01
`
`Unlocking
`pharma growth
`
`Navigating
`the intricacies
`of emerging
`markets
`Exhibit 1134
`IPR2017-00807
`ARGENTUM
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`000001
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`000002
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`Unlocking
`pharma growth
`
`Navigating the intricacies of emerging markets
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`Contents
`
`1.
`
` Introduction
`
`  
`
`2.
`
`10.
`
`14.
`
`20.
`
`28.
`
`36.
`
`42.
`
`46.
`
` Rethinking the big pharma sales model: Thoughts from China
`As the ranks of China’s field forces continue to swell, pharma’s traditional commercial model
`is showing signs of strain. It’s time for multinationals to get smarter about how they sell.
` Bing Chen, Franck Le Deu, and Jin Wang
`
` Winning in the emerging middle class: Findings from Brazil
`Global pharma companies are missing a chance to serve Brazil’s increasingly prosperous and
`growing middle class. Although wealthier segments spend more on drugs per capita, the scale
`of the underserved middle-class market is almost twice as big.
` Sanjeev Agarwal, João d’Almeida, Tracy Francis, and Paula Ramos
`
` Using behavioral segmentation to boost salesforce effectiveness
`Many companies segment their customers by behavioral characteristics to increase sales,
`but segmenting the field force is a new approach. Early experience in India suggests that it could
`improve salesforce effectiveness in emerging markets.
` Kaustubh Chakraborty, Javed Kadir, and Sathya Prathipati
`
` Counter strategies: Getting more value from the retail channel
`Most pharma companies operating in emerging markets gear their sales and marketing efforts to
`physicians and hospitals. It’s time they widened their horizons: building retail muscle could help them
`address a large and neglected opportunity.
`Sanjeev Agarwal, Putney Cloos, Alka Goel, and Mary Rozenman
`
` Public–private partnerships: An untapped strategic lever
`Traditional approaches to PPPs have focused on their role in raising a company’s profile or improving
`its corporate image. Now pharma companies are entering partnerships with governments and global
`organizations that deliver solid business benefits too.
`Doan Hackley, Jorge Santos da Silva, and Lieven Van der Veken
`
` How sustainable are branded generics?
`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.
`Sanjeev Agarwal, Andrew Cavey, and Ali Murad
`
` Growth in Brazil’s branded generics market: Perspectives from Maurizio Billi,
`president of Eurofarma
`The leader of one of Brazil’s most eminent pharma companies talks about building a platform
`for growth and how local players can capitalize on their market knowledge.
` Nicola Calicchio and Tracy Francis
`
` China’s digital healing
`The world’s biggest and most dynamic social media market is talking about health care.
`But are companies really listening?
` Cindy Chiu, Chris Ip, Ari Silverman, and Florian Then
`
`000004
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`

