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 / Winter 2008 /Issue 53(originally published by Booz & Company)


Beyond Borders: The Global Innovation 1000

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.

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  1. Vinay Couto and Arie Y. Lewin, Next Generation Offshoring: The Globalization of Innovation (Duke Center for International Business Education and Research, 2007): Examines trends in global offshoring practices and analyzes why and how companies go about globalizing innovation and seeking talent globally, and what challenges they face.
  2. Vinay Couto, Arie Lewin, Mahadeva Mani, and Vikas Sehgal, “Offshoring the Brains as Well as the Brawn,” Booz & Company/Duke Center for International Business Education and Research, July 2008: Shows how providers of outsourcing services are increasingly performing innovation work, such as new product development and R&D.
  3. Kevin Dehoff and Vikas Sehgal, “Innovators without Borders,” s+b, Autumn 2006: Provides comprehensive insight into the market for offshored engineering and technical services.
  4. Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (Farrar, Straus and Giroux, 2005): Bestseller analyzing the progress of globalization with an emphasis on geo-economic trends.
  5. Thomas Goldbrunner, Yves Doz, Keeley Wilson, and Steven Veldhoen, “The Well-Designed Global R&D Network,” s+b Resilience Report, 05/15/06: A study of cross-boundary innovation networks worldwide showing low-cost, high-value ways they can be designed.
  6. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: The 2007 study, identifying two primary success factors in innovation strategy: aligning the innovation model to corporate strategy and listening to customers every step of the way.
  7. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Smart Spenders: The Global Innovation 1000,” s+b, Winter 2006: The 2006 study, uncovering a small group of high-leverage innovators who outperform their industries.
  8. Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia, “Money Isn’t Everything: The Global Innovation 1000,” s+b, Winter 2005: The 2005 study, revealing the value of an innovation dollar — and the basics of a better strategy.
  9. For more articles on innovation, sign up for s+b’s RSS feed.
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