Emerging Markets Turn to Innovation Feature Articles: Jun 1, 2012 (Vol. 32,
No. 11) G. Steven Burrill Governments Increasingly Seek to Build Their
Economies through Life Science Investments In April 2011, Ascletis launched with
$100 million in backing from a Chinese billionaire to discover and develop new
treatments for cancer and infectious diseases in China. The company’s management
team, based in Chapel Hill, NC,
is made up of seasoned pharmaceutical industry veterans, but most of its staff
is based in the company’s Hangzhou,
China, offices.
Ascletis is not the first company attempting to marry U.S. expertise in drug development with
affordable talent in China.
But the company hopes to seize opportunities created by cultural differences
between the two countries that may allow it to in-license promising products
that have been shelved by pharmaceutical companies because they were seen as
undesirable products for developed markets. For example, Americans want
once-a-day pills instead of injections, whereas people in China are more concerned about
pricing, efficacy, and safety rather than convenience. Ascletis reflects not
only the new global marketplace—single, flat, interconnected, and increasingly
borderless—but the opportunity life science companies have today to exploit the
availability of capital and the differing value assets from one country to
another. It also points to a harsher reality of which the pharmaceutical
industry has taken note. After decades in which the U.S.,
Europe, and Japan were the
principal drivers of global economic growth, the tide has shifted to developing
nations in Asia, Latin America, and other
parts of the world where a rising middle class is fueling an economic boom. These
emerging markets—China, India, Brazil,
Russia, South Korea, Indonesia,
and Turkey,
among others—are becoming the new economic heavyweights. China surpassed Japan
as the world’s second-largest economy in 2011 and is projected to overtake the U.S.
by 2020. India
is expected to become the third largest economy within the next couple of
years. And Brazil and Russia’s GDP is higher than any European country
with the exception of Germany.
Within Brazil, Russia, India,
and China,
the middle class is expanding rapidly—growing at 21% a year to reach 1.8
billion people by 2014. The increased affluence is creating a greater demand
for healthcare, in part because with changing lifestyles have come a growing
incidence of chronic disease. India
and China
will make up nearly one-third of the world’s total patients with type 2
diabetes in 2030, with more than 150 million people afflicted with the disease
by then.The pharmaceutical industry has targeted these emerging markets as a
primary source of sales growth in the coming years. With many products facing
patent expirations and slowing sales growth in developed countries, big pharma
sees emerging markets providing an opportunity to extend product life after
loss of exclusivity in established markets. These markets have a high regard
for brands, giving the originator a leg up over generic competitors. Big Pharma
is also investing in research and development around the world to take
advantage of low-cost talent, local expertise, and proximity to new markets.
For example, Merck in 2011 said it would commit $1.5 billion to expand its
research and development activities in China. Every multinational
pharmaceutical company now is establishing a presence in the major emerging
markets countries. And it’s not just traditional big pharma, but biotechs as
well. Amgen has been steadily diversifying into emerging markets, entering Brazil in a big way with its $215 million buy of
Bergamo, and establishing a foothold in the Middle East with the $700 million acquisition of
privately held Turkish pharmaceutical firm Mustafa Nevzat.
New Focus Once
viewed solely as a source of inexpensive labor, these emerging markets are
becoming sources of innovation. This is seen in the rapid increase in their
contributions to scientific articles being published in peer-reviewed journals
and patent applications being filed with the World Intellectual Property
Organization. China is
closing ranks with the U.S.
as the top filer of patents applications and is expected to surpass it by 2015.
One striking example of this innovation shift is the rapid rise of BGI,
formerly the Beijing Genomics Institute, to become the world’s leading
sequencer of genomes. Backed by $1.5 billion in government funding, BGI has
established partnerships and collaborations with leading academic and
government research institutions throughout the world, as well as global
biotechnology and pharmaceutical companies. In February BGI teamed up with the
Asia Cancer Research Group (ACRG) to conduct genomic research on lung cancer
and liver cancer. ACRG was established in 2010 as an independent,
not-for-profit company by Lilly, Merck, and Pfizer to accelerate research and,
ultimately, improve treatment for patients affected with the most commonly
diagnosed cancers in Asia by freely sharing
the resulting data with the scientific community. We are also seeing a global
movement of scientists, who often come to the U.S.
and Europe for education and
business-management training. Unlike the recent past when they would remain and
work in their adopted countries, they are returning to their native countries
to take advantage of the growing opportunities available to them in their
homelands.