`

`52.
`
`60.
`
`66.
`
`72.
`
`80.
`
` Breakthrough R&D for emerging markets: Critical for long-term success?
`Pharma companies pursuing growth in emerging markets will increasingly need to adapt their
`portfolio to address local requirements. The right R&D strategy will involve reducing costs so that
`they can develop innovative drugs tailored to emerging market needs and still make a profit.
`Sanjiv Talwar, Shail Thaker, and Matthew Wilson
`
` Cutting through the complexity: Insights into the future of clinical trials in
`emerging markets
`As investing in emerging market infrastructure becomes a pillar of pharma growth strategies,
`conducting clinical trials in these markets should be more attractive than ever. So why are
`such trials declining, and how should executives evaluate the opportunities in this increasingly
`complex environment?
`Jackie Hua, Shail Thaker, and Matthew Wilson
`
` Managing pharma supply networks in emerging markets
`Before they rush to secure sources of supply in emerging markets, pharma companies should take
`care to ensure they have the right long-term strategy, the right partners, and the right organizational
`resources to manage their partnerships.
` Vikas Bhadoria and Jaidev Rajpal
`
`  
`
` The outlook for China’s medical products industry
`Robust growth prospects are creating tailwinds for China’s medical products industry. However,
`multinationals should prepare for turbulence ahead as market access becomes more complex,
`pricing pressures increase, and local competition intensifies.
`Lifeng Chen, Yinuo Li, Rajesh Parekh, and Jin Wang
`
` Winning in Russia pharma: The next growth horizon
`Over the next ten years Russian pharma will more than double in size. Companies seeking to capture
`a share of this growth must prepare to face the challenges of increasing pharma regulation and
`intensifying competition.
` Jan Ascher, Sean O’Connell, Shail Thaker, and Tim Züwerink
`
`92.
`
` Helping Indian pharma reach its full potential
`What will it take for India to join the world’s leading pharma markets? As a period of flux brings
`proliferating opportunities, companies should quickly adapt their sales and marketing models,
`refocus their commercial investments, and collaborate within and beyond the industry.
` Vikas Bhadoria, Ankur Bhajanka, Kaustubh Chakraborty, and Palash Mitra
`104. Tracking shifts and spotting opportunities in Mexican health care
`Mexico’s health care has improved thanks to recent public initiatives, but rising costs, capacity
`constraints, and growing disparities pose new challenges. To keep pace with these shifts, pharma
`companies need to raise their capabilities to global standard and preserve the flexibility to update
`their plans as often as every quarter.
`Julio Dreszer, Pablo Ordorica, Lisa Ramon, Safa Sadeghpour, and Jorge Torres
`
`110.
`
` About the authors
`
`  
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`000005
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`Introduction
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`1
`1
`
`As pharmaceutical companies grapple with expiring patents and pricing pressures in
`developed markets, they are starting to expect more from emerging markets. Although
`the global economic environment is depressing near-term GDP growth, countries such
`as China, India, Russia, and Brazil have a bright medium- and long-term future as some
`of the world’s largest economies. Rapid growth can also be expected in some smaller
`economies in eastern Europe, Southeast Asia, Latin America, and the Middle East. As
`GDP growth converts into greater personal wealth and higher disposable incomes,
`spending on health rises disproportionately, and drugs consumption even more so.
`
`Even in the near term, large emerging pharmaceutical markets are likely to grow
`more strongly than developed markets. The share of revenues and profits contributed
`by emerging countries is lower in pharma than in other global industries, and major
`multinationals have yet to tap these countries’ vast emerging middle classes. At a typical
`global consumer goods company, emerging markets account for a share 1.5 to 3 times
`higher than at a typical multinational pharma company. Such figures indicate that
`emerging markets are still emerging and offer significant opportunities for further growth.
`
`Such optimism must, however, be tempered by an awareness of the challenges
`and volatility that multinational pharma companies face in emerging markets. First,
`government intervention is increasing through both direct actions (such as price setting
`and compulsory licensing) and indirect measures (such as changes in manufacturing
`requirements and the terms of government tenders). Second, promotions are reaching
`saturation point, especially in the big cities where multinational and local companies
`have expanded their sales forces rapidly over the past few years. Third, as some
`multinationals shift their focus toward specialty products, managing portfolios of
`drugs with very different commercial needs is becoming considerably more complex.
`Fourth, the war for talent continues, and is intensifying in some countries.
`
`Looking ahead, we believe that emerging markets continue to offer attractive
`opportunities for growth, but pharma companies will need to navigate the intricacies of
`individual markets and tailor commercial models and approaches to their specific needs.
`
`In this compendium of articles, McKinsey practitioners share new perspectives on
`unlocking growth in emerging markets. The first section focuses on developing tailored
`capabilities and approaches in key functions such as sales and marketing, R&D, clinical
`trials, and the supply chain. The second section focuses on individual countries—China,
`India, Russia, Brazil, and Mexico—and describes models to tackle the challenges and
`capture the opportunities they offer. If you have any comments on these articles or
`would like further information, please feel free to contact the authors directly (see “About
`the authors” for details), or email pharma_emerging_markets@mckinsey.com.
`
`Gokhan Sari
`Raj Parekh
`Andrew Cavey
`Sanjeev Agarwal
`Principal
`Director
`Associate principal
`Principal
`New York office
`Shanghai office
`London office
`New Jersey office
`Pharmaceutical and Medical Products Practice, Emerging Markets Group
`
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`

`2
`
`Rethinking the big pharma sales model:
`Thoughts from China
`
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`

