For a business based on the effective protection of intellectual property, a robust regulatory and legal framework is a non-negotiable requirement. And steering a company through the complexities of disparate global legislatures is no mean feat.
This is why, with industry veteran Dr Daniel Vasella at the helm, Swiss pharmaceutical group Novartis can rest assured that its global expansion strategy is an informed one, against the backdrop of a rapidly changing pharmaceutical business landscape.
Some investment decision criteria are generic across all business sectors, because without political stability, for example, a global firm will be hesitant to risk investing assets, human or otherwise.
However, within the pharmaceutical industry, the legal and regulatory framework of a business location is the key factor. Dr Vasella says: “In our business, protection of intellectual property, good health care policies, labour laws and tax regime are all vital.”
And at no time has the importance of good governance been more tested by the firm than last year, when Novartis decided to withdraw a significant amount of planned investments from India over the next few years in response to an Indian court ruling that weakened intellectual property rights on new medicines.
Given that Novartis has a turnover of $36.75bn, India has a lot to lose. Dr Vasella says: “A predictable business environment with clear and enforceable rules is what we look for because the worst possible business environment is one in which you never know what your next move will be, or if if you should or shouldn’t invest in the country.”
The pharmaceutical patent laws in India are not, in Novartis’s view, compatible with the Trade-Related Aspects of Intellectual Property Rights agreement, an international agreement administered by the World Trade Organization that outlines minimum standards for intellectual property regulation.
Dr Vasella says: “The regulatory framework in India hampers the growth of a life sciences industry that could be bigger, grow faster and develop locally if they had better protection of intellectual property.”
According to Dr Vasella, China has been much better at implementing patent laws because although violations still occur, the government intervenes when those cases are discovered. Added to the emergence of a new generation of highly skilled scientists, China’s business environment has prompted Novartis to invest $100m in a new R&D facility in Shanghai.
“We are hiring as we speak, with our US, Chinese-born colleagues leading the enterprise,” says Dr Vasella. Although the firm is leasing a facility in Shanghai, construction began in April on a 38,000-square-metre site for approximately 400 scientists, located on Shanghai’s Zhangjiang Hi-Tech Park.
Singapore is another good investment location, according to Dr Vasella, because the country has invested in infrastructure, provides a secure environment for staff and is open to taking on talent from other countries to complement the local workforce.
“The government has invested in education and biotechnology to create a business environment with everything that is needed, including hospitals, academic centres and laboratory space,” says Dr Vasella.
Novartis has an R&D centre, the Institute for Tropical Diseases, in Singapore, to develop non-profit vaccines for diseases including malaria, tuberculosis and dengue fever.
In February, the firm announced the opening of a similar R&D centre in Siena, Italy. The Novartis Vaccines Institute for Global Health complements the Singapore centre by focusing on vaccines for diseases in the developing world.
The centre will employ 50 scientists within three years and will be co-funded by the Gates foundation and the Welcome Institute.
But there are challenges involved with operating in fast-growing markets. According to Dr Vasella: “The major challenge in rapidly growing markets is attracting and retaining talent.”
Dr Vasella says he knows of many companies across all industries where, in some markets, staff turnover reaches between 30% and 40%. “We are not in that bracket and have a global staff turnover in the low double digits but it does mean that we have to understand much better what makes the people tick,” he says.
In emerging economies, it is generally not all about the money, according to Dr Vasella. He says: “It is also about education – staff in these markets are so keen to learn that they are like sponges and their career outlook and how they can grow is important to them, as are the benefits a company can offer to them and their family.” It is a problem the firm must endeavour to address because every employee who leaves a year after joining costs the firm two years’ salary through training and investment in that employee.
In emerging economies, the human factor becomes more critical because there is a lack of managerial talent, says Dr Vasella. But that also depends on why the company is entering a market.
In manufacturing, for example, labour costs tend to be insignificant, although employers will need to pay more if they want reliability. “But for R&D there is no competition between cost and quality because quality is the one critical factor, he says.”
Dr Vasella adds that it is a mistake to invest on the basis of a cheap workforce alone: “The strategy might work for today and tomorrow but in the long term, if you look at places such as India, for example, salaries are sky rocketing.”
The size and potential of the market is also a key consideration when Novartis plans its global expansions. The percentage of the global market represented by emerging economies is just half of what it will be in a few years and it will outgrow the established industrial markets substantially.
Watching the industry
Dr Vasella says: “With every percentage point of GDP growth, health care expenditure grows proportionally at about 30%.” Added to that, industrialisation brings sedentary work habits and pollution, which in turn create diseases, which makes the medicine market grow.
However, with a significant slowdown in its US business, the firm may need to shift its focus to less mature markets which, despite their lack of openness and market orientation, have a huge commercial attractiveness in terms of size.
The firm has a large US operation, mainly based in Cambridge, Massachusetts, as well as the Genomics Institute of the Novartis Research Foundation in La Jolla, San Diego, near to the Scripps Research Institute.
Novartis is one of the world’s fastest-growing drug companies and earlier this year forecast another record year of net sales and earnings in its global businesses despite low single-digit sales growth at its core division in 2008.
Despite the positive outlook, Novartis announced a restructuring programme last December in a bid to adapt to global market changes.
Competition from cheaper generic drugs and a spate of product withdrawals has led to a cost-cutting effort, which has involved shedding 1260 jobs throughout its US sales and marketing arms to save $230m a year from 2008 onwards. Speculation about further job cuts is rife.
Dr Vasella says: “In some markets we are expanding rapidly and in other markets such as the US we are forced to rethink the model by which we go to market.” The firm had two major launches and three smaller ones last year in the US and nine in Europe, and therefore has to adapt its resource allocation to the product portfolio.
More to come
This restructuring will not be the last. Dr Vasella says: “Novartis is a flexible organisation and we will not get entrenched in a certain way of doing business. We constantly focus outward and adapt to market changes.”
The message from a man with more than 35 years of experience in the pharmaceutical business is clear: be absolutely sober in your decisions, be aware of what is going on in the market and make sure that you adapt accordingly.
Head office: Basel, Switzerland
Turnover: $36.75bn (2006)
Research centres: Singapore, California, Basel, Siena
Established: 1996 through merger of Ciba-Geigy and Sandoz
Employees and associates: 100,000
Global presence: 140 countries