to be sufficient to support the
adaptive business models that would
deliver success in these markets.
Most existing metrics will struggle
to capture the intangible value
drivers identified in Section 2.
It was also apparent that the
investment community itself could
play a more significant role to support
the development of health systems
by directly providing capital to
entrepreneurial ventures.
N!3 M!0.%c/ 0+ E2a(1a0!
E)!.#%*# Ma.'!0/
As highlighted in Section 1,
economic and demographic growth
combined with epidemiological
trends in emerging markets point
to strong commercial potential for
pharmaceutical companies. At a
macro level, Dresdner Kleinwort (DrK)
(2008) forecasts that emerging
markets could provide over 30% of
sales and 50% of sales growth by
2020, and finds that from 2008 to
2015 there is over US$650 billion new
sales potential in emerging markets.
This compares with US$150 billion
sales at risk from patent expiries in
the US and EU during this period.
38
Opportunities are not limited to
patented drugs; sales of branded off-
patent drugs and healthcare products
are growing rapidly. Despite these
attractive fundamentals, investment
analysts have little to no guidance
from companies on sales or earnings.
Those analysts who have looked at
the potential are concerned by what
emerging market sales will do for
average margins and their working
assumption is that lower prices will
mean lower margins and lower
profitability, measured in terms of
return on equity (ROE) or return on
assets (ROA). There is, however, little
empirical information to test this
hypothesis and the financial results
for the nine listed subsidiaries of large
global originals producers (including
GSK, Merck, Aventis, Pfizer, Abbot,
Wyeth, AstraZeneca, Novartis and
Solvay) suggest these concerns
may be overblown. Five-year average
pre-tax margins for these companies,
for instance, are above their parent
companies.*
39
And this is despite
the fact that the Indian subsidiaries
product profile tends to be more
heavily weighted towards off-patented
branded generics and OTC products,
and the fact that the Indian market is
commonly viewed as the most
competitive among emerging
markets.
40
Moreover, ROE and ROA depend
as much on asset turnover (sales per
unit assets) as net income margins.
DrK (2008) estimates that when we
incorporate potential sales to
emerging markets (growing at an
estimated 1215% up to 2010, then
falling back to a longer-term 5%),
despite an estimated drop in margins,
long-term EBIT growth for Big Pharma
of 4% (Compound Annual Growth
Rate 20072020) is realistic. This
is above the implied consensus for
long-term growth of -2% to +2%,
and could justify an upward re-rating
for the sector.
41
Analysis by USS in December
2008 using data from Bloomberg
finds that originals producers
Indian subsidiaries earned an
average 27% pre-tax margin,
versus 22% for their parents, over
the preceding five-year period.
*
This lack of disclosure is increasingly
at odds with company statements
that emerging markets are now a
strategic priority.
Given the above anecdotal and
theoretical analysis, investors are
increasingly interested in how
pharmaceutical companies are
positioning themselves in emerging
markets. Investors are keen to see
a carefully considered and clearly
articulated business strategy for these
markets, as well as key performance
indicators, including: approximate
percentages of sales in emerging
markets (and by country); the
percentage of profits made in
emerging markets; the number of
employees in emerging markets;
the share of capital expenditure in
emerging markets, the percentage
of assets held in emerging markets;
the proportion of stock-keeping
units (SKUs) available in emerging
markets; the average price of key
products in emerging markets
versus developed markets; and
the percentage of R&D spent in
emerging markets.
L!a%*# I*%ca0+./ "+.
F101.! S1cc!//
This sort of quantitative information
will go a long way to help investors
gauge how companies are performing
in emerging markets. To gain a better
idea of how effectively companies
are positioning themselves to ensure
sustainable long-term earnings,
however, will require additional
forward looking indicators. As this
report illustrates, many of the
attributes that will be needed to
manage the emerging markets
successfully are hard to quantify.
How do you measure the successful
management of government
relationships which are so vital to
this highly regulated industry in
all markets?
