Evaluating the Supply Chain in Emerging Markets

February 1, 2011
Patricia Van Arnum
Pharmaceutical Technology
Volume 2011 Supplement, Issue 2

The article examines pharmaceutical market growth, company positioning, and the innovation potential in emerging markets. Read this and other preferred organization articles in this special issue.

This article is part of a special issue on Preferred Providers.

Emerging markets are an important source of strategic growth for pharmaceutical companies. As companies expand, they must consider not only how to position themselves in specific product markets, but also how they should align their sourcing, procurement, purchasing, and related supply-management groups. Recent activity from the pharmaceutical majors shows the greater importance and their positioning in emerging markets. Also, a pharmaceutical benchmarking analysis reveals the growing role of supply-management organizations in emerging markets, and another survey shows the rising role of China and India in overall economic innovation.

Market potential

The pharmaceutical industry's focus on emerging market stems from strong growth projections, which outpace overall pharmaceutical industry growth. In 2011, the value of the global pharmaceutical market is expected to grow 5–7% to $880 billion, according to October 2010 estimates by IMS Health, improving from 2010 industry growth of 4-5%. Seventeen so-called pharmerging countries, as defined by IMS, are forecast to grow at a 15–17% rate in 2011, to $170–180 billion. China's pharmaceutical market, which is predicted to grow 25–27% to more than $50 billion in 2011, is currently the world's third-largest pharmaceutical market.

PAPER BOAT CREATIVE/GETTY IMAGES

Other market estimates are equally bullish. The overall market for therapeutic drugs in emerging markets in 2009 was $131.4 billion and $145.8 billion in 2010, according to a January 2011 analysis by the market research firm BCC Research. The countries and regions included in this analysis are Latin America, China, Eastern Europe, the Middle East, South Korea, India, Russia, and South Africa. These markets are expected to collectively increase at a compound annual growth rate (CAGR) of 8% between 2010 and 2015 to reach $214.2 billion. The Eastern European market was estimated at $32.2 billion in 2010, an increase of 13.4% from 2009. CAGR of 13.4% is estimated through 2015, when the market is expected to reach $55 billion. Russia's pharmaceutical market was estimated at $6.5 billion in 2009 and $7.4 billion in 2010. CAGR of 7.1% is estimated through 2015, when the market is expected to reach $10.5 billion.

Pharmaceutical company positioning

Lured by the potential and the need to strengthen their positions in emerging markets, the pharmaceutical majors are investing in development and manufacturing in emerging markets through several strategies. In some instance, they are making greenfield investments, and in other instances, they are partnering with domestically domiciled firms to access local markets, particularly for established products. A review of recent activity reflects those trends.

For example, in November 2010, Novartis signed a memorandum of understanding with the city of St. Petersburg, Russia, confirming its intent to build a new full-scale pharmaceutical manufacturing plant there. The investment is part of an overall $500-million commitment in local infrastructure and collaborative healthcare initiatives in Russia planned by Novartis for a five-year period. Once completed and approved for commercial production, the facility will produce both branded generic drugs and pharmaceuticals. Construction is scheduled to start in 2011, and the plant is expected to produce approximately 1.5 billion units per year.

In parallel with establishing a manufacturing facility in Russia, Novartis said it plans to continue to expand its investment in research and development (R&D) and public healthcare collaborations with the Russian government. These activities include collaborations with universities and emerging Russian private businesses in various areas of medical science. These collaborations may include out-licensing of Novartis compounds to Russian companies, in-licensing and scouting for promising drug candidates from Russian scientists and universities, and modeling and simulation activities for clinical trials. Additionally, Novartis plans to double its investments in drug development in clinical trials in Russia and expects to enroll approximately 4000 individuals by 2013.

Novartis also is positioning innovator drug products in emerging markets. In September 2010, Novartis announced that the Russian health authority, the Federal Service on Surveillance in Healthcare and Social Development, granted approval for the company's Gilenya (fingolimod) 0.5 mg once-daily oral therapy for the treatment of relapsing remitting multiple sclerosis. Russia was the first country to approve Gilenya. Novartis expects to launch Gilenya in Russia in early 2011. In September, Novartis reported that Rasilez (aliskiren), a renin inhibitor, received regulatory approval in China for the treatment of high blood pressure alone or in combination with other high blood pressure medicines. Rasilez/Tekturna is approved in over 80 countries and was approved in the United States in March 2007, in the European Union in August 2007 under the trade name Rasilez, and in July 2009 in Japan.

