Emerging Market EntryAn Interesting Decision

Vijayaraghavan Venugopal, 27th November, 2012

Mumbai

Presentation Outline

• Aspirations of Indian companies

• Markets & Environment

• GI – LR Matrix in the Pharma space

• Characteristics of Emerging Markets

• Where do we start?

• Different models and implications

• Risk versus control trade off

• Currency related issues

• Conclusion

Common “Global” Aspirations

“Enriching lives Globally, with quality and affordable

pharmaceuticals”

“To be a leading Global healthcare provider with a

robust pipeline”

“An Innovation led Transnational Pharmaceutical

Company”

“To become Asia’s leading generic company and one

among the top 15 in the world by 2015”

“To be an integrated biotechnology enterprise of

Global distinction”

Source – websites of companies

Which Markets?

Tier 1 & 2 markets

Tier 3 markets

Source – IMS Health MIDAS, Market

Prognosis October 2009

Focus on Tier 1, 2 & 3 markets – “The Emerging Markets”

Challenging Environment

Even the biggest and the best find the going tough! Need

to invest for the long term.

Source – IMS MIDAS MAT Sep 2009

The GI-LR Matrix : PharmaceuticalsG

lob

al In

teg

rati

on

Local Responsiveness

Multi -Domestic

Global

International

Source – Adapted from IR frameworks by Bartlett & Ghosal (1991) & Prahalad

& Doz (1987)

Resource constraints,

stage of evolution &

mindset play a major

role…

Transnational Corporations

API Business

Formulation Business

Formulation Business

• Sizeable pharma market

(> USD 1 bn)

• Growth/ addition of > 1 bn

USD in the next 5 years

• Per Capita GDP income of <

USD 25,000

• Evolving government policies

• Strong local companies

• Lesser transparency in

transactions & regulations

• Cultural & Linguistic

differences

• Varying IP standards

• Lack of clear in-house

knowledge about the markets

• Currency Risks

Emerging Market Characteristics

Everyone is on the learning curve…

Where do we start?

Pharma Specific AssessmentRegulatory Pathway, Clinical

Studies, Import Regulations etc

Strategic & Capability FitAlignment with overall goals, capabilities etc

Quantitative AssessmentMarket Share, Population, GDP,

Growth Rates, Therapeutic Focus

etc

Qualitative AssessmentLanguage, Political &

Economic stability, Tax etc

Mid Term Goals

Short Term Goals

Long Term Goals

Entry Strategies

• Exports

– Direct & Indirect Exports

• Strategic Alliances

– Licensing

– Technology Cooperation

– Exclusive Relationships

• Onshore Presence

– JVs

– FDIs

Export Oriented Model

• Traditional method with lowest risk

• Direct Exporting

– Customers & Distributors in the markets

– Need an International Sales & Logistics team

• Indirect Exporting

– Through Agents & Associations in own market

• Works well when one has a monopoly in product technology or

cost

• Example – Indian Pharma in Africa, specific cephalosporin API

exports to China till recently

• Risks – Lack of brand building in the market, may not work long

term

Strategic Alliances Model

• Exports plus & FDI minus

• Need for local knowledge, tie-ups and reach

• May not be ready for financial investments

• Local regulations makes this obligatory

• Several examples

– Supply of Ceph Intermediates & API technology to Chinese

players

– Formulation technology tie-ups with Brazilian companies

– Exclusive supply of formulations to local marketing company

– Dossier linked supply of APIs

Strategic Alliances Model

• Advantages

– Gives a feeling of longevity

– Potential opportunity for acquisition or stake

– Helps a company to operate in a larger space with limited

resources

• Disadvantages

– Danger of abrupt termination

– Proliferation of technology without any controls

– Less than full value captured

Onshore Model

• More Indian Companies

moving this way

• High Risks but long term

rewards

• Can augment export or

alliance model

• Investment in people

• Need for continuity

Representative Office

Trading & Marketing Office

JV – Manufacturing or Marketing

100% Subsidiary (Manufacturing or

Marketing)

Rep & Trading Offices

Rep Office

� No investment and legal liability

stays with the parent company

� No power to sign contracts

� To have eyes & ears close to

market

� Numerous Rep Offices in China

Trading & Marketing Office

� Some investment or seed

capital

� P&L center

� May need board approval

� Offices in Dubai & Singapore

Joint Ventures

• JVs for manufacturing/ marketing

• Varying equity stakes with local partner

• Reason for JV

– Local expertise or presence required

– Government regulations

– Complimentary capabilities

• JV was the buzzword in China in the last 20 years

• Ranbaxy - BYS (Guangzhou), Dr Reddys - Rotam (Kunshan),

Orchid – NCPC (Shijiazhuang) etc

JVs – Things to consider

• Is it an “IMS” effect?

• Are the expectations matching?

• Long term view of partners?

• What are the capabilities both the partners are bringing to the

table?

• Is there a long term management commitment? (China – a

classic example)

• Risks of a manufacturing JV

• Legal & Repatriation issues

• Majority may not be enough…(few decisions need unanimous

board approval)

100% Subsidiary

• High Risk but full control (Example – Ikea)

• Freedom to operate

• Management

– Indian companies have used locals to run the show…

– Exceptions need huge management depth (Aurobindo & Ranbaxy

China)

• Difficult to exit

• Increased need of company time & resources

• Highest exposure to political & financial risks

Risk vs Control Trade Off

Smaller companies

Bigger companies

Decision Matrix for Entry Strategy

Other Risk Mitigation Steps

• Start with a hybrid model till confidence is gained

• Due Diligence from all aspects

• Acquire hard assets only if you are fully convinced

• Existing owners to run the show with pay outs over a time

period

• Leverage known connections in the market

• Have a clear business plan & pay back period in place

• Think about exit plan & worst case scenario

• Do not spread your resources thin

Currency Matters

• Stability & Acceptability of the currency; ex: - Chinese RMB

gaining strong acceptability

• Keep a watch on currency fluctuations

– Determines ability to pay, by customers

– Pricing in local market vis-à-vis USD

• Business in USD or Euro

• Banking System – Is it pliable?

• Insist on advance payment or irrevocable letter of credit

• May be better to lose sale than repent later

Chinese Yuan vs USD

• Stable & Appreciating currency

• Imports becoming more cheaper, exports becoming costly

• Investment in 2012 will mean more USD/INR outgo than 2006

• Chinese costs on the increase

• Becoming an alternative to the US Dollar

Ignoring Emerging Markets?

32%

15%

11%

42%

US & CanadaEU 5Japan

Mature Markets

US 0-3%

Japan 2-5%

Germany 1-4%

France 0-3%

UK -1-2%

Mature 1-4%

Pharmemerging

Tier 1 19-22%

China 19-22%

Tier 2 12-15%

Brazil 10-13%

Russia 11-14%

India 14-17%

Tier 3 10-13%

Pharmemerging 13-16%

CAGR 2010 -15Region Market share of

Global Sales by 2015

Mark

et

En

vir

on

men

t

Source – IMS Health, Market

Prognosis March 2011

Co

mp

an

y

Current – Turnover X crores > US & India

Future – Turnover 3X crores > US & India + ?

First Mover Advantage, Increasing cost of delayed entry, organizational knowledge etc

Beyond Technical Capabilities

• Do we have a company goal?

• Do we understand the similarities & differences?

• Are we ready to learn & unlearn?

• Do we have a Team A in place?

• Is the top management ready to spend quality time?

• Are you willing to invest & respect the country?

• …

Emerging Market Mantra

“Crossing the river by feeling for the stones…” Deng Xiaoping

Thank You