Branded generics are delivering great growth and profitability in emerging markets, but how much longer can they continue to do so? A new approach helps companies assess the prospects market by market.
Over the past five years, generic and branded generic (BGx)1 drugs have continued to grow strongly in emerging markets, often at a pace two to five times faster than branded originals.
In those emerging markets where brands are seen a proxy for quality, and where physicians retain considerable control over prescriptions and patients over purchasing decisions, branded generics have been more successful than their unbranded counterparts, and have maintained their prices for longer. Recognizing this opportunity, many global pharma companies have announced plans to boost their emerging market business by investing in branded generics, whether by launching their own portfolios or by acquiring those of other companies.
However, the landscape for branded generics is far from uniform, with individual markets evolving in markedly different ways. In some markets, such as Turkey, governments are implementing cost- reduction measures. In other markets, such as South Africa, payors are putting pressure on prices. By contrast, some markets, such as Brazil, are continuing to see rapid growth in branded generics as the emerging middle class acquires increasing purchasing power.
Given such differences, multinational pharma companies need to examine their portfolios and geographic footprints to identify those markets where branded generics will remain a sustainable proposition and those where conditions are likely to become more challenging. In this article we outline an approach to assessing markets that leaders can use to establish a fact base to inform their discussions on investing in branded generics.
Recent investments and new challenges
Global pharmaceutical companies have adopted a variety of approaches to enter the branded generics segment in emerging markets:
M&A. Many multinationals pursue an acquisition strategy to build their branded generics business. For instance, Sanofi-Aventis expanded its portfolio and footprint by acquiring the Czech Republic–based Zentiva and Brazil’s Medley in 2009. Similarly, Abbott acquired Belgium-based Solvay and India’s Piramal in 2010, and in the same year Pfizer acquired a stake in Teuto in Brazil.
Long-term partnerships. Several global pharma companies have embarked on joint ventures with local players. For instance, GSK set up a partnership with Aspen, a South Africa– based generics manufacturer, in 2009 to expand in sub-Saharan Africa. Similarly, Merck partnered with India’s Sun Pharma in 2011 to develop and commercialize new formulations and fixed-dose combinations, and in 2012 the company embarked on a three- way joint venture called Supera with Eurofarma and Cristalia in Brazil.
Licensing and supply agreements. These deals are another mechanism used by global companies to expand their branded generics business in emerging markets. Examples include Pfizer’s in-licensing deals with India’s Aurobindo in 2009 for several branded generics and AstraZeneca’s supply agreements covering several therapeutic areas with Aurobindo and another Indian manufacturer, Torrent, in 2010.
Through these steps, global pharmaceutical companies have secured access to a large and fast-growing market segment. To achieve the best results from this access, they need to understand and address some core challenges presented by emerging markets. The most important of these are:
Price pressures from payors.
As institutional payors - governments and private health insurers reimbursing patients for drugs - face economic pressure, they tend in turn to exert pressure on prices. In South Africa, for instance, payors have recently started to use international benchmarking across the private sector to drive down prices. At the same time, the public sector has been investing heavily in broadening healthcare coverage within the national health insurance scheme, a plan that involves purchasing large volumes of inexpensive, mostly generic medicines. Elsewhere, the Turkish government has followed a path of regular and significant price reductions over the past few years.
Requirements for local investment.
Several markets are facing a balancing act between the desire to support local companies and the need to manage government spending on pharmaceutical products. In Turkey, multinationals have had to invest heavily in local manufacturing or partnerships with local players in order to meet local good manufacturing practice (GMP) requirements. Similarly, the Russian government’s Pharma 2020 plan encourages local manufacturing by requiring regional authorities to buy a certain percentage of locally produced drugs. The Brazilian government has also announced that it will create a price advantage of between 8 and 25 percent for locally manufactured products in government tenders.
Increasing consolidation and assertiveness among wholesalers and distributors.
In markets where major multinational retailers have started to establish a significant presence or where retailers have consolidated, as in Brazil, global and local drug companies have faced growing pressures in building their brands and competing against the new entrants. Retailers are also creating a new product segment in the form of private-label brands, which barely existed in emerging markets
The prospects in key markets
India, Brazil, Mexico, and Russia are the markets where we see the best long- term prospects for branded generics. India, with its majority out-of-pocket segment and limited government price intervention, looks set to sustain a strong preference for branded generics, although they are likely to stay at today’s low prices. Brazilian consumers have consistently displayed a very strong preference for brands in many product categories, including pharmaceuticals. Although the Brazilian government has recently enabled access to one of the world’s largest health insurance schemes, the country’s largest segment is still the patient-paid retail market, which is expected to continue to grow.
Physicians and patients have a strong preference for brands in Mexico too, and we believe it will remain an attractive market for the foreseeable future.
Finally, Russia also has a pronounced bias toward branded generics, and although the government plans to reduce the market share of this segment as announced in Pharma 2020, we believe it still holds good prospects.
Although Saudi Arabia retains a strong preference for brands, branded generics are losing their appeal, a trend that is likely to continue as the government introduces measures to reduce prices. Government tenders have become more systematized thanks to NUPCO (the National Unified Procurement Company for Medical Supplies), price reductions have become sharper following the introduction of international price benchmarking, and regulatory standards have risen as the Saudi Food and Drug Authority evolves.
In Turkey and South Africa, meanwhile, government pressures to reduce pharmaceutical costs are making
the branded generics markets less attractive despite the strong preference for brands in these countries.
Across eastern Europe, trends are emerging that have drastically reduced the appeal of branded generics. Faced with tight austerity budgets, government payors are making efforts to reduce their spending on drugs. For example, Hungary’s 2011 economic reform package requires OEP, its national health insurance fund, to make significant savings in its drug reimbursement budget. However, this trend does not affect all countries in the region in the same way. For instance, in Romania, which still has a strong out- of-pocket segment, the government’s share of spending on branded generics remains small and consumers continue to demonstrate a strong brand preference, meaning that sustainability is higher.
That said, the preference for brands in eastern Europe is expected gradually to weaken as the introduction of EU standards leads to a rise in quality across the board. Over time, these markets could begin to resemble those of France and Germany, where strong regulatory systems have combined with austerity pressures
to limit the appeal of branded generics.
(originally written by Sanjeev Agarwal, Andrew Cavey, and Ali Murad of McKinsey&Company and previously published as 'Unlocking pharma growth' and edited by pharmanaming. Sanjeev Agarwal is a principal in McKinsey’s New Jersey office; Andrew Cavey is an associate principal and Ali Murad is a consultant in the London office. mail:firstname.lastname@example.org