Pharmaceuticals China report 2009

ChinaPharma reportDecember 2009

Hector Joseph, Herbal Medicine, 2008

China: Big Pharma’s Long March to End in China?

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While the global economic system is still adapting to China’s role as the ‘world’s factory,’ the country’s explosive pharmaceutical sector presages yet anoth-er seismic shift in global trade fl ows. Two revolu-

tions are currently underway in China: The fi rst is the rapidly growing importance of the Chinese pharmaceutical market, which has outpaced GDP growth, expanding at approximate-ly 20% in recent years. Many analysts project China to be-come the world’s second largest market by 2020. The second is the explosive growth of Chinese R&D, bootstrapping with outsourced services and inexorably moving towards in-house portfolios of innovative drugs.

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Current figures mask these subterra-nean shifts, where Big Pharma only sees 1.5% of total sales from this market, which is projected to reach USD 28 billion in prescriptions in 2010. The conven-tional OTC market is also tremendous, currently valued at around USD 10 billion and counting. As with most every-thing in China, the market also has ‘Chinese Characteris-tics,’ where Traditional Chinese Medicine (TCM) repre-sents another segment worth approximately USD 21 billion encompassing sales of herbal remedies and other treat-ments that have been handed down over the millennia. TCM treatments are part and parcel of an ancient Chinese philosophical tradition that aims to bring the body’s vari-ous organs into harmony, rather than focus on individual symptoms and proximate causes. The TCM segment is un-dergoing rapid modernization with both modern formula-tion techniques as well as exhaustive research into isolat-ing active ingredients for pharmacological efficacy. However, these modernization efforts are still in their in-fancy. In the pharmaceutical segment, innovative thera-peutics are dwarfed by generics at a scale of four to one, and this proportion is likely to increase as healthcare re-form favors local generic producers. Only a few years ago, investing in Chinese R&D was hamstrung by fears of IP leakage. Today these fears often seem a distant memory as global pharma sinks hundreds of millions of dollars into R&D infrastructure, while Chinese startups build compet-itive IP portfolios of their own. In some cases, Chinese firms have even pursued IP litigation against the multina-tionals. If there is to be a reset to the innovative pharma-ceutical business model, the Middle Kingdom will likely be ground zero.

Chinese Style Universal Healthcare: A dose of pragmatism

As the Chinese economy has rebounded, global in-vestors are hoping that Chinese consumption may make up for continued lackluster performance in

Western markets. Unfortunately, a household savings rate

at nearly 40% has kept a lid on con-sumption. Consum-ers’ reticence to open their wallets is frequently attribut-ed to shortcomings in the social safety net, particularly in education and healthcare. Thus the 2009 Chinese healthcare reform,

an investment of USD 124 billion over the next three years, will not only directly impact the lives of tens of millions of rural Chinese, but may also have global implications. The reforms are not in response to a deficit in the quality of care. Eric Bouteiller, Chairman of the EU Chamber of Commerce in Tianjin, believes that “now, especially in the big cities and large hospitals, you have doctors on the same level as European or American specialists.” The major problem is sharply unequal access to high level care and disseminating services to a large and impoverished rural and suburban population. There are a number of pro-grams currently in place and they have been hastily ex-tended in an attempt to cover China’s 1.3 billion citizens by 2020.

However, conditions are far from perfect. Christian Grapow, General Manager of Solvay China, indicates that corruption, inefficiency and inequities in the system have even prompted cases of patients attacking doctors in hos-pitals. The government is certainly aware of poor patients’ frustrations and has long been searching for an effective solution. Howard Balloch, former Canadian Ambassador to China and President of China’s leading independent boutique investment bank, The Balloch Group, relates an encounter between a Canadian official and the Premier of China. “The Premier turned to the Canadian official and said, ‘we would love to be as Socialist as Canada, but we can’t afford it.’” Ambassador Balloch observes “Like many areas of reform, this country doesn’t start from an ideo-logical basis, but rather from a pragmatic viewpoint, rec-ognizing that the provision of basic healthcare services to the people is a necessary component of social stability.”

