Unleash the Dragon

December 1, 2004
Zhu Shen

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-12-01-2004,

China's large patient base and concentrated specialty hospitals make it easier to recruit patients for clinical trials in than in the United States. On average, companies can save from two to five months by conducting a Phase I study in China.

China is currently the seventh-largest healthcare market in the world. By 2010 it is expected to become the fifth-largest, with pharmaceutical sales of $24 billion, and some experts believe that by