International Incentives: Are They All They're Cracked Up To Be?

By Gail Dutton, Contributing Writer
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After helping to clone Dolly the sheep in 1996, Alan Colman, Ph.D., was approached with recruitment offers by institutes from around the world. He refused them all until 2002, when a $6 million grant lured him to Singapore. Six years later, he returned to the United Kingdom, accepting a post at King’s College London. Publicly, he said his return would pave the way for UK/Singapore collaborations.

Last year, former U.S. National Cancer Institute researchers Neal Copeland and Nancy Jenkins also left Singapore after its research priorities abruptly shifted to emphasize commercialization. They accepted positions in Texas.

The access to funding that attracted Colman, Copeland, and Jenkins also attracts companies. Economic development agencies approach companies with incentives that include a wide range of grants, tax incentives, logistics help, and other enticements, including streamlined bureaucracy. According to EDB (Economic Development Board) Singapore, for example, “It takes 15 minutes to register a business online, 3 weeks to receive approval for clinical trials, and 24 to 36 months for a manufacturing facility to be operational.”

Brendan O’Callaghan, VP of biologics, therapeutic proteins, and contract manufacturing operations for Merck, insists, “The significant growth for pharma won’t be in developed world markets but in emerging markets. Therefore, although economics is a key driver, economics alone doesn’t provide all answers.”  Access to markets with growth potential is another important factor, followed by the availability of local talent and local government support. Further, the convenience of the location in terms of access to air travel and major cities also comes into play.

Using those criteria, Novartis identified China, Russia, and Brazil as high-growth emerging markets. Novartis spokesman Eric Althoff says the company is investing $1 billion to build the largest pharmaceutical R&D institute in China. “It is studying epigenetics, stem cells, hepatitis, and infection-based cancers endemic in the region.”

In Russia, Novartis is building a new manufacturing plant in St. Petersburg to produce innovative pharmaceuticals and generics. “Russia is an attractive climate for investment because of its long history of scientific development and technology, its growing pool of local business and scientific talent, tremendous natural resources, and its quickly-recovering economy,” Althoff says. Compared to other Russian locations, St. Petersburg offers a convenient location, attractive cost structures, and a supportive local government, as well as access to leading universities and talent.

Novartis also is establishing operations in Brazil, signing a letter of intent with the Brazilian Ministry of Health, outlining nine initiatives addressing local production, technology transfers, National Health System disease priorities, and R&D. 

Government Support
With regions throughout the world committed to attracting life sciences companies, organizations are working closely with governments not only to gain financial incentives and access to top talent, but also to share priorities and improve local disease awareness and management, while improving business standards.

In China, for example, Novartis has a joint research laboratory with Fudan University to study cancer genetics and cell biology and to develop innovative disease models. This and similar academic partnerships provide hands-on experience for emerging Chinese talent and help develop scientific expertise in the region.

In another partnership example, multinationals are committing resources to combat neglected diseases. Novartis is working with the government of Brazil and with the World Health Organization to help eradicate leprosy. Working together, Novartis and the Singapore EDB established the Novartis Institute for Tropical Disease in 2003 to discover novel therapies and preventive treatments for dengue fever, tuberculosis, and malaria.

Industrialized Nations’ Strategies
Incentives and partnerships aren’t limited to emerging nations, of course. Industrialized nations also are actively working to attract life sciences businesses. “In the 1970s Europe was growing, and Ireland offered a very well-established education system, an English-speaking population, and an easily accessible time zone,” O’Callaghan says. The Irish also were comfortable working within regulated environments.

“Now, 40 years later, the pharmaceutical industry has a huge installed base, the infrastructure is established, and academic research continues to seed the talent pool,” O’Callaghan adds. Some of Ireland’s initial benefits have been diminished by EU harmonization regulations, which tend to equalize the relative benefits of any particular EU member when compared to another.

To retain companies, Western nations are capitalizing on their life sciences experience, established regulatory environments, and installed base. For example, Ireland is working with unions to moderate wage inflation and with utilities to contain energy costs as part of a national effort to build a more competitive industrial framework.
In the United States, Congress reauthorized the Prescription Drug User Fee Act (PDUFA) and in 2011, the Small Business Innovation Research (SBIR) program. The FDA, for its part, is attempting to reform itself to foster innovation. 

Taxes Can Make The Difference
“A well-regulated environment and the ability to grow a business are more important than the tax rate,” says Dave Shanahan, global head of life sciences for IDA Ireland. Taxes do play a role, however, as CFOs point out each January at the JP Morgan Healthcare Conference. In terms of taxes, Shanahan says, “Ireland has a corporate tax rate of 12.5% and an effective tax rate of 11.7%.” That’s comparable to Switzerland’s and Portugal’s. But French multinationals, he notes, often pay no taxes despite a 33% tax rate.

Singapore has a 17% corporate tax rate and offers enticing incentives, including streamlined bureaucracy, as it builds its life sciences industry.

China’s corporate tax rate is 25% but, under the Enterprise Income Tax rule, businesses classified as “Chinese tax residents” receive a 100% tax incentive for certain technology transfers. Foreign businesses may receive a 5% tax exemption for technology transfer. The details of obtaining those tax credits, however, are ambiguous, so may not be leveraged.

Other Concerns
Specific risks attached to working internationally vary by country but include changing research priorities such as those that frustrated researchers in Singapore, an evolving and sometimes erratic regulatory system in China, a limited infrastructure in Brazil, and corruption that is still an issue in many regions.

Organizations also must contend with widely varying business practices and attitudes toward innovation and work itself.China, for example, has imposed two temporary bans on stem cell research, which directly affects NeuralStem’s work. Richard Garr, president and CEO of NeuralStem, says he expected a fluid environment and unpredictable delays. “You never know when things will happen.” Garr maintains Chinese bureaucracy still moves faster than it does in the United States or the EU. ChinaBio, however, notes China’s SFDA (State Food and Drug Administration) takes one to two years to process NDA (new drug application) submissions. A recent study in the New England Journal of Medicine reports that the median total review time for NDAs was 322 days at the FDA, 366 days at the EMA (European Medicines Agency), and 393 days at Health Canada.

Risk/reward calculations may differ internationally, also. “The Chinese government is promoting innovation very aggressively,” Garr says, so it fast-tracks innovative therapies for incurable diseases. In the United States, the FDA is expected to expand the fast-track option later this year.

Intellectual property protection remains a key concern for innovative companies. Laws may not be uniformly enforced or understood, so, Garr says, “It’s hard to know what protection you actually have. As a business, look at where it makes sense to have IP in emerging markets.”

NeuralStem established a manufacturing facility in 2011 in China’s Suzhou BioBay to develop GMP-equivalents for cell-based research for Chinese clinical trials. “We decided the technology, science, and medical expertise are available in China now to deliver our product, a spinal injection that treats chronic motor disorders caused by stroke. In the United States, stroke affects a total of 1 million people, but in China 2.5 million new stroke patients are added each year. “We’re in China because this is an enormous public health problem and at the BioBay because of its facilities and proximity to Beijing. There are no incentives,” Garr says. Perhaps not, but there is a climate conducive to innovation. Regardless of where companies invest, the right business climate and significant market potential generally trump governmental incentives.