The mechanics of the health care reform are very much a pragmatic affair, emphasizing the construction of commu-nity health centers in rural and suburban areas to alleviate the pressure on this under served population. Yu Mingde, former member of the National Development and Reform Committee (NDRC), describes the highlights and implica-tions of the health care reform. “There will be a general expansion of the total market affecting all companies

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Left to right: Yu Mingde (CPEA), Wei Huacheng (Beijing Pharma Group), Howard Balloch

(The Balloch Group)

across the country,” predicts Mr. Yu. “The five policies adopted by the government include: new farmers and the health care system, the health care insurance system for urban residents, the 15 types of infectious diseases with the national free treatment policy, the planned 13 types of vaccine with nationwide free vaccination, and the State-aid system for poverty-stricken populations.” Mr. Yu fur-ther estimates that reform policies will result in an “in-crease in drug consumption between 160-170 billion

RMB.” There will also be strong support for generics and the primary drug reimbursement list, under the auspices of the Basic Medical Insurance program (BMI), is undergoing a long awaited overhaul, the first since 2004. Dan Zhang, Chairman and Founder of Fountain Medical Development (FMD), a Contract Research Organization (CRO), outlines other structural reforms such as “new guidelines issued by the SFDA specifically saying they will speed up approval for four classes of drugs. First are New Chemical Entities (NCE), candidates that have never been approved any-where. Second are unmet medical needs such as oncology or pandemic diseases. Third, orphan medications. Fourth, new uses or combination uses of Traditional Chinese Med-icine (TCM).” Mr. Zhang believes that further changes are on the horizon. He points out that the State Food & Drug Administration (SFDA) “has begun to systematically trans-late US drug development guidelines into Chinese.” This is a significant signal regarding the direction in which China wants to move.

Big Pharma executives have not played a very vocal role in the Chinese health care debate. Many would probably agree with Merck Sharp and Dohme’s GM Michel Vounat-sos who advises, “One should not be in China to change China. One should come to this country to understand China and be here to support the policy priorities already established in the country.” However, many multinational pharmaceutical firms view the short-term impact of the re-forms with a certain level of caution. Pony Lu, General Manager of Servier, notes, “We are likely to see even stron-ger price controls by the government in order to manage its healthcare spending. The patient pool in these new ar-eas is indeed huge, but consists mainly of people with very low income levels, who have little ability to pay for drugs themselves.” These concerns have kept most MNCs on the sidelines, yet there can be little doubt that current infra-structure investments and structural reforms will signifi-cantly improve patient outcomes over the coming years.

Solvay Pharma ChinaSolvay(Shanghai)Co.,Ltd.Unit K, Floor 14, International Shipping & Finance CenterNo.720, Pudong Avenue, Pudong New AreaShanghai 200120Tel: +86-21-38424788



Left to Right: David Ricks ( Eli Lilly), Pony Lu (Servier) , Michel Vounatsos (MSD), Christian Grapow (Solvay)

Let a Hundred Flowers Blossom: A Deeply Decentralized Framework

China has always had a deeply decentralized political structure, where ancient emperors could often hope for little more than loosely administering the many far-fl ung

provinces. The modern Chinese government is somewhat more centralized, however, aside from military and foreign affairs, re-gional and local governments often have vast and far-reaching jurisdiction. Decentralization has played an important role in China’s rapid economic growth, spurring intense competition to attract investment. Less positively, decentralization has spawned a vast array of policies and standards across the country. These regional differences have a distinct impact on all economic activ-ity, and particularly on heavily regulated industries such as phar-maceuticals. To begin with, there is no Chinese pharma com-pany with nationwide operations. The largest Chinese fi rm is Hayao, based in the far North Eastern city of Harbin, but it re-mains a distinctly regional player. Some distributors have at-tempted to build nationwide scale through acquisition, such as

Sinopharm and Shanghai Pharma, but they are quite far from operating as a single en-tity. These fi rms function as holding companies comprised of independent, and at times competing, regional players. David Ricks, General Man-ager at Eli Lilly observes, “people talk about the coun-try in terms of cities, and there’s a reason for this: the cities behave differently. There is not one China. I think of it more like four Eu-



Sinobioway: Prescriptions for a Sick EconomyWhen Pandemic H1N1/09 virus, commonly called ´swine fl u´, broke out in Mexico in early 2009, scientists all over the world raced to produce a backstop against the spread of the highly pathogenic virus. Chinese biotechs were swift. Specialized in vaccine R&D and manufacturing, Sinobioway’s subsidiary Sinovac Biotech, has been in the spotlight as the fi rst fi rm worldwide to produce an H1N1 vaccine. International consulting fi rm Deloitte had previously named the fi rm as one of China’s 50 fastest growing companies.

