Darren Ji at PharmaLegacy Laboratories provides an overview of the pharmaceutical industry in China
China has long been a country observed through a veil of myth and mystery. No wonder the idea of doing any level of high technology business in China seems daunting. Perhaps it is the distances that need to be bridged not just physically, but also culturally and politically, that are cause for hesitation. Or is it the most commonly cited obstacle, a lack of intellectual property (IP) protection, that prompts an outright dismissal of the prospect? Other hindrances more specific to the pharmaceutical industry may include the complex drug approval procedures and a lack of effective governmental incentives for research.
A closer (and in some instances more accurate) look is certainly warranted, especially as China is becoming a large economic power and is undergoing a rapid transformation. For example, in the biopharma industry, IP protection in China is noticeably improving, and the lure of the huge commercial potential offsets much of the risk-averse concerns. Indeed, China’s position in the pharmaceutical world is in steep ascendancy, both in terms of the size of market and the integration of China-based R&D into the global industry. Government support, a dynamic entrepreneurial environment and the promise of a booming market are driving changes not only in China, but in the global pharmaceutical industry as well.
CHINA’S GOVERNMENT-BACKED INFRASTRUCTURE AND INCENTIVES
China’s government has identified life sciences as one of its pillar industries for growth, and is investing heavily in healthcare for the public as well as in drug development research and programmes that will attract overseas commercial entities. In 2006, China implemented a 15-year medium- to long-term plan for the development of science. An overall objective of the plan is the development of an innovation-oriented society. The plan sets in motion measures for reducing dependence on foreign technology by promoting innovation at home. The plan commits China to invest 2.5 per cent of the country’s gross domestic product (GDP), estimated at US$4,607 billion in 2009, in research and development. The previous year, a little more than half this amount (1.34 per cent of GDP) was spent on research. Reforms that promote industrial development, small- and medium-sized businesses and tax breaks for high technology zones are also included in the policy framework of the plan.
The plan has also given rise to some other clear signals indicating the Chinese government’s seriousness in rising to become an international player in drug development. For example, in 2008, China started funding significant novel drug development projects. Stemming from China’s medium- to long-term plan, a budget of 6.7 billion Chinese yuan ($1 billion) was allocated to drug discovery as a start. The grant money was not only available for institute and university research; industrial researchers in Chinese-owned companies were also eligible. The so-called research megaprojects are orientated toward providing research budgets that are congruent to the budgets available abroad. Although the spread was considered too thin to have a substantial effect at the initial stages, continuous funding by central and local governments in China is certain to help build infrastructure and human capital.
The government input in improving the resource levels (financial and structural) available for research and development is also meant to help lure overseas Chinese talent back to its homeland. Top government officials from the nation’s science parks have been conducting competitive road shows to pitch to talent pools working in places like the biotech hubs of San Francisco and Boston. Many of the top drug houses that set up R&D facilities in China cited the growing talent pool of scientists who trained overseas as one of the factors that attracted them to China.
Improving the climate for research and development is not the only major government initiative that will affect the pharmaceutical industry. Healthcare reforms aim to increase the proportion of the population with health insurance to between 80 and 90 per cent by 2011. In 2009, a budget of 850 billion yuan (US$124 billion) was committed to fund the plan for a three-year period (2009- 2011). Estimates of China’s domestic market for pharmaceuticals for 2008 vary between $23 billion and $33 billion. The pharmaceutical intelligence company, IMS Health (which projected 2008 sales at $28 billion), lists China as the fifth largest pharma market in the world and predicts that it will reach third place by 2013. One driver for the growth is the establishment of an Essential Medicines System, part of the current health reform budget, which calls for an estimated 300 to 400 essential medicines to be made available at all public facilities. Access to healthcare and pharmaceuticals will be increased through the construction of hospitals in every county (approximately 2,000), the construction of 29,000 township hospitals and upgrades of another 5,000.
