Unleash the Dragon 2

Aug 31, 2008

If last month's Olympics marked China's "coming out" in the global media, last year saw a similar (if less extravagant) emergence of China's pharmaceutical industry. Insiders took note of two signal developments: WuXi Pharmatech's IPO on the New York Stock Exchange in September, and the R&D collaboration deal between Hutchinson Medipharma in Shanghai and Eli Lilly. The largest China-based contract research organization (CRO), WuXi has seen its stock value climb as high as $40-plus per share since its IPO at $14. Hutchinson Medipharma's partnership with Lilly, focusing on oncology and inflammation, is the first "rich deal" between a Big Pharma and a China-based drug R&D shop.

In fact, with its explosive economic growth and increasing influence on world affairs, China has emerged as one of the last remaining superpowers, and experts predict that China will surpass the United States as the top pharmaceutical market worldwide in the next two decades. Accordingly, the Chinese government has designated the life sciences as one of its "pillar industries" to fuel growth. Various incentive programs were created to attract overseas commercial entities to establish Chinese operations and entice "sea turtles" to return to the homeland as entrepreneurs. (Why "sea turtles"? "Overseas returnees" and "sea turtles" are pronounced the same in Mandarin Chinese: hai gui.) Increasingly, US and European venture capital (VC) funds are looking to China for new life-sciences investment opportunities.

According to a May 2008 Citigroup report, the global CRO market is estimated to be US$15 billion, and growing 15 to 16 percent annually. China's share is growing well above that rate. Despite fears about quality control—mainly in manufacturing—Big Pharma's outsourcing of R&D is only accelerating. Chemistry and small-molecule compounds lead the way, with biology and protein-based work gaining fast. And preclinical safety research is just starting, with initiatives from Charles River and Covance/WuXi Pharmatech.

Big Pharma has understandably tended to take a one-toe-at-a-time approach to sourcing in China, especially when it comes to cherished R&D activities. Roche Research China went at it more ambitiously, working with a wide range of partners—academic groups, biotechs, and CROs—and integrating them as much as possible into Roche's own drug discovery teams. "We are seeking the optimal balance of how much we do in-house and [what we do] with external partners," says Li Chen, head of research at Roche China R&D Center. "We expect to approach a 50/50 ratio by the time we run a full portfolio, from lead generation to Phase IIa clinical trials." The Swiss giant is now collaborating with its Chinese partners on translational research and looking into the clinical trial design for new medicines discovered in China.

The Question of Quality

The recent heparin panic—the likely result of a sophisticated contamination upstream from the plant processing the anticoagulant for Baxter—has apparently not dampened Big Pharma's enthusiasm for outsourcing to China. "I don't see much of a difference between running an operation with internal staff and external staff," says Roche's Chen. "It's all about leadership. If you look at the quality of the science itself, Chinese chemistry is always good. DMPK [drug metabolism and pharmacokinetics] and safety operations can be standardized in China just as in any other part of the world. Research biology and pharmacology require knowledge and expertise, and they are still evolving. The redistribution of talent is now happening—from Big Pharma to CROs/biotech, and from West to East. The challenge is to translate individual excellence to an institutional and industrywide practice in China."