Meanwhile, the mother company has fi xed its gaze on a loftier ambition than fi ghting the fl u pandemic. Chairman Pan Aihua has developed a theoretical framework for the growth of the company as well as the industry, and has begun to explore cross-disciplinary applications of his Bioeconomy System Theory. “The bioeconomy system theory is now established through the Universal Central Dogma, and expressed in the study of Social-genology and Econo-genology. Social-genology is a fi eld that investigates economics through the views and methods of medical science and biology,” says Dr. Aihua. His fundamental axiom is that “Capital controls the world. Life determines capital. ‘Gene’ dictates life.” Dr. Aihua’s background, with PhDs in both political economy and molecular biology, positioned him to engage in such cross-disciplinary theoretical work. “The aim is to uncover the ‘invisible hand’ of economic development, which is mod-eled as the economic genome. There are a number of concrete applications of methodologies and concepts from life sciences such as economic assets in bio-recombination theory, the medical pattern of the stock market, concretized circulation of invisible assets, and open-ringed chain operation.” Dr. Aihua is also investigating human social develop-ment and is seeking to apply his theory in other areas of study. He describes his efforts at Sinobioway as an attempt to bridge theory and practice, testing his ideas in real world conditions as well as a “promotional exercise in spreading this theory and applying it in innovative ways.” Dr. Aihua’s ambitions also extend beyond the Bioeconomy Theory. One of the company’s goals is to have at least one world-leading product, which he defi nes as reaching RMB 1 billion in sales. To reach this goal the company is reinforcing its manufacturing cost advantages while investing in building out a robust research-based line of products. Thus, Dr. Aihua is working to make Sinobioway “the fl agship in the Bioecon-omy” through both theory and practice.

“There is not one China. I think of

it more like four Europes, which in

population and differences between

markets is roughly right.”

David Ricks, GM of Eli Lilly China

Pan Aihua (Sinobioway)

ropes, which in population and differ-ences between markets is roughly right.” Regional policy variations impact every aspect of the business, from sales and marketing to the design of manufacturing facilities. Hooker Cockram, a construc-tion fi rm headquartered in Melbourne, has extensive experience working with multinational pharmaceutical fi rms. The company has developed a consultative approach to help multinationals navigate the complexities of China’s provinces’ ever-changing rulebooks. Hooker Cock-ram General Manager, Greg Mithen, be-lieves “The SFDA (State Food and Drug Administration) rules are more like guide-lines, as the interpretations in Jiangsu Province and Tianjin Municipality could actually be completely divergent. When we create a design, we have to do it on a basis of what we think will work in China but when we put it through the actual process, we need to adjust our plans based on each province’s characteristics.” The SFDA itself is quite decentralized with in-dependent branches that execute policy in each of the leading urban markets. Thus, many foreign fi rms tend to approach the Chinese market with an array of regional strategies as opposed to conceiving of the country as a single market.

The Search for the next Growth Center: The Rural Question

It is often said that there are two Chi-nas, a sophisticated urban and modern China, close to or on par with the de-

veloped world, as well as a rural and poor China that is still very much a part of the 3rd world. Of course the truth is far more nuanced. Major cities such as Shanghai, Beijing and Guangzhou have large, wealthy populations and are experiencing steady growth, while the markets in lesser-known cities such as Zhengzhou and Chongqing are undergoing booming expansions. As

quickly as the recent boom markets have emerged, new ones will necessarily take their place and com-panies are constant-ly on the lookout for the sudden emer-gence of the next growth engine. However, it is not only a search for new physical loca-tions, but also for new market seg-ments. There are certainly many options to choose from as outlined by Michael Ryde, General Manager of Lundbeck. “The market is extremely fragmented; in a way it is as if there were several coexisting small markets for different groups of pa-tients such as those paying out of pocket, city workers, farmers, etc.”

Drug portfolios must be carefully tai-lored to these fragmented market dynam-ics, especially to the huge potential in lower market segments. Eli Lilly still sells Prozac in China, which is actually one of the key markets for the ageing drug world-wide. However successful penetration of these segments comes down to more than



China Report

Left: Liam Condon (Bayer) RIght: Eric Bouteiller (Beaufour Ipsen)

careful portfolio selection. Marketing carryover is sharply lower than in Western markets, meaning that drugs are far more promotionally respon-sive. Portfolios need to be sus-tained with constant invest-ment, but on the other hand, new drugs can grow far more rapidly than in Western mar-kets. Lilly’s GM, David Ricks, comments, “We know that if we don’t invest, it will slow down, and if we do invest, it will grow stronger. A manager

can’t be so clever with their money in China: they have to make a business case product by product.”

One of the big challenges in creating the right marketing strat-egy is timing. The opportunities are staggering and in some ways obvious, but timing market penetration is not. Some companies have even suffered from premature investment in this market. Ryde remarks, “one of the keys to success in China is to have a lot of patience and long-term perspective.” In this vein, Lundbeck

