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Jun 1, 2012 (Vol. 32, No. 11)

Emerging Markets Turn to Innovation

Governments Increasingly Seek to Build Their Economies through Life Science Investments

  • Shifting to High-Value Industries

    Perhaps the clearest sign of these countries as emerging sources of innovation is the concerted investment their governments are making to move their economies to high-value industries from a dependence on low-value commodities and manufacturing. They see biotechnology and other medical technologies as important drivers of economic growth and are investing heavily in education, infrastructure, and healthcare to develop homegrown industries to serve the needs of their people and fuel further growth of their economies.

    Russia may be the leader in this trend, leveraging its financial strength to gain industry expertise. Government-backed investment funds have been making significant bets in innovative Western life science companies that are willing to set up drug development and manufacturing facilities in Russia. Rusnano, backed by $10 billion in government money, has entered into a $760 million partnership with U.S. venture capital firm Domain Associates to back up to 20 companies willing to develop their compounds in Russia.

    China’s current economic plan calls for doubling biomedical R&D innovation funding from the previous plan to $300 billion. It seeks to make China the second-largest pharmaceutical market by 2020. South Korea has pledged increased funding for stem cell research, describing it as a “new growth engine.” Its drug agency approved the first therapeutic using allogeneic stem cells in January, developed by Seoul-based Medipost to regenerate knee cartilage using stem cells derived from umbilical cord blood.

  • Win-Win Opportunities

    Life science companies facing a difficult funding environment in the U.S. are finding that one cost-effective way to develop their drugs is through partners in emerging markets. They can gain access to capital to fund development while retaining rights to their products throughout most of the world.

    For example, Harbor Biosciences granted Sinopharm subsidiary China State Institute of Pharmaceutical Industry (CIPI) exclusive rights in China to three of its products in exchange for the Chinese government-owned pharmaceutical’s agreement to develop them. CIPI will finance all product development in China to two mid-stage compounds and one preclinical compound for major indications including diabetes, cancer, inflammation, and infectious disease.

    Besides being eligible for milestone payments and royalties for sales in China, Harbor retains all rights outside China and can use the clinical data generated by CIPI to seek marketing approval elsewhere. Harbor advances its products through development without having to provide any financial support to do so.

    By leveraging the needs in emerging markets, companies such as Harbor can obtain access to nondilutive financing, reduce development risk, and develop multiple compounds at once. For the emerging markets, these deals provide a way for these countries to build their economies, decrease their dependence on drugs produced outside their borders, and increase the high-value skills and technical skills of their workers as they address the health needs of their populations.

    Such agreements take on varying forms. Rusnano, for example, often ties its investment in Western biotechs with agreements to develop their compounds and commercialize them first in Russia. Its investment in two Massachusetts-based biotechs, Bind Biosciences and Selecta Biosciences, include providing each company with $25 million to set up wholly owned subsidiaries in Russia to advance the clinical development of their pipeline candidates. They expect Rusnano’s commitment to help them in their partnering efforts, as well as help them access global sources of funding.

    In other cases, deals take on the form of more traditional partnering arrangements. Maxwell Biotech Venture Fund, partially backed by the Russian government, licensed Maryland-based Sequella’s experimental antibiotic for the treatment of tuberculosis, which is an epidemic in Russia. Maxwell gains rights to the drug in Russia and neighboring Commonwealth of Independent States countries, where it will assume responsibility for further clinical development and regulatory approval.

    Sequella gets a partner that can navigate the product through the local regulatory agencies, an equity investment, clinical supply purchase, and milestone payments worth up to $50 million, as well as royalties. Plus, Sequella retains all rights to the drug in the U.S. and the rest of the world.

    In this way, companies can leverage an asset they may be ill-prepared to commercialize in an emerging market, and leverage the needs in those countries to accelerate development, cut costs, and reduce the risk of bringing those products to market in developed countries. At the same time, this global movement of technology and innovation can help boost the economies of the emerging countries and address unmet medical needs of their populations.

  • Challenges Ahead

    This is not to say that doing business in emerging markets will be easy. Other than their economic potential, emerging markets have little in common. Their demographics, governments, regulatory policies, economic structures, healthcare systems, and cultures are quite disparate and must be taken into account when devising an emerging markets strategy.

    Just as in developed countries, governments in emerging markets face increased pressure to rein in healthcare costs. In most of these countries, government regulations and policy are designed to benefit local companies, and demand that foreign companies wishing to do business in their markets establish local subsidiaries and partner with local firms. Their regulatory bureaucracies can be difficult to navigate, and businesses are often hampered by a lack of managerial expertise. Markets are often fragmented with many small players competing to get their products on official government lists of essential drugs.

    The potential market is huge, however, and governments see the importance of investing in the life sciences to build innovation-based economies that can provide high-quality jobs. They see innovation as the way to transform their societies for the better, especially amidst the austere economic conditions and global challenges facing the world today. The challenge for innovative companies is to understand and be able to take advantage of global opportunities when and wherever they may arise. Those that succeed are posed to reap huge rewards.

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