Pharma's New Worldview: Transforming R&D Through Emerging Markets

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By Heather Fraser

To date, research and development (R&D) in the pharmaceutical industry has been dominated by a developed markets perspective. But as emerging markets change pharmaceutical companies’ worldview, its time for drug makers to fundamentally rethink how R&D is done.

In response to various financial pressures – the loss of patent protections, declines in market value, escalations in productions costs – pharmaceuticals companies in the developed world have readily enough outsourced certain capabilities – like manufacturing, sales and marketing. But R&D – and particularly research – was seen as core to the business and thus necessary to keep within. In IBM’s view, however, offshore R&D is an option that for a variety of reasons, all very pressing, the pharmaceutical companies should consider.

Push pull
Several major forces are both pushing and pulling pharmaceutical companies to move capabilities like R&D offshore. On the push side, while pharmaceuticals companies struggle to compensate for expiring patents, they face unprecedented pricing pressure and intensifying competition. In the U.S., for instance, 10 states have banded together under the National Medicaid Pooling Initiative to negotiate significant bulk discounts. On the competitive front, increased funding (both public and private) and more affordable technology (like grid technology, which now allows fledgling companies to access the kind of computing power previously available only to major players), are breaking down competitive barriers.

On the pull side, we can identify
at least five major forces:

Innovation investment.
Emerging countries are beginning to invest more significantly in R&D. For example, six of India’s top pharmaceutical companies increased their R&D expenditure by more than 20% between 2003 and 2005. Not surprisingly, innovation, as measured by registration of new chemical entities and biologics, is occurring.

Talent.
Though suitable talent in emerging markets is generally limited, specific skills are plentiful in certain countries. As of 2005, according to published reports, India had over 115,000 scientists with master’s degrees in chemistry and 12,000 with doctorates in that subject. Add to those numbers the multitudes of scientists from India and other countries likely to return home after training in the West.

Clinical trial participants.
Emerging markets offer huge pools of patients unexposed to other drugs that could interfere with testing. This can be quite beneficial when working in therapeutic areas like oncology and anti-infectives, where the cost of clinical trials is high.

Consumers.
Even though the drug expenditure per capita is still low in emerging nations (US$10 in China versus US$623 in the U.S.), population size and growing economies make them attractive markets in the long term.1 By 2035, Brazil, Russia, China and India are expected to represent a quarter of the global pharmaceuticals market.

Cost.
Obviously, the lower costs in emerging markets are a major benefit. Research in India costs 40% less than in the U.S. – and drug development costs are a tenth in India of what they are in the West.2

So if these forces of both push and pull are so strong, why haven’t Western pharmaceuticals companies set up full-scale R&D operations in the emerging world? Perhaps the most publicized concern has been intellectual property (IP) protection. It simply isn’t as strong or as dependable – in the sense of enforcement – as it generally is in the West. For example, it’s been estimated that in India, more than 10,000 small domestic companies are making copycat drugs for the local market3 and there is an ongoing IP ownership tug of war in China over Pfizer’s Viagra patent.

Other problems include intrusive, arbitrary regulation; the absence of some very specific skills among local populations; language incompatibilities and insufficient connectivity, particularly in rural areas.

Rethinking the R&D business model
Despite the hurdles – the overall argument for offshore R&D is attractive for large Western pharmaceuticals firms. But based on our analysis, IBM believes that these companies need to review four key aspects of their R&D approach before they can fully exploit this opportunity.

Research focus areas
At one time, pharmaceuticals companies could rationalize abandoning research into certain diseases because they’d been largely contained in the developed world. Now, rising social consciousness has drawn new attention to these diseases.

Poorer countries faced with life-threatening diseases are demanding the right to produce their own generic drugs without permission from patent holders, or to buy unauthorized generics from manufacturers in other companies. For Western firms, this presents a tough dilemma: collaborate with these countries, or expect them to rise as fierce competitors.

Pharmaceuticals firm Novartis took the collaborative approach. It developed its anti-malarial drug Coartem in concert with two Chinese partners: Kunming Pharmaceutical Corporation and Zhejiang Medicine companies. Interestingly, one of the drug’s core ingredients is derived from China’s sweet wormwood plant, which has been used in traditional Chinese medicine for centuries.

