Heathcare report | The race intensifies

Rising research and development (R&D) costs, more stringent regulators, generic competition and government spending cuts all make it increasingly difficult for big pharmaceutical firms to post the type of financial performance that investors demand. The picture is not nearly as bleak, however, in many emerging markets. More people are able to afford basic healthcare than ever before, and there is a growing segment with access to the latest premium drugs brands.

To take advantage of the opportunities in these markets, multinationals have to reinvent themselves. Defining a unique functional proposition has become difficult, leading to increased attention to emotive branding. Pharmaceutical products have become brands, and it is now essential to develop a brand's power in the mind of prescribers.

In many emerging markets, where government spend is much lower and the private market is often dominant, pharmaceutical firms have concentrated on building accessibility. Local generics companies have benefitted from favourable intellectual property environments to develop products at a fraction of the cost of the originals, later selling them effectively through extensive and relationship-driven sales teams.

The result is cheaper medicines, affordable to the middle classes, and a physician population highly motivated to prescribe. This approach enabled Dong-A to become the largest drug producer in Korea, and Cipla and Ranbaxy to become India's top two players, for example. So how are multinational (MNC) players competing? There are currently four key areas of focus.

The first is lowering the cost base. Recently, the industry has seen a series of deals between MNCs and local generics houses. Pfizer was one of the first to go this route with its tie-up with Aurobindo, but Abbott (Piramal) and Daiichi Sankyo (Ranbaxy), among others, soon followed suit. Such acquisitions not only provide a high-calibre sales force in a key emerging market, but also give access to cheap generic production. The implications of this change are concerning for more developed markets. Large MNCs are likely to decrease production in markets like Japan, where high production costs  and a strong yen make exports unaffordable. Developed countries will have to follow Singapore's lead in giving MNCs big incentives to keep manufacturing.

Second, branded generics and the emerging middle class are also key. Across the emerging markets, the upper-middle class is expanding rapidly, providing a larger market for original brands. However, the lower-middle classes are also growing, providing an ever-increasing market for branded generics. Companies have responded to this growing opportunity in different ways.

GlaxoSmithKline (GSK) has driven market access in certain key emerging markets by pricing its original brands at affordable levels. The company reduced the price of Cervarix, its cervical cancer vaccine, in the Philippines to make it more affordable and to ensure that a greater proportion of young women could benefit from the vaccine. Merck went a similar route with Januvia in India, pricing the diabetes drug much lower than in other markets.

Other companies have created a branded generics offer. Sandoz, Novartis' branded generics arm, and Teva, have already succeeded in combining strong corporate values centred on quality with high service levels and cheap production. Competitors are now investing in similar models to trump local players by overlaying market power with branding and sales excellence.

Third, in more developed markets, like Japan and Australia, where drug spend is largely covered by healthcare systems, MNCs need to address the issue of treatment value more directly. The onus is now on the manufacturers of premium products to prove their worth through healthcare economics and outcomes (HEOR) data. Only if a drug can prove long-term benefits to society and to government coffers can it expect to be reimbursed.

Indeed, commitment is a crucial factor to success across the board. In addition to the acquisition of local generics houses, most MNCs have now invested in R&D facilities in emerging markets. This not only reduces the costs, but also garners favour with governments. Pfizer went much further by shifting its regional office to Shanghai, making a significant investment and creating hundreds of jobs.

Fourth, while MNCs are rationalising their sales forces in developed markets, emerging markets continue to offer return on expansion. In a market the size of China, the real sales opportunity does not lie in taking market share from competitors in first-tier cities, but by expanding into second- and third-tier cities. This model again bucks the trends usually seen in developed markets.

So, who is adopting this new business model most successfully? Notably, Pfizer's Q2 results were up 58 per cent on the same period in 2009. Novartis has also posted strong growth in China, India and Korea. The organisations that control their cost base, drive market access, invest heavily and commit to emerging markets and develop their value proposition will undoubtedly be successful. The key is to do it earlier and stronger than the competition. To quote Daniel Vasella, former CEO of Novartis: "Be there from the start, with full power."