Novartis has stated its interest in expanding in emerging markets. In a November 12, 2010, press statement, the company said it "plans to strengthen its commercial position in fast-growing emerging markets and develop significant businesses in China, Russia, Brazil, and India." As part of that strategy, Novartis announced several investments in those markets during the past several years. The company is investing $500 million in a new vaccine-manufacturing facility in Goiana, Brazil, which is scheduled to be operational by the end of 2014. The company opened a new technical R&D and active pharmaceutical ingredient (API) manufacturing facility in Changshu, China to support the production of Tekturan/Rasilez, which included a $56-million investment in 2009 as part of a $265-million investment in that facility. In November 2009, Novartis announced it is investing $1 billion during the next five years to expand its research center in Shanghai, making it the company's third-largest research institute in the world. The company also acquired an 85% stake in the Chinese vaccine company Zhejiang Tianyuan Bio-Pharmaceutical (1).

sanofi aventis also is positioning in emerging markets. In November 2009, the company signed a memorandum of understanding with Prominvest, a fully owned subsidiary of the Russian State Corporation Rostekhnologii, confirming its intent to participate in the Pharmpolis Project. The project is part of an overall effort by the Russian government to localize innovator-drug manufacturers in Russia and foster the expansion of the country's pharmaceutical market. sanofi-aventis will use its insulin-manufacturing facility in Russia as part of a pilot initiative in the Pharmpolis Project. Other investments in 2009 include the acquisition of the Hyderabad, India-based vaccine producer Shantha Biotechnics; expansion of prefilled injection production lines for its insulin product Lantus SoloStar in China; expansion of vaccine production in Shenzen, China; and an expansion and relocation of facilities in Hangzhou, China. The company also invested EUR 100 million ($137 million) for an influenza vaccine-manufacturing facility in Mexico (1). Also, sanofi-aventis (Paris) enhanced its generic-drug portfolio and position in emerging markets during the last several years with several acquisitions of generic-drug companies: Zentiva (Czech Republic), Kendrick (Mexico), and Medley (Brazil).

In 2010, Abbott acquired the Piramal Healthcare Solutions' business (domestic formulations) for $3.72 billion. The deal consisted of an upfront payment of $2.12 billion and annual payments of $400 million during four years beginning in 2011. At the time of the announced acquisition in May 2010, emerging markets accounted for approximately 20% of Abbott's pharmaceutical sales, according to the company. Abbott estimates the combined entity of Abbott and the Piramal business has a market share in India of approximately 7%. Abbott estimates the growth of its Indian pharmaceutical business with Piramal will approach 20% annually and expects it to reach sales of more than $2.5 billion by 2020. Abbott estimates the current Indian pharmaceutical market at $8 billion and expects it to more than double by 2015.

The move followed recent deals by Abbott to increase its presence in emerging markets. In 2010, the company signed a licensing and supply agreement with the pharmaceutical company Zydus Cadila (Ahmedabad, Gujarat, India) for a portfolio of pharmaceutical products that Abbott will commercialize in 15 emerging markets. Under the agreement, Abbott gained the rights to at least 24 Zydus products and has an option for an additional 40 products. Abbott anticipates that the agreement will produce the first product launches in 2012 Abbott also formed a stand-alone established products division that is focused on expanding Abbott's sales outside the United States.

In November 2010, GlaxoSmithKline (GSK) formed an alliance with the Russian vaccine maker JSC Binnopharm to enable local secondary manufacture of several GSK vaccines in Russia. Under the alliance, GSK will supply bulk vaccine and provide technology and expertise to enable Binnopharm to undertake the secondary manufacturing, including filling and packaging, under GMP standards. Binnopharm is responsible for gaining approval of their facilities to allow supply of GSK's cervical cancer, rotavirus, and pneumococcal vaccines under Binnopharm's trademark for the Russian market.

In 2009, GSK partnered with India's Dr. Reddy Laboratories under which Dr. Reddy manufactures and supplies drugs to GSK, which licenses and comarkets the drugs in various countries in Africa, the Middle East, Asia-Pacific, and Latin America. In December 2009, GSK extended its strategic relationship and acquired a 19% stake in the South African pharmaceutical company Aspen PharmaCare to serve emerging markets.

Pfizer also has been building its position in emerging markets, particularly in established products. In 2010, Pfizer formed a strategic global agreement for the worldwide commercialization of biosimilar insulin products with Bangalore, India-based Biocon. The agreement involves Biocon's biosimilar versions of insulin and insulin analog products: recombinant human insulin, glargine, aspart, and lispro. Pfizer has exclusive rights to commercialize these products globally, with certain exceptions, including coexclusive rights for all of the products with Biocon in Germany, India, and Malaysia. Pfizer also has co-exclusive rights with existing Biocon licensees with respect to some of the products, primarily in several developing markets. Biocon will remain responsible for the clinical development, manufacture, and supply of these biosimilar insulin products and is also responsible for regulatory activities to secure approval for these products in various geographies.

Pfizer's deal with Biocon followed other agreements with domestic India pharmaceutical companies and suppliers. In 2010, Pfizer formed a collaboration with India's Strides Arcolab under which Pfizer commercializes off-patent sterile injectable and oral products in the US. The finished dosage-form products are licensed and supplied by Strides, Onco Laboratories, and Onco Therapies, two joint ventures between Strides and Aspen PharmaCare. And in 2009, Pfizer partnered with two Indian pharmaceutical manufacturers: Aurobindo Pharma and Claris Lifesciences. Under the deal with Aurobindo, Pfizer acquired the rights to 55 solid oral-dose products and five sterile injectables in 70 emerging markets. Pfizer also acquired the rights to 15 generic injectables from Claris Lifesciences.

