Matthew Szuhaj, Director, Consulting Strategy and Operations Practice, Deloitte (Biotech Location Guide 2008)
As the biotechnology industry matures beyond its R&D origins, first-generation biotech companies - like "Big Pharma" - before them, are facing important decisions about how to continue to develop products and establish production capacity to capitalize on the opportunities of a global marketplace. Given relatively less robust pipelines for new products, competition due to patent expirations, and margin pressures, biotech firms must decide how to address the challenges of managing growth while mitigating risk as they establish the infrastructure necessary to compete in a dynamic global market.
Any global growth strategy that biotech companies adopt will need to address developing new products in a timely cost-effective manner. The average clinical trial takes seven years and costs $100M (according to Tufts Center for the Study of Drug Development), representing roughly one third of all costs associated with bringing a drug from idea to prescription. New business models have emerged as a result of these issues, including offshoring development to contract research organizations and conducting clinical trials in lower-cost locations. Also the issue of matching production capacity to product demand will be critical. This includes accurately forecasting product pipelines, rationalizing yield improvements, and effectively utilizing contract-manufacturing organizations. Sustaining operational productivity will also be a challenge in a global market, from the perspectives of maximizing human resources across cultures and languages, validating and improving production processes, and maintaining information systems security and integrity.
Biotech companies also must focus on mitigating financial, regulatory, and operational risks in their global growth strategy. Key challenges include:
• Protecting intellectual property (IP) from both a regulatory and enforcement perspective
• Identifying suitable development partners
• Navigating unpredictable political, regulatory, and economic landscapes
• Handling business disruptions due to natural disasters or political/social upheaval
• Balancing tax advantages with a suitable operating climate
• Regionalizing the product mix, if necessary
• Establishing flexible manufacturing capacity
• Satisfying lead times required to establish manufacturing capacity
• Managing the supply chain and its costs
• Managing required regulatory approvals
Biotech companies can manage the financial, regulatory, and operational risk aspects of global growth by carefully evaluating their expansion drivers and criteria and then developing balanced, objective business strategies. Specific drivers and criteria, including relative importance, are dependent upon which function of the enterprise is being strategically considered. Biotech companies are comprised of a "value chain" of highly interrelated but distinguishable activities including R&D, clinical trials, manufacturing (bulk and fill/finish/formulation), and distribution. For each value chain function, the primary operating success drivers can be segregated into two categories:
• Cost of operations - major expenses that have an impact on the overall cost of the value chain activity
• Operating conditions - qualitative operating factors in the external environment that can be levered for success or that may adversely impact the success of the value chain activity
Cost and Operational Considerations
The primary cost drivers include labor, taxes, and utilities. These costs tend to be higher in places such as the United States, western Europe, Japan, and to a lesser extent Singapore. Having recognized this disadvantage relative to emerging economies, some of these nations have established attractive incentive schemes in order to reduce the otherwise comparably higher operating expenses. Ireland and Switzerland, for example, have attractive corporate tax structures, while Singapore has developed corporate tax exemptions and programs in which it shares the capital burden of R&D with the investor.
Emerging economies, on the other hand, may offer lower operating expenses, but often lag their developed counterparts in qualitative operating conditions. Some of the principle operating challenges specific to the biotech industry include the lack of an established R&D presence, insufficient IP protection, less reliable infrastructure/utilities, and generally fewer amenities to attract expatriate talent.
A significant presence of R&D tends to be a catalyst for establishing a robust cluster of related activities. While the traditional biotech hubs maintain their lead in total R&D expenditure, nations such as India, China, and certain eastern European countries are actively fostering biotech R&D. For example, India, China, Singapore, and the Czech Republic have experienced an increase of 30 percent in their respective R&D investments over the last three years (IMD World Competitiveness Yearbook 2005 and 2007). This growth reflects their proactive effort to stimulate the development of local human capital and technology, in part to attract foreign investment.
Critical to the presence and growth of all biotech value-chain activities is an established regulatory system that protects intellectual property rights. Once again, the United States, Japan, Singapore, and western European nations have well-established regulations with stringent and enforceable rules for IP protection. Many emerging economies recognize that IP protection is a vital factor to attract and maintain biotech investments. Through the last decade, nations such as Malaysia, Hungary, India, and China have taken major strides by enacting and enforcing legislation that assists with the improvement of the IP protection standards; however, there is still room for improvement.
Biotech companies require a robust and
reliable infrastructure for every aspect of the value chain.
Availability of sufficient electrical and water capacity may create a
more challenging search for a potential location. While emerging
countries tend to lag in overall infrastructure availability and
quality, established biotech hubs may also face utility challenges. For
example, Ireland has determined that the nation's current electric
capacities cannot fully meet the demands of the growing manufacturing
industry. As a result, plans are in place to increase the overall
electric supply, improve the transmission network, and thus open up
more locations to future investors.
Being a knowledge-based
industry, biotech companies are not only in need of a location that can
provide a deep talent pool, but also a location that can attract
outside talent. According to third-party surveys, the availability of
qualified engineers is as high in a populated country such as India as
it is in comparatively smaller nations such as Switzerland or Singapore
(IMD World Competitiveness Yearbook 2005 and 2007). This suggests that
quality of life and amenities are vital factors in attracting talent.
As a result, Switzerland and Singapore, while not as populous as India,
are able to attract talent to meet their labor demands.
any major investment, operational, financial, and managerial risks in
each potential location need to be thoroughly evaluated. A sound and
well thought out strategic plan that addresses the key value-chain
drivers is paramount in making an expansion or location decision. There
is no single dominant location that attracts expanding biotech
companies. Every location has its advantages and challenges; however,
the evaluation of these factors is solely dependent on a company's
philosophy and business strategy.
The successful growth and
establishment of an effective global footprint is a challenge that all
companies must face. As competition increases and biotech companies
evolve, the global footprint will evolve to reflect the changing market
demands, operating conditions, and costs of prospective global
Matthew Szuhaj is
the life sciences industry leader for Deloitte Consulting's Global
Expansion Optimization practice. He has 16 years of experience in
domestic and international site selection and development, specializing
in global strategy, real estate and site evaluations, infrastructure
review, and operating costs/conditions analysis and has worked on
numerous life sciences projects throughout North America, South
America, Europe, and Asia.
Olaf Babinet and Jovana Trkulja of
Deloitte Consulting LLP, Global Expansion Optimization practice, also
contributed to this article.
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