How do you evaluate an effective
company approach to the social
contract? What does a flourishing
relationship of trust and reciprocity
look like? Various compelling attempts
have been made to quantify the
impact of mistrust on the pharma-
ceutical industry. Consultancy firms
PwC and BCG have both undertaken
work that demonstrates how a loss
of trust has a direct impact on the
bottom line by leading to longer
and more expensive regulatory
requirements.
42
Measuring a positive
avoidance of problems will be
harder to achieve. The ability of the
investment community to evaluate
these choices will help it more
accurately identify those companies
that are better placed to succeed,
and encourage companies to pursue
strategies that deliver the greatest
societal and financial value.
N!3 F+.)/ +" I*2!/0)!*0
PF3 also discussed the fact that the
investment community itself can play
an important role in making capital
available to new ventures in emerging
markets. Central to much of the
discussion was the recognition that
to maximise volume potential some
health and pharmaceutical enterprises
in such markets will want to offer
some products and services at lower
margins than in Western markets.
Those who opt for this path will need
to develop strategies which recognise
the fact that such ventures may need
to go through a long investment
period before becoming profitable.
While much non-commercial
healthcare has to date been made
possible by philanthropic funding,
there are limits to that resource.
Further, with significant levels of out
of pocket spending and increasing
interest in social purpose investing,
there is an opportunity to develop
sustainable social enterprise models
in these markets. Consequently,
PF3 undertook research to determine
whether it would be possible and
even advantageous to structure
investment vehicles that would
draw for-profit capital alongside
philanthropic investment to support
social enterprise ventures.*
43
Philanthropic investing or the
unfortunate rubric philanthro-
capitalism theoretically treats
charitable grants and contributions
as investment of capital for social
purposes. The philanthropist typically
asks that the enterprise be managed
and monitored as a business and
will structure the gift as a loan or
equity investment. This investor
is exceptionally patient in that
expectations of the return on those
funds may not require interest or
dividends, and often may not seek
any return at all. The benefit to the
investor comes from the discipline
of running the enterprise as a
business thus, hopefully, reducing
the need for subsequent infusions
of capital.
These philanthropic vehicles come in
a variety of shapes and carry many
labels but, at their core, they share
a common goal: to use investment
capital to realise a social or
environmental return. The investor
pool offering capital currently consists
of a diverse set of actors, including:
high net worth individuals of
conscience, foundation endowments,
foundation programme funds, socially
responsible investors and funds,
public pension funds, patient capital
and occasionally corporations.
40 Pharma Futures 3
This research was carried out by
John Schaetzl, who has been involved
in Pharma Futures since its inception,
originally as a portfolio manager for
domestic and global healthcare funds
with broad research responsibility for
healthcare at General Electric Asset
Management and following his recent
retirement as an independent expert.
For full biography see note 43.
*
41 Pharma Futures 3
To date it has not included significant
participation by the mainstream
investment community. Though efforts
to attract for-profit investors support
for social enterprises and other
social purpose ventures are still in
their early stages, they offer significant
opportunity and potential benefits
for individuals interested in tackling
systemic challenges such as access
to medicines in emerging markets.
Social purpose investment funds have
the potential to bring additional capital
into the marketplace to augment the
existing pool of philanthropic dollars.
Further, attracting mainstream
investors to a field traditionally
dominated by non-profits also brings
skills and knowledge, particularly the
ability to select and scale innovative
enterprises capabilities much
needed in the growing third sector.
Of particular promise is the hybrid
investment model approach: patient,
philanthropic capital paired with
mainstream venture or other like
capital. This model uses philanthropic
capital to favourably rebalance risk
and reward through various forms
of guarantees and increased returns
(e.g. assigning disproportionate
return to the for-profit partner).
Unexpectedly, it is conceivable
that the current financial crisis may
provide a fertile opportunity, due
to an increase in risk aversion of
mainstream investors and
expectations of sharply lower
market returns.
