Health Care: Breaking Down Barriers
Although our analysis of the health-care industry covers primarily the research side of the equation, both sides are seeing significant growth, as companies look to promote open innovation in pure research, while conducting more and more of their clinical testing and development in LCCs all over the world.
Overall, R&D in the health-care sector grew by $11 billion in 2007, bringing the total to $109 billion, second only to computing and electronics. The sector’s sales increased by 9 percent, to $813.6 billion, while R&D spending grew by 12.8 percent; as a result, R&D intensity in the industry grew to 13.4 percent of sales in 2007. That level of intensity is almost 10 percentage points more than the overall average for the Global Innovation 1000; only the software and Internet sector invests at a higher rate.
Despite the sector’s high level of investment, health care’s global research footprint is significantly less diverse than either autos or C&E, and much of the sector’s money continues to be spent in the developed world. The U.S., where 58 percent of the health-care companies we analyzed are based, accounts for 53 percent of the industry’s total spend, or $49.8 billion, and U.S. companies export just 46 percent of that total. Meanwhile, companies based outside the United States import $11 billion into the U.S., bringing net exports from the U.S. to just 23 percent of the total. Compare that to China, which is the only LCC among the top 10 spend locations, with just 3 percent of the total spend in the industry.
When it comes to sending R&D offshore, and especially to LCCs, first-mover status belongs to development, not research. We estimate that about 70 percent of health-care R&D is devoted to development; about two-thirds of the development money is spent on clinical trials, and the rest goes to process development, regulatory filings, and the like. At present, about 15 to 20 percent of the money spent on clinical work is going to countries outside the U.S., Europe, and Japan. Meanwhile, the research side has been much slower; in 2007, close to 95 percent of the money going into drug discovery was spent in the U.S., Europe, and Japan.
Why have companies’ clinical efforts moved faster offshore than pure research? Because they need access to people willing to participate in clinical trials of new drugs, and they need to perform those trials cost- effectively. In addition, access to emerging markets is becoming an important factor for health-care companies choosing where to locate R&D, as these markets become wealthier and their middle classes grow in size. Piracy concerns have also inhibited pure research. Those are waning in significance, however, as countries such as China and India establish stronger mechanisms for protecting intellectual property.
Furthermore, until recently the skills and capabilities to perform basic health-care research didn’t exist outside the West. That, too, is changing as the skills base in other countries improves. Western health-care companies are beginning to establish collaborative efforts with universities and other entities in emerging markets to take advantage of that improvement. Novartis AG, for instance, recently opened a major R&D facility in Singapore to conduct research on tropical diseases, and Merck & Company Inc. has been working with INBio, a nonprofit group dedicated to maintaining biodiversity in Costa Rica, to gain access to promising natural compounds.
Much of this research activity is directed at solving an ongoing problem faced by the entire pharmaceutical industry: Over the past decade or so, the industry has come up with few novel and even fewer blockbuster drugs. The old “Big Pharma” research model, centered on chemistry-based, or small-molecule, drugs, relied on automated processes to find drugs that worked against a known disease target. And the science behind those targeted disease areas was better understood than the science in disease areas that are currently the biggest challenges for society, such as obesity, cancer, and central nervous system disorders.