Restore margins in emerging markets
Lists of top trends for the pharmaceutical industry are well known and have hardly changed in the last years. Especially the development of emerging markets has risen as one of the few promising trends in the last decade. Some recent developments might indicate that these markets are perhaps a not-so-promising trend.
One can't say that the pharmaceutical industry doesn't have any challenges. The blockbuster nineties are way behind us and R&D pipelines are drying up. More specifically: it takes much more effort and investment to bring a new compound to phase III than it did 15 years ago. At the same time the companies are hit by some strong price reducing factors. First of all USD 170bn of blockbuster sales will go off patent in the coming 5 years. Secondly, Western countries are actively putting pressure on prices of medicines in an effort to reduce health care spending.
Looking at the global footprint of these companies, the untapped potential of the emerging markets such as China, India and Brasil becomes immediately clear. A 2012 IMS market forecast has predicted that the total spending in emerging markets will nearly double to 2016 when compared by 2011 figures, going from 194bn to 260bn. The figures cannot be applied to margins, however. Average margin of branded products was 34% in emerging markets vs. 60% in the US.
With such a rapid development of medicine uptake, governments of these countries see healthcare spending rising rapidly. Higher health care costs are not just a concern for the Western countries anymore. The first signs of governments trying to cap the spending are already here. Early this year, the National Development and Reform Commission of China announced to reduce the price of 400 medicines by up to 20%. And last year India has announced it is investigating price reductions between 11 and 75% for 330 medicines.
The result is that margins will drop even further in these countries. And the new reality: high volumes at (much) lower prices. A completely new ball game for most pharmaceutical companies. So how can margins be kept healthy in this new market? We explore 3 key elements which we are convinced will distinguish leaders from laggards in the next decade.
First, know what to expect. All too often, "Asia" is treated as if it is one country in demand planning processes, while Europe's granularity goes to "Sales Belgium". A stronger presence of Sales is required to leverage local knowledge and come to a higher granularity demand plan. In addition, the operating model of governments often is different from what Western companies know. The new way to sell is via tenders. The "yes or no" characteristic requires a more integrated (Finance!) and S&OP-like (how much can we promise) approach.
Second, know what to do. With chemical plants, DC's, fill / finish sites and outsourcing partners located across the globe, pharmaceutical supply chain orchestration is often a complex and slow exercise. The result is unnecessary stock locked up at local DC's and too long (decision) lead times. In the new game the products must flow through the SC quicker and more effectively. This starts with making the right decisions at the right time, based on the latest information from the entire chain. A strong planning function in the form of central supply chain orchestration, in popular terms a Control Tower, is a must to be able to maintain service levels while reducing working capital.
Third, do it good. Execution of the plan needs to be right first time and continuously improving. The first hurdle is that Quality Control needs to be incorporated in the plan. Yes it is difficult and it requires experts, but that doesn't mean it can't be planned and improved. The second hurdle is that the production assets can and need to be utilized much, much better. When compared to modern chemical manufacturers, most pharmaceutical processes have many more steps on old or badly fitting lines (e.g cartoning machines with high speeds but slow change overs), many more intermediates and slow quality assurance sampling and testing methods. The perception is that the costs associated with a recipe change are not worth the benefit. We think that the (lack of) margins on a high cost base will prove otherwise.
One big challenge, three challenging interventions. When will we see the first SC control tower do you think?