The demographic predictability of
demand for high-quality affordable
maternity care in India or treatments
for tropical diseases may be an
attractive alternative to the
increasingly higher efficacy and
safety hurdles for new drugs in the
developed markets.
The reality of bridging the for-profit
and non-profit worlds is not without
its challenges. Socially purposed
venture capital funds (including
Commons Capital and the Global
Health Ventures Fund) have had
difficulty raising capital. For-profit
and philanthropic counter-parties
have different motivations, which will
complicate investment management.
It is also true that the few existing
healthcare projects which have taken
off (e.g. Acumens investment in
Life Spring Hospitals and the Gates
Foundation drug development
projects) have drawn philanthropic
capitalists and not mainstream
investors.
The reasons for this are clear.
Particular challenges exist around
the for-profit investors wish to retain
the right to make corrections which
the philanthropists fear may
compromise the plans original social
purpose. Second, for-profit investors
place high importance on exit strategy
(the ability to withdraw their
investments) in contrast to the
patience of philanthropic investors.
Third, both philanthropic and for-profit
investors and particularly those at
the venture stage tend to co-invest
only with familiar well-known partners
and trust is a prerequisite for success.
Coming from such different
backgrounds agreements between
different players will take time
to build.
Fourth, tax issues typically
preclude simultaneous investment
of foundation endowment and
programme funds in the same
endeavour. And, finally, identifying
investable deal flow (companies or
ventures to invest in) can be difficult
and time consuming.
Despite the challenges the first
opportunities are emerging. With the
emergence of micro-credit all sorts
of new investment vehicles have
been developed including a fund for
funds in which mainstream investors
participate with equity alongside
philanthropic capital which is provided
as debt. Investment for Health in
Africa provides another example of
a hybrid investment vehicle which is
investing in healthcare infrastructure.
These examples illustrate how the
opportunity to leverage the funding
and talent of the for-profit investment
community to help scale social
enterprise solutions to societal
challenges is ripe for experimentation.
There is potential also for global
pharmaceutical firms through their
venture arms and foundations
to partner traditional institutional
mainstream and philanthropic
investors, and possibly sovereign
wealth funds, in order to sow the
seeds of eventual market growth
which will occur well beyond
typical investment time frames.
The pharmaceutical industry and
its investors, who have acknowledged
the need to more proactively engage
in developing healthcare infrastructure
in emerging markets, could reasonably
consider what promise hybrid-
financing models offer to support
this effort.
Figure 7
T$! S,!c0.1) +" S+c%a(
Ca,%0a( I*2!/0)!*0
Source: Ashoka
Grants Venture
Philanthropy
Programme-
Related
Investments
Corporate
Engagement
Including
CSR
Socially
Responsible
Investment
Mainstream
For-Profit
Investments
No Financial Return
L
o
w
R
i
s
k
H
i
g
h
Below Market Return Market Return
The Need for More
Information
Investors are increasingly interested
in how pharmaceutical companies are
positioning themselves in emerging
markets, but are hampered by a lack
of information. Investors are keen to
learn more about companies
immediate and longer-term business
strategies, and need information on
key performance indicators, including:
percentages of sales in emerging
markets (and by country); the
percentage of profits; the number
of employees; the percentage of
assets held; the share of capital
expenditure and R&D; the proportion
of stock-keeping units (SKUs)
available; and the average price of
key products in emerging markets
versus developed markets.
The Potential for
New Funding Models
PF3 illustrated that the opportunity
to leverage the funding and talent of
the for-profit investment community to
help scale social enterprise solutions
to societal challenges is ripe for
experimentation. The potential of
new hybrid financing models able
to help develop service-models,
infrastructure, differential pricing
challenges and micro-insurance was
explored and emphasised. This
potential also extends to global
pharmaceutical firms through their
venture arms and foundations to
partner with traditional institutional
mainstream and philanthropic
investors, and possibly sovereign
wealth funds, in order to sow the
seeds of eventual market growth
which will occur well beyond typical
investment time frames. The
pharmaceutical industry and its
investors, who have acknowledged
the need to more proactively engage
in developing healthcare infrastructure
in emerging markets, could reasonably
consider what promise hybrid-
financing models offer to support
this effort.
