Advisory Services for an Evolving MarketplaceWed, 09/09/2015 - 15:02
Q: What is the importance of the health division for Ernst & Young (EY)? How would you characterize the market here?
A: Since the healthcare sector is very big, it is divided into life sciences and pharmaceuticals within EY. The pharmaceutical business comprises consulting and professional services, and while it is a large division in other countries, it remains quite small in Mexico – despite this country being the second-largest pharmaceutical market in Latin America. This is mostly due to strategic and tactical decisions being made at our offices in Europe or the US rather than in Mexico. Moreover, even when decisions are made locally, they often need authorization from abroad. In addition, the budget allocated to these companies in Mexico is not large enough. Many companies from other industries experiment in Mexico by investing in the country and using the results to predict the return on investment for similar countries. For some reason, the pharmaceutical companies do not do this here, despite Mexico being an excellent platform to learn about emerging markets.
Q: What are the main learning opportunities?
A: The Mexican market is so diverse that the pharmaceutical industry could use it as a business performance laboratory, the results of which could be extrapolated to other countries. Mexico is both a middle market and an emerging market. Whatever formula works here will very likely succeed in other middle markets in emerging countries. We expect this business division to grow over the next five years. We have highly specialized professionals who know the industry very well, so it is very important for EY to keep on supporting the sector in becoming stronger and more innovative in Mexico.
Q: The pharmaceutical industry is very dynamic and there have been major changes in the distribution segment lately – how have these changes affected the entire industry’s value chain?
A: The traditional drug distribution model in the private sector consists of patients looking for products at pharmacies, which are in turn supplied by distributors who buy directly from the manufacturers. Historically, distributors and manufacturers had the biggest margins in the value chain. Because of this, they held the power in the industry. In recent years, family-owned pharmacy stores have been displaced by retail stores, bringing big changes to market dynamics. Each time a pharmacy chain opens a single store in a neighborhood, 20 to 30 local independent stores close as large chains are more efficient, productive, and competitive. Some independent pharmacy practices –such as having special promotions, or changing prices on certain days of the week – posed problems for transparency. Prices in pharmacy chains, however, are very clear, and can be compared to several options in the same store or different ones. Also, pharmacy chains have power over their prices, since they decide what to buy directly from manufacturers instead of the distributors. As such, one of the most important current trends is the shrinking of the distribution segment. In fact, in some countries distributors are nonexistent, and pharmaceutical companies directly supply hospitals and stores. Moreover, where patients previously did not question doctors, today they are more informed and have many tools for expanding their knowledge on health. This gives them the confidence to question doctors about the reason for being prescribed a specific treatment and its side effects. They also feel able to opt for one product over another. Power in the pharmaceutical value chain is being claimed by consumers and retail stores.
Q: What strategies should innovative pharmaceutical companies implement in order to stay on top regardless of the rise of generics, and what is the future of generics?
A: Pharmaceutical companies are facing many challenges, beginning with decreasing efficiency in research and development. They no longer have the blockbusters products of the past, and they must become creative in order to develop new business models. Many companies are not only trying to leverage their molecules, but also creating new ways to connect with patients, such as apps and advising platforms. Being closer to patients is more profitable than focusing on the supply chain. The boom in generics and changes in the trade balance are certainly affecting innovative companies. We have to understand the Mexican healthcare sector and the two different ecosystems that it comprises: the public and private sectors. The way companies negotiate with IMSS, ISSSTE and Seguro Popular cannot be compared to doing business with private pharmacy chains. While the most important thing for the government is that companies demonstrate the cost benefit of their drugs, pharmacy chains focus on prices and supply efficiency. In addition, some of the big pharma companies are either incorporating branded generics into their portfolios or creating business divisions focused on generics. The growing demand requires better prices, which is the most important driver for the generics industry today. Furthermore, negotiations in the generics segment differ from the traditional pharmaceutical models in that pharmacies have proportionally a bigger margin by selling generics than by selling patented drugs. The generics industry is set to keep on growing and local manufacturers will need to be well prepared for the entry and consolidation of Indian and Chinese companies in the Mexican market. Not surprisingly, patients as well as retail stores are taking full advantage of generics while the rest of the actors in the value chain are struggling. Other pharmaceutical companies are getting rid of their generics and OTC portfolios; nevertheless if they are planning to launch blockbusters as they used to, they are very likely to have a hard time. Pharmacy chains have their own brands too, and this is part of the market competition that manufacturers have to deal with.
Q: What are the biggest transformations and challenges for the OTC business in Mexico?
A: Today, the pharmaceutical industry resembles the consumer goods industry. In the OTC segment, the competition is not about selling the best molecule, but about having the best place on the shelves and the most targeted brand exposure. OTC manufacturers are dealing with the same challenges as companies such as P&G and Unilever, so both image and price concerns are becoming more relevant. There are many products in the Mexican market that do not have sufficient supporting evidence for their therapeutic action, which is not a problem for the manufacturers because prescriptions are not mandatory. Some companies take a product with a long history in the Mexican market, rebrand it, and present the product to consumers as an innovative medicine. Companies producing OTC products spend more money on marketing and branding on television in order to create a demand for the product. However, with the rise of internet streaming, television is no longer as popular, forcing companies to restructure their whole marketing strategy.
Q: Some experts say Mexico is an excellent medical tourism destination while others argue there is no such thing as medical tourism – what is your perspective?
A: Everyone talks about medical tourism and medical clusters, but more efforts are needed to really support both in Mexico. We have a great geographical location, unfortunately there are still quite few medical tourism clusters, and clustering in general has not been well promoted yet. The whole concept of medical tourism requires a cluster with different specialty areas that can deliver high quality low cost services. There are many things to consider. The right location is essential to ensure patients have the proper environment for recovery. The weather around the Gulf of Mexico is not suitable, while cities in the Bajio area such as Queretaro and Guanajuato are already well developed. An infrastructure project like a new medical cluster could be useful to further support their economic development. A medical tourism city would be a similar workload to establishing the resorts in Cancun and Cabo San Lucas, both excellent cities that received private and public investment and have become extremely popular destinations. My recommendation is that we allocate specific human and economic resources to build an authentic health cluster in Mexico. This ought to be a huge, inclusive project instead of separate hospitals trying to attract foreign patients alone. Medical tourism promotion would fall under the Department of Finance’s remit, as it attracts investment, creates jobs, and stimulates the economy. I can envisage a large Canadian and US market for medical tourism, driven by the search for lower prices and reduced waiting times outside their own countries. Mexico’s proximity and quality make it the best option. The famous street in Tijuana where US citizens drive to buy cheaper medicines is an excellent example of this type of consumer behavior.