Pfizer also is partnering with suppliers in Latin America. In 2010, Pfizer acquired a 40% stake in Laboratorio Teuto Brasileiro, a Brazilian generic-drug company. Pfizer has an option to acquire the remaining 60% of Teuto's shares beginning in 2014, and Teuto's shareholders have an option to sell their 60% stake to Pfizer beginning in 2015. Pfizer also has the opportunity to register and commercialize Teuto products in Brazil and various markets outside of the country under its own brands, including branded and unbranded generic medicine.

Other companies also are positioning in emerging markets. In March 2010, AstraZeneca signed a license and supply agreement with the Indian drug company and manufacturer Torrent Pharmaceuticals, under which Torrent supplies to AstraZeneca a portfolio of generic medicines for emerging markets. Torrent has two large manufacturing plants. in India. At Chhatral, the company has capacity to manufacture approximately 3000 million tablets, capsules and vials, and 20,000 kilograms of API. The manufacturing plant at Baddi has a capacity to manufacture 3600 million tablets, 150 million capsules, 10 million oral liquid bottles, and 12 million sachets per annum. The capacities are as reported by AstraZeneca in a March 11, 2010, press release. Torrent's R&D Center in Gujarat has a team of over 600 scientists who provide dedicated services in the areas of discovery research, generic-drug development, and new drug delivery systems/value-added generics, according to the press release.

Benchmarking the supply chain

The increased interest in emerging markets also is reflected in companies' need to expand their supply organizations in those markets. CAPS Research, a joint research initiative between the Institute for Supply Management and the W.P. Carey School of Business at Arizona State University, recently conducted a benchmarking study to evaluate supply management and supply-management organizations in emerging markets among pharmaceutical companies. For purposes of the survey, supply management includes sourcing, procurement, purchasing, and other functions assigned to the organization's supply-management group. The study is part of the 2010 CAPS Research Pharmaceutical Industry Supply Management Performance Benchmarking survey, which examined topics selected by a group of pharmaceutical industry supply-management executives. The survey on emerging markets was conducted in July 2010, and the results were released in August 2010.

Presence in emerging markets The survey found that almost half (45%) of the respondents have supply-management organizations physically located in emerging markets. Of those companies with supply-management organizations in emerging markets, all of them (100%) had organizations physically located in Asia (less China), Brazil, China, Eastern Europe, and India. Eighty percent of the respondents had supply-management organizations each in Mexico, the Middle East/Turkey, and Russia. Twenty percent had supply-management organizations in other regions, which include Africa or Southeast Asia.

The survey examined the degree to which companies had supply-management full-time equivalents (FTEs) physically located in emerging markets. For those companies with supply-management organizations physically located in emerging markets, 80% each had supply-management FTEs physically located in Asia (less China), Mexico, the Middle East, and Russia and 100% had supply-management FTEs locate each in Brazil, China, Eastern Europe, and India. Twenty percent had FTEs in Africa.

Change in leadership. The survey also examined the level of change given to supply-management leadership in select emerging markets to source and procure goods and services locally or regionally during the past year. The survey ranked the level of change on a scale of 1 to 7, where 1 represented no change, and 7 represented significant change. The level of change was moderate, ranging from a value of 3.20 in India to a value of 4.80 in China. The results were as follows: Asia (less China), 3.80; Brazil, 3.80; China, 4.80; Eastern Europe, 3.6; India, 3.20; Mexico, 3.25; Middle East/Turkey, 3.20; and Russia, 4.00.

Growth in emerging markets. The survey also examined to what degree pharmaceutical companies except supply-management growth in emerging markets during the next three years. The survey found that 80% of respondents plan to increase their supply-management organizations in emerging markets during the next three years. A majority of respondents (60%) anticipate this growth being 10% or less. Twenty percent anticipate growth of 11 to 20%, and 20% anticipate higher growth of 21–30%.

Innovation potential

Emerging markets, particularly China and India, are expected to raise their position in overall economic innovation. According to the results of a survey of 6000 respondents in six countries conducted by AstraZeneca and released in December 2010, China is expected to become the world's powerhouse of innovation over the next decade, eclipsing the United States and Japan. The survey showed that China will be the most inventive country by 2020, followed by India. The US and Japan will be relegated from first and second place to third and fourth, respectively. Thirty percent of survey respondents currently ranked the US most innovative, followed by Japan (25%) and China (14%). However, when asked which country will be the most innovative by 2020, China which was projected by 27% of survey respondents to overtake the US as the most innovative economy. India was ranked second, (17%), followed by the US (14%), and Japan (12%). More than half of those surveyed in China and India thought their home countries would be the most innovative in the world by 2020 (57% and 56%, respectively). Americans were also optimistic with 28%, believing their country would hold this position.

Conclusion

Given the market potential of emerging markets, combined with slowing pharmaceutical industry growth in established markets in the US and Western Europe, emerging markets will continue to be an important cog in the growth strategies of the pharmaceutical majors. These strategies entail investing in internal development and manufacturing, partnering with domestic companies, and building supply-management organizations in emerging markets.

Reference

1. P. Van Arnum, Pharm. Technol. 34 (8), 32–38 (2010).