On the Move: Pharmaceuticals R&D in Asia (Part Two)

China with its population of about 1.3 billion, is expected to become the world’s leading consumer of pharmaceuticals by 2020. In 2006, the market size was US$13.1 billion for Western-style medicines. It is currently growing by about 30percent per year, according to Datamonitor.

The country’s domestic market is expanding due to the rising number of middleclass families with increased access to healthcare. In addition, reforms have expanded distribution channels. Prescription drugs continue to represent a large opportunity, while Over-The-Counter (OTC) medications are also seeing growth, with increased awareness of self-medication, rising disposable incomes and large numbers of uninsured.

The Chinese domestic pharmaceutical industry is highly fragmented, with a number of smaller local players accounting for about 70 percent of the country’s overall drug market. However, a process of consolidation has started.

Quality of Life

The rising number of middle-class families with increased access to healthcare due to changing life styles, are triggering interest from global investors. The growing use of Traditional Chinese Medicine (TCM) is complemented by Western products.

More stringent government standards and controls, stronger Intellectual Property Rights (IPR) protection and the return of Western educated Chinese with technical and management skills are additional contributing factors for growth.

About 98 percent of China’s drug products are still generic copies. There has been an increase in the number of Drug Master File (DMF) filings (approximately 75 in 2005) with an effort to follow the Indian model, ie, approximately 1-5 years away from Abbreviated New Drug Application (ANDA) filings.

Sinopharm has, under the control of central government, 10 wholly owned subsidiaries or shareholding companies. Sales in 2004 were US$2.3 billion with an import/export volume of US$500 million.

Zhejiang Hisun (one of the largest bulk manufacturers for antibiotics, antitumor and statins API) exports more than 80 percent of API production to the EU/ US. Other major players are Zhejiang Huahai, Shanghai Fosun, Harbin Pharma, SJZ Pharma Group, Hisun Pharma SPG, Hengdian Group, Neptunus, Shandong LuNan, Yangzijiang and Founders Group.

China is committed to building and expanding the pharmaceutical industry, with strong support from the government. At the same time, there are also foreign Multi-National Corporations (MNCs) operating in China with large R&D budgets and global resources.

For example, the government is building science parks, like the Zhangjiang science park (“Drug Valley”) in Pudong, Shanghai. Eli Lilly and Roche have R&D facilities at this location. Another development zone is the Tiajan Economic Technology Development Area (TEDA) in Beijing.

Efforts have been made to attract talent back from the West. Like India, the reverse “brain drain” is fuelling the build-up of Chinese talent. As an example, the Guangzhou Institute of Biomedicine and Health is actively recruiting scientists, with a strong preference for those who have had international experience.

Government Assistance

Since 2004, foreign–invested, Shanghai–based firms are eligible to receive subsidies for newly patented technologies and/or methodologies that are used in new products. Previously, only domestic firms could apply for these subsidies. These funds can represent up to 75 percent of R&D costs, if the latter is performed in Shanghai.

China has created an attractive tax environment, ie, 20 percent for foreign companies, compared to 33 percent for domestic companies. This is about to be revised (foreign: 24 percent, domestic: 28 percent). However, favorable tax incentives will still apply for R&D collaborations with Chinese research institutes and for those R&D companies that are registered in the High-Tech Development Zones (HTDZ). Incentives seem to be more attractive in Shanghai’s HTDZs compared to those in Beijing.

Along with Beijing, Shanghai is a popular location for foreign-owned pharma R&D centers, due to its growing variety of other businesses that provide services to the pharmaceutical industry. Tax concessions and access to capital at favorable rates are in addition to direct savings on facilities, overheads and salaries.

The Chinese domestic biotechnology industry has become one of the largest and most productive in Asia (eg, the world’s first licensed gene therapy medication was developed by Shenzhen-based SiBiono GeneTech in 2003).

Contract Research Organizations (CROs) are becoming an increasingly important component of the drug development industry. Chinese CRO growth is outpacing that of the industry. A growing number of foreign and domestic CROs are also establishing operations in China.

China’s top ranking emerging CRO is WuxiPharmatech. It was founded in 2001 and has grown to over 900 staff. It claims that its current customers include 18 of the top 20 pharmaceutical companies and eight of the top 10 biopharmaceutical companies in the world. Ranking second is ChemPartner, which was founded in 2003 and has grown to 400 staff. Its customers include Eli Lilly, Merck, and other top 20 global pharmaceuticals companies.