has been working to increase sophistication in the marketplace and has recently opened a branch of the Lundbeck Institute to help train doctors in the fi eld of Alzheimers and other Central Nervous System (CNS) diseases. Mr. Ryde sees this as particu-larly important in fi ghting misperceptions, such as the idea that Alzheimers is an unavoidable ‘old man’s disease’ as opposed to a treatable, chronic condition. Bayer is also taking a proactive ap-proach to market creation through its doctor training program, but on a vastly larger scale. While most other innovative pharma companies are content to take a wait and see approach to the health care reform’s community health centers, Bayer is commit-ted to building a presence in this area. Liam Condon describes Bayer’s program, which is conducted together with the Ministry of Health. “There are a lot of people in rural parts of China that call themselves doctors, often it is a role handed down by families, but in reality they have undergone no formal education.” Simply educating doctors is vital to improving care in rural regions, while improving these centers will also alleviate pressure on the overall system. Condon continues, “One of the main problems in China is that people who feel sick fl ock immediately to the big hospitals and specialist centers. Of course this leads to a very chaotic and ineffi cient system in which patients can wait half a day or more in overcrowded centers just to see the doctor for a couple of minutes and then walk out with a bag full of antibiotics. So what the government wants to do is set up a gatekeeper type of system in which community healthcare centers play a key role.” Bayer’s investment in the public health infrastructure and its cooperation with the Ministry of Health will certainly give it a favorable posi-tion in this segment, laying a foundation for the day the rural market becomes profi table for MNCs. However, as the number one multinational pharmaceutical fi rm in China, Bayer is proba-bly one of the few fi rms to have the scale and experience to en-gage in such an undertaking. At this point, most MNCs are stick-ing to the urban centers and trying to capture market share in China’s booming Tier Two cities.

Many Strategies for Waging the Talent War

China has been called the pharmaceutical battleground of the future, and understanding this market will be at least as important as understanding the US or Eu-

rope, if not more so. Executives who understand China are already in hot demand at the headquarters of multinational fi rms and thus GM positions in China are highly coveted. At the same time the prospect of such a vast, rapidly changing and high stakes market can be daunting. One of the primary challenges that GMs face in China is extremely high turnover. Howard Sui, GM of Merck Serono, refers to an “ongoing tal-ent war.” He says, “Every company is committed to China



Dan Zhang (FMD)

and is expanding here. The competition for talent is quite intense.” Training at Western fi rms is highly prized and some employees are looking to eventually ‘cash out.’ However, fi rms employ a wide array of strategies to retain top talent. As in any market, focusing on career development and providing opportunities for advance-ment is crucial. While sala-ries have gone up, many MNCs avoid bidding up sal-aries, instead offering train-ing and frequent promotions in fast growing organiza-tions. Perks can help as well. Mr. Mithen advises on the benefi ts of social events, not-ing, “We look after our staff and coordinate social activi-ties such as company confer-ences, barbeques and the like. Interestingly, 10 to 15 years ago these kinds of perks were something most Chinese would not care about, but today these bene-fi ts are becoming more at-tractive.” While MNCs offer, on average, better pay than local fi rms, local players fi nd ways to adapt. For example,

Mr. Zhang has built a relationship with the local government that allows the director of his central lab to have a position and publish through a local university. Mr. Zhang describes this as “a huge golden handcuff. This is a non-cash reward that allows me to be competitive with Quintiles but at a lower cost.”

A distinct genre of China oriented business literature has emerged, advising foreign managers on how to avoid cultural pit-falls in the Chinese workplace. There is certainly a Chinese man-agement style that is often discussed. Mr. Grapow encapsulates this advice as “ensure employees get respect and recognition for their work. Praise in public, criticize in private.” On the other hand, some fi rms have managed to build more of a hybrid cul-ture, which prize outspokenness and minimize hierarchy. Bioduro exemplifi es this mixed company culture, as an R&D outsourcing company founded by serial entrepreneur John Oyler. Oyler re-lates an anecdote that occurred during a visit from a French sci-

entist. “He was asking where people on the team are from and they were telling him the names of some cities that he didn’t recognize. I drew a rough map of China on the white board, and pointed out Beijing and Shanghai. The fi rst team member said he was from Chengdu and I drew a star on the map where that was, and the next team member said Xian and I drew a dot for that city. This young scientist who had worked at our company for less than one year jumped up, ran to the board saying, “no, no, you’re completely wrong,” and grabbed the pen out of my hand and drew it a little further South on the map.” Afterwards the French scientist remarked that even at his company, a fi rst year team member wouldn’t tell the CEO that he’s wrong and grab the pen out of his hand.

However, beyond communication, the principle cultural barrier that newly arrived executives are cautioned on is ‘Guanxi.’ Often translated as relationships, many local executives claim they have



China Report

Howard Sui (Merck Serono)Eric Zwisler (Zuellig)

“...the importance

of relationships

in this market

is overstated.

Relationships

are a protective

barrier to avoid

change and a

method of

maintaining

control in the

market.”