An industrial flavour can easily be spotted in China’s public policies. Even before the science and technology plan was put in place, China’s central and regional governments had been making heavy investment in life science startups clustered in R&D parks located in the country’s major cities (Beijing, Shanghai, Suzhou, Tianjin, Taizhou and others). China has dedicated large areas (10 to 15 square miles or more) to R&D parks such as in Zhangjiang Hi-tech Park in Shanghai, or China Medical City in Taizhou. Whether it be moving residents to make room or locating universities and institutes in close proximity to these parks, China has stepped up in providing major capital to support its quest to become an innovation-based economy. These parks have provided ample room for the growth of new companies such as contract research and manufacturing organisations.
CROs, BIG PHARMA AND THE VIRTUAL FLEXIBILITY OF BIOTECH
Pharmaceutical and biotech companies seeking out ways to reduce costs and speed up development have been driving the demand for outsourcing research and development work. Due to a climate that is able to provide a cost advantage and supply talent to the industry, the number of contract research organisations (CROs) in China has expanded substantially over the last five to seven years. Initially, Chinese CROs were founded by Chinese scientists who had been educated overseas, creating small businesses that concentrated on a specific area of expertise. Now, CROs are being formed with significant financial backing for constructing large labs which are capable of handling all aspects of drug development with leadership that may or may not be Chinese.
The outsourcing industry in China originated with the offering of chemistry services. China’s contract manufacturing organisations (CMOs) began engaging in active pharmaceutical ingredient (API) production as early as the 1990s. While manufacturing is the largest segment of the outsourcing market (internationally, not just in China), it is the other aspects – preclinical and clinical research – that are of greater interest from the perspective of China’s aim to become deeply integrated into the global pharmaceutical industry.
Chemistry and small molecule compounds are still the most prevalent parts of R&D outsourcing in China. However, the number of more biology orientated (such as animal models) and protein-based service providers is growing along with preclinical safety services (such as toxicology). Clinical trial services have also come online, either through locally founded companies (such as Fountain Medicals) or international companies that are setting up shop in China (such as Quintiles) or establishing joint ventures with Chinese companies. The vast patient base, a supply of rare diseases and a naïve population (never exposed to other drugs) are tremendous assets in helping move a clinical candidate down the development chain expeditiously and cost-effectively. China is home to more than 250 CROs and CMOs that form an integrated service chain, addressing every link from early drug development to clinical trials.
The major Chinese CROs are located in either Shanghai or Beijing. Consequently, a great deal of outsourcing activity is allocated to the two largest biotech parks: Shanghai Zhangjiang Biopharmaceutical Park (part of the Zhangjiang Hi-tech Park) and Beijing Zhonguancun Life Science Park. The Zhangjiang Hi-tech Park is experimenting with a venture capital (VC), IP and CRO sponsorship model. The business model utilises VC (both government and private) to obtain IP from global sources for testing and development at CROs located in the park. The Zhangjiang government collaborates with private companies to manage this programme, known as the VIC initiative. The plan has the potential to promote the development of innovative medicines using its own CROs. Other industrial parks are also considering similar approaches.
The fertile Chinese soil for the creation of a myriad of CRO-service companies that span the drug development chain has also created an atmosphere of experimentation for the global pharmaceutical industry. On 30th October 2004, Roche made the pioneering move of opening a new global R&D centre in the Zhangjiang Hi-tech Park. Industry analysts regard the establishment of Roche’s Shanghai R&D centre as a turning point, because several other top 10 pharma companies followed. Currently, Shanghai Zhangjiang Hi-tech Park has nine of the world’s leading pharmaceutical companies listed as residents (or potential residents as some facilities are under construction). They include Roche, Novartis, Astra Zeneca, GSK, Eli Lilly, Johnson and Johnson (J&J), Pfizer, Abbott and Sanofi Aventis. Recently in Beijing, Genzyme joined the pack and broke the ground for its China R&D centre.
These companies are experimenting with new models for drug discovery. The extent to which R&D is performed within dedicated facilities or farmed out to the potpourri of CROs varies from company to company. On one side of the continuum is Eli Lilly: the company has rented offices with a small staff dedicated to outsourcing and overseeing diabetes and oncology drug discovery with a five-year budget of US$100 million. On the other side are GSK and Novartis. GSK is building a permanent home in Puxi for its neurodegenerative and neuroinflammatory drug development programmes, focused on multiple sclerosis, Parkinson’s disease and Alzheimer’s disease. Their plan is to employ 1,000 people over the next 10 years. Novartis have announced a continuing investment of $1 billion into the R&D they are conducting in China. Predictions point to the Yangtze-delta region (Shanghai and the surrounding area) becoming the largest life science cluster in the world (by employment), and the second largest R&D base after New Jersey and Pennsylvania.
