Changing Patterns for Global Pharmaceutical Growth

Led by the United States, the North American pharmaceutical market accounts for almost half of global pharmaceutical sales, but select countries are increasing their share of the global market. By 2020, Brazil, China, India, Indonesia, Mexico, Russia, and Turkey are projected to account for almost 20% of the market. In addition to changing patterns for pharmaceutical industry growth, emerging countries also are stepping up their role in operations for drug development.

Shifting patterns of global pharmaceutical growth

In 2006, pharmaceutical sales in North America, which accounts for 45% of global pharmaceutical sales, grew 8.3% to $290.1 billion, up from growth of 5.4% in 2005, according to (Fairfield, CT). Sales in the five major European markets (France, Germany, Italy, Spain, and the United Kingdom) increased 4.4% to $123.2 billion, down from 4.8%-growth in 2005. Thus, 2006 was the third year of slowing performance. Sales in Latin America grew 12.7% to $33.6 billion, and sales in Asia Pacific (outside of Japan) and Africa grew 10.5% to $66 billion, according to IMS. Japan's pharmaceutical market declined 0.4% in 2006 to $64.0 billion, the result of the government's biennial price cuts.

While established markets in Europe and Japan showed slowing pharmaceutical sales, China and India saw robust sales growth in 2006. Pharmaceutical sales in China grew 12.3% to $13.4 billion in 2006, compared with growth of 20.5% in 2005, according to IMS Health. This slowdown in growth resulted from the government's introduction of a campaign to limit physician promotion of pharmaceuticals, according to IMS. India was one of the fastest growing markets in 2006, with pharmaceutical sales increasing 17.5% to $7.3 billion.

"Last year, India transitioned from a 'developing' market to an emerging one, with many multinational pharmaceutical companies tapping into the huge potential this market offers," said Ray Hill, IMS's general manager of global consulting, in a company release. "Several factors, including the acceptance of intellectual property rights, a robust economy, and the country's burgeoning healthcare needs, have contributed to accelerated growth in that country."

Overall, 27% of total market growth is now coming from countries with a per-capita gross national income of less than $20,000, according to IMS Health. As recently as 2001, these lower-income countries contributed just 13%.

Importance of emerging countries

The growing importance of emerging countries to the future of the global pharmaceutical market is also underscored by a 2007 analysis by (New York). By 2020, the global pharmaceutical market is expected to more than double in value to $1.3 trillion, and the seven emerging (E7) countries of Brazil, China, India, Indonesia, Mexico, Russia, and Turkey could account for as much as one-fifth of global pharmaceutical sales. That growth parallels overall improving economics for the E7 countries. The real gross domestic product (GDP) of the E7 countries is projected to triple from $5.1 trillion in 2004 to $15.7 trillion in 2020, but real GDP growth of the G7 countries (Canada, United States, France, Germany, Italy, Japan, and the United Kingdom) will grow by 40% from $25.8 trillion to $36.1 trillion, according to the PricewaterCoopers report, "Pharma 2020: The Vision, Which Path Will You Take?"

Growth of offshore drug-development activities

The rise of domestic pharmaceutical markets also is changing the participation of those countries in drug-development services. A 2006 analysis by the points to the growing partnerships between multinational pharmaceutical companies (MPCs) and local companies in India.

"India's greatest attraction is its promise of near-immediate gratification for MPCs that seek to enhance chemistry-related activities and accelerate clinical trials," said senior partner John Wong, regional chairman of Boston Consulting Group's Asia-Pacific region and a coauthor of the 2006 report, "Harnessing the Power of India: Rising to the Challenge in Biopharm R&D", in a company release.

"Deciding whether to engage in India is not nearly as difficult as deciding how," said Simon Goodall, partner at Boston Consulting Group and coauthor of the report. "The key to any game plan in India is to determine which services best support your strategy and which options will foster success. When it comes to a strategy for investing in India, one size does not fit all."

He points out that each company must establish its own approach and take into consideration variables such as previous offshoring experience, concerns about security and control, aversion to risk, and budget. The most critical influence on a company's chosen approach is the nature and scope of the planned activities. Clinical trials, data management, or less complex chemistry activities, for example, might be safely outsourced to an established local vendor, according to the Boston Consulting Group study. Advanced chemistry work or preclinical trials, in contrast, might require a local collaborator with proven end-to-end capabilities or a captive facility tooled with top-notch equipment and staff.

