New York--With pharmaceutical companies facing slower growth and a dearth of new medicines in the pipeline, there’s increased pressure to quickly bring drugs to market and find new revenue streams.

To do that, drug companies are turning to China and India to test their drugs, two emerging markets that have burgeoning populations. What’s more, as the number of people who can afford drugs grows in these two regions, drug companies setting up research and development and manufacturing operations are poised to benefit from increased sales. After all, China alone is expected to be one of the world’s top health-care markets in the coming years.

“Pharmaceutical companies are looking at more efficient and cheaper ways to undertake research,” said Graham Lewis, vice president of global pharmaceutical strategy at health-care information and consulting company IMS Health (RX). “Over the next five years, we forecast that 40% of global growth in pharmaceutical sales will come from emerging markets.” According to Lewis, China is forecasted to account for 10% of the growth from 2007 to 2012 while India is projected to account for 3%.

While countries like India and China aren’t churning out the next Viagra as of yet, U.S. and Western European drug companies have been setting up shop to test and potentially discover drugs.

In the U.S. and Western Europe, drug companies are having a tough time finding patients for clinical trials mainly because many patients have gone through multiple trials, making it harder to determine the effect of the drug, said Les Funtleyder, an analyst at Miller Tabak. In emerging markets like China and India, where drug trials aren’t commonplace, the quality of the trials are enhanced, he said.

“What we are seeing is trials moving somewhat more away from North America and Western Europe and more toward Central and Eastern Europe, Latin America and Asia Pacific,” said Mark A. Goldberg, president of clinical research services and perceptive informatics at PAREXEL International (PRXL), the clinical-trials outsourcing company. “Some countries' ability to recruit patients into trials tends to be faster.” Goldberg noted that patients in emerging markets have more incentives to engage in clinical trials because it could mean better health care. Physicians in emerging markets are also more inclined to conduct the trial to get the experience and build their reputations, he said.

“We get very good data from all these places, which is completely critical,” said Goldberg. “You can’t go to a region and benefit from a recruitment standpoint and not have the quality.”

Still, China and India don’t have the infrastructure in place as of yet to become leading regions for drug testing. According to Goldberg, the number of research-trained physicians able to run trials is still small compared to the Western world and the populations of the countries.

“They are making a huge effort both in India and China to train the medical community to perform research according to internationally accepted standards," said Goldberg, noting it will increase over time. It is in pharmaceutical companies’ best interest to see this happen to drive down the cost of R&D, which analysts said can account for 15% to 20% of annual sales.

“It's all just to improve their margins,” said Funtleyder of Miller Tabak. “If you can discover something and produce it in a cheaper way it improves margins.”

Pfizer (PFE), the big pharmaceutical company that’s been struggling recently as its drug pipeline dries out is just one of the drug companies focusing on emerging markets.

In a recent press release, the company said it plans to expand operations in China from 110 cities to more 650. Pfizer is targeting a 6% increase in market share in Asian markets by 2012. Pfizer estimates China will be one of the world’s top-five health care markets by as soon as 2010.

Meanwhile AstraZeneca (AZN), the London drug company saw sales in China increase to $437 million in 2007, up from $85 million in 2001. AstraZeneca now has the top spot in China, according to IMS Health. In September of 2007, AstraZeneca, one of the first to engage in large-scale clinical trials in China, inked a partnership with Peking University 3rd Hospital to establish its first Clinical Pharmacology Unit in China. The unit will focus on Phase I clinical research.

Last year, UK’s GlaxoSmithKline (GSX) opened a research-and-development center in Shanghai to work on discovering and developing new drugs for disorders including multiple sclerosis, Parkinson’s disease and Alzheimer’s. Genzyme (GENZ), the Cambridge, Mass. biotechnology company became the first U.S. biotech company to set up a R&D shop in China. In late April, it announced it’s investing $90 million to construct a 2,000-square-foot R&D facility in Beijing.

“The Chinese demographic structure is similar to that in North America and Western Europe. All the chronic diseases already exist or will exist in the next ten to twenty years,” said Lewis of IMS Health. "Urbanization, western diets and (bad) habits will all contribute, with a big surge in respiratory diseases if pollution is not curbed."