`Unlocking pharma growth
`Rethinking the big pharma sales model: Thoughts from China
`
`3
`
`As the ranks of China’s field forces continue to swell, pharma’s
`traditional commercial model is showing signs of strain. It’s time for
`multinationals to get smarter about how they sell.
`
`Bing Chen, Franck Le Deu, and Jin Wang
`
`Face-to-face selling may be on the wane
`in developed markets, but it’s still the
`channel of choice for pharmaceutical
`companies in China. Walk down the
`corridor of a big hospital in Shanghai
`or Beijing and you’re as likely to meet
`a sales rep as a nurse or doctor. This
`traditional sales model has enjoyed years
`of success, with leading multinationals
`seeing their China revenues multiplying
`five-fold between 2005 and 2011, adding
`$7 to $8 billion to their collective top line.
`
`Beyond that, dozens of China blockbusters
`have emerged with annual revenues
`exceeding $100 million. We estimate
`that 34 drugs attained that symbolic
`height in 2011, compared with just two
`in 2005. The largest prescription brand
`in the market, Plavix, is set to break the
`$400 million mark in 2012 (Exhibit 1).
`
`But is this rate of growth sustainable?
`The commercial model that underpins it is
`starting to show signs of strain. Challenges
`in productivity and profitability and the need
`to get physicians’ attention in crowded
`hospitals are prompting pharma companies
`to reconsider their sales approach. Many
`continue to put more feet on the street,
`but some are calling a halt to expansion
`until they work out the best next move.
`
`To ensure that the next wave of growth
`meets profitability expectations, pharma
`
`companies need to consider other
`sales models and make better-informed
`choices about staff deployment, sales
`and marketing initiatives, and resource
`allocation. Below we explore how they
`have achieved their recent growth,
`what the dominant sales model looks
`like, why its effectiveness has probably
`peaked, and how companies could
`pursue a more sustainable model.
`
`Bucking the global trend
`
`The top 10 multinational pharma
`companies have added more than
`17,000 reps in China over the past
`five years, with some adding as many
`as 1,000 in a single year. Pfizer now
`fields a sales force numbering over
`4,000; Bayer, MSD, AstraZeneca, and
`a few others are not far behind. In Novo
`Nordisk’s field force of more than 2,000
`reps, the vast majority cover a single
`area, diabetes-related products.
`
`This expansion stands in sharp contrast
`to global trends. In the United States,
`for instance, multinationals have shed
`33,000 sales jobs from a peak of 105,000
`five years ago. They are moving to new
`channels such as service reps and
`call centers, as well as new models
`that involve acting like an educational
`resource rather than making sales pitches.
`
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`

`

`4
`
`Exhibit 1: China’s pharma boom
`
`Cumulative sales of prescription
`drugs at top 10 multinationals
`US$ billions
`
`9.7
`
`+ 7.3
`
`2.4
`
`Bestselling multinational
`prescription brands
`Annual revenue in US$ millions;
`number of brands
`
`More than $200 million
`$100−200 million
`$50–100 million
`
`69 brands
`6
`
`28
`
`35
`
`8 brands
`0
`2
`
`6
`
`Leading prescription brand
`
`Annual sales, US$ millions
`
`395
`
`x 4
`
`107
`
`2005
`
`2011
`
`2005
`
`2011
`
`2005
`(Heptodin)
`
`2011
`(Plavix)
`
`Note: At constant exchange rate of US$1 = 6.3 renminbi
`Source: press reports; interviews; CPA; McKinsey analysis
`
`These approaches have cut costs and
`been welcomed by physicians who
`resented the old hard-sell tactics.1
`
`However, the new techniques have yet
`to make real inroads in China, which still
`relies on face-to-face selling on a huge
`scale. There are several reasons for this:
`
`  The broad range of drugs being
`promoted. Many portfolios include not
`only innovative patented drugs—the
`mainstay of developed markets—but
`also off-patent, mature brands that still
`have room to grow in China despite
`competition from generics. Both require
`face-to-face selling to physicians.
`  The need to cover a vast territory.
`Most prescriptions are written in
`hospitals, and there are many large
`hospitals for reps to visit. Most
`multinationals derive the bulk of their
`business from the top 50 to 80 cities
`and 500 to 1,000 hospitals, but leading
`
`companies cover more than a hundred
`cities and thousands of hospitals. The
`field force for blockbuster primary-
`care brands can easily reach 500
`representatives, and teams of 130
`reps for one brand are not unusual in
`specialty care such as oncology.
`
`  The stage of market development.
`Because many therapeutic
`categories are still at an early stage of
`development, companies need to invest
`in educating physicians to improve
`diagnostics, establish standards of
`care, and drive large-scale adoption of
`therapies. It is reps who do the work
`of conveying medical and product
`information during their frequent
`interactions with doctors.
`  The use of single-line sales forces.
`Most reps covering larger cities and
`hospitals sell only one product, and their
`companies tie their monetary incentives
`to that product so as to maximize its
`
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`