The Need for Forward-
Looking Indicators
Investors would also benefit from
leading indicators that can help
them forecast future success.
Metrics that measure how well
companies are managing government
relationships as well as public
expectations would, in particular,
provide invaluable insights.
I),(%ca0%+*/ "+.
I*2!/0+./
Section 4
C+*c(1/%+*/
PF3 underscored the excitement
and interest of both pharmaceutical
executives and investors in the
potential of the emerging markets.
It stressed the importance for the
pharmaceutical industry of developing
and scaling up innovative business
models that are suited to emerging
markets. At the same time, it
emphasised the potential for the
investment community to improve its
understanding and support of these
efforts, which aim to deliver long-term
value. The dialogue identified the work
of social entrepreneurs and firms
domiciled in emerging markets as a
critical source of learning and
inspiration. The core needs identified
in the dialogue were:
Investors need clearer signals from
industry about the nature of the
opportunities in the emerging
markets and the investments such
opportunities will require.
Pharmaceutical companies will
need to adapt their business
models from ones developed
for Western markets with robust
health infrastructure to models
that account for the realities of
emerging markets. New approaches
to distribution and pricing will
be required.
42 Pharma Futures 3
43 Pharma Futures 3
Improved communication, not
just between companies and
investors, but also between the
industry, governments, global
health experts and local people
will facilitate effective emerging
markets solutions. The media,
in particular, has a role in the
promotion of accountability
and transparency.
I),(%ca0%+*/ "+. 0$!
P$a.)ac!10%ca( I*1/0.5
PF3 identified the three common
elements that are particularly relevant
to pharmaceuticals and healthcare in
the business models that have been
successful in meeting the needs of
lower income consumers in emerging
markets:
(1) they are human-centred; (2) they
have taken a radically new approach
to understanding affordability; and
(3) they have sought new means
of achieving market penetration,
by taking a much more active role
to ensure that their offering is
accessible.
Human-Centred
Companies need to continuously
ensure that their products/services
meet customer needs. Pharmaceutical
companies expanding into emerging
markets must critically examine their
product offerings for individual
markets.
Affordable
Middle-income consumers in
emerging markets have lower
capacities to pay than their
counterparts in Western markets.
To reach these customers requires
going beyond cost-cutting to thinking
about approaches such as volume-
based business models and customer
aggregation. Other companies are
experimenting with financing
mechanisms that tap consumer
willingness and ability to pay despite
limited or no access to credit. Pricing
was a recurrent theme throughout
PF3 with considerable interest
expressed in exploring tiered pricing
and affordability for lower-income
populations. While the details are
commercially sensitive, it appears
that many companies are already
experimenting with innovative pricing
schemes. These efforts, however, are
hampered by concerns over (1) the
potential detrimental impact of new
pricing models for industrialised
markets, and (2) the risk that investors
will respond negatively, assuming that
lower prices will lead to lower
profitability.
Accessible
The absence of healthcare
infrastructure means that to expand
meaningfully to serve low-income
populations requires the development
of different approaches to distribution.
The potential for developing
partnerships with local organisations
social entrepreneurs, companies,
governments, local business and
NGOs who understand the
landscape were strongly supported.
It was acknowledged that the
industry could learn much from
other companies and social
entrepreneurs who have been
successful in meeting the needs of
the low-income consumers. Such
partnerships could enhance both
access to medicines and market
development. The partnerships likely
to be most successful are those that
emphasise health outcomes and the
development of service innovation to
complement product innovation.
44 Pharma Futures 3
Ac'*+3(!#!)!*0/ This report is a record
of a year-long structured
dialogue between the
pharmaceutical industry,
institutional investors,
global health experts and
social entrepreneurs about
the challenges and
opportunities of delivering
healthcare in emerging
markets. It attempts to
capture an extraordinarily
rich discussion about the
role of the pharmaceutical
industry in markets
characterised by acute
healthcare needs in
which great wealth and
great poverty coexist.
