TAKING ON THE WORLD

UK life science firms are entering new emerging markets; here Peter Rose discusses the main challenges that face them

In 2015, UK life science firms are making increasing moves into emerging markets as healthcare spending on home soil dries up. The National Health Service (NHS) set to achieve an unprecedented efficiency saving of £20 bn by March 2015 and a further efficiency target of £50 bn by 2020¹. Emerging economies are becoming increasingly appealing for all sizes of UK firms due to improved standards of living driving demand among the emerging middle class and increasing life expectancy, all of which are increasing demand for medical products. In fact, while the global pharmaceutical market will grow 4.5% a year on average to 2016, emerging markets are expected to average almost 12%².

A report by IMS Health suggests that pharmaceutical sales alone will exceed $1 trn by 2017 making it a rich market for clinical trials laboratories. Increased spending on medicines in emerging markets and new drugs for cancer and orphan diseases are identified as the main drivers for this growth. China, with a compound annual growth rate of 14-17% until 2017 is identified by this report as the most profitable area of expansion –  especially as it aims to have total healthcare coverage of its 1.35 bn population by the year 2020, equivalent to over $180 bn growth over four years³.

But businesses moving to pastures new are fully aware that with potential also comes risk, and that they will then face the challenge of navigating the varying complex national regulatory systems. When a new drug is developed, it is critical that Good Manufacturing Practices (GMP) is followed throughout the extensive laboratory testing and clinical trials stage in order to ensure that entry into an international market is speedy and risk-free.  Timelines of launch are critical to ensuring that research and development costs are covered early. It is not surprising, given this background that latest research by life-science consultants Maetrics,  shows that the biggest challenges facing the life science industry, with 50% of respondents, is compliance with emerging market regulation.

Regulatory compliance is a critical issue as fines can not only be particularly crippling for a smaller laboratories and businesses, but it can also expose them to reputational damage, patient safety issues, criminal sanctions and critically it can deter investors. Notably, a court in China recently imposed a fine of nearly £300 m on a global pharmaceutical firm for bribery. Compliance issues such as drug safety, counterfeiting, good laboratory practices (GLP) and government policies mean that every new drug being developed needs to be carefully planned to ensure it meets regulations in all markets it is going out to. Regulatory diversity in these areas means there is no ‘one-size-fits-all’, while reputational damage in new markets can impact the future of a company in that particular geography dramatically.

This research also found that in the UK specifically, the predicted £30 bn funding gap set to hit the NHS by 2020⁴ is a major concern with 43% of respondents confirming that reduced healthcare spending will be one of the main challenges they face this year. Additionally, a quarter (26%) of respondents are concerned about the stability of the economy. In December 2011, the government launched a ten-year Strategy for UK Life Sciences, setting out the long-term vision to support the growth of British life science small and medium-sized enterprises. The aim of this is to bring further investment into the UK life science industry, which helps allay fears about the economy and funding gaps whilst supporting innovation in the sector.

Research and development in the pharmaceutical area reportedly accounts for approximately £11.5 mn spent every day according to the Association of British Pharmaceutical Industry (ABPI), and the majority of this expenditure is funded from within the industry, highlighting how core the sector is to the nation’s growth and economy, but also how self-reliant it is. In 2013, 22% of the entire R&D activity in the UK was in the pharmaceutical sector alone and UK companies funded 66% of their R&D while 23% of investment came from abroad⁵. But with cost pressures continuing to increase, the recent downturn has left many life science companies fundamentally reassessing their business model, increasing their efforts on factors such as safety, personalised and targeted medicines, and network based collaborations⁶.

Whilst compliance and healthcare budgets were major concerns for respondents, the study shows that another key challenge for 2015 is new product launches, with 46% citing it as a top obstacle.  To encourage innovation in the UK, Patent Box tax legislation provides UK businesses with an incentive to perform research and development, however businesses also report that they face an industry skills shortage with 43% of respondents agreeing that finding specialised staff will be difficult.

This specialised staff shortage was initially highlighted by the ABPI in 2008⁷, but since then the issue has worsened and in 2012 the industry topped the PWC’s ‘talent challenge’ poll⁸. Indeed, one core aim for theStrategy for UK Life Sciences is to attract, develop and reward talent in the industry⁹. With businesses entering new emerging markets, it is important that their staff have the necessary skills, knowledge and experience to successfully navigate compliance issues abroad.

Finally, one in five respondents in the study reported that merger and acquisition activity will pose a challenge in the next year. Commentators universally acknowledge that M&A transactions almost doubled in 2014 compared to 2013 and this trend shows no sign of abating with activity still buoyant in early 2015. Pharmaceutical companies in the USA are continuing to make acquisitions in low-tax economies, but larger pharmaceutical companies are also focused on building capability in specific diagnostic areas in order to maintain a strong pipeline. The hunt for so-called ‘blockbuster drugs’ is keeping interest in smaller, specialised outfits and laboratories very much alive.

Whilst the concerns surrounding emerging market expansion remain for the life science industry, the opportunity for growth is potentially unprecedented. Key to success is having a strong quality and compliance team, whether internally or externally through a consulting partner. It’s clear that to fully leverage the opportunities in emerging markets, confidence in interpreting and implementing regulations will be an integral part. For laboratories, complying with good laboratory practice (GLP), implementing quality standards in drug research, development and testing, and understanding the situation in developing countries is critical.

The drive into emerging markets is bound to increase given the opportunities they present, however, despite the challenges that face UK life science businesses, the outlook is tentatively positive. The UK’s Patent Box strategy for example was intended to help UK laboratories to perform research and development and reduce migration of intellectual property, whilst improved access to data and technology helps generate insights that will encourage businesses to continue to identify emerging needs and new opportunities.

The author:

Peter Rose is Managing Director of Maetrics

Contact: prose@maetrics.com

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