`Unlocking pharma growth
`Rethinking the big pharma sales model: Thoughts from China
`
`5
`
`chances against heavy competition. This
`approach also meets physicians’ needs,
`since it helps them split their business
`among multiple companies and reps so
`that they aren’t perceived as being too
`close to any individual or organization.
`  The escalation in competitive
`intensity. Increasing competition for
`share of voice, the need to respond to
`expansion by competitors, and the fear
`of falling behind in market coverage
`have all contributed to the growth in
`field forces.
`
`Signs of trouble
`
`If this traditional sales model has
`delivered attractive returns, why change
`it? We believe that the way the Chinese
`market is evolving is putting the model
`under strain. The chief challenges it
`faces are a lack of productivity growth
`and intensifying cost pressures.
`
`Productivity is declining
`A crude measure of the average
`productivity of multinationals can be
`obtained by dividing total sales by
`the number of reps. On this measure,
`the annual productivity of the top 10
`multinationals has declined by 2 percent
`overall in the past five years. Although
`some companies have managed to raise
`their headcount and their productivity at the
`same time, many others found that taking
`on more reps diluted their performance.
`
`What accounts for this weak showing?
`We see three factors as key:
`
`  Companies focused on boosting rep
`numbers, not productivity. In the rush
`to scale up, multinationals paid too little
`attention to the skills, capabilities, and
`support needed to drive performance
`in the field. Recruiting and hiring took
`
`priority over training, defining account
`potential, tracking performance, and
`building IT support systems. Reliable
`information on account potential,
`competitive dynamics, and customer
`needs was in short supply. Investments
`in market research, voice-of-the-
`customer studies, and on-the-ground
`observation were limited, partly because
`sales came easily. Accurate data on
`doctor-level prescriptions and salesforce
`effectiveness barely existed. As a result,
`the deployment of field reps was patchy,
`with big performance gaps between one
`city or hospital and another.
`  Expansion involved moving into
`less productive accounts. Having
`covered the top hospitals and cities,
`companies started to add lower-tier
`hospitals in smaller cities and rural
`areas to their customer base. These
`accounts cost more to serve and are
`less productive, so each new rep must
`visit more of them to cover the same
`potential. Many are located in territories
`with entrenched local competition and
`limited access to the local formulary. As
`a result, penetrating new accounts calls
`for patience and strong cross-functional
`collaboration—often difficult to achieve
`in China.
`  Staff turnover is high. Most companies
`have staff turnover rates in excess of
`20 percent per year. As well as direct
`hiring costs, high turnover creates
`indirect friction costs, such as the
`damage caused by leaving a territory
`temporarily open in a promotion-
`sensitive market. To reduce turnover,
`companies are increasing employee
`benefits and providing better promotion
`opportunities, but we don’t expect a
`dramatic improvement any time soon.
`
`Other factors also contribute to low
`productivity. Because turnover and hiring
`are so rapid, few reps have more than two
`
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`

