Global Pharma's New Center of Gravity - growth, risk and learning in the Asian drug manufacturing market

The Asian region has gradually emerged as the center of gravity for global pharmaceutical manufacturing, and since Asia is home to the world's largest market for medicinal drugs, it is also a source of momentum for the world pharmaceutical manufacturing industry. Meanwhile, the Asian region's rapid economic development and low manufacturing costs have encouraged many drug makers to undertake market research, R&D and clinical trials in Asia. As today's multinational drug companies aggressively pursue seats at the Asian table, numerous local Asian drug companies are just as aggressively expanding their international footprints. Although many local "pharma" enterprises would make valuable M&A targets, countries in the Asian region are far from homogeneous, and they present special challenges and opportunities. Added to this are the complexities of operating risk in the Asian region: Although there have been major improvements in Asia, its diverse markets still harbor many latent risk factors.

With the foregoing as background, PricewaterhouseCoopers (PwC) interviewed decision-makers at multinational and local corporations in nine countries across Asia to complete its recent "Pharma White Paper", based on in-depth understanding of the Asian pharmaceutical industry's current situation and future development as it responds to challenges in an era of globalization.

Shift in the pharmaceutical industry's global center of gravity

Asia has zoomed into place as the world's center of gravity for the manufacturing of pharmaceuticals, and the majority of enterprises surveyed feel that this trend is well entrenched. Fifty-five percent of multinationals and 62 percent of local enterprises believe that pharma manufacturing's center of gravity has already shifted from Europe and North America to the Asian region. China, India and Singapore have meanwhile emerged as the leading nations in Asia's pharmaceutical manufacturing industry.

Internal versus external expansion

Two-thirds of local enterprises view expansion in markets outside their own local market to be their main corporate objective, and increasing international market share is of considerable importance to these corporations' development. At one-third of multinationals surveyed, annual plans include the use of M&A as a means to expand their business in Asia.

The complexity of operating risk in Asia

Multinational enterprises and local enterprises alike feel that, although operating risk in the Asian region has improved, issues like intellectual property rights, corruption and price fixing deserve greater attention. Half of local enterprises worry about unfair competition from generic brands, while multinational corporations express greater concern over intellectual property rights and legal risks. In addition, corruption remains an unavoidable social practice in the Asian region. Sixty-seven percent of drug manufacturing companies believe that corruption is a considerable negative factor for the industry's development in Asia, but in the short-term it will be difficult to root out this particular evil.

Enterprises looking to learn from each other

Multinationals feel that their learning curve in the Asian region has become gentler than they originally anticipated, and many problems in practice have turned out to be less difficult than they had at first imagined. However, some multinationals surveyed still lack the kind of knowledge and depth of vision they need for the region, and find themselves unable to secure a seat at the table in Asia. The Asian partners of multinational enterprises share the view that multinationals must learn from local companies and adapt to the industry environment in Asia. For example, multinationals should better understand local business environments and learn first-hand the work ethic of local enterprises. On the other hand, there are many advantages that local enterprises can derive by learning from their multinational counterparts.

The trend towards outsourcing reflects changing business models

Outsourcing services are no longer limited to the kind of manufacturing traditionally outsourced. Nowadays, outsourcing has been extended to R&D, clinical trials and analytical services. This trend reflects the growing capacity of the Asian industry, as well as the changing business models of multinational corporations. Multinationals are gradually focusing their attention on the marketing function, while leaving other corporate functions to outsourcing services. In reality, however, the outsourcing trend still has a long way to go because most of the enterprises surveyed feel that they still have not grasped the potential of outsourcing, and have missed opportunities to share in development, learning and improvement.

The demand for medicines in developing countries continue to grow, in tandem with the rising standard of living in these countries (especially those in Asia), and this has helped Asia become the world's biggest market for medicines. By leveraging their understanding of local markets to cultivate competitive advantage, corporations can, in the midst of intensified change, systematically adjust their product strategies to accommodate markets and future demand.

From the kind of research reported in the White Paper discussed above, we can begin to explore the special nature of Asia's pharmaceutical manufacturing market, just as, from the above analysis, we can examine some the main problems today's drug companies face, as well as the way towards their solution.

Elliot Liao is a partner at PricewaterhouseCoopers Taiwan. Please send your comments and questions to: elliot.liao@tw.pwc.com