Pharma center of gravity shifts eastward
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Drug research tends to follow spending. Take Merckās pledge to invest $1.5 billion in research and development in China over five years. Emerging economiesā citizens are growing wealthier and living longer, while their governmentsā fiscal health is robust. Merckās step suggests the pharmaceutical industryās center of gravity is shifting eastward accordingly.
Growth in developed markets, where drug companies make most of their sales, is slowing to a crawl. The blockbusters of a few years ago are losing patent protection, while strapped governments are clamping down on the prices they are willing to pay for state-funded medical programs. The United States, which accounts for more than a third of total revenue for the sector, saw drug sales increase only 2 percent last year according to IMS Health.
In some emerging markets, by contrast, drug sales are growing 20 percent a year or faster. And Chinaās importance cannot be overstated. It will become the second-biggest drug market in the world by 2020, IMS reckons, as the government implements its $125 billion basic healthcare plan for all citizens.
While an artistās atelier doesnāt have to be next to a patronās palace, it makes sense for pharmaceutical companies to follow the money. Research and development is cheaper in developing countries, partly because places like India and China are pumping out lots of science and engineering graduates. The quality of these researchers and the clinical trials they perform can fall short of the rigorous standards established in developed markets. But both seem to be improving. Also, Merck and its rivals have a better chance of success fighting diseases such as Hepatitis B and esophageal cancer ā both far more common in China than elsewhere ā if they do research and trials on the ground.
Western worries over intellectual property theft havenāt gone away. Merckās move is modest: a $300 million annual R&D budget in China would only add equate to 4 percent of the $8 billion the company is on track to spend this year. But by investing in the Peopleās Republic, Merck and competitors like Novartis are establishing bridgeheads in an important market. They wonāt be alone. For drug companies, āGo Eastā is likely to be a reliable refrain for at least the next decade.