`

`6
`
`Exhibit 2: Portfolios are exposed to price cuts
`
`Share of off-patent brands in total sales remains high…
`$ billions
`
`…but with large variations between companies
`
`100% =
`
`Patented
`
`Off-patent
`
`10
`
`20
`
`80
`
`2011
`
`Price pressures are
`expected to grow on
`off-patent brands
`
`Highest
`
`Average
`
`Lowest
`
`98
`
`80
`
`35
`
`Share of EDL* drugs adds to exposure…
`$ billions
`
`100% =
`
`10
`
`List of 307 EDL
`molecules is expected
`to expand to 400 in
`2012 and 800 in the
`medium term
`
`Non-EDL
`
`EDL
`
`87
`
`13
`
`2011
`
`…and also shows significant variations between companies
`
`Highest
`
`34
`
`Average
`
`13
`
`Lowest
`
`4
`
`* Essential drug list; currently comprises 307 molecules (205 western medicine molecules and 102 traditional Chinese medicines)
`Source: industry association; GBI Source; SFDA; McKinsey analysis
`
`years’ experience. Most enjoy considerable
`freedom in deciding how to spend their
`time and which doctors to visit, and
`companies are seldom able to track their
`activities closely, so they can easily avoid
`the most competitive accounts in favor of
`easier accounts with lower potential value.
`
`Revenue and cost pressures
`are mounting
`The economics of the business face
`challenges on several fronts.
`
`Prices have taken a battering for
`“innovative” drugs: molecules that have
`gone off-patent and been genericized
`globally, such as Adalat by Bayer
`and Losec by AstraZeneca. Having
`benefited from a price premium for many
`years, such drugs are still among the
`bestsellers for most multinationals. The
`government’s phasing out of the price
`premium has had a dramatic effect on
`
`these companies, since on average
`about 80 percent of their revenues comes
`from off-patent molecules (Exhibit 2).
`
`In addition, the establishment of the
`essential drug list (EDL), which covers
`205 western molecules, has created
`severe pricing pressures for some drugs.
`Its effect varies by molecule, depending
`on the availability of high-quality supply
`from local companies, but its overall
`impact has been to depress prices
`substantially. The government aims to
`extend it to 800 or more molecules in
`the medium term, although how this
`will be implemented is still uncertain.
`
`As prices have fallen, so costs have risen:
`the fully loaded cost of a sales rep has
`steadily increased to some $45,000 to
`$55,000 per year. The rapid expansion
`of sales forces and the acute need for
`experienced reps continue to push up
`
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`

`Unlocking pharma growth
`Rethinking the big pharma sales model: Thoughts from China
`
`7
`
`salaries. We expect costs to rise by
`about 8 percent per year to an average
`$80,000 by 2016. A slowing of the pace
`of field force growth will relieve some of
`the salary pressure on multinationals, but
`this may be partly offset by the increase
`in competition from local companies.
`
`These productivity, quality, and cost
`issues will intensify in the next few
`years, and pharma companies will
`have to tackle them because the field
`force is likely to remain the dominant
`model in China for the time being.
`
`Planning an effective response
`
`How can multinationals anticipate and
`respond effectively to these shifts? We
`have identified eight principles for them to
`consider as they weigh their next steps.
`
`Take salesforce effectiveness seriously
`and build systems, capabilities, and
`mindset to drive productivity gains.
`Few multinationals have the data to show
`which accounts and reps perform well and
`what the reasons are. Sales, marketing,
`and market-access colleagues should work
`together to analyze why a given account is
`doing well or badly, using common metrics
`such as share of new patients, preferences
`of influential hospital stakeholders, and
`frequency of activity relative to competitors.
`Once the causes of performance become
`clear, companies should develop plans
`to raise lagging accounts closer to the
`level of high performers and put tracking
`mechanisms in place to monitor progress.
`
`Revisit the single-line sales model.
`This is the single biggest change lever, and
`some multinationals are already achieving
`encouraging results by moving to a new
`model. They face several challenges, from
`defining incentive structures to maximize
`sales of multiple brands to upgrading
`
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`
`