China and Singapore and amongst the countries that are alternatives to India for conducting pharmaceutical R&D. Whilst China is of strategic importance as a market and offers low labor costs, Singapore mainly attracts companies by tax incentives and infrastructure.

Attracting Investment

China is a somewhat challenging country in which to conduct business, due to its varied culture and business environment. There are several reasons for conducting R&D

in China:

• Supportive government policies

- Building infrastructure to support biopharmaceutical R&D (industrial parks)

- Tax incentives

• Large talent pool and well-educated workforce

- 4.5 million university graduates annually

- Bench scientists with few major knowledge gaps

• Academic research

- Competent professionals

- Productive collaborations are possible with proper guidance

• Low cost structure

– In particular low cost of conducting clinical trials, due to low labor costs and speedy clinical trial recruitment. However, as low-cost labor will not always be available, companies that decide to stay for the long-term should consider quality, market share and talent pool.

• Quick entry to the fast growing Chinese market

• Huge naive patient population

• Abundant preclinical animal resources

• Rich Traditional Chinese Medicine (TCM) / natural medicine knowledge

There are also challenges to consider:

• China’s SFDA (State Food & Drug Administration) approval process tends to be lengthy, with a lack of transparency

• Language barrier resulting in delays in communication and compromising cost advantages (eg, by the use of interpreters)

• Import tax for instruments and reagents

• Weak IPR (trade secret, patent protection, confidentiality agreement, etc)

• Lack of experienced R&D personnel

• Competition for talent in focal areas such as Shanghai

• Limited GMP experience relating to GMP sensitive areas such as full development (eg, analytical and formulation)

• Dealing with government bureaucracy

India should be seen as a complement rather than an alternative to China in terms of conducting R&D. Therefore, an evaluation of pros/cons for offshoring R&D between China and India may not be practical as it depends on strategic intent, the type of R&D activity, business model and other factors that have been discussed.

According to an Economist Intelligence Unit (EIU) survey which involved 104 senior executives across industries worldwide, China and India are emerging by far as the top favorable destinations outside of their home countries for R&D spending.

A strong driver for choosing China, is the country’s generally strong economic growth and its national reimbursement list. In India, the focus is on the public procurement of generics.

MNC Activity

In 1985, Janssen Pharmaceutica (Johnson & Johnson) was the first Western pharmaceutical company to set up a pharmaceutical factory in China (Xian). By 1983, the company had signed a cooperation contract to modernize products in an existing, but old, chemical factory in Hanzhong. Xian Janssen is one of China’s top joint ventures with a turnover of about US$400 million in 2006 and more than 1,500 employees. Novo Nordisk inaugurated the first international R&D centre in China in 2002.

Over the past few years, the pace of expansion into China has accelerated, with 38 foreign pharmaceutical companies now operating in the country. Of these, AstraZeneca, Eli Lilly, Novo Nordisk, Pfizer and Roche run their own clinical trial centers in China, with much of their activities being centered around Shanghai.

The decision by companies to move into Shanghai reflects the city’s growing reputation as a technology hub. Apart from what has been called the best physical infrastructure in China and an expanding base of several hundred biotechnology and medical enterprises, many foreign chemical and pharmaceutical companies have set up their operations in Shanghai. These companies include Degussa, Dow Chemical, DuPont, Honeywell, Pfizer, Roche and Toray Industries.

The Roche center was inaugurated in 2004 and now employs 80 people including 56 scientists. Of these, about one-third are Western-trained scientists of Chinese origin who have returned home. According to Roche, the facility may eventually employ as many as 250 drug discovery scientists.

Roche has announced its decision to build a second R&D site in China, spending US$100 million to create the first fully functional China clinical drug R&D center that is owned by a pharmaceutical MNC.

Pfizer has invested US$500 million, amongst plants in Dalian, Suzhou, and WuXi and also in a clinical trial center.

In November 2006, Novartis announced the construction of a 400-person, 38,000 sq meter Shanghai R&D center (Zhangjiang Hi-Tech- park, close to Roche’s center), reflecting a US$100 million investment while at the same time building an API plant in Jiangsu province.

Prior to the establishment of the center, the company had been bringing European experts into China to establish centers in hospitals with good clinical practice. This was to allow it to conduct clinical trials in China in collaboration with Chinese partners such as, the Shanghai Institute of Materia Medica, WuXi PharmaTech, Chinese University of Hong Kong National Institutes of Biological Sciences, and Kunming Institute of Botany.

