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Emerging Markets Slow-Going, Not Near Threat, Data Confirm

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By Randy Osborne
Staff Writer

The first signs surfaced in about 2007 that maybe China and India would not soon become the drug-development giants that the U.S. industry believed, and new research published as correspondence in the March 2013 issue of Nature Biotechnology seems to confirm suspicions about emerging markets.

"It's a lot harder to get stuff done," said Justin Chakma, analyst with the venture capital (VC) firm Thomas, McNerney & Partners, one of the authors. "There's not actually as much high-quality, commercializable science as was previously thought."

Specifically, compared to developed countries, life-sciences VC investment was significantly lower not only in absolute terms, with only about $1.5 billion invested in China and India over the past 10 years, but also lower in relative terms compared to other sources of R&D spending by about 10-fold compared to wealthy territories.

And even that was highly concentrated in a select group of about 30 funds that have historically selected for oncology assets (which make up about 80 percent of their outlays). What's more, the investments were supported by syndicates, with round sizes historically 30 percent and 60 percent smaller than the U.S. or European Union, respectively.

In other words, sequestration may not hobble U.S. biomedical research as compared to developing countries to the degree that some have predicted, Chakma said. Other authors of the data, which include Brazil and South Africa as well (though Chakma spoke largely about China), are Stephen Sammut, at Philadelphia's Wharton School, and Ajay Agrawal, at the Rotman School of Management at the University of Toronto.

"The U.S. doesn't have that much to fear, at least for the next decade," Chakma told BioWorld Today.

"It's really hard, despite all the money that's gone in, to find good early stage investments" in emerging markets, he said. "Even among the companies we looked at, a good part of them were compounds that were in-licensed to be developed in China, as opposed to ones that originated in China itself. You see the billion-dollar figures that the Chinese government is putting into R&D, which is a good thing for the industry globally," he added, but the fruits of that will take a while to appear.

VCs shopping for new potential drugs most likely would "have to partner with somebody who's already on the ground," Chakma said. "You probably can't go it alone, because there are so few [early stage candidates], and the players there are so well established." Some investors are looking at the somewhat safer, easier services space to get a foot in the door, "as opposed to diving right into the search for more innovative compounds," he said.

"[Paris-based Sofinnova Ventures] in particular had hired a consultant to look into interesting compounds in China," and came up dry, Chakma said. "They called off their plans to do anything in China. I don't think it's fair to make a blanket statement, but for most firms, it's probably not worth the time to set up shop in China and go to Chinese universities and try to find compounds. There isn't that critical mass of ready assets that you need."

Therapeutics make up 33 percent of all investments by VC in China and 53 percent in India, the research found. "Of the other product categories, diagnostics account for 17 percent and 12 percent of overall investment in China and India, respectively," probably thanks to shorter development timelines and other factors, according to the research. Basel, Switzerland-based Roche AG's diagnostics division reported year-over-year revenue growth of almost 50 percent in China during 2010 and 2011.

VC funds "can adapt their investing strategies to increase life sciences innovation in emerging markets and develop capital markets, the $100 million to $150 million annual innovative VC investment levels [now] correspond to only about 20 percent to 25 percent of all life-sciences deals and 10 percent to 15 percent of all life-sciences dollars," the authors wrote. "This suggests financing supply is not the issue as much as demand."

Chakma said that "tech-transfer policies you have in China and India are just not as well established" as they need to be, though the correspondence concluded that, if governments in emerging countries keep backing new R&D, "limited partners and VC investors may be presented with a unique investment opportunity as the first generation of truly innovative emerging-market start-ups arrive on the global landscape" – eventually.

Gathering data about developing regions is almost as tough as developing drugs there, Chakma and his colleagues in the project found, because of "opaque" business practices. Firms are "not willing to share information, they're more protective, maybe the reporting standards are not as robust," he said. "For public companies, it's a little bit different, but for private companies, there's certainly a dearth of information."