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August 22, 2022

Foreign direct investment in clinical trials revs up after pandemic hit the breaks

FDI clinical trial projects grew by 16% in 2021, with the sector attracting more projects than it did prior the Covid-19 pandemic.

By Sofia Karadima and Reynald Castañeda

The Covid-19 pandemic caused overall greenfield foreign direct investment (FDI) project numbers to decline by 17.5% in 2020. However, as the world started to adjust in 2021, investors reacted quickly and FDI levels rose by 18.1%.

When the pandemic struck in 2020, companies put FDI projects on hold, Switzerland Global Enterprise investment promotion director Sirpa Tsimal says. The 2020 lockdowns prevented international travel, which is a key element in building FDI project momentum, Invest Southern Virginia FDI consultant Joe Anwyl notes.

From 2021, in a bid for companies to make up for lost time, most sectors witnessed a rise in the number of FDI projects. The clinical trials sector is no exception, with growth being particularly notable for investment activity coming from clinical research organisations (CROs) and other types of providers offering products and services that support drug development.

Specifically, GlobalData's FDI projects database shows that there were 43 projects in the clinical trials sector in 2021, up from 37 in 2020 and 40 in 2019. New projects made up 81% of the projects announced or opened in 2021, with the remainder being expansions of existing facilities. GlobalData is the parent company of Clinical Trials Arena.

That said, Anwyl notes it is possible there are more FDI projects happening behind the scenes, as there is likely to be underreporting in all sectors since there is no standardised way of relaying such information.

Where are the leading FDI destinations?

Western Europe was the leading region when it came to attracting FDI projects in the clinical trials sector in 2021, with 37.2% of all projects in the sector announced or opened globally. Western Europe is a desirable destination because companies also want to enter its consumer market, explains Tsimal, who has 17 years of experience in FDI, four of which are in life sciences. Asia-Pacific received the highest number of projects during 2019–21.

When it comes to the leading destinations for FDI projects, China and the US ranked at the top for 2019–21, with China receiving 17 projects and the US attracting 16 projects. In 2021, the US attracted five projects, up from three in 2020. However, China experienced a significant drop and received only two projects in 2021, down from 12 in 2020.

Anwyl notes there is a variance in FDI cost among US states. For example, Virginia is 20–25% below the national average, whereas hotspots like California, Florida, and Texas are much higher, he adds. In southern California, the cost can be as much as 60% above the national average, meaning there is a delta of around 80% in this region compared with Virginia. Anwyl has 20 years of experience in FDI in engineering, manufacturing, and technology park projects.

Clinical Trials Arena previously investigated the clinical trials activity in China, discovering that it presents large opportunities for foreign sponsors.

US key investor in China

The US has been the key source country for China, as US-based investors backed 15 out of the 17 projects that the country received in this three-year period. It also received one project from Germany and one from Japan. In 2021, US-based CRO Advanced Clinical announced plans to open a new office in China.

Irish, French, and Canadian investors have backed most of the projects that were opened or announced in the US during the same three-year period. The US has also attracted projects from investors based in South Korea, Switzerland, Spain, the UK, China, Japan, and Italy. Novadiscovery, a France-based health tech company using in silico clinical trials to predict drug efficacy and optimise clinical trial development, opened its US headquarters in Boston, Massachusetts in 2021.

Several countries, including the UK, South Korea, and Ireland, began to recapture inward clinical trial sector investment in 2021, after their levels plummeted in 2020. Other countries that received a good number of projects in 2021 include Poland, Australia, and Belgium.

Switzerland attracted three projects in 2020 and two in 2021. Tsimal says the pandemic helped showcase the country as having the kind of local knowledge and stability that made it ideal for long-term projects.

What are the top FDI project business functions?

Business and professional services was the largest business function in terms of inbound projects in 2021, but also for 2019–21. China received most of these projects during this three-year period, followed by the US. Ireland-based CRO Atlantia Clinical Trials has moved its operations to a larger premises in Chicago, Illinois.

The top reason for FDI projects is to find talent, whereas previously the main driver was tax-driven reasons, Tsimal says. Anwyl agrees, noting that the key to expansion is finding a location that meets recruitment needs.

The first person to be hired at the new location is pivotal due to the gargantuan challenge of initiating a company’s new presence in a new jurisdiction, Anwyl explains. “Everything else can be built—factories, offices, supply chains, and networks.”

The second largest business function has been research and development (R&D), with a good number of projects located in China, the UK, and the US. This business function experienced a solid increase in projects in 2021, at 14 projects, up from five projects in 2020.

Where are the FDI investors located?

The US was the leading source market for outbound FDI in 2021, also topping the ranking in 2020 and 2019. It was the source country for 51.6% of all projects announced or opened during the three-year period.

Companies from the US invested in 15 projects in China, seven projects in the UK, and four projects in Poland and Australia, among other destinations. Eight projects were announced or opened by UK-based investors, while German and French investors backed six projects each during this three-year period.

The clinical trials sector not only managed to bounce back in 2021, but also received more projects than the year before the pandemic started. While most sectors witnessed a rise in their number of projects in 2021, there are concerns about whether this rise will continue due to geopolitical tensions, the global cost of living crisis, slow economic growth, and continued supply chain disruptions.

Companies looking to expand overseas are, above all else, looking for stability, Tsimal says. “FDI projects have long processes. Companies can take one to four years just to decide where to go. It’s a big investment in time and money.”

This article was concurrently published with Investment Monitor.

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