Cooperative Research

Similarly, Wyeth unveiled its first R&D facility in China in 2006. The Shanghai-based center will act as the company’s regional clinical development center in Asia. To augment the center’s in-house capabilities, Wyeth has established a joint early clinical development center with Peking Union Medical College Hospital in Beijing.

Eli Lilly is headquartered in Shanghai with offices and facilities in Shanghai, Beijing and Guangzhou,. The company established a joint venture in Suzhou and wholly owned it in 2002. Its Suzhou manufacturing plant and Shanghai research center together employ about 1,000 staff.

Its 250 Chinese chemists, which represent the largest of its non-US drug development teams and about 20 percent of its overall scientific staff strength, are working in all stages of drug development. Lilly intends to reduce its global R&D budget from about US$3 billion in 2006 to US$800 milion by 2010.

The company aims to achieve this through joint research with Chinese and Indian organizations. In China, Lilly has been working with ChemExplorer in Shanghai on molecule selection since 2003, and now outsources 20 percent of its discovery work to the latter. In 2007, Lilly also entered into a strategic partnership with Hutchison MediPharma (HPML).

GSK is planning to establish and invest US$40 million in a stand-alone R&D center, devoted entirely to discovering innovative drugs and healthcare solutions. Its first production plant was setup in China 22 years ago, and the company has small R&D units in Beijing, Shanghai and Tianjin. It spends 17 percent of its sales on international R&D every year. While GSK already uses China as a manufacturing hub to produce medicine, its center will allow the development of new end-to-end products.

Merck is also active in Shanghai, although its presence is largely through R&D collaborations rather than its own in-country staff. In 2006, the company announced an agreement with Shanghai Biochip on genetic and biotechnology research for cancer treatment. The agreement is for the collaboration of an oncology research program.

In 2006, AstraZeneca set aside US$100 million for a R&D center called Innovation Centre China ICC, to start operations in 2009, while also investing into their manufacturing site in WuXi.

Beginning 2009, Bayer Schering announced that it will be strengthening its global R&D capabilities through the foundation of a global R&D center in Beijing. The company will invest some 100 million Euros (US$147 million) over the next five years to establish the center.

Servier, one of the largest independent French pharmaceutical companies, has set up a joint venture with Tianjin Huajin Pharmaceutical in Tianjin after already establishing a R&D company in Beijing in 2001.

Some drug developers are seeking to expand their activities to include traditional Chinese medicines. In 2006, for example, Merck entered into an agreement with Chi-Med's Shanghai research center, giving the former access to the latter’s library of botanical compounds.

Headquartered in Beijing, Novo Nordisk has about 1,000 employees in China and has become a leader in diabetes products in the country with fully integrated R&D, production, sales and distribution. The company has also announced an investment of another US$10 million in Beijing for a biotech development center.

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Singapore: Setting the Stage for Expansion

Singapore’s government has formulated a strategic objective to enable the country to become a center for the pharmaceutical, biotechnology and medical- technical industries. Besides tax incentives, a world-class infrastructure, political stability and its IPR protection record, Singapore offers highly professional authorities – amongst them the Singapore Economic Development Board (EDB) that supports investors and companies that are considering to set up a presence in the country.

Many pharmaceutical MNCs, amongst them GSK, Sanofi-Aventis, Merck ,Pfizer, Schering – Plough, Johnson & Johnson and Wyeth have invested in Singapore with their own R&D centers, manufacturing facilities, marketing and distribution hubs or support functions such as Information Technology (IT) or finance.

In recent years, Pfizer and Schering-Plough have initiated API plants in which they have invested several hundred million dollars each. Merck moved its Asian regional headquarters from Hong Kong to Singapore in 2007 because of the latter’s favorable business environment.

Eli Lilly announced in 2007 to triple the size of its existing research center in Singapore with an investment of US$150 million. In total, the MNCs in Singapore are estimated to employ more than 3,000 staff.

One drawback of the country is (besides the absence of a domestic market) the fierce competition for experts and scientists.

This could mean that the currently relatively low labor costs will rise, as the surrounding countries are unable to provide the growing need for qualified human resources. At the same time, there is an increasing number of MNCs that are entering the country or that are expanding their presence.

However, the attractiveness of Singapore for expatriates from the West and the influx of foreign experts still compensates for the shortfall, to an extent. Singapore is particularly attractive for MNCs, because the saving potential for their pricey products is provided by tax incentives that are offered by the government.

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Part three of this series will be featured in the November/December issue of PharmaAsia and will focus on a comparison between India, China and Singapore.