Country Assessment Analysis

Industry Growth and Profit Potential

Strategic Growth Needs

Bayer’s strategy is aimed at achieving economic growth balanced with their responsibility for the environment and society (Bayer, 2016). Bayer has many strategies and goals for the segments in which they operate. However, in order to achieve these goals, there must be available resources for their investment in innovation and to increase their efficiency. Research notes that the overseas expansion of firms from emerging economies can be driven by their search for resources and other critical assets, such as technological know-how, R&D capability, managerial skills, and global brands to compete successfully with their more advanced peers from developed markets in the global economy (Tsai & Eisingerich, 2010). When comparing markets, Bayer should identify the availability of resources that enables them to conduct research and development in order to meet their strategic goals. Research and development helps Bayer improve in all of their segments - pharmaceuticals, consumer health, crop science, animal health, and covestro.

Another strategic goal of Bayer is to improve access to their products in developing and emerging countries. Their goal is to continue to implement economically feasible concepts such as clinical development programs and patient assistance programs (Bayer, 2016). These programs help countries where portions of the population have no access to innovative medicines, via health care systems. Such programs exist in the United States, China, South and Southeast Asia, and South Eastern Europe (Bayer, 2016).

Bayer has strategic goals that are similar to those mentioned by Tsai and Eisingerich that are categorized as “Multinational Challengers”. Multinational challengers target global markets; adopt a new product development strategy and pursue a wide product range; develop a global branding strategy and focus on product and process innovation (Tsai and Eisingerich, 2010). The issue of self-medication is gaining importance for millions of people, as well as for governments, health care systems, and healthcare payers. In addition, another strategic goal of Bayer is to build a strong position for over-the-counter (OTC) medicines, nutritional supplements and other self-care products in selected categories (Bayer, 2016). In order to accomplish this goal, Bayer must have the right environment and resources necessary to have a stronger focus on brand building, key markets and consumer-centric innovation (Bayer, 2016).

Additionally, Bayer’s Crop Science segment is aligned to long-term trends of the agricultural market. Their strategic goal is to help shape the future of the agricultural industry with innovative offerings that enable the production of the sufficient high-quality food, animal feed and renewable raw materials for a growing world population despite the limited amount of availability of arable land (Bayer, 2016). For example, one of Bayer’s latest innovations includes seed technology with chemical and biological crop protection.

Bayer works hard to ensure that they are reducing their environmental impact of their business activities to benefit the environment. Some of their strategies includes production processes that are more resource-friendly, reducing their energy consumption, and use of effective water management at sites in water scarce areas. A market that is conducive to these environmental strategies would be ideal for Bayer.

Home Country Structure

Germany is known as the best international location for the research, production, and distribution of pharmaceuticals at an exceptionally high level due to its renowned scientist, outstanding research units, and major pharmaceutical markets (Germany Trade and Invest). Unlike neighboring countries, Germany has been able to succeed in the pharmaceutical industry and owns a number of patents around the world. It has a future market with high healthcare expenditure and domestic pharmaceutical production but it is the cost-saving government policies that remain the largest barrier to future growth (Pharmaceuticals Industry Profile: Germany, 2017). Some of these barriers, such as the Arzneimittelmarkt-Neurodunungsgesetz (AMNOG) reduce drug expenditure within the public health sector. The performance of the market is forecast to decelerate between 2016 and 2021 (Pharmaceuticals Industry Profile: Germany, 2017).

Global Structure

The pharmaceutical industry is important because it is a major source of medicine innovation. Unlike many other industries, the pharmaceutical industry heavily relies on research and development. Due to the uncertainties presented by newly invented products in this industry, there are a series of test and measures that these innovations may undergo. The industry is faced with intense scrutiny, debate, criticism, and praise. The United States and Europe are the leading pharmaceutical companies (Statista, 2016). Because of the steady loss of patent protections, the invention of new drugs is of vital importance for the pharmaceutical industry (Statista, 2016).

Analysis of International Markets

Comparative Market Size

Canada

In the report, “Outlook for Global Medicines through 2021: Balancing Cost and Value” by QuintileIMS institute, Canada was ranked number 11 in the “Top 20 Countries Ranking Constant US $”. Canada is also mentioned among the ten developed markets which represent a diverse range of health systems from the way in which they are funded, controlled and their expectations of spending and growth” (QuintilelIMS institute, 2016). In terms of spending on categories of drugs, Canada is among developed countries, which are expected to spend by 2021 projections as follows: original brands (69%), non-original brand (14%), unbranded (12%), and other products (5%) with a total spending revenue of between $ 975- $ 1,005 billion (QuintilelIMS institute, 2016).

China

In the same report by QuintileIMS institute, China is ranked number 2 among the top 20 countries, which display constant income growth by 2021. China was also ranked among the top countries that are considered pharma emerging markets, “set to emerge as strong investment opportunities for multinationals” (QuintileIMS, 2016). Being categorized as a pharma emerging country, China’s pharmaceutical spending includes original brands (22%), non-original brands (42%), unbranded products (14%) and other pharmaceutical products (22%).

India

India is also in the list of top 20 countries showing potential for continual income growth by 2021 and is ranked number 9 (QuintileIMS institute, 2016). India is identified as one of the pharma emerging economies alongside improvement in social development (QuintileIMS institute, 2016). It has similar spending percentages as China, with expected spending revenue by 2012 to be between $315 billion - $345 billion.

Chile

Chile currently has a population of 17 million people and leads Latin America in rankings such as human development, per capita income, and competitiveness as well as sustainability and democratic development” (Ribbink, 2014). The Chilean community is expected to reach an increase in income levels of $73 billion to $124 billion, in 2018.

Based on the above ranking, India would offer the best market for the Bayer Company since it is ranked among the top 20 countries showing potential for continual growth. Furthermore, India demonstrates potential in regards to their social development as well as already demonstrating close comparisons to their competitors

Comparative Industry Growth

Canada

Canada’s pharmaceutical market value is $6 billion (IBISWorld, 2017) and “accounts for 4.5% of the America’s pharmaceuticals market value” (Pharmaceuticals Industry Profile: Canada, 2017, p.7). Companies such as Johnson & Johnson (9.6% share), Pfizer (6.5% share), Apotex (5.4% share) and Merck (5.3% share) dominate the market (Pharmaceuticals Industry Profile: Canada, 2017, p.10). The market growth slowed down in the past due to health care spending on hospitals and doctors instead of pharmaceuticals. In 2015 and 2016, the market values were $18.6 billion (11.5% growth) and $19.9 billion (7.0% growth) respectively (Pharmaceuticals Industry Profile: Canada, 2017, p.8). During 2012 to 2016, there was a “compound annual growth rate (CAGR) of 6.6%” (Pharmaceuticals Industry Profile: Canada, 2017, p. 8).

Experts forecast increased market growth in the next 4 years. The forecasted growth market values for 2017, 2018, 2019 and 2020 are, $21.6 billion (8.6% growth), $23.0 billion (6.7% growth), $24.6 billion (7.0% growth) and $26.1 billion (6.1% growth) respectively (Pharmaceuticals Industry Profile: Canada, 2017, p. 11). Factors such as moderate threat of new entrants keep the market rivalry strong.

Chile

In 2015, its market value was “$2.32 billion, based on retail prices” (EMIS, 2017). Experts forecast that the pharmaceutical market will grow at 8.2% CAGR from 2012 to 2017 (IMS Health, 2012, p.5). This is due to factors such as, availability of universal healthcare, and growing population. In 2016, the population was about 17,909,754 and the annual population growth rate was 0.825 % (GlobalEdge, 2017). Furthermore, about 68% of this population were in the age range of 15-64 (GlobalEdge, 2017).

India

India has one of the largest populations in the world. Its pharmaceutical market value takes 4.5% of the Asia-Pacific over the counter (OTC) share (OTC Pharmaceuticals Industry Profile: India, 2016). In 2015, the market value was $2,062.7 million (1.8% growth) (OTC Pharmaceuticals Industry Profile: India, 2016). Its availability of healthcare to rural areas and expanding healthcare system enables market growth for the pharmaceuticals industry. However, new entrants in the market face difficulty in the market because of the level of competition and government requirements and regulation.

Experts forecast that the market CAGR will increase through the next 5 years from 2015 to 2020 at 9.5%. This will value the market at $3,252.5 million (OTC Pharmaceuticals Industry Profile: India, 2016, p. 10). In 2017, 2018, 2019 and 2020 they forecast that the market will growth at $2,436.5 million (9.4 % growth), $2,672.2 million (9.7 % growth), $2,938.1 million (10% growth) and $3,252.5 million (10.7%) respectively (OTC Pharmaceuticals Industry Profile: India, 2016, p. 13).

China

China “accounts for 36% of the market value in the Asia-Pacific pharmaceutical market” (Pharmaceuticals in Asia-Pacific, 2017, p. 10). There are over 4,000 pharmaceutical manufacturers in the market. Out of this number, only about 100 lead in the market and make up one-third of the market share (Pharmaceuticals in Asia-Pacific, 2017, p. 2). Factors such as, aging population, rising income levels and expanded access to the healthcare system are aiding in the growth. Most importantly, “the chronic disease burden will remain a key driver of growth in the decades ahead” (ITA, 2017, p.2).

From 2011 and 2015, the CAGR grew by 6.2%, bringing the market value to $19,005.3 million (Pharmaceuticals in Asia-Pacific, 2017, p. 10). However, powerful government regulation, laws, and other entry barriers are hindering some market growth. Experts forecast that the market value will increase to $108 billion (9.1% growth) from 2015 to 2020 (ITA, 2017, p. 1).

Impact on Prioritizing

The forecasted growth of the pharmaceutical markets in Canada, Chile, India, and China show how the different markets will accelerate in the next three years, regardless of government regulations and laws. This impacts decision on prioritizing the countries in the global business strategy by showing how opportunities in factors such as, population growth, aging population, government laws and regulations and expanded access to the health care are affecting each market. Already, the pharmaceutical market is highly concentrated which makes it very competitive. Large, well established firms controls market sentiment through influence and setting prices.

Population growth and aging population allows the pharmaceutical to remain stable and guarantee its growth because of the self-medication trend it creates. According to Bennadi (2013), responsible self-medication reduces some cost of minor treatments and consultation time (Bennadi, 2013). Therefore, OTC pharmaceutical markets and MNC’s operating in them will capitalize on this strength. In other words, the larger the population, the better the chances of profit for a MNC company in China and India. Furthermore, government laws and regulations influence the prices of generic and nongeneric drugs. A free market allows for more profit and rivalry. China has stronger regulations than the other countries, which stifles growth. Lastly, expanded access to the healthcare allows MNC’s to bring value to the consumers by offering useful products and cures for diseases. Thus, improving overall healthcare and affordable medication to the majority of the population.

Competitive Environment

Pharmaceutical companies are currently experiencing high profit margins on the drugs they produce and distribute into the marketplace. Many companies attempt to justify the high prices due to high costs in the area of research and development. On average, only three in 10 drugs launched are profitable, with one of those going on to be a blockbuster with $1billion plus revenues a year (Anderson, 2014). In 2013, the profit margin for pharmaceutical companies ranged from 10% to 42%, with an average of 18% (Deangelis, 2016).

Canada

Valeant Pharmaceuticals is the biggest pharmaceutical company in Canada. The company had $10.4 billion in sales worldwide, in 2016 (GlobalEdge, 2017). Other leading multinational pharmaceutical companies in Canada accounted for about half of Canadian medicine sales, both prescription and non-prescription, in the same year (See Appendix A). The pharmaceutical industry in Canada is facing some tremendous challenges, however.

The Canadian pharmaceutical market, similar to other developed nations, has been slowed by record levels of loss of exclusivity for major brand products, a lack of new blockbuster products, sluggish uptake of new products and a slowdown in new product approvals (Industry Canada, 2014). Restrictive market access and pricing policies for both brand name and generic products have also had a significant impact on company performance in the Canadian industry.

The demand for more affordable drug options has shifted the market towards consumers seeking more generic drug options. The profit margins of pharmaceutical manufacturers with operations in Canada has declined from 11% in 2006 to 7% in 2010.

Chile

A large number of generic drug alternatives is marketed in Chile, as government officials mandate the use of generics. Pharmaceutical laboratories in the country are grouped in two main associations: CIF (Chilean Pharmaceutical Chamber), which includes leading international pharmaceutical research and biotechnology companies, and ASILFA (Industrial Association of Pharmaceutical Labs), which includes both generics and branded generics manufacturers (Ribbink, 2014). In 2014, Abbott Laboratories purchased Chile’s largest generic pharmaceutical company, CFR Pharmaceuticals, which “currently markets more than 1,000 products” (Ribbink, 2014) and continues to innovate and bring new products to the market.

Because “Chile only accounts for 3% of the healthcare expenditure in Latin America” (Grom, 2013), the country doesn’t normally get the attention of big multinational companies as much as we’ve seen in other Latin American countries like Brazil and Mexico. Chile, however, is becoming more attractive to global pharmaceutical companies as the market continues to show strong growth (Ribbink, 2014). Some multinational companies operating in Chile include AstraZeneca, GlaxoSmithKline, Novartis, and Merck.

However, the pharmaceutical industry of Chile continues to face challenges due to the lack of investments by the government and overall systemic corruption within the industry. In 2014, the country’s top three pharmacies were found to be fixing the prices of medications and whistleblowers revealed doctor kickback schemes (Ribbink, 2014). To address this issue, the government passed a bill that required pharmacies “to stock more common medications like aspirin on the shelves versus behind the counter, and doctors must also suggest lower-cost or generic medications when appropriate” (Ribbink, 2014).

India

Sun Pharma Industries and Lupin are the two biggest home-country multinational pharmaceutical companies operating in India, with $4.1 billion in sales and $2 billion in sales respectively, in 2016 (GlobalEdge, 2017). Other leading companies include GlaxoSmithKline, Glenmark Pharmaceuticals, Dr. Reddy’s Labs, and Aurobindo Pharma.

The pharmaceutical market in India is estimated to be the third largest in terms of volume, and one of the largest in terms of value created (Mondal & Pingali, 2017). In 1970, the Government of India (GOI) formulated the Patents Act, which allowed only process patent protection, which “led to the development of a domestic pharmaceutical industry” (Mondal & Pingali, 2017). In 1978, government officials introduced price control legislation that “created opportunities for the domestic pharmaceutical companies to specialize in manufacturing of generic versions of patented pharmaceutical drugs” (Mondal & Pingali, 2017).

Today, the Indian market is dominated by generics with 72% market share in terms of revenues, while patented drugs cover only 9% of the overall market. Thus, India is the “largest exporter of generic drugs, accounting for 20% of worldwide exports” (Mondal & Pingali, 2017) and are among the cheapest priced drugs in the world.

In India, generic alternatives require branding, “unlike in the US, where generic medicine sells purely based on the molecular name” (Mondal & Pingali). However, consumers still prefer brands created by big multinational manufacturers over the domestic brands. Generic brands that come at a lower cost than brand name products is more important in the Indian market as most of the Indian population is not covered by insurance and must pay for these expenses out of pocket.

China

In China, Kangmei Pharmaceutical and Shanghai Fosun Pharmaceutical are the two largest home country pharmaceutical companies, with $3.2 billion and $2.2 billion in sales respectively, in 2017 (GlobalEdge, 2017). Other leading pharmaceutical companies operating in China include Guangzhou Pharmaceutical Holdings, Xiuzheng Pharmaceutical, Harbin Pharmaceutical Group Holding, and Pfizer. The Chinese pharmaceutical market is dominated by more than 3,000 domestic firms “accounting for about 75% of annual sales, of which about 95% operate in the generics market” (Dierks et al., 2013).

Recently, pharmaceutical MNC’s operating in China have enjoyed a tremendous amount of growth. The success of these companies was “driven by factors unique to Chinese healthcare, including price premiums allowed on off-patent “originator” drugs – branded drugs marketed by the company owning the initial patent, after the patent has expired” (Bain & Company, 2014).

However, the Chinese market does present some challenges for MNC’s operating in China’s pharmaceutical industry. First, the healthcare system is centered around the hospitals whom “sales account for 70% to 80% of the market” (Dierks et al., 2013), which leaves a small percentage available for products to be sold at retail. Drug pricing and reimbursement are regulated by government officials, while “price and quantity of drugs stocked in hospitals are negotiated at the provincial level” (Dierks, et al., 2013). This complex pricing system can potentially impact profits, as wholesale prices are much lower at the provincial level.

In addition, new regulatory and payment reforms enacted by government officials will force MNC’s to either make drastic changes to its business model or opt not to do business in China altogether. For instance, Western pharmaceutical companies are required to “conduct clinical trials in China prior to their product launches – notwithstanding former trials in their home market” (Dierks et al., 2013). With the clinical trial period in China averaging 9 to 12 months versus 60 days in the European market, this will increase the time it takes to bring products’ to market. MNC’s looking to do business in China may overcome this hurdle by opting to investment in R&D facilities and include China in “early-stage international clinical trials” in an attempt to accelerate a product's’ time to market.

The Chinese government is also implementing a “zero drug mark-up policy in hospitals across the country, and its vigorous responses to ethical compliance is accelerating reforms that will affect drug sales and pricing” (Bain & Company, 2014). The transition to a two-tier market of patented drugs and mass generics will squeeze the profitable times of the originator market space (Bain & Company, 2014). The impact of these decisions will cause MNC’s to restructure the way they go about doing business, in terms of sales and marketing.

Conclusion

Bayer has been established globally, especially in its home country Germany. The pharmaceutical company has built a strong brand for itself and has advanced research and development capabilities. R&D allows Bayer to continue to ensure that they are meeting new consumer demands and the introduction of new products such as self-care products in order to achieve growth while also balancing their concern for the environment and society. India provides Bayer the opportunity to target an advanced global market while also adopting new product strategies and focus on product differentiation.

Recommendation

After careful examination of the four markets considered for expansion, our consultants recommend that Bayer move forward with entering the Indian pharmaceutical market. Although the market presents some policy and regulatory challenges, the pharmaceutical industry in India is one of the fastest growing emerging markets in the world. We believe that Bayer can enter the market and work alongside government officials to help shape the pharmaceutical environment for years to come. This will give Bayer the opportunity to exhibit themselves as thought leaders in the pharmaceutical industry and the potential to create future opportunities with other member countries of the BRIC (Brazil, Russia, India, and China).

References