The report points out that the multinational pharmaceutical companies should take at longer-term perspective when evaluating India as source for operations. This approach would consider operations as part of a global network rather than a short-term solution for less expensive custom synthesis or biostatistics work.

Big Pharma positions in India

The growing role of India in the pharmaceutical value chain is also evident in increased partnerships with Indian drug-development companies and by internal investment by the pharmaceutical majors in the region.

Earlier this year, (New York) unveiled plans to expand its research and development capabilities in India. The company said it will "significantly" increase the scope of its existing relationship with (Bangalore, India) to further develop integrated capabilities in India in medicinal chemistry, biology, drug metabolism, and pharmaceutical development. Under the terms of the agreement, Biocon, through its subsidiary Syngene International, will work with Bristol-Myers Squibb to establish a research facility in Bangalore that could ultimately house more than 400 scientists to help advance Bristol-Myers Squibb's discovery and early drug development.

In a separate multiyear agreement, Bristol-Myers Squibb expanded its relationship with (New York) to include support for clinical data and document management, pharmacovigilance, and scientific writing functions in India. Accenture will also provide maintenance and support for research and development (R&D) information systems. Bristol-Myers Squibb will use Accenture's life- science centers in Bangalore and Chennai.

In March 2007, (London) opened a new $15-million process R&D laboratory next to its R&D center in Bangalore, India. The new 8000-m² process R&D facility can accommodate up to 75 scientists. The facility is AstraZeneca's only process R&D facility outside of Europe and is the company's fourth such facility overall. The company also has two process R&D facilities in the United Kingdom and one in Sweden.

China's role in the pharmaceutical value chain

Just as India is raising its profile in the pharmaceutical value chain, so is China, and key considerations for the pharmaceutical industry are how to position its drug-development activities in India and China and how to balance internal operations and outsourcing activities in those countries.

While analysts say the offshoring strategies should involve both countries in the near and the longer terms, China and India require differing business models. "Outsourcing some of a company's 'excess' leads to India is a great way to quickly ease bottlenecks and access a broad and reliable vendor base," said Kim Wagner, partner at Boston Consulting Group and coauthor of the 2006 report "Looking Eastward: Tapping China and India to Reinvigorate the Global Biopharmaceutical Industry," in a company release. "In contrast, the optimal business model in China is generally the captive R&D center, which helps ensure a stake in that country's huge potential market in the longer term."

China's increasing significance in the R&D strategy of the pharmaceutical majors can be seen by several recent investments.

In May 2007, (GSK, London) opened a new R&D center in Shanghai. GSK R&D China will focus on research into neurodegeneration with the goal of creating new medicines for disorders such as multiple sclerosis, Parkinson's disease, and Alzheimer's disease. The center will eventually direct the global discovery and development activities within its therapeutic area from drug-target identification to late-stage clinical studies, while collaborating with research institutions elsewhere in China and other countries.

GSK also has a growing R&D presence in China. For the past decade, the company has collaborated in discovery with the Combinatorial Chemistry Laboratory at the , the drug-research institute of the Chinese Academy of Sciences. In development, GSK started 17 clinical studies in China during 2006 and plans an additional 18 in 2007, according to a 2007 GSK press release.

GSK has its Chinese headquarters in Shanghai and major offices in Beijing, Tianjin, and Hong Kong. The company employs more than 2200 people in China and pursues all its businesses there: prescription medicines, vaccines, and over-the-counter medicines. It has manufacturing plants in Shanghai, Tianjin, and Suzhou.

In November 2006, (Basel, Switzerland) announced plans to invest $100 million to build an integrated biomedical R&D center in Shanghai's Zhangjiang Hi-Tech Park that will become an integral part of its global R&D network. R&D activities at the site will initially focus on addressing medical needs in China and Asia, particularly infectious causes of cancer endemic to the region.

"The Shanghai center will allow us to combine modern drug-discovery approaches with those of traditional Chinese medicine that have been used to treat patients in China for thousands of years," said Daniel Vasella, chairman and CEO of Novartis, in a November 2006 press release. "This new research center will help Novartis contribute to the needs of patients in China and elsewhere and has the potential to become a global center for biomedical innovation."

