For an industry with a high risk profile, which eats up a lot of money over a long period of time, biotechnology in the current age of austerity has to be agile and adventurous. Drug discovery is becoming increasingly global, and as biopharma hubs across the world continue to evolve, we are seeing different economicscenarios play out.
Era of change
Biotech companies are having to be nimble as their business ecosystem undergoes considerable change. The traditional funding model of early-stage venture funding followed by initial public offering of stock is no longer so easy to achieve. With reduced capital available after the recession of 2008, there is a lot less available for start-ups, which in turn is impacting upon the level of new starts.
The focus for existing companies has been on conserving cash, and cutting costs through job reductions and the shelving of projects. Better cost efficiencies have been sought through outsourcing and overseas activities to capture relative cost advantages.
Their survival strategy has included more partnerships to spread risk and generate revenue, with a portfolio approach trying out different business models with different partners in different places. Big pharma continues to be a key source of funding through acquisitions and various types of partnerships. Biotechnology innovation is helping to address big pharma’s declining drugs pipeline. This is a major issue, with the need to replace blockbuster drugs currently coming out of patent protection.
The pharmaceutical industry is undergoing a major change. As well as its declining R&D power, it is facing healthcare reforms in many of its major markets; emerging economies are producing huge middle-classes, and with them growing prosperity; and in mature economies, government budget deficits are generating spending cutbacks and higher taxes. Significant business transformations are under way, including cost-cutting and closures, divesting to focus on core health areas, outsourcing to lower cost locations, creating new areas of business, and moving in to new geographies.
These changes are affecting the location of biosciences activity, and there is a marked difference in performance between the more established and the newly emerging bio locations.
California is the undisputed biomedical champion region, accounting for 12% of the total global biopharmaceuticals pipeline. Comprising hubs in the San Francisco Bay area, Los Angeles County, Orange County and San Diego County, it has 2224 biomedical companies, directly employing about 268,000 people. It is the largest biomedical cluster in the world.
However, it is facing a number of challenges. The California Healthcare Institute’s Biomedical Industry Report for 2011 has identified that for the first time since 1993 when its records began it has seen the biomedical industry shrink, with a loss of nearly 6000 jobs between March 2008 and March 2010. The recession has hit hard, with losses in the areas of basic research, medical devices, instruments and diagnostics, and in the wholesale trade.
Pressing issues that California needs to resolve include a severe 2011-12 budget deficit (estimated to be about $25bn) which raises the spectre of higher taxes and the potential for reductions in public science research and education spending.
There is also the issue of healthcare reform in the US, which is going to have major implications for biomedical business. Red tape has been highlighted, with the US Food and Drug Administration needing to become more user-friendly to the biomedical industry. Another area identified for improvement is the workforce training needed for positions in fast-growing areas such as personalised medicines, biofuel processing, and stem cells.
The California Biomedical Industry Report highlights that 80% of biomedical company CEOs in California have been “courted” by other locations across the world in the past year.
California has every element of the biomedical industry ecosystem, and with big names such as Genentech associated with it since the early 1980s, it has both depth and width. According to figures from fDi Intelligence, it is the fourth most popular FDI destination for biotech, and is the world’s leading source of biotech FDI, accounting for 13% of all recorded biotech FDI projects since 2003.
China is making a long-term strategic investment in building up its life sciences base. Its ambitious 'Healthy China 2020' programme is significantly reforming healthcare provision to its 1.4 billion population and opening up new business opportunities. It is changing patent laws to be more attractive to overseas companies by investing heavily in life science education and research and tapping into the Chinese scientific diaspora.
One of the growth hotspots in China for biopharmaceutical activity is the city of Wuxi in Jiangsu Province. Situated at the centre of the Yangtze Delta, it is about 30 minutes from Shanghai by high-speed train. It started early in biopharma with Sino-Swed, the first foreign-invested biopharmaceutical company to set up in China in 1982. Since then it has attracted many other big names such as Astra Zeneca, Pfizer, GE Healthcare, Siemens and Rhodia. It has also created the largest pharmaceutical R&D outsourcing enterprise in China – Wuxi Pharmatech, which was listed on the New York Stock Exchange in 2007.
In 2010, the biopharmaceutical industry in Wuxi had total revenue of $3.63bn, and it attracted 16 large overseas investments. This includes a $50m expansion by Astra Zeneca for an Asia-Pacific logistics and packing centre, and Sigma-Aldrich investing $50m in a new factory and product service centre.
The Bureau of Commerce in Wuxi points to a number of business support measures available. Biopharma companies can secure a reduction in their corporate income tax, from 25% to 15%. There are grant incentives for biopharmaceutical start-ups (up to Rmb1m, or $152,000) provided within one month after enterprise registration. Venture capital is provided to R&D start-ups from government funds after the relevant approval process. Offices and apartments can be provided to start-ups to use for free for up to three years. Products produced in Wuxi have priority in government purchasing by Wuxi City and Jiangsu Province.
Wuxi provides a prime example of the impressive growth in bio business that China is achieving. All companies active in biotechnology and pharmaceuticals now need to consider China as they think about the future of their business.
Douglas Clark is a director at FDI consultancy Location Connections.