With its 95% cure rate, Coartem is proving crucial in the battle against malaria, which takes more than a million lives a year – the majority in Africa. As part of its philanthropic effort, Novartis is providing the drug at cost to developing countries where the disease is endemic. And of course the cost is lower when much of the R&D is conducted in the emerging world and particularly in this instance since the manufacturing is also being done in China.

One useful exercise pharmaceuticals companies can undertake is to evaluate their existing portfolios against the special needs of emerging markets. Existing drugs, diagnostic tools and treatments often require adaptation before they can be considered viable solutions. For example, some treatment regimes that would be routine in the developed world would be prohibitively expensive or inconvenient in the developing one.

R&D activities to perform offshore
Compared to research, the development stage of R&D is more labour-intensive, and spending on development constitutes about 70% of the total cost of R&D. As a result, shifting development activities to countries where labour costs are lower can have a substantial financial impact. It followed that activities like clinical trials and related data management were among the first R&D activities to be moved offshore.

But IBM’s study suggests it pays in many ways to move research offshore too. Driven primarily by a shortage of chemists in the West, most of the offshore research activity to date has focused on chemistry.

But other discrete discovery activities – like bioinformatics; and absorption, distribution, metabolization and excretion (ADME) – are attractive targets for offshore work too. ADME is a traditional bottleneck in the discovery process – but specialized outsourcing centers can often accelerate the normal turnaround.

As we considered the R&D lifecycle – all the way from target ID to production and manufacturing – we noted four characteristics that made a given activity especially suitable for outsourcing: 1) it causes bottlenecks in the process (primarily due to skill shortages; 2) it offers opportunities to reduce cost without comprising quality; 3) it relies heavily on patient pools, often larger or more effective in emerging markets; and 4) it taps skills and technologies that might already have been acquired through drug manufacturing experiences.

Still, before outsourcing a particular activity, it’s important to consider the impact that action might have on other activities. For instance, some companies that performed ‘commodity’ services like clinical data management offshore subsequently encountered knowledge management challenges.

Optimal locations
Certain combinations of research area and R&D activity will naturally point toward particular countries – because, for example, of the patient pools or labour skills. However, when looking at a location, companies should consider a wide range of characteristics, such as contract research organization (CRO) maturity, IP status, relevant cost and time benefits, test population potential, skills and experience of available professionals, IT and infrastructure availability, tax policies and more.

Because of the number of interrelated elements to consider across a rather extensive list of countries, some pharmaceuticals firms are using sophisticated evaluation tools. Pfizer, for example, is using a program based on a multidimensional model that evaluates 30 different countries.

Business model alternatives
Pharmaceuticals companies have a range of options in going offshore: from CRO, to exclusive CRO, to co-development, to build/operate/transfer, to setting up captive subsidiaries. As companies ponder the possibilities, they need to consider factors like their mid- to long-range plans; internal management resources and experience in outsourcing/offshoring; whether they have other local operations in the country (like sales, marketing, and manufacturing); the presence, size, and reliability of local external service providers; and the risk-adjusted costs of the various options.

As companies move more development offshore, IBM suggests a ‘staged’ approach to increase flexibility. For instance, firms can use international CROs that have offshore operations to test the waters.

Setting up their own operations in key strategic markets, and having partnerships in the others, can help companies capture more of the cost savings while retaining more know-how.

For research, IBM believes that companies should selectively pursue risk- and profit-sharing ventures in countries that enable special avenues of research.

Conclusion
As competition and opportunity continue to reshape how you view the world outside your main demand markets, you might want to ask yourself the following questions:

Are you approaching offshore options
strategically or mainly to cut costs?

How far down the research agenda do you have to go to find a research area focused on emerging markets’ priorities?

How can you collaborate with emerging countries to find affordable, practical treatments for neglected diseases?

Do you know which of your existing treatments are impractical for emerging markets, and why?

What percentage of your clinical trials and associated data management are performed outside the main demand market?

Thinking beyond development, which research activities are you planning to send offshore?

Are you equipped to collaborate interactively on a worldwide scale?

How much innovation are you buying from emerging markets?

Are you using a structured method for evaluation and selecting offshore activities and locations?

Rererences
1     Coster, Helen. “A billion Pill Poppers.” Forbes, July 24, 2006.
2     Kripalani, Manjeet. “India: Big Pharma.” BusinessWeek. April 18, 2005.
3     Ibid.

Heather Fraser is Global Leader, Life Sciences/Pharmaceuticals, IBM Institute for Business Value. She can be reached at hfraser@uk.ibm.com