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This chapter is from the book

Navigating the New World of Global Innovation

The recent trends described in the preceding sections are powerful enough to have transformational impacts on the life science–based industry. Short of some unforeseen world cataclysm, the trends look unstoppable. The new reality of global innovation presents companies with unprecedented opportunities to tap into the comparative advantages of nations, regions, companies, and scientific institutions around the world. In principle, this should allow considerable efficiencies, cost savings, and access to the best talent and to new growing markets. Openness to trade and investment, respect for international IP regulation, and the rapidly improving science and innovation capabilities in key emerging economies mean that we are reaching a new, broader and deeper phase of globalization. More efficient division of labor among countries and regions and the new efficiencies thus gained should result in accelerated scientific discovery and innovation, along with new and better products and processes for the world.

This is a tantalizing vision, but as experience with earlier phases of globalization shows, getting there may not always be a smooth ride. Resistance will come, and both losers and winners will emerge. As R&D resources are relocated to emerging economies, some facilities in Western countries are being closed down or downsized. For example, a number of important pharmaceutical labs in Europe have already closed, and more may follow, as Table 1-6 shows.

Table 1-6. Examples of Pharma Laboratories Shut Down in Europe—Will Europe Become a Cemetery of R&D Labs?38

Company

Countries Where Labs Were Closed

Merck

Italy, Spain, and others

AstraZeneca

Spain, Belgium, and Sweden

GlaxoSmithKline

UK

Sanofi Aventis

Ireland, more closures announced

Pharmaceutical companies do not like to announce R&D lab closures, so the real list is longer than what Table 1-6 presents. European governments have seen the danger of Europe becoming a "graveyard of pharma labs," with some major companies relocating to Asia and other competitive destinations. A study commissioned by Leem, the French pharmaceutical industry association, estimates that 32,000 pharmaceutical jobs may be at risk between 2005 and 2015 unless appropriate policy responses are adopted.39 The danger for the old continent is of gradual dissipation of European capacities to perform certain types of R&D. Depending on their strengths in science and innovation, European countries are exposed differently to the risk: Southern European countries such as Italy are more vulnerable than, say, the United Kingdom which regards itself as a powerhouse in the life sciences area. Some European governments are establishing "countermeasures" against the offshoring trend: For example, France recently announced a strong program of government actions designed to attract international R&D investments. The program includes offering tax incentives, linking French universities into large specialized consortia, and building new competitive campuses and clusters with mixed funding from both the public and private sectors. As the new emerging powers upgrade their R&D capabilities; build science, technology, or knowledge parks; and create special economic zones, Western nations will respond. They cannot match the Asians and others on costs. Instead, they are concentrating on the quality of science and infrastructure—and some are not shy about employing national and regional government subsidies.

This new truly global competition to attract R&D investment provides companies with opportunities to pick and choose, to find the best research groups and the most promising projects, and to spread their risk. To be able to fully take advantage of the range of new opportunities, companies must rethink their strategies and change their structures. We present an overview of how different global pharma companies are reinventing R&D strategies in Chapter 7.

As we indicated earlier, the traditional business model for science-based businesses such as pharmaceuticals relied on the company's own R&D capability to develop new products, which the firm then produced and marketed to generate profits on its own. This model is generally viewed as obsolete. In the age of global R&D, with many new entrants and research centers around the world competing for and contributing to innovations, it no longer makes sense for even a big company to go it alone. Any science-based business, whether in biotechnology, pharmaceuticals, or medical devices, needs to contain costs, enter new emerging markets, and constantly improve R&D productivity. Even the largest companies are using networks of partnerships for a variety of business functions, including research.

Beyond the disruptive changes in the economics of R&D, the life science-based industries are undergoing a period of changes in markets, politics, and the public systems of support and regulation governing food production, energy, and healthcare. Companies face decisions about how quickly they want to change and how to restructure their model of business.

Some companies, such as Lilly and Merck, have moved aggressively; others, such as French pharma giant Sanofi-Aventis, announced major changes only recently. Lilly is quickly transforming itself from a vertically integrated pharmaceutical company into a fully integrated pharmaceutical network that outsources most functions. Merck has chosen to close many of its R&D labs in Europe and relies on a network of collaborative partnerships that include R&D, drug development, and technology licensing. Recent deals include several Indian companies, including Orchid and Ranbaxy, which have been chosen as partners for joint development of novel drugs.

GlaxoSmithKline, Pfizer, and Novartis have used corporate venture capital funds. This approach involves investing in a portfolio of companies in return for a share of the intellectual assets and growth opportunities instead of outsourcing tasks (see www.eba.com.ua). Such venture investments are carefully targeted and may be either specialized in a niche area or diversified to spread risk. The investor company may choose to eventually claim the IP and outlicense it to a third party. Companies also can extend the model much further, to include players from emerging economies; this has already started to happen.

No single business model serves everyone, so companies pursue their own mix of strategic approaches, combining outsourcing with geographic diversification and venturing. One part is certain: The model of the vertically integrated pharmaceutical company is largely gone. Moving to some form of the collaborative network model must include the dimension of truly global thinking. And today, global means not just the developed world, but also, increasingly, emerging economies, with their potential role as collaborators in R&D as well as creators of intellectual property.

Of all the forms of business expansion and diversification, geographical expansion is the most difficult and most risky. Assumptions, especially those about human behavior, are often proven wrong. Institutions and cultures in other countries work differently, and the economics of operations may be surprisingly different. Therefore, many Western life science–based companies have been cautious about taking full advantage of the many opportunities for collaboration with emerging economies—and not just because of fears of IP dissipation. Lack of knowledge of the quality of the public research institutions and the private companies in high-potential emerging economies has been responsible for the underperformance in many areas of offshoring, including R&D, where the scope for beneficial collaboration is much higher than what exists today. Pioneers or early movers such as Novartis can take advantage of the best opportunities for tapping talent and working with the best research teams in the emerging world. The globalizing companies are also likely to profit from the ability to place more "bets" on discovery targets and take advantage of low costs, tax incentives, and hidden subsidies. In any event, companies should be up-to-date in their ability to assess and understand the present and future innovative potential of emerging economies. This book may help them do just that.

In the following chapters, we take the reader on a tour of the most important future centers of innovation in the key emerging economies that have recently joined the global R&D race. We look at their national and regional policies of support for innovation, including science and education reform and manpower development in Chapter 2, and clusters and bioparks in Chapter 6. In Chapter 3, we evaluate the potential and maturity of the emerging markets for pharmaceuticals and related sectors. In Chapters 4 and 5, we explore Western companies' offshoring of discovery and clinical trials to emerging markets. Chapter 7 reviews the new R&D strategies and recent R&D investments in emerging economies made by leading international pharma companies.

The two giants of Asia, China and India, feature prominently in our journey. The two countries so far are attracting the majority of Western collaborative and investment projects in the biopharma industry. China currently has the greater potential, but India is in some ways easier for Westerners to work with and may have the greater growth potential in the industry for the long term. Today the "older tigers" of Asia—Singapore, South Korea, and Taiwan—have become advanced economies with significant high-tech capabilities. In terms of cost, Singapore is as expensive as most Western destinations but offers a world-class business and science environment. South Korea and Taiwan have advanced engineering and precision equipment industries and offer sophisticated business environments at lower cost, compared to Singapore. All three countries have ambitious programs for life science industry development. Thailand and Malaysia are less developed but are cheaper and have made rapid progress recently. These two "new tigers" may become destinations of choice in specialized areas such as food-related biotechnology, in the case of Thailand. The newcomer in the Western Hemisphere is Brazil, which not only is a key future market, but also is attracting clinical trials and research collaboration and has vast potential in bioagriculture and bioenergy.

Looking at R&D and innovation from such a truly global perspective presents myriad choices and opportunities. To take advantage of this enormous potential for successful collaboration, companies must be prepared. They must change their business models, strategies and structures, and cultures and attitudes. This is a complex and challenging process, and this book can help them succeed.

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