10/22

The Hidden Costs of Expanding Drug Products into New Markets

by Cheng He, October 22th 2013  

Increasingly, U.S. drug companies are looking to maximize the financial return of U.S.-based prescription (Rx), generics (Gx), or Over the Counter (OTC) products by expanding them into new markets abroad. Because the products are already fully developed and approved by the FDA, the R&D cost of taking them to international markets is usually minimal compared to new drug development.

Best-practice pharmaceutical new product development (NPD) processes clearly indicate that the decision about where to launch a new product should occur early in the NPD process. This practice allows for conducting any clinical trials required to support secondary markets. Unfortunately, in practice, companies do not always carry out drug development with a global perspective. Often secondary markets are only considered once the product has launched in the lead market or even a long time afterward. In such instances, how does a drug company decide whether a product is a good candidate for geographic expansion, and which markets it should be expanded into?

While the financials of expanding an existing drug product into an international, secondary market is often identified as the most important criterion, in our experience, many companies do a poor job of evaluating financial impact. Typically, the initial financial assessment is done by the local commercial team with only three pieces of information: projected sale volume, target price in the local market, and standard cost of goods. Because this limited assessment does not take into account the costs related to the requisite regulatory and manufacturing work, the forecast often underestimates the true cost of geographic expansion. We have seen geographic expansion projects in which the resulting revenues barely covered the cost to develop and register the regulatory dossier and maintain the registration. In one example, the local commercial team requested that a U.S. Rx product be brought to Southeast Asia. However, at the proposed local market price, the cold chain shipping cost alone would have brought the margin down to almost 0%. To really understand the true cost/benefit of a proposed geographic expansion, the financial assessment must include a comprehensive assessment of three often overlooked factors: 1) local regulations; 2) manufacturing capabilities; and 3) speed to market.

1. Local Regulations

A company should only invest in expanding a product to a new market if the product stands a good chance of gaining market authorization and potential revenue exceeds the regulatory costs. This requires a careful and smart assessment of the regulatory pathway and requirements. For example, a significant amount of work and time may be required when:

1.
A drug product classified as Rx, Gx, or OTC in the US warrants different classification in the new market;
2.
A drug approved in the US only has zone II stability data but is being expanded into zone III/IV countries resulting in the need for a new stability study;
3.
The new market requires population-specific clinical trials; and
4.
The expansion initiative addresses a single region within which there are multiple requirements. For example, different countries within the same region may require different Module 1 documents or different dossier formats (CTD vs. eCTD).


2. Manufacturing Capabilities

When thinking about new, international markets, it is also critical to assess manufacturability, including production planning, manufacturing, quality assurance (QA), and shipping. Companies should ask themselves the following questions:

1.
Do we have the capability to manufacture if the product fill/count size for the target country is different from the way we are currently marketing? This is especially critical for in-line manufacturing. For example, a fill and packaging line set up for a 5ml sachet for the US market may not be able to handle the 10ml fill that the prospective foreign market may require.
2.
What is the minimum order quantity (MOQ) required to make geographic expansion worthwhile? Many of the geographic expansion markets are developing countries with low target pricing and volume forecast. Companies need to assess whether the cost of production will negate any financial/strategic benefit from the geographic expansion.
3.
Can we manufacture in compliance with all the regulatory requirements of the target country? For example, one of our clients had to give up the geographic expansion of a U.S. product to Mexico because while the product is considered a nutritional in the U.S., it is considered an Rx in Mexico. Unfortunately, the GMP standard used for production in the U.S. doesn't meet the more stringent Mexican Rx standard.


3. Speed to Market

The speed at which a company can get a drug product into a new, secondary market often makes the difference as to whether the launch is profitable or not. For example, first-in-market products usually do well financially by retaining a large market share even after the launch of competing brands.

Speed to market is primarily dependent on how quickly the dossier can be prepared and how long it takes to gain regulatory approval. Dossier preparation is affected by the number of regulatory gaps, and it can take as few as 3-4 months for nutritionals as many as 4+ years for Rx. Complicating matters, some countries require submission/approval of a "shorter" form before the full dossier can be accepted and reviewed (e.g. Pre-Submission Planning Form for Australian TGA). In one case, a client explored the feasibility of expanding a Gx product into several European countries, but put the decision on hold after realizing that by the time the product would launch, it would be the 3rd in its class for that market and thus not sufficiently profitable.

When considering the expansion of a U.S. drug into overseas markets, it is critical to look beyond standard costs of goods. Instead, seek to understand the true costs and timing associated with regulatory and manufacturing requirements. In addition to new projects, ongoing projects should be reviewed periodically to address developments that may alter costs. In today's competitive marketplace, drug companies have limited resources. Assessing the true financials for each potential geographic expansion project allows the company to strategically dedicate its limited resources to opportunities with the maximum chance of success.

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