Losing the World’s Top Market: iPhone’s Lessons for Innovative Biopharma

Losing the World’s Top Market: iPhone’s Lessons for Innovative Biopharma

As China moves steadily to overtake the US as the world’s leading drug market in the next decade, most senior executives in “big Pharma” as well as innovative biotechs have yet to grasp the speed and magnitude of the strategic shift now underway.  None are prepared for the full implications this transition will have on their businesses.

Case Study in Complacency

During a video conference with the global oncology leadership team at one of the world’s top biopharma firms, I mentioned in passing that China would overtake the US as an oncology market in the next 10-15 years.  While tangential to the larger strategy issue under discussion, the three US-based senior executives responsible for this global business reacted with incredulity.  Mildly surprised, I rattled off the basic math.  Still skeptical, they asked for a more complete data set.  I laid out the two scenarios below, one extremely conservative and the other provocatively challenging.  The later seems more likely to me, based on three decades working in China, but I considered this less important than communicating the overall direction and inevitability of the coming change.

China Oncology Growth: Conservative Scenario
Oncology convention wisdom

China Oncology Growth: Provocative Scenario
China Oncology Growth: Provocative Scenario

The most senior – and most skeptical – on the global team scheduled a follow up call.  As we reviewed the data, he was clearly relieved.  “This tells me China will clearly NOT become more important than the US – at least in my lifetime.”  To his mind, cytotoxics – the vast majority of the Chinese oncology market today – were so passé as to be irrelevant in setting priorities at a leading innovative biopharma firm.  I described China’s unique market dynamics, radical changes in reimbursement including the private cancer insurance market pioneered by Roche and SwissRe and the dramatic expansion of diagnosis and treatment infrastructure.  What if an additional $30 billion was added to the 2025 China market – with all or most of it filled by innovative targeted therapies?  He remained unmoved. To his way of thinking, China’s infamous affordability gap meant it would be 50 years before China would be worthy of the same attention as the US domestic market for a leading innovative global firm with a strong stake in oncology.

The Smartphone Saga

That China “leapfrogged” land lines to become the largest mobile phone market is well known.  But like the biopharma executive who dismissed China’s oncology growth opportunity, until recently many in the mobile business complacently assumed that Chinese cellular customers would continue to rely mainly on cheap, basic cell phones.  A handful of affluent, urban Chinese would drive a rapidly growing smart phone segment, but not one large enough to justify distracting developers and designers from the key markets of the US and Europe.

The two charts below demonstrate how rapidly China can up-end our complacency.   In 2014, US consumers will buy roughly 85-90 million smartphones at “subsidized” prices built into their cellular contracts (think company health plans).  At the same time, Chinese customers will purchase nearly 300 million smartphones,  paying cash upfront at prices ranging from $200-600.   Which markets do you think should drive the growth strategies, product priorities and marketing investment of a “global leader” in smartphones today?

2014 Smartphone ForecastThe consequences of not responding effectively to this tectonic shift are clear in the second chart, which shows the unit share of the smartphone brands sold during Q1 2014 in China. Samsung, Lenovo, Xiaomi hold 40% of the market.  Apple, generally considered the world’s most valuable brand, holds a 9% unit share – battling to stay ahead of a clutch of second-tier competitors.  Curiously, Western tech pundits faulted Lenovo for launching Vibe Z, its first 4G LTE phone only in early 2014.  Clearly Lenovo’s timing was designed not for secondary markets like the US, but instead targeted to win in the world’s largest smartphone market where, 4G is only now becoming available.

 

China Smartphone Market SharesMore than a dozen Asian companies – mainly Chinese – have developed a compelling value proposition designed to meet the needs of Chinese cellular customers.  The same is happening in India:  220 million smartphones are forecast to be sold this year with Samsung, Micromax and Karbonn dominating the market.

Apple – only seven years after the iPhone’s launch –has been relegated to “leadership” only in the relatively inconsequential US market.  Apple’s higher pricing supported a larger value share in emerging markets, adding to short term profits. But this also built a wall of corporate denial around Cupertino’s China complacency.  As Apple now scrambles to turn the tide, it will be interesting to see how effectively the company responds – at the same time that these emerging Asian competitors build their positions Asian, Latin American and African markets.

Oncology Déjà vu?

Could we be at the early stages of a parallel disruption in oncology?  Icotinib, Zhejiang Beta Pharm’s EGFR for lung cancer, focused solely on the Chinese market -already the world’s largest in terms of patients.  The molecule moved from the clinic to commercial launch in six years at a cost of $20-30 million.  It sells for roughly 65% of the price of Iressa and Tarceva.

Western critics who take comfort in saying that the Chinese product is not “novel enough” miss the point.  Asian companies are beginning to develop innovative drugs offering a superior value proposition in the eyes of Chinese patients, providers and payers.

Hundreds of Chinese drug developers are exploring a wide range of small molecule and biologic platforms, seeking fresh mechanisms of action to reach new as well as established drug targets.  China’s treatment infrastructure and reimbursement options are expanding.  Regulatory barriers are being removed.

How will today’s biopharma leaders compete effectively in a global market that will increasingly be led by Chinese demand?  A “great molecule” will not be enough;  it needs to be accompanied by a development cost and pricing/access model aligned with the needs of Chinese patients.

By the time your current preclinical candidate reaches patients, we may well be living in a global market and competitive environment similar to the one in which Apple’s iPhone finds itself today.  Does our depth of understanding of Chinese unmet needs match our level of insight on smaller markets like the US?  How would a more accurate map of unmet needs impact our allocation of scarce R&D resources among competing targets and indications?  Do we need a paradigm shift in our development, regulatory and access processes?  Or should we make a few fresh incremental changes… and then simply wait and see?

About George Baeder

George Baeder has spent 35 years helping corporate leaders and policy makers to unravel the complexities of Asian business and economics. China’s growing global role will continue to radically alter long-held assumptions about market priorities, innovation and rules of competition. After nearly four decades in Asia – as an economist, strategy consultant, entrepreneur, investment banker and line manager – George is dedicated to helping organizations challenge and rethink their assumptions, pinpoint the risks and opportunities inherent in China’s emerging global leadership and develop actionable strategies and initiatives to create tangible high-impact outcomes.

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