Eric Zwisler, CEO of Zuellig Pharma



“I always wanted to come back…I can make a much bigger impact here in China than in the US. I wanted to contribute and help improve conditions in China. I wanted to be an actor in making the world more fl at. Before I went to the US, I didn’t even have a TV in my home, and the memories of poverty and living conditions prevalent in China always stuck with me.” Like many others, Dr. Xiaochuan Wang, founder of Sundia MediTech, felt that it had always been her duty to return and serve her homeland. But doing so came at a premium price. She had to convince her husband to quit his job, sell the house and cars, and move the family to Shanghai. Dr Wang sees the risks she took as integral to the success of the company. “All our clients see that we’re deeply com-mitted to the company and this commitment makes the difference and has helped build our good reputation in the industry.” This reputation has allowed Sundia to grow ex-

tremely quickly, and skyrocket to its position as one of the largest CROs in China. Over the past fi ve years, Sundia has completed six successful drug discovery projects, a tremen-dous accomplishment in a fi eld rife with dead ends and disappointment.

Dr. Wang was one of many Chinese graduate students who, during the 1980’s, began coming to the United States to pursue postgraduate studies. These students be-came scientists and engineers and played a signifi cant role in the biotech and IT booms of the 1990’s. Over the past several years, these now seasoned technology veterans have been returning to China to work in universities, MNC research centers, and most

signifi cantly, start their own fi rms. A huge percentage of the explosion in biotech and CRO activity has been due to these so-called ‘returnees.’ Ambassador Balloch outlines the importance of these reverse migrants. “Returnees are contributing a great deal to the growth of the country. It’s not just about the science, but also about combining the science and innovation with business. We see that even where local science has produced the advances, the returnee has a large role in the business in terms of access to funds, protecting IP, and the functioning of the company in developing an innovative business culture in addition to the scientifi c work. The last 30 years of growth have been accelerated by the fact that Chinese are travelers.”

The personal reasons behind their homeward orientation and spike in entrepreneurial activity are numerous. Lee Ka-Shing’s Hutchison strenuously recruited Dr. Samantha Du from Pfi zer to found Hutchison Medipharma, but it took many months of persuasion. On the other hand, Darren Ji, founder of PharmaLegacy was inspired to come on his own. He says, “it wasn’t diffi cult at all to make the decision to go out on my own. The opportunities in China have been extremely attractive.” Dr. Wang enunciates how interna-tional experience grants returnees a signifi cant advantage in the pharmaceutical industry. “All of our senior team has from ten to twenty-plus years experience and everyone on the team feels that their past experiences fl ow naturally into the work they’re doing at Sundia.” These individuals are making great contributions to the development of Chi-na’s technical industries, but they are by no means alone in this effort. Chinese trained scientists and entrepreneurs have also made a great impact, yet the returnees seem to attribute a good deal of their success to Western training and business acumen. Dr. Wang observes, “you really can’t do drug discovery or development as an individual; it’s inherently a team effort. The fundamental importance of teamwork is a great lesson we learned in the US.”

Sundia MediTech: Western Experience in a Chinese Context

Xiao-Chuan Wang (Sundia)

it, while foreigners struggle to build it. Eric Zwisler, CEO of Zuellig Pharma, has over 20 years experience in China and seeks to debunk some of Guanxi’s mystique. “When markets are ineffi cient, rela-tionships are important. When markets are more effi -cient, relationships become less important because the markets become more sys-tematic, professional, and objective in the way they op-

erate.” Mr Zwisler continues, “It may be a bit controversial, but I think the importance of relationships in this market is overstated. Relationships are a protective barrier to avoid change and a method of maintaining control in the market. If local companies use 70% relationship and 30% content, we use 70% content and 30% relationship, and we are just as successful.”

Innovation: Provincial Style Central Planning

The Chinese central government has made a fundamen-tal commitment to transforming the country from a manufacturing economy to an innovation-driven

economy. The state has supported basic research for many years and its strong support for science education has created a highly trained pool of researchers. Wang Hongguang, of the China Naitonal Center for Biotechnology Development (CNCBD), notes that annual R&D investment has reached USD 44 billion. Mr. Wang relates that “the number of essays published in international journals is six times larger, and eight new drug applications were granted clinical approval. Compared to the year 2000, the number of patent applica-tions between 2001 and 2005, has increased 11 fold.”