Biotech companies are also driving the demand for services as they look to CROs to provide the expertise they lack. A virtual company is a company founded on an idea and owning the IP, but outsourcing R&D, clinical studies, toxicology and production. The primary role of the virtual company is to monitor and manage the outsourced activities. This strategy for making biotech companies more capital-efficient is greatly helped by the advantages offered by China’s CROs.
The large number of niche service providers are providing fodder for consolidation of the CRO industry. Recently, Pharmaceutical Product Development (PPD) announced the acquisition of both Excel Pharmastudies and BioDuro, two prominent companies providing clinical and preclinical services. The acquisitions make it possible for PPD to offer a full line of services, from preclinical to clinical trials, and to contend with other companies offering a more complete range of services.
A BIG MARKET AND A GROWING SOURCE FOR INNOVATIVE DRUG CANDIDATES
China is becoming highly active in looking for global drug candidates for development, both for China and the global market. A handful of commercial companies – NovaMed Pharmaceuticals, Simcere Pharmaceuticals, Profex and Hutchison Medipharma – have been active in this area. China’s R&D is beginning to provide drug candidates for global development. In terms of providing innovative drug candidates, discovery based on traditional Chinese medicine (TCM) and natural products is a deep well from which to draw. TCM has the potential for becoming a formidable source of novel compounds for drug development. Hutchison Medipharma’s lead candidate, a botanical product extracted from a herb that occurs naturally in China, HMPL- 004, has completed a US Phase II trial for Crohn’s disease and a China Phase II trial for ulcerative colitis. Both trials demonstrated the therapeutic benefits of the lead candidate. The herb has an extensive history of use in TCM for the treatment of upper respiratory tract infections and other inflammatory and infectious diseases.
CHALLENGES AND PROMISE
While China’s pharmaceutical and biotech sectors have cause for optimism, some formidable challenges still remain. Despite significant evolution in recent years, the levels of IP protection and enforcement in China present a challenge. Even so, an increased awareness regarding the importance of IP is indicated by the soaring patent applications and the number of IP litigation cases filed by domestic companies. All evidence suggests that the situation will continue improving in the years to come.
While the government is stepping up with financial resources, the sophistication in making investment decisions needs maturing. Sources of VC funding are increasing from within China and from the West. Fidelity Asia Ventures, the Asian branch of the Fidelity Investment group, was the first Western fund to set up shop. They began as early as 1995. One of their investments, WuXi Pharmatech, a pharmaceutical, biotechnology and medical device R&D outsourcing company located in Shanghai, launched a very successful IPO on the New York Stock Exchange. Other early-day VCs include Qiming, HBM BioMed China Partners, and BioVeda China. Recently, highly successful VC firms such as Kleiner Perkins and Orbimed also opened offices in China. Other Western funds include Lilly Asia Venture Capital Fund, targeting resources at Asian enterprises, especially China-based startups in the life sciences sector with huge potential. Angel investors such as Morningside are also actively investing in different aspects of the business, ranging from CROs to research platforms. Despite the emergence and growth of funding sources, China’s burgeoning pharmaceutical business could still use more capital.
Another challenge involves China’s drugregulatory agency, the State Food and Drug Administration (SFDA). Currently, time to permission for first-in-human studies is too long, and for new chemical entities this process is next to impossible. On the positive side, China has gone to extremes to clear the agency of corruption and there is a new generation of regulatory officials eager to take on the challenge of bringing the agency up to international speed. However, until a complete reform takes place, the regulatory environment will remain a hurdle to innovative productivity in pharmaceutical development.
China is on track to become a significant and integrated force in both global biopharmaceutical development and the global market for pharmaceuticals. As commercial interest increases, the veil of myth and mystery is certain to be raised.