Shifting to High-Value Industries Perhaps the clearest sign of these
countries as emerging sources of innovation is the concerted investment their
governments are making to move their economies to high-value industries from a
dependence on low-value commodities and manufacturing. They see biotechnology and
other medical technologies as important drivers of economic growth and are
investing heavily in education, infrastructure, and healthcare to develop
homegrown industries to serve the needs of their people and fuel further growth
of their economies. Russia
may be the leader in this trend, leveraging its financial strength to gain
industry expertise. Government-backed investment funds have been making
significant bets in innovative Western life science companies that are willing
to set up drug development and manufacturing facilities in Russia. Rusnano, backed by $10
billion in government money, has entered into a $760 million partnership with U.S. venture capital firm Domain Associates to
back up to 20 companies willing to develop their compounds in Russia. China’s current economic plan calls
for doubling biomedical R&D innovation funding from the previous plan to
$300 billion. It seeks to make China
the second-largest pharmaceutical market by 2020. South Korea has pledged increased
funding for stem cell research, describing it as a “new growth engine.” Its
drug agency approved the first therapeutic using allogeneic stem cells in
January, developed by Seoul-based Medipost to regenerate knee cartilage using
stem cells derived from umbilical cord blood.
Win-Win Opportunities Life science companies facing a difficult funding environment in the U.S.
are finding that one cost-effective way to develop their drugs is through
partners in emerging markets. They can gain access to capital to fund
development while retaining rights to their products throughout most of the
world. For example, Harbor Biosciences granted Sinopharm subsidiary China State
Institute of Pharmaceutical Industry (CIPI) exclusive rights in China
to three of its products in exchange for the Chinese government-owned
pharmaceutical’s agreement to develop them. CIPI will finance all product
development in China
to two mid-stage compounds and one preclinical compound for major indications
including diabetes, cancer, inflammation, and infectious disease. Besides being
eligible for milestone payments and royalties for sales in China, Harbor retains all rights outside China
and can use the clinical data generated by CIPI to seek marketing approval
elsewhere. Harbor advances its products through development without having to
provide any financial support to do so. By leveraging the needs in emerging
markets, companies such as Harbor can obtain access to nondilutive financing,
reduce development risk, and develop multiple compounds at once. For the
emerging markets, these deals provide a way for these countries to build their
economies, decrease their dependence on drugs produced outside their borders,
and increase the high-value skills and technical skills of their workers as
they address the health needs of their populations. Such agreements take on
varying forms. Rusnano, for example, often ties its investment in Western
biotechs with agreements to develop their compounds and commercialize them
first in Russia.
Its investment in two Massachusetts-based biotechs, Bind Biosciences and
Selecta Biosciences, include providing each company with $25 million to set up
wholly owned subsidiaries in Russia
to advance the clinical development of their pipeline candidates. They expect
Rusnano’s commitment to help them in their partnering efforts, as well as help
them access global sources of funding. In other cases, deals take on the form
of more traditional partnering arrangements. Maxwell Biotech Venture Fund,
partially backed by the Russian government, licensed Maryland-based Sequella’s
experimental antibiotic for the treatment of tuberculosis, which is an epidemic
in Russia.
Maxwell gains rights to the drug in Russia and neighboring Commonwealth
of Independent States countries, where it will assume responsibility for further
clinical development and regulatory approval. Sequella gets a partner that can
navigate the product through the local regulatory agencies, an equity
investment, clinical supply purchase, and milestone payments worth up to $50
million, as well as royalties. Plus, Sequella retains all rights to the drug in
the U.S.
and the rest of the world. In this way, companies can leverage an asset they
may be ill-prepared to commercialize in an emerging market, and leverage the
needs in those countries to accelerate development, cut costs, and reduce the
risk of bringing those products to market in developed countries. At the same
time, this global movement of technology and innovation can help boost the
economies of the emerging countries and address unmet medical needs of their
populations.
Challenges Ahead This is not to say that doing business in emerging markets will be easy.
Other than their economic potential, emerging markets have little in common.
Their demographics, governments, regulatory policies, economic structures,
healthcare systems, and cultures are quite disparate and must be taken into
account when devising an emerging markets strategy. Just as in developed
countries, governments in emerging markets face increased pressure to rein in
healthcare costs. In most of these countries, government regulations and policy
are designed to benefit local companies, and demand that foreign companies
wishing to do business in their markets establish local subsidiaries and
partner with local firms. Their regulatory bureaucracies can be difficult to
navigate, and businesses are often hampered by a lack of managerial expertise.
Markets are often fragmented with many small players competing to get their
products on official government lists of essential drugs. The potential market
is huge, however, and governments see the importance of investing in the life
sciences to build innovation-based economies that can provide high-quality
jobs. They see innovation as the way to transform their societies for the
better, especially amidst the austere economic conditions and global challenges
facing the world today. The challenge for innovative companies is to understand
and be able to take advantage of global opportunities when and wherever they
may arise. Those that succeed are posed to reap huge rewards.