GIM 2011 -
POSTED ON: 05 May 2011
RESEARCHERS: Cecil Brown, Gem George, Sylvia Jasaroska, Yohanne Kidolezi and José Ochoa
What do Boston, San Francisco, and Ho Chi Minh City have in common?
Each city houses biotechnology resources that help fuel regional and global economic growth. However, several trends make Southeast Asia particularly attractive when it comes to biotechnology. Biotech players generally agree that few blockbuster drugs remain to be discovered. Companies thus face increasing pressure to reduce costs incurred in the development of cures, a trend favoring newly emerging low-cost development hubs. What is more, Asian countries are increasing their expenditure on health care, thus opening up new and large markets for these biotech players.
This article examines the biotechnology ecosystems of Singapore, Thailand, and Vietnam along multiple dimensions to understand the role each region will play in the dynamically evolving global biotechnology value chain. It summarizes field research conducted by a team from Kellogg’s Global Initiatives in Management program that traveled to Southeast Asia in March 2010. The research concluded that Singapore is better positioned to conduct translational research, Thailand offers good capabilities for clinical trials, and Vietnam is stronger in biomedical manufacturing. Evidence for these conclusions is summarized below, along with the implications of each country’s biotechnology capabilities.
The Biotechnology Value Chain
The biotechnology value chain comprises of four main parts, the first two of which fall under R&D: (1) exploratory phase; (2) clinical trial; (3) manufacturing; (4) sales and marketing.
The exploratory phase involves the development of chemical compounds that have the potential to prevent/cure different diseases. This phase is often open-ended, and research very much depends on the researcher. Traditionally this phase was carried out in Western countries. Clinical trial, a routinely outsourced phase, involves testing of new treatments on human subjects. As little as 5 percent of drugs ultimately gain approval for public use. Failure in this step is very expensive. In the past, exploratory work and clinical trials were sequential and distinct, but the new field of “translational research” derives value from overlap and feedback between these phases. Manufacturing of biotechnology products is largely contracted out; biopharmaceutical manufacturing contracting was a $4.3 billion market in 2011, with 10 percent growth. Biotech companies are spending on average 30% of their total revenues on sales and marketing. This phase has traditionally not been outsourced. However, this has recently begun to change, as biotech players increasingly outsource sales as well.
Six Dimensions of a Successful Biotechnology Ecosystem
Research suggests six key dimensions to a successful national biotechnology ecosystem.
The government’s role includes its biotech-related incentives, relative stability, and policies attractive to foreign direct investment. A country’s regulatory and intellectual property environment determines the trust and the ease with which a major biotech company can setup operations in a country. Access to capital—from the government, venture capital funds, and industry partnerships—is crucial because developing a biologic is extremely risky and can cost as much as $2 billion over 15 years. Good location and infrastructure and availability of a skilled workforce will further enhance a country’s biotechnology ecosystem. Finally, local biotech needs will shape the biotechnology expertise a nation develops and the attractiveness of selling biotech products within its borders.
The government of Singapore, a country with well-developed infrastructure and proven technology capabilities, has invested billions to cultivate strength in biotech manufacturing and attract multinationals. The effort includes a comprehensive Biomedical Sciences Initiative seeking to employ 15,000 in the sector by 2015. Multinationals have responded, seeing the country as a low-cost manufacturing location. As competition from China and others mounts, Singapore is seeking to diversify into R&D. Can it become a global biotech hub?
The country scores very high on important dimensions like government and intellectual property (IP) protection. However, because of its smaller population, the country scores low on local needs and skilled resources. Interviews with public- and private-sector leaders suggest that many biopharmaceutical players would prefer to house operations in larger markets, particularly China and India, to gain access to talent and revenues for the clinical trials and sales/marketing portion of their value chain. Singapore is at a disadvantage here. When it comes to the R&D phase, multinationals most value the dimensions like IP protection, in which Singapore is strong. However, regulations in competing countries are improving, threatening Singapore’s dominance. We believe Singapore’s opportunity lies in translational research. The country’s small size and its tight collaborative network provide a unique opportunity in this area. For firms willing to partner in this area, Singapore offers strong financial and infrastructure advantages over other Asian countries and may keep this advantage far into the future, even as other countries come to dominate other stages of value chain.
Although Thailand boasted 165 biotech companies as of late 2009, multinationals are unlikely to partner with Thai entities on early-stage research due to challenges related to costs (e.g., well-established collective bargaining practices), IP protection (e.g., piracy), and skilled-workforce availability (e.g., very low unemployment). Still, foreign firms may look to acquire or license Thailand-based technology.
Thailand is also competitive as a provider of clinical trials. Outsourcing there is estimated to save 60 percent of US-based trial costs. Aside from a less expensive workforc, the nation offers faster patient enrollment and lower dropout rates, due partly to the large proportion of uninsured citizens. Thailand also provides a much higher patient concentration per trial site than the US and Europe. These features have helped the country become a premier clinical-trials provider, notably for a large HIV vaccine trial run by the US Army and National Institute of Health. Today, over 400 private-industry clinical trials are being run in Thailand.
Thailand is also seen as a prime “pharmerging market,” along with Argentina and Turkey, because of its strong market potential in biotechnology. Prominent local players include the VC-backed i+Med Laboratories, which makes diagnostics and medical devices.
Despite its past focus on generic manufacturing processes and copying proven concepts, Vietnam has potential to be a global biotech-manufacturing leader. For example, the country leads its region in the production and export of genetically modified foods. Its fast-growing and highly literate (92 percent of citizens 10 or older) population is another key asset. The number of university students doubled from 975,000 to 1.9 million between 2001 and 2007. Today less than 20 percent of the population is below poverty level. Moreover, Vietnam has a long history of biotechnology-specific initiatives, including for agriculture-focused research and public-private partnerships.
These features position Vietnam to be a leading manufacturer of mass-produced biotech products. But the country lacks the capability to perform other functions within the biotechnology value chain. For example, Vietnam lacks the population size and regulatory structure (e.g., it ranks 149th out of 176 countries on the Economist Intelligence Unit’s democracy index) to drive sales and clinical trials. Nonetheless, given foreign investors’ high regard for Vietnam (in 2007, Japanese investors voted the country the third most attractive globally) and its low cost structure, more biotechnology activities will likely take place there in the future.
It is clear that as Western biotech players offshore pieces of their value chain, Southeast Asia will play a increasingly important role. Singapore will continue growing its share in the upper part of the value chain, especially in translational research. Thailand’s large population and academic/healthcare infrastructure will help the country gain popularity as a clinical-trials provider. Vietnam will enjoy an increasing share of biologic manufacturing, given its attractive cost structure and literacy rate. These strengths are durable enough to withstand threats from larger neighbors, such as China and India. All things considered, Southeast Asia seems poised to occupy an critical and distinctive place in the biotech industry’s global future.