China 2020: Walled In No More - Pharmaceutical Executive


China 2020: Walled In No More

Pharmaceutical Executive

Where Does Innovation Come From?

In the past few decades, the Chinese pharmaceutical market has been dominated by generic drugs as well as traditional Chinese medicine (TCM). China has been weak in pharmaceutical R&D because the foundation for novel research was lacking and there was no infrastructure of venture capital (VC) investment and technology transfer to foster and support new biotech companies. This is in many ways still the case. But now China is eager to change that by pouring large amounts of government funding into key industries and establishing large-scale science and technology parks with incentives in top-tier and second-tier cities to attract talent and new technologies.

However, given that the US developed an efficient infrastructure to support new technology spinoff with venture capital, university licensing, and capital market expertise over many decades, it would be unrealistic to expect the same to be built in China in a matter of a few years. China does not yet have enough knowledgeable VC professionals with successful track records and experience in the life sciences industry to run government-owned quasi-VC funds, as most of the experienced ones work for US or European VC funds that happen to include a China operation.

Infrastructure is being supplied by contract research organizations (CROs)—both locally based firms as well as foreign players with operations in China. Many of the major drug makers are working in partnership with CROs to build their clinical trials and manufacturing presence for the Chinese market. Drug discovery services in China are expected to grow at an annual rate of 18 percent from 2008 to 2014, with preclinical and Phase I trials at a 7 percent rate during the same period.

The trend in the CRO industry is that pharma and biotech companies are moving away from the pure fee-for-service model when working with their CRO service providers. Instead, many are migrating toward the "strategic partnership" model with their preferred CRO companies, as the CROs continue to gain therapeutic-area expertise, operational excellence, and build positive relationships with their pharma/biotech clients. The strategic partnership model allows pharma companies to focus their resources and make bigger and hopefully smarter bets on "vetted" CRO partners with a proven track record of quality and deliverables who may also be willing to share part of the development risks because of their research insights from working on certain therapeutic targets and disease areas in the past.

The dozen or so leading Chinese CRO companies have blossomed in the past five to seven years thanks to the rapid demand for their services from multinational and Western biotech companies. Most of senior management at leading Chinese CROs are "sea turtles" (overseas returnees) who not only manage the day-to-day operation and growth of the companies, but also train a vast number of local hires on technical as well as managerial skills. New demand for Chinese CRO services is beginning to come from Chinese domestic pharmaceutical companies, government/NGOs, and academia as a result of the government's mandate for innovation and the need to access high-quality research and expertise.

The Blossoming Talent Pool

The Chinese CRO industry is a fertile ground for cultivating talent in new drug discovery and innovation as the industry continues its close relationship and shared learning with its pharma clients and partners. For example, Lee Babiss left his post as president of research at Roche in February to join global CRO company PPD as its executive vice president of global laboratory services. PPD recently acquired China-based discovery research CRO BioDuro and clinical trial CRO Excel Pharmastudies.

One major reason Babiss cited for his departure from Big Pharma was a shift in focus away from drug R&D to managing budgets and cost cutting. "When I was at Roche, my reason to go to China was always for the talent, not cost," remarked Babiss. "China is very strong in synthetic organic chemistry. In medicinal chemistry, it may take three to five years for China to catch up to the US or Europe, [but] it is pretty close already. In biology and pharmacology, there are some disease models that are pretty good, [but] still a work in progress." It is just a matter of time before a wave of research talent exits the CRO industry to take the logical next step: starting fully integrated R&D-based biotech companies in China.

Another source of innovation comes from senior research scientists at Western pharma/biotech companies and research institutions. Because it takes a long time to develop truly novel drug-like compounds from the discovery stage, several new well-funded Chinese biotech startups decided to initially in-license compounds with positive clinical data from other companies, including from the US. Beijing's BeiGene is such an example, a startup cofounded by BioDuro cofounder John Olyer, former Howard Hughes Institute investigator Xiaodong Wang, and two Big Pharma scientists with drug approval track records. Hua Medicine, a Shanghai-based startup headed by CEO Li Chen (former CSO of Roche China) is another example. Simcere Pharmaceuticals, a Nanjing-based, New York Stock Exchange-listed company is also aggressively pursuing licensing to grow its top and bottom line.

Nevertheless, licensing activity remains in the infancy stages and has not yet approached its potential. Negotiating expertise on the Chinese side is sketchy, while Big Pharma companies remain wary of a partner's ability to manage and contain IP exposures—and challenges still exist to the government's ability to enforce basic patent standards.


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