As co-author of the report
(my colleague Maggie
Brenneke is the other) we
take responsibility for any
errors of omission or
commission.
PF3 would not have been
possible without the active
engagement and support
of many individuals, three
of whom deserve special
mention. First of all,
I would like to thank
Maggie Brenneke,
SustainAbilitys Healthcare
Lead, who combined
energy and a huge sense
of fun with intellectual
rigour and curiosity, project
management skills and
strategic thinking both
in conceptualizing the
project and in the report
writing. PF3 owes much
to Maggie.
Second, John Schaetzl,
an active and prized
participant all Pharma
Futures incarnations,
has made invaluable
contributions to this iteration
of the project and planted
the seeds for ideas about
how to capture mainstream
funding for social ventures
in healthcare which are
likely to survive and thrive
well into the future.
Third, Pamela Hartigan,
whose inspiration, insight,
experience, and enthusiasm
for the world of social
enterprise, was hugely
important both in the
workshops and in the
report writing.
Thank you to Riders for
Health, Novartis, Aravind,
Fabio Rosa and GSK for
some of the photos used
in the report.
I would also like to thank
Ritu Khanna, who played
a critical role in the early
stages of PF3, Alexa Clay,
Ivana Gazibara and
Preetum Shenoy for their
indefatigable research
efforts and the quality
of their outputs, Ori
Chandler, Rose Crawford
and Kate Timperley who
met the projects many
administrative and logistical
demands with great
humour and efficiency.
And SustainAbilitys CEO,
Mark Lee, provided rocklike
moral and intellectual
support throughout.
Most of all, however,
I would like to thank the
members of the Working
Group and the other experts
(listed on p. 47) whose views
and perspectives were
shared with us for their
active participation in the
project. As with previous
iterations of Pharma
Futures, these people are
the project. The openness to
discuss difficult issues and
willingness to listen created
an extraordinarily fruitful
exchange, all the more
challenging because this
time we wanted to move
from research into concrete
proposals on the ground.
Finally, I would like to
thank the pension funds
participants in particular
who in asking, what does
it mean to be an active and
responsible investor in a
whole sector? are creating
an approach to investment
that fully integrates
social and environmental
considerations into
investment decision-making.
Given the current challenges
of the financial system,
we hope this approach
will serve as a model for
others as they consider how
to create, capture and
evaluate long-term value.
S+,$%a T%c'!((
Director, Pharma Futures
January 2009
45 Pharma Futures 3
Appendix 1
P.+&!c0 Pa.0%c%,a*0/
W+.'%*# G.+1,
J!/1/ Ac!b%((+
Head of Region, Emerging
Growth Markets, and
Country Head, Spain
Novartis
S0!3a.0 A'%*/
Director
Stewart Adkins Advisors
Limited
Ma00$!3 C(a.'
Americas Portfolio Manager
USS
R11 D+bb!.
Regional VP, Asia Pacific
AstraZeneca
Ma.0%* E%&#!*$1%&/!*
Senior Portfolio Manager
APG Investments
C$.%/ E(%a/
President
PATH
J!a**!-Ma.%! G!/c$!.
CEO and Founder
cga
Da2% G.!!*
Social Entrepreneur
Pa)!(a Ha.0%#a*
Founding Partner
and Director
Volans
Abba/ H1//a%*
President for the
Emerging Markets
GSK
Ha**a$ K!00(!.
Program Officer, Global
Health Policy and Finance
Bill and Melinda Gates
Foundation
Na0a/$a La*!((-M%((/
Analyst, Responsible
Investment
USS
R10$ L!2%*!