The Shanghai center will become the eighth site within the Novartis's R&D network. Scientists will initially work in a 5000-m² start-up facility that was scheduled to open in May 2007. Construction of a permanent 38,000-m² facility for approximately 400 scientists will begin in July 2007. The site will also include an integrated exploratory development center that will closely collaborate with basic research and local academic centers to further develop the concept of mechanism-based medicine and leverage emerging new technologies.

Novartis ranks as the fourth-largest pharmaceutical company in the Chinese hospital market with a compound annual sales growth rate of more than 30% during the last five years, according to the company. In February 2006, construction began on a $83- million development and production plant in Changshu, Jiangsu Province, scheduled to open in 2007.

The company also has R&D collaborations with Chinese partners. Novartis has a research partnership with the to identify and test traditional medicines for pharmacological properties. It also established collaborations with the pharmaceutical R&D service company in (Shanghai), the , and (Kumming, Yunnan, China).

In March 2007, named Shanghai's Zhangijang Hi-Tech Park as the initial base for its new Innovation Center China (ICC). The ICC was first announced in May 2006 as part of larger $100-million R&D investment package and is the primary focus of AstraZeneca's latest investment in China. The facility was scheduled to open in mid-2007. AstraZeneca already has 2900 employees in China and a manufacturing site at Wuxi, Jiangsu Province and clinical research facilities.

In March 2007, (Bagsvaerd, Denmark) and the (CAS, Beijing) established a joint research foundation in China. The aim of Novo Nordisk-Chinese Academy of Science Research Foundation is to fund or cofund activities of common interest within the fields of diabetes and biopharmaceuticals, including related disciplines and technologies such as protein chemistry, immunology, inflammation, toxicology, oncology, endocrinology, and drug delivery.

In January 2002, Novo Nordisk established an R&D center in Beijing. After five years of R&D activity in China, Novo Nordisk decided to cooperate with CAS and fund $2 million in supporting research in diabetes and biopharmaceuticals.

In 2006, Novo Nordisk expanded its production facilities in Tianjin, China and designated the Tianjin plant as Novo Nordisk's primary production base in the Asia Pacific region for supply to China and export markets. The expansion included a new assembly plant for Novo Nordisk's "NovoPen 3" insulin pen as well as an expansion of current packaging facilities for "Penfill" insulin cartridges and "FlexPen" prefilled insulin pens. Novo Nordisk's first plant in Tianjin was built in 2002, and the new plant was built on its existing 40,000-m² site.

In December 2006, (Whitehouse Station, NJ) extended and expanded an agreement through which the contract R&D firm (Shanghai) for providing chemistry-related R&D services. The ecompanies first signed a pact in 2003, and the new agreement is effective through 2010. The new agreement increases the number of full-time WuXi scientists assisting Merck and includes a broad range of functional services including synthesis, process research, and medicinal chemistry.

Reflecting the growing importance of China in its business strategy, (New York) held its board of directors meeting in Shanghai last October, marking the first time the company had convened this meeting in China. Pfizer has invested more than $500 million in China as of October 2006, according to a Pfizer China press release.

Investment in other emerging pharmaceutical markets

In addition to China, the large pharmaceutical companies are also investing in other emerging pharmaceutical markets.

In April 2007, Novo Nordisk inaugurated a major expansion of its production facilities in Montes Claros, Brazil. The new 37,000-m² plant is the largest manufacturing facility of Novo Nordisk outside Denmark and represents an investment of approximately $200 million. According to Novo Nordisk,the facility is the largest single investment in the history of the pharmaceutical industry in Brazil.

The new unit will increase Novo Nordisk's insulin manufacturing capacity in Brazil significantly. The plant will formulate and fill insulin into 3-mL "Penfill" cartridges, which are used in the company's pen systems. Approximately 95% of the total volume produced in the Montes Claros plant will be exported to other countries such as Germany, Austria, the United Kingdom, Ireland, Australia, New Zealand, Canada, and later to several developing countries.

Novo Nordisk recently approved an additional investment of $50 million for the construction of a manufacturing facility for the "FlexPen," prefilled insulin pen in Montes Claros. The new FlexPen facility is expected to become operational by 2009.