`

`8
`
`sales reps’ capabilities. Running pilots in
`individual cities or hospitals helps to limit
`risk and enables the new model to be
`fine-tuned before it is rolled out nationwide.
`
`Choose your core footprint and
`focus your field force accordingly.
`Many emerging opportunities, such as
`community healthcare clinics in large cities
`and county hospitals in rural areas, require
`new sales models. Companies busy
`addressing performance gaps and keeping
`up with growth in the core business of
`large hospitals and big cities may not
`have the capacity to address lower-priority
`markets. If they do, they should carefully
`evaluate the tradeoffs, resources, and
`organizational changes needed. Success
`calls for a granular view of sources of
`growth, clarity over resource allocation,
`and the decisiveness to walk away from
`some opportunities. Half-hearted short-
`term efforts are no way to win in China.
`
`Allocate resources thoughtfully across
`brands. New product launches are
`likely to expand companies’ portfolios of
`patent-protected drugs, while off-patent
`drugs should continue to perform well
`for many years. Both categories require
`heavy investment to create demand in
`a developing market. With profitability in
`mind, multinationals must choose which
`opportunities to pursue and which to
`forswear. They should identify mature
`brands that have limited appeal and
`could be de-emphasized, low-demand
`products that could be outsourced,
`new launches that will require heavy
`investment to build up capabilities in
`unfamiliar therapeutic areas, and so on.
`
`Develop marketing as a key function.
`For many years the sales function took
`center stage in China while marketing
`languished in the background. Links
`
`between the two were tenuous at best.
`But now that brands reach hundreds of
`millions of dollars in annual revenues and
`new launches face a more competitive
`and difficult-to-access environment,
`marketing budgets can easily stretch
`to $30 million. Companies should take
`a hard look at how resources are being
`spent and decide whether to double
`down or pull back on some initiatives.
`They should also consider how marketing
`can support the sales team effectively
`and help implement brand strategy.
`
`Embrace the power of price elasticity.
`Multinationals have largely overlooked or
`underestimated the power of price elasticity
`to boost demand. When local companies
`launch a generic drug, they typically sell
`it at a price 30 to 50 percent lower than
`that of the branded equivalent, spurring
`additional demand for the molecule at the
`lower price. For instance, Sino Biopharm
`has achieved impressive uptake for
`Runzhong, its generic version of Baraclude
`(entecavir)—Bristol-Meyers Squibb’s
`drug for hepatitis B—since launching it in
`March 2010.2 To get ahead of this curve,
`companies could review price points for
`mature brands every three to five years so
`as to tap latent demand and capture value
`that would otherwise go to local generics.
`
`Pilot new channels. Although China
`still lags some years behind developed
`markets, local companies have started to
`offer services that allow multinationals to
`target customers or communicate with
`stakeholders in smarter, more efficient
`ways.3 New channels such as online
`learning modules won’t replace traditional
`channels any time soon, but companies
`should start investing in them to strengthen
`prescribers’ loyalty, promote academic
`activities, and expand their market reach.
`
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`Unlocking pharma growth
`Rethinking the big pharma sales model: Thoughts from China
`
`9
`
`Pursue partners while they are
`still available. Partnerships can help
`secure access to additional products,
`complementary capabilities, and field
`coverage. Several multinationals have
`already formed partnerships with local
`companies, such as the joint ventures
`between MSD and Simcere in the
`cardiovascular market and between
`Pfizer and Hisun in branded generics.
`With few attractive prospective partners
`available, speed is of the essence.
`
`  
`
`Pharma companies still need armies
`of local sales reps to cover China’s
`vast territories. But while this sales
`model is likely to remain dominant for
`the next few years, scale alone will no
`longer be an advantage. Before long,
`how many reps you have walking the
`hospital halls will matter less than how
`you deploy them and how you support
`them with better analytics, integrated
`marketing, and alternative channels.
`
`Notes
`1 See “Drug sales reps try a softer pitch,” Wall Street Journal, 10 January 2012.
`2 Lefei Sun, Jinsong Du, and Iris Wang, Bottom-fishing Future Winners in China, Credit Suisse report,
`6 October 2011.
`3 See “China’s digital healing,” pp. 46–51.
`
`This is an edited version of an article first published in China Healthcare: Entering uncharted waters,
`McKinsey & Company, 2012.
`
`Bing Chen is an associate principal and Franck Le Deu and Jin Wang are principals in McKinsey’s
`Shanghai office.
`
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`

`10
`
`Winning in the emerging middle class:
`Findings from Brazil
`
`000016
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`

`Unlocking pharma growth
`Winning in the emerging middle class: Findings from Brazil
`
`11
`
`Global pharma companies are missing a chance to serve Brazil’s
`increasingly prosperous and growing middle class. Although wealthier
`segments spend more on drugs per capita, the scale of the underserved
`middle-class market is almost twice as big.
`
`Sanjeev Agarwal, João d’Almeida, Tracy Francis, and Paula Ramos
`
`Many multinationals are hungry to
`sell their goods and services to the
`emerging markets’ growing middle
`class, comprising nearly 2 billion people
`with $7 trillion in spending power. That
`immense opportunity has put this group
`at the center of many global corporations’
`strategies. But the world’s leading
`pharmaceutical companies are holding
`back: the top five generate less than
`20 percent of their sales in these markets.
`
`Our study of Brazil’s pharma market, the
`second largest in the emerging world,
`confirms that global pharma companies
`are missing a significant opportunity to
`make profits serving a big part of the
`country’s middle class—120 million strong
`and growing fast. Just as important,
`expanding the reach of research-driven
`global pharma companies would give
`millions of Brazilian households access to
`the highest-quality patented medicines. In
`2010, the value of the prescription drugs
`sold to Brazil’s middle class was $8 billion,
`mostly for unpatented medications.
`
`While global pharma executives
`acknowledge the recent increase in the
`disposable income of Brazil’s middle
`class, they think that this group is
`more interested in spending money on
`categories such as consumer electronics,
`cosmetics, and travel than on health
`care. In discussions with us, executives
`
`say that the middle class prefers to
`rely on public health services, whose
`physicians prescribe only generic drugs.
`Moreover, these executives believe that
`even when physicians prescribe branded
`drugs, cost-conscious middle-class
`patients ask pharmacists to switch their
`medications to less expensive generics.
`
`As a result, global pharma companies have
`concluded that they must focus on Brazil’s
`wealthiest consumers and can reach
`the middle class profitably only through
`generics and branded generics—a strategy
`that at least five of the top ten pharma
`companies have recently announced.
`With local players as the driving force,
`the generic-drug market is growing at a
`28 percent compounded annual rate.
`
`But a closer look at Brazil’s pharma market
`suggests that it’s time to rethink this
`approach. Over the past two decades,
`growing incomes have allowed the middle
`class to satisfy not only its basic needs
`but also its interest in beauty products,
`consumer electronics, and more upscale
`services. Proprietary McKinsey research
`conducted during late 2010 and early
`2011 found that better health care and
`education are increasingly important to
`large segments of Brazil’s middle class.1
`Sixty-three percent of it considers brands
`very relevant for medicine and would pay
`a premium for trustworthy ones—a finding
`
`000017
`
`

`

`12
`
`typical of the vast majority of
`consumer goods categories.
`Most global pharma companies
`haven’t invested in this
`population segment, however,
`so it has little or no awareness
`of their corporate brands.
`
`Three factors lead us to
`believe that high-quality
`patented medicines are a
`large, profitable opportunity.
`
`Exhibit 1: Four segments among Brazil's middle class
`
`Willing to spend on healthcare
`
`Rely on public healthcare services
`
`Committed
`“I love my health
`insurance. I go out
`of pocket to avoid
`lines and buy what
`my doctor tells me.”
`
`Self-assured
`“I’m confident about
`making my own
`choices and getting
`the most value out
`of my healthcare
`spending.”
`
`SUS* compliant
`“I don’t have private
`health insurance.
`I follow what my
`SUS doctor
`prescribes for me
`and currently spend
`little on drugs.”
`
`Struggling
`“I rely on SUS and do
`not see any value in
`branded medicines.”
`
`Share of total 20%
`
`27%
`
`23%
`
`30%
`
`* Sistema Único de Saúde, Brazil’s universal healthcare system
`Source: 2010–11 McKinsey quantitative and qualitative surveys of >800 middle-class patients
`
`  Our research identified four
`middle-class segments
`(Exhibit 1). Two—SUS compliant
`(the Sistema Único de Saúde is Brazil’s
`universal healthcare system) and
`struggling—have views very much in
`line with how pharma management
`tends to see the middle class: they
`rely on public services and purchase
`less expensive generic drugs. But the
`other two segments—committed and
`self-assured, accounting for almost half
`of the middle class—would pay out of
`pocket to have access to better health
`care (for example, to avoid waiting
`for a medical appointment or exam),
`and believe even more strongly in a
`relationship between a medicine’s price
`and its efficacy than the upper classes
`do. These two segments are willing to
`make spending tradeoffs and pay extra
`for more effective drugs, fewer or milder
`side effects, and well-known brands.
`  Middle-class households with older
`family members who suffer from chronic
`diseases spend 15 percent more on
`health care and 10 percent more on
`medications than the middle-class
`average. Many of these men and
`women take multiple medicines and
`cannot always afford to buy the highest-
`quality drugs, and so need to make
`tradeoffs. That’s an important factor for
`pharmaceutical companies to bear in
`mind when developing their strategies.
`
`Meanwhile, the incidence of chronic
`diseases is rapidly increasing in this and
`other emerging markets; for example,
`Brazil’s diabetes rate is expected to
`become one of the highest of any major
`country within the next t