VP, Programs and
Operations
CGD
G V P.a/a
CEO and Vice-Chairman
Dr. Reddys
R!)a Ra&!/3a.a*
Associate
Generation Investment
Z%0+ Sa.0a.!((%
Company Group Chairman,
Pharmaceutical Business in
Asia Pacific (including China
and India), Japan and Latin
America
Johnson & Johnson
Pharmaceuticals Group
J+$* Sc$a!06(
Individual
Ta.1* S$a$
Head (Asia)
Mehta Partners
E.%'-Ja* S0+.'
Sustainability Specialist
APG Investments
Da*%!( S1))!."%!(
Co-Head of Responsible
Investment
USS
R D T$1(a/%.a&
Executive Director: LAICO
Aravind
Ba.0 Z!(!*.1/0
Portfolio Manager
Robeco
O0$!. C+*0.%b10+./
S$!.!!* E("!'%
Fellow
American University in Cairo
M%c$a!( F.!!
VP & Senior Advisor,
Technologies
PATH
L5** Ma.'/
Senior VP, Center for
Clinical Study Excellence
(CCSE), Medicines
Development
GSK
A*%( Ma0a%
CEO, Pharma Novartis India
Novartis
J+$* McHa(!
Senior Vice President
Pioneer Investment
J1(%! McH1#$
Company Group Chairman,
Virology
Johnson & Johnson
Pharmaceuticals Group
V%.!* M!$0a
Principal
Mehta Partners
Ma.5 M+.a*
Director, Health
Policy Division
The George Institute for
International Health
B!* P(1)(!5
VP, Communications
Johnson & Johnson
Pharmaceuticals Group
J!**5 W%*0!.
VP, Group Public Affairs
AstraZeneca
46 Pharma Futures 3
Appendix 2
E40!.*a( E4,!.0/
E(%6ab!0$ Ba%(!5
Commons Capital
A.+* B!(%*'5
EcoPress
T%) B.+3*
IDEO
C$a.(!/ C(%"0
DfID
Ra&%2 D+/$%
Stanford-India Biodesign,
Stanford University
C$.%/ Ea.(
BioVentures for
Global Health
Da% E((%/
Clinton Foundation
E))a*1!( Fab!.
Danone
S$a%(!/$ Ga.!
IMS Research
Da**5 G.a5)+.!
DfID
Y1/1" Ha)%!
Cipla
T+) Ha/(!00
Seven Seas Capital
Management
V!*'a0 Ja/0%
Suven Life Sciences Ltd
M+$#a Ka)a(-Ya**%
Oxfam
Ta.1* K$a**a
Harvard Business School
R%c$a. La%*#
WHO
A*.!%a Ma.-1!/
Medley
Pa0.%c' McN!!(a
GE Asset Management
Fab%+ R+/a
IDEEAS
Sa)%a Saa
MeTA
L+%c Sa+1(!0
INSEAD
Sa*$5a V!*'a0!/3a.a*
Formerly of CARE
J+$* W%('!./+*
Galen Partners
A.0$1. W++
Ashoka
M1$a))a Y1*1/
Grameen
47 Pharma Futures 3
N+0!/
1
There is a mass of
literature on this issue:
Joseph E. Stigliz,
G,/"!,)2!3)/. !.$ )32
D)2#/.3%.32, 2002;
Amartya Sens various
articles and presentations
following the publication
of his book, D%5%,/0-%.3
!.$ F1%%$/-, 2001;
Thomas Friedman, T(%
/1,$ )2 F,!3 3.0, 2007.
2
The New Global Middle
Class: Potentially
Profitable but also
Unpredictable,
Knowledge@Wharton,
9 July 2008.
http://knowledge.wharton.
upenn.edu/article.cfm?
articleid=2011
3
Piggybanks Full of Pesos
B42).%22%%+ O.,).%,
13 March 2006.
www.businessweek.
com/@@br4qqoyqbgaIvr
0a/magazine/content/
06_11/b3975071.htm
4
Cyrillus Harinowo,
Economic Growth:
The Rise of the
Indonesian Middle Class
T(% J!+!13! P/23.
www.thejakartapost.
com/news/2008/09/16/
economic-growth-the-
rise-indonesian-middle-
class.html
5
Robert Fitzpatrick, Brazil
Becomes Middle Class,
But Not Bourgeois,
B1!88),, 24 August 2008.
www.brazzil.com/
articles/190-april-2008/
10103-brazil-becomes-
middle-class-but-not-
bourgeois.html
6
Nicholas Zamiska,
AstraZeneca Taps
Chinas Hinterlands,
T(% !,, S31%%3 J/41.!,,
13 June 2008.
7
Ibid.
