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Leverage China and India to Transform the Pharma Industry

Steven Pearlstein’s article - “Not What the Doctor Ordered” - in today’s Washington Post makes some excellent points about the self-imposed ills of the pharma industry. Here are some additional perspectives.

The pharma industry needs to figure out how to speed up its rate of new drug development while at the same time reducing the exploding costs of R&D. And, it needs to aggressively pursue new growing markets so that the rising costs of R&D can be spread over a larger scale. On both of these fronts, leveraging China and India (as talent platforms and as markets) is becoming increasingly important for the health of the pharma industry.

Each of these two countries produces five times as many chemists at the bachelor’s level and three times as many at the master’s level than the U.S. on an annual basis. And, this talent costs only about one-fifth to one-third of that in the U.S. Also, given the large populations and low income levels in China and India, enrollment in clinical trials can be fast, easy, and highly efficient as a single site can recruit a much larger number of patients. According to Jean-Pierre Garnier, the recently retired CEO of GSK, the cost of Phase II and Phase III clinical trials at a top notch academic medical center in India is less than one-tenth the cost of similar trials at a second-rate medical center in the U.S. In short, if a global pharmaceutical company wants to boost its innovative capabilities while at the same time trimming its R&D budgets, it must rely increasingly heavily on China and India as R&D platforms.

China, India, and other emerging economies are also becoming strategically important as markets. According to industry estimates, by 2017, pharma sales in just the big emerging markets are likely to be larger than those in the United States plus the top five European markets combined. In a highly scale-sensitive industry such as pharmaceuticals, going where the growth is becomes critical not just for the top line but also to be able to support growing expenditures on R&D.

Will the current economic turmoil result in a back tracking of globalization?

Many people think that the coming recession will lead governments in the U.S. and elsewhere to become more protectionist thereby slowing or reversing the ongoing march of globalization. I disagree for the simple reason that companies from the mature developed countries need access to high growth markets like China and India more than ever. Any protectionism in the developed countries will be met by a counter response thereby jeopardizing this much needed access.

Globalization refers to integration across economies. As the spread of the U.S. sub-prime crisis to the rest of the world has demonstrated, the world economy is more integrated than ever. As is also clear, a solution to this crisis has to be a globally coordinated one involving the developed as well as the major developing economies rather than isolated actions by individual countries.

Over the next five years, the primary growth opportunities will lie in the big emerging powerhouses (primarily China and India) and not in the developed markets of U.S., Europe, and Japan. Even as the U.S. and Europe head into a recession, China’s GDP is expected to grow above 9% in 2008 and around 8% for 2009. For India the predications are above 8% in 2008 and around 7% for 2009. Thus, for any established MNC, pushing for growth requires a deeper commitment to the pursuit of markets in China and India.

Another likely byproduct of the current recession in the U.S. and Europe will be a more intense push for cost reduction. As a result, companies are likely to be more eager to outsource value chain activities from countries such as China and India where the cost of blue collar labor is 1/20th and that of white collar labor 1/5th of the costs in the U.S..

For companies headquartered in China or India, the current economic turmoil means lower asset prices in the developed world creating more favorable opportunities to acquire valuable businesses. Thus, another outcome of the current economic turmoil is likely to be a more rapid globalization of the emerging dragons and tigers from China and India.

Roads Ahead for Chinese Companies Going Global

Chinese companies that aim to become the global giants of tomorrow must overcome their weaknesses in the soft skills - organization and leadership. Why? Chinese companies that become global will have their value chain activities geographically dispersed. Their key managers may come from many different nationalities separated by a huge distance of time, language and cultures. And so in that case, a command and control system doesn’t work. Of course, companies will always have hierarchies but if the person reporting to you is sitting 10,000 miles away, the fact that he or she reports to you is irrelevant because essentially it becomes a lateral, horizontal relationship.

Given China’s history of a more of a command and control economy, a culture that respects hierarchy, a country that’s relatively very homogenous, that the DNA of Chinese business leaders hasn’t taught them as a natural course how to work horizontally, how to work across diversity will be an immense challenge. And I think that’s the single biggest area where Chinese companies need to figure out how they build those capabilities.
And they’re working on that. But it’s something that is going to take time. China has the capital and the hard capabilities, but what still needs to be accumulated and cultivated and built are the soft capabilities.