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European Biopharmaceutical Review

Follow the Money

The US and EU have long been the leading worldwide locations for pharmaceutical research, clinical testing and marketing. The relative distribution of activity mirrors market size and industrial R&D spend. However, a new analysis by medical economists at the University of Michigan – published in the January edition of the New England Journal of Medicine – shows a dramatic five-year shift in the locus of global biomedical R&D activities from the US to East Asia.

According to the analysis, the US share slipped from 51 per cent to 45 per cent in the period 2007 to 2012. The EU remained steady at 29 per cent, while Asia grew from 18 per cent to 24 per cent. A deeper dive into these numbers reveals a negative annual growth rate in R&D spend in North America and the EU, while R&D in Asia – notably Japan, South Korea and China – is on the rise. For China, the compound annual growth rate during the period was nearly 33 per cent.

Big Winner

The advantages of conducting clinical trials or manufacturing active pharmaceutical ingredients in China and India are well-known. It is not surprising that China is a big winner, due to its low cost of raw materials, low labour rates and excellent infrastructure. This trend will continue, with all of the major East Asian governments having policies in place to foster biomedical innovation, and promote economic growth and intellectual advancement.

Moreover, as the analysis shows, the bulk of the market shift can be attributed to industrial spending activity. During the study period, US public spending has remained level. The authors of the analysis caution that the real dollar level of US public sponsorship may actually drop in the coming years, as planned budget cuts take effect.

Strategic Tools

Major pharma companies are global endeavours in R&D, production and marketing. In recent years, the industry has followed a trend of maintaining core competencies in discovery and marketing, while outsourcing and partnering certain development activities – such as chemistry manufacturing controls and clinical trials – to lower cost locations, as well as finding opportunities for host government subsidies.

Outsourcing is accelerated by the increasingly high cost of developing a new drug; pricing pressure from payers in all countries; and externalisation of pipelines to academic or emerging firms – which must outsource due to limited infrastructure and lean business models.

Partnering is also an important sales and marketing tool. Sourcing power is concentrated in large firms with global reach. The marketing importance of these arrangements is clear: ability to sell into the host market; and to satisfy the goals of the host government for employment, balance of trade and access to hightech industry.

For the major industry players, the prize is clearly the huge China market. The middle class in China is larger than the entire population of the US; and China is predicted to be the third largest market for pharmaceutical drugs, after the US and EU, in only a few years’ time. This market will grow rapidly, with the rising tide of economic prosperity, a large ageing population and an expanded national healthcare system.

Unexpected Consequences

The shift of biomedical R&D towards East Asia is the logical outcome of an efficient global economic system. But national policies and culture also affect the outcome – sometimes with unexpected consequences.

Two specific government policies jeopardise the position of the US as a global hub of biomedical research: the corporate tax code, which places a tax on repatriated global profits; and looming future cuts to public-funded basic life sciences research. Add to that a venture capital environment that seeks less risky later-stage opportunities, and you have a perfect storm that is particularly troubling to early-stage start-up companies vying to be the next generation of up-andcoming biotechs.

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Emile Bellott is a New Englandbased consultant with over 25 years of experience in drug discovery, development and pharmaceutical outsourcing.
Emile Bellot
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