8
Research and Markets,
I.$/.%2)! P(!1-!-
#%43)#!,2 !.$ H%!,3(#!1%
R%0/13 Q2 2008,
April 2008.
www.researchandmarkets.
com/reports/c92549.
9
UNDP, T(% H4-!.
D%5%,/0-%.3 R%0/13
2007/08, 2007.
10
Ibid.
11
Ibid.
12
The New Global Middle
Class: Potentially
Profitable but also
Unpredictable,
Knowledge@Wharton,
9 July 2008.
http://knowledge.
wharton.upenn.edu/
article.cfm?articleid=2011
13
Centre for Global
Development.
14
The Global Fund website.
www.theglobalfund.org
15
IDEO, T//,+)3 &/1 H4-!.
C%.3%1%$ D%2)'.: H%!1,
August 2008.
https://client.ideo.com/
hcdtoolkit/wp-content/
themes/hcd/pdfs/
hear_facilitator.pdf
16
How Did Nokia Succeed
in the Indian Mobile
Market, While Its Rivals
Got Hung Up?
Knowledge@Wharton
India, 23 August 2007.
http://knowledge.
wharton.upenn.edu/india/
article.cfm?articleid=4220
17
Ibid; India to have
529 Million Telecom
Subscribers by 2010,
T(% E#/./-)# T)-%2,
24 May 2008.
http://economictimes.
indiatimes.com/article
show/3067323.cms
18
Nokia, Top Mobile Co. in
India, R%$)&& I.$)! A"1/!$,
16 June 2008.
www.rediff.com/money/
2008/jun/16nokia.htm
Nokia website.
www.nokia.com
19
Nokia Annual Report,
2007.
www.nokia.com/nokia_
com_1/about_nokia/
sidebars_new_concept/
annual_accounts_2007/
nokia%20in%202007.pdf
How Did Nokia Succeed
in the Indian Mobile
Market, While Its Rivals
Got Hung Up?
Knowledge@Wharton
India, 23 August 2007.
http://knowledge.
wharton.upenn.edu/india/
article.cfm?articleid=4220
20
Nandini Lakshman,
Unilever Looks to
Recover Lost Indian
Glory, B42).%22%%+,
26 September 2007.
www.businessweek.
com/globalbiz/content/
sep2007/gb20070926_
123492.htm?campaign_
id=rss_as
21
Nokia website.
www.nokia.com
22
How Did Nokia Succeed
in the Indian Mobile
Market, While Its Rivals
Got Hung Up?
Knowledge@Wharton
India, 23 August 2007.
http://knowledge.
wharton.upenn.edu/india/
article.cfm?articleid=4220
23
Ibid.
24
Ibid.
25
Ibid.
26
Jack Ewing, First Mover
in Mobile, B42).%22%%+,
4 May 2007.
www.businessweek.com/
innovate/content/
may2007/id20070504_
299909.htm
27
A Tale of Two Sectors:
What Can Indian Telecom
Firms Teach the Power
Industry about Reforms?
Knowledge@Wharton,
15 February 2007.
http://knowledge.
wharton.upenn.edu/
article.cfm?articleid=1660
28
Asuncion M. Sebastian,
Patrimonio Hoy: Building
Hope for the Poor, A2)!.
I.23)343% /& M!.!'%-%.3,
5 May 2005.
www.themfmi.org/
attachments/cemex%20
patrimonio%20hoy%20
case%20(aim-5-05-0007-
cs).pdf
29
Ibid.
30
M. Letelier, F. Flores and
C. Spinosa, Developing
Productive Consumers
in Emerging Markets,
C!,)&/1.)! M!.!'%-%.3
R%5)%6, Summer 2003.
31
Shane Rosenthal,
T(% M!.),! !3%1
C/.#%22)/.2 !.$ T(%)1
I-0!#3 /. 3(% P//1,
Yale School of Forestry
and Environmental
Studies, 2001.
47 Pharma Futures 3
48 Pharma Futures 3
32
Manila Water: An IFC
Client Improves Lives,
IFC, 31 October 2007.
www.ifc.org/ifcext/
media.nsf/content/
feature_manila_water
33
Manila Water Annual
Report, 2007.
www.manilawater.com/
files/MWC_AR2007.pdf
34
Jane Comeault,
M!.),! !3%1 C/-0!.7:
I-01/5).' !3%1 !.$
!23%6!3%1 S%15)#%2 &/1
3(% U1"!. P//1, United
Nations Development
Program, 2007.
35
Manila Water website.
www.manilawater.com
36
UNDP, T(% H4-!.
D%5%,/0-%.3 R%0/13
2007/08, 2007.
37
Jos Augusto Bezerra,
O Gaucho Eletrico,
O G,/"/, 252nd edition,
October 2006.
38
Dresdner Kleinwort,
R%0,%.)2().' R%341.2 9
E-%1').' M!1+%32
S400/13 F4341% G1/63(
&/1 L/.'-T%1- I.5%23/12,
Equities Research:
Pharmaceuticals, Europe,
13 May 2008.
39
Care must be taken in
using subsidiary figures
since performance is
influenced by transfer
pricing (and how much
profit the parent is
prepared to allow the
subsidiary to keep) and
the product portfolio (e.g.
Abbott and Pfizer have old
products in India rather
than their latest product
offerings and these are
less profitable).
40
Views expressed by
executives participating in
the Pharma Futures 3
meeting in Mumbai,
October 2008.
41
Dresdner Kleinwort,
R%0,%.)2().' R%341.2 9
E-%1').' M!1+%32
S400/13 F4341% G1/63(
&/1 L/.'-T%1- I.5%23/12,
Equities Research:
Pharmaceuticals, Europe,
13 May 2008.
42
Ulrik Shulze, VP and
Director, BCG, Future
Challenges and
Opportunities for the
Pharmaceutical Industry,
presentation at Swiss Re
Life Sciences Forum
2006; PriceWaterhouse-
Coopers, P(!1-! 2020
T(% V)2)/., 2007.
http://www.pwc.com/
extweb/pwcpublications.
nsf/docid/91BF330647
FFA402852572F2005
ECC22
43
Prior to joining GE Asset
Management, John
Schaetzl held senior
marketing and planning
positions at Bayer/Miles
Laboratories. He was
also a consultant to the
pharmaceutical industry
at Healthcare Forecasting
Inc. and Scott Levin
Associates. John has
taught and held
administrative positions
at several universities.
He is a frequent speaker
on healthcare issues
and participated in the
structured dialogues
between senior
pharmaceutical
executives and investors
which were a part of
Pharma Futures 1 and
Pharma Futures 2.
He is a non-executive
director of SustainAbility
and Columbus House.
He is the co-author of
P1!#3)#!, P/,)3)#2 !.$
A-%1)#!. G/5%1.-%.3
(MacMillan 1976) and
P1/*%#3 18: E&&%#3)5%,7
I.&,4%.#).' P/,)3)#!,
D%#)2)/.2 (Edinburgh,
1973). John holds an MA
from the University of
Pennsylvania and a BA
from Harvard College.
48 Pharma Futures 3
P1b(%ca0%+* D!0a%(/ T%0(!
P(!1-! F4341%2 3:
E-%1').' O00/134.)3)%2
First Edition 2009
ISBN
9781903168257
C+,5.%#$0
2009 SustainAbility Ltd.
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Panos Pictures
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