“There is a signifi cant political push on the national level to accelerate the growth and importance of innovation,” notes Mr. Grapow. “However, the execution is completed on a provincial level. Some regions such as the Shandong Province or Shanghai Municipality have made a huge commitment to pharmaceuticals and biotechnology and pharmaceutical inno-vation will certainly play a role in such regions.” One such Shandong pharma pioneer is Luye Pharma. The fi rm’s banker turned entrepreneur, CEO Liu Dianbo, decided to axe a prof-itable API business in favor of focusing on moving up the value chain with formulations. Mr. Liu has also decided to take the road less traveled in building his business. “Luye is a

small company that cannot afford a lot of new drugs,” says Mr. Liu. “So we decided to focus on differentiating our drug delivery sys-tems and concentrating on the most diffi cult applications with the aim of using these plat-forms to make a new global standard.” Bei-jing has also produced a number of innovative fi rms, which are coordinated through the Beijing Pharma & Biotech Cen-ter. The center has helped a number of fi rms overcome early stage hurdles through its affi liate, the Alliance of Biobox Out-sourcing (ABO). Ting Lei, Director of the center, described a member company who had “encountered obstacles in opera-tion since the establishment of the company. We provided consulting services and convinced him to transform the core technology of his company, transitioning to a service based business model. The company then grew 10 times in two years.” Despite the emergence of other innovative hubs,



China Report

Wang Hongguang (CNCBD)

“...within fi ve to

ten years, Shanghai

will become the

epicenter of global

pharmaceutical R&D”

Dr. Jason Gang Jin, CEO of ShanghaiBio, the CRO of Shanghai Biochip

Shanghai is the epicenter for China’s in-novative industry, with a wide array of institutes, biotechs and service fi rms all engaging in cutting edge R&D. Most Big Pharma players have R&D facilities in Shanghai including Roche, Novartis, Eli Lilly, AstraZeneca, Pfi zer, and GSK, while other fi rms such as Merck have established collaborations with local fi rms. These multinational fi rms fol-lowed the talent and infrastructure in coming to Shanghai, and that makes the local players the true success stories. WuXi PharmaTech pioneered the out-sourcing trend, opening its doors in 2001 and its success has spawned a huge service industry whose epicenter is Shanghai’s Zhangjiang Science Park.

One of the most unique fi rms in the Zhangjiang park is Shanghai Biochip (SBC). The company was initiated from 2000 and offi cially founded in 2001, when the mapping of the human ge-nome had captured the worlds atten-tion. Chairman Hua Yuda describes the context of the founding of the company, saying “the US and various European countries invested a great deal in devel-oping the biochip industry. China had limited resources at the time and thus we decided to build up capacities in this area through this organization.” This state backed approach to development has enjoyed signifi cant success in lower tech industries. However there has been a more collaborative, public-private ap-proach in R&D oriented sectors, par-ticularly pharmaceuticals. Shanghai Biochip is designed to develop technolo-gies that change the way research is con-ducted. Mr. Hua says, “We are provid-ing research services designed to measure and test human disease and health con-



Above: SBC Offi ces

Right: Hua Yuda (Shanghai Biochip), Jason Jin (ShanghaiBio)

ditions.” China’s vast potential pool of patients provides an excellent population for these diagnostics. The company has also been utilizing the country’s large population to build out a sample collection quality standard and tissue bank in addi-tion to genomics, pharmacogenomics and biomarker analysis platforms. Shanghai Biochip already provides these services to ten leading global fi rms. According to CEO of Shang-haiBio, the CRO of Shanghai Biochip, Dr. Jason Gang Jin, the company already has a number of validated biomarker analy-sis methods for personalized medicine research in clinical tri-als, in addition to genomics services for discovery researches. The company’s highlight thus far, has been a biomarker analy-sis platform that allows physicians to target chemical and ra-diotherapy treatment regimes. Companies such as Shanghai Biochip are utilized as a site of translational research, where-by work done in universities and institutes be channeled into the market directly, without hoping for the market to develop on its own. Additionally, for core emerging technologies such as genomics, these technology platforms are a part of the push to catalyze expertise and jumpstart innovation. Refl ecting a commonly held view, Mr. Jin is highly bullish on Shanghai’s future as a hub for innovation citing Shanghai’s highly trained scientists, dramatic MNC investment, ambitious local entre-preneurs and extensive outsourcing services. Mr. Jin says, “I have a bold vision that within fi ve to ten years, Shanghai will become the epicenter of global pharmaceutical R&D.”

Service Companies: Buffet or Gourmet?

The service sector boom, occurring primarily in Shanghai, has the potential to reshape the way pharmaceutical re-search is conducted. Firms have been experimenting

with different risk sharing and outsourcing models and a single approach has yet to dominate the market. Chen Chunlin, Co-Chairman of Medicilon/MPI Preclinical Research – Shanghai sees “a trend among companies in the region starting with chemistry based services, adding preclinical services and then expanding with biology services.” Medicilion was indeed one of



Lilly R&D partnership with Hutchison Medipharma

Dropping the Traditional in TCM For the past 3000 years, Traditional Chinese Medicine (TCM) herbal treatments have undergone a process of trial and error that yielded a vast corpus of remedies. A medical system based on balancing opposing energies, known as Yin and Yang, TCM includes acupuncture, acu-pressure, massage, Tai Chi Chuan, Tui na, Qigong, and various other treatment regimens in addition to herbal mixtures. TCM is highly regarded in China, and when patients are given the option, many choose a TCM treat-ment over Western medicine. The market for herbal treatments is projected to reach USD 28 billion in 2010, accounting for 40% of the total Chinese pharmaceuti-cal market. While it has roots in ancient history, this industry has moved far beyond homemade mixtures. Many TCM fi rms use modern purifi cation and formula-tion techniques, and the central government has put a major emphasis on further developing the industry. Medicinal chemists are also mining TCM compounds for lead generation in drug discovery, which is particularly attractive as licensing pools dry up in Western markets. The major success story thus far has been Artemis-inin, an antimalarial developed from a TCM remedy in the 1970’s. However, that is the only truly successful product to date, and researchers often fi nd it extremely challenging to isolate the active ingredients in complex herbal mixtures. Nonetheless, the central government has directed a great deal of funding towards leveraging China’s medicinal legacy into a global drug industry. While there are challenges, scientists are also develop-ing new screening and analysis methods and the results of their efforts are starting to work their way into patent applications and clinical trials across China. Given the level of commitment and interest in modernizing TCM, there is no doubt that a good deal of China’s future in-novative drugs will be fi rmly rooted in its ancient past.

the fi rst fi rms to take this ap-proach and it is now a major player in the space. The com-pany entered a joint venture with US based MPI in order to broaden its service offerings and provide a more fully inte-grated approach to drug dis-covery outsourcing. Mr. Chen believes that the current wave of startups is just the tip of the iceberg. “I foresee an increased number of viable start-up companies as the bio-eco sys-tem and workforce matures in

China. Many of my colleagues in the service sector, and in phar-ma positions, are frustrated entrepreneurs who eventually want

to start their own companies to launch novel biologics and pharmaceuticals.” Many fi rms including Wuxi Pharmatech, ChemPartner, and Sundia Meditech have achieved rapid growth and repeat customers with this business model. However, some of these newer fi rms have a different outlook on the best strat-egy to thrive in this crowded sector. Mr. Ji, from PharmaLega-cy, sees a future in highly specialized services. Mr. Ji’s philoso-phy is that “everybody can set up a good banquet, with every type of dish available. But there’s still a market for a great cof-fee shop, and we want to brew the best coffee in town.” Thus far, the market is hungry enough to sustain both models, but when supply fi nally comes to keep pace with demand for out-sourced drug discovery services, there may be a sharp consoli-dation in the cards.

Latecomers Face Growing Challenges

The The Chinese challenge for Big Pharma is to scale up operations and start building profi tability. How-ever, a number of international biotechs and midsized



China Report

Chipscreen Bioscience: A Southern InnovatorWith leading research institutions and company clusters based in and around Beijing and especially Shanghai, one may be surprised to learn that a prominent Chinese biopharmaceutical company is based in sunny Shenzhen. Chipscreen Bioscience is bringing its San Diego inspired fl air for innovation to the southern province of Guangdong. The name is de-rived from their chemical genomic screening process, which allows for the parallel comparison of research against an established library of compounds. Us-ing this method, Chipscreen competes with larger research organizations by identifying potential targets early in the R&D process.

Moreover, Chipscreen’s approach is paying off as they were the fi rst company in China to license out phar-maceutical research to a foreign fi rm and are quickly changing the face of Chinese genomics. The Chinese government has also noticed their success and the Ministry of Science & Technology has recently named them as one of the six most innovative rising stars in the pharmaceutical industry. In fact, the government is so supportive that when it became apparent the company would need a world-class manufacturing facility, the local municipality stepped in to build one. “The vision behind Chipscreen is to create an R&D driven biotech, company that will be a leading innova-tor in China,” says Dr. Xian-Ping Lu, President and CSO of Chipscreen. With multiple products in the pipeline and several in trials, it appears that they are well on their way to realizing this goal.

Xian Ping Lu (Chipscreen Bio)

players are only now starting to break into the market. These fi rms face a new set of challenges as the big MNCs have the incumbents’ advantage and a broad array of dy-namic local fi rms crowd the playing fi eld. Mr. Zwisler warns new entrants, “The market is very, very competitive and the



Left: Mireille Gingras (Huya Bioscience) Right: Chen Chunlin

(Medicilon) MPI

Medicilon MPI Preclinical Research ShanghaiHuya Bioscience: Bridging the Pacifi cThe proliferation of Chinese pharmaceutical research initiatives both at state run institutes and also at pri-vately funded startups, have the ultimate goal of pro-ducing successful drugs to improve patients’ quality of life. In most markets Big Pharma plays a crucial and direct role in the later stages of commercialization, by partnering or buying IP. However, China proved so vast and had such a rapidly shifting playing fi eld, that MNCs found it diffi cult to effectively separate the wheat from the chaff. In stepped Dr. Mireille Gingras, an entre-preneur from Quebec by way of San Diego, who saw the tremendous potential in Chinese research, along with the unmet needs for both parties; multinationals looking to expand to new licensing pools, and Chinese researchers in need of the experience and resources necessary to commercialize and launch novel thera-peutics. Over the past four years Gingras’ company, Huya Bioscience, has signed fi rst look agreements with thousands of Chinese organizations that have yielded over 1,500 compounds. On the other side of the table, she also works with MNC partners including Abbott, Solvay and Schering-Plough. “Our model is focused on reducing the risk, cost and timeline necessary to pro-duce a drug,” says Gingras. “We are providing a means to help Big Pharma fi ll its pipeline in a moment where many of these fi rms are scrambling to overcome the patent cliff.” In addition to cultivating a large portfolio of compounds as well as having built relationships and credibility with individual PI’s, Gingras insists that the fi rm is ‘not a matchmaker or broker.’ Huya invests its own capital to take candidates through Phase II trials in the US. After they share part of the risk in develop-ing these compounds, Huya is able to set up out-licens-ing agreements at later and far more profi table stages. Thus risk is reduced for MNC partners and Chinese organizations receive drug development assistance and leverage that they might have trouble attaining independently.

cost of entry in China is quite high. The time to market for registration and reimbursement, the scope and scale of sales forces needed, and learning to navigate in a complicated op-erating environment all contribute to a high barrier to en-try.” A company in just this position is Biogen Idec. The world’s fi rst biotech fi rm, Biogen Idec had previously tar-geted its international expansion efforts in Europe. With-out an extensive branded generics portfolio to leverage, Biogen Idec has had to carefully time market entry, lest it invest too rapidly before the market could bear its prod-ucts. General Manager David Yang seeks to ease his way into the market through partnerships. “When our products are approved we will form partnerships with local Chinese or foreign companies to help us commercialize our prod-ucts,” states Yang. “Operating in China is about recogniz-ing risks and then minimizing them. This is a daily exercise where you are constantly evaluating where to share profits and where to go it alone.” Another biotech to recently enter the market is Genzyme, which has attempted to over-come barriers to entry through intensive commitment to the country, including USD 90 million in R&D to produce the first cell therapies in China. Henri Termeer, the global Genzyme Chief Executive is also personally committed to

building the business in Chi-na. Nonetheless, it still takes time to penetrate this market, and without sup-port through the reimburse-ment system, Genzyme’s or-phan drugs have yet to realize any revenue in the Chinese market.

A strategy for overcoming these barriers is innovative product offerings. One of Biogen Idec’s principal strengths is its product Avon-ex, which is currently the number one multiple sclerosis treatment in the world. Part of Avonex’s success is owed to the fi rm’s comprehensive follow up program, which includes advice and counseling. Mr. Yang seeks to replicate this pro-gram in China as part of a strategy to differentiate the fi rm’s offering in customer service. He believes that these types of programs will elevate Biogen Idec above the competition to effectively penetrate this challenging market. As part of a longer-term strategy, Mr. Yang is looking to construct a re-



David Yang (Biogen Idec)



China Report

gional clinical development plan for so-called ‘Asian Diseas-es’ in addition to investigating ‘the full spectrum of pharma-coeconomic operations.’ To this strategy, Mr Zwisler would add the following warning, “Be prepared that anything you do in China will take twice as long as you think, be twice as hard, and cost twice as much.”

Conclusion

The dramatic changes underway in modern China are shaping the course of world events. China’s image as a low cost manufacturer and source of ‘me-too’ prod-

ucts is on the verge of transformation, with thousands of fi rms vying to bring innovative products to market. As Big Pharma is leveraging this scientifi c talent to refi ll drug development pipelines, ‘made in China’ will certainly be joined with ‘dis-covered in China.’ The health care reform will introduce hun-dreds of millions of new patients to the benefi ts of modern medicine, accelerating the trend driven by urbanization and rapidly expanding purchasing power. Performance in the Chinese market today is likely a predictor for the global lead-

ers of tomorrow. Thus, both as a market and as a source of innovation, the rise of China has already begun to transform the global pharmaceutical industry.

Note: Since the date of the interview, Michael Ryde has left Lundbeck China and is now working as Commercial Counselor, Teamleader Health, at the Danish Embassy in Beijing. Oscar Parra currently holds the position of General Manager for Lundbeck China. David Ricks is now the GM of Eli Lilly US and Christian Grapow is now GM of Solvay Pharma Italy.

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Pharmaceuticals China report 2009

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