Life Sciences and Emerging Markets: Know Your Risk
Deloitte Insights Video
With a global market that is exceeding one trillion dollars and projections over the next five years of double digit growth, it’s an exciting time for life sciences companies. Emerging markets provide attractive growth opportunities for life sciences companies. But life sciences companies should proceed with caution. While emerging markets may represent incredible growth opportunities, they are still developing, and many have reputations for seemingly pervasive corruption in their business practices and processes. It’s critical for companies to know the risks to effectively capitalize on opportunities for growth.
Tune into the latest episode of Deloitte Insights to learn more about opportunities and risks for life sciences companies in emerging markets.
Sean O’Grady: Hello and welcome to Insights. On this episode, we will be discussing the opportunities and risks facing the life sciences industry in emerging markets. Here to share their thoughts are Mark Stehr, a partner in the Life Sciences practice of Deloitte & Touche LLP, and we also have David Hodgson, a partner and the global leader of the Life Sciences practice for Enterprise and Risk Services with Deloitte & Touche LLP. Gentlemen, thank you very much for joining us today. Opportunities and risks, I would like to understand the positives first. So, Mark, tell me a little bit about the positives for life sciences in these emerging markets.
Mark Stehr: It is a very exciting time for life science companies today. It’s a global market that is exceeding one trillion dollars and with projections over the next four or five years of double digit growth, mostly outside of the United States in markets like Russia, India, and China. So, it is very exciting for our clients. You are going to see some smaller, moderate growth in more mature markets like Japan, the United Kingdom, and the United States. But for the most part, people are very bullish on the life sciences market. For our clients, particularly outside the United States, international markets represent roughly sixty percent (growth potential).
If you’re wondering what’s driving the growth, it’s M&A activity as well as innovation and organic growth. However, the underpinning is that people are living longer outside the United States. In the United States, life span is holding steady. Outside the U.S., in developing nations, people are living longer. They are demanding a higher standard of health care and quality of life. They are also placing pressure on the government to keep drugs at an affordable level. Plus, you have a growing middle class. So people have more cash in their pockets to spend on products, including medicines, nutritionals, and devices to improve their standard of living.
You also have the collaboration between some of the large life science companies that historically would not often partner together. But, we are now seeing a trend toward risks and rewards. Some of the biggest competitors in the world (are) trying to find a way to penetrate markets together. We are also seeing the reliance on third-party intermediaries as a way to get close to the patients and the customers in the international markets. Third-party intermediaries, also known as TPIs, which David is going to discuss in a moment, are critical players in helping companies to get into marketplaces they were not in last year. They are going to be a very important factor to effectively grow a company’s footprint in those international markets that are so very, very important for our life science clients.
Sean: David, let’s do that. Let’s talk a little bit more about TPIs, these third-party intermediaries. What are they and how are they a positive (influence) in these emerging markets?
David Hodgson: First of all, it is really important to say that you can’t (get into) these markets now without TPIs or third-party intermediaries being involved because the markets are so complex and so many business partners are needed to succeed. For example, there are three or four big categories of TPIs to talk about. The first are those who are really involved in being a strategic business partner to your organization. People who license your IP; and people who may be in JVs (joint ventures) and alliances. Next (second) are the guys who really help to commercialize your product or your drug in that marketplace. People like distributors and sales agents. The third category is the R&D, contract research organizations or CROs, which play a very, very important role. And lastly (fourth), often forgotten about, are the transportation guys (or) travel agencies—which surprisingly are a pretty significant source of fraud these days.
Just one more point I would like to make. We talk about emerging markets (as if they were similar to) Western Europe or the U.S. In fact, the emerging markets are very different from each other. So, it is very important to keep that in mind. For example, India’s per capita spend on health care, (approximately) sixty-five or seventy dollars a year, is driving a scenario which some life sciences companies view as being a “brands” or “generics” market. There are a large number of products and a large number of competitors within the country and also international competitors as well. Now, this is very, very different from China, where the market dynamics are being driven very much by their version of health reform right now.
Sean O'Grady:: So that was a bird’s-eye view of the positives in emerging markets. What about the flipside of the coin? What about the negatives, Mark?
Mark: I think some of the markets that represent the greatest growth for our clients happen to be markets that are also developing nations. But, they are also some of the most corrupt markets in the world. If you look at Transparency International’s Web site, you will likely see that information. The challenge for our clients is to effectively penetrate these markets. However, the problem with those markets is that you are dealing with cultures that may be very different from the cultures that exist in the corporate headquarters. That is a real challenge for our clients.
The agreements that exist between our clients and the third-party intermediaries, as David described before, is often the driver behind some of the real problems. Because, if the agreements do exist, they often contain very murky language. You have to realize that life science companies have grown (into) large global organizations through acquisitions. Very often, the agreements that have been inherited through these M&A or merger and acquisition transactions don’t really talk about guidance on pricing, discounts, and allowances. If you look at some of the acts of foreign corruption that go along with using the third-party intermediaries, it’s often (tied to) interpreting the language in the agreements.
This is when you get into areas of regulatory concern or violation around the Foreign Corrupt Practices Act known as FCPA as well as the UK Bribery Act and other anticorruption laws and regulations around the world. So, it is a real challenge for our clients in these markets because you are dealing with a business culture that may go back hundreds or thousands of years. Trying to get individuals to change their behavior takes a long time. Sometimes, the regulatory regimes are not as mature as the SEC or the Department of Justice would like. It calls for patience, and training, and teaching.
Sean: It certainly sounds like several layers of ambiguity. David, your thoughts on the negative side in the emerging markets?
David: Adding to what Mark said, it is really hard to figure out who the good guys are in some of these markets. By good guys, I mean those guys who understand and adhere to typical western ethical standards and practices. That is hard because the cultures are very different. People come here from different contexts and different backgrounds. Also, many of these companies haven’t been in existence for very long. So they don’t have the track record of ten, twenty, or thirty years of being in business that you see typically in the west. They (may have been in business) one or two years. The availability of data by which you really ascertain the background context on these companies just isn’t there. So things we rely on here—data sources like Dun & Bradstreet, S&P, SEC filings that are driven by regulation—just aren’t there to help you really judge or determine whether these folks are in fact good people for you to be doing business with.
Sean: So that begs the question if those resources aren’t there, to use your words, how do you find the good guys?
David: You have to set a standard or a very structured way to think through who you are going to do business with. So typically, you would see is a risk assessment and a structured way of thinking that would drive you toward those TPIs that may present less risk to your company than the others in the marketplace.
Sean: Mark, (do) you agree?
Mark: Yes, I do. I think that planning in advance and screening your third-party intermediaries is very important. Trying to get as much information—before you sign up with them—is very important as well. Identify problems early in the process before they become huge problems down the road and stories in the Wall Street Journal and New York Times.
Sean: So clearly you want to do your homework upfront so that you can stop these problems before they start. Gentlemen, thank you very much for joining us. We have been talking emerging market risks and opportunities in the life sciences industry with Mark Stehr, a partner in the Life Sciences practice of Deloitte & Touche LLP, and David Hodgson, a partner and the global leader of Life Sciences practice for Enterprise and Risk Services with Deloitte & Touche LLP. If you would like to learn more about Mark, David, or any of the topics we discussed on this program, you can find that information and much more by visiting our Web site. It’s www.deloitte.com/insights/us. For all the good folks here at Insights, I am Sean O’Grady, we will see you next time.
As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.