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Go East, Old Man

6 December 2011 By Robert Cyran

Drug research tends to follow spending. Take Merck’s pledge to invest $1.5 billion in research and development in China over five years. Emerging economies’ citizens are growing wealthier and living longer, while their governments’ fiscal health is robust. Merck’s step suggests the pharmaceutical industry’s 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 China’s 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 artist’s atelier doesn’t have to be next to a patron’s 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 – both far more common in China than elsewhere – if they do research and trials on the ground.

Western worries over intellectual property theft haven’t gone away. Merck’s 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 People’s Republic, Merck and competitors like Novartis are establishing bridgeheads in an important market. They won’t be alone. For drug companies, “Go East” is likely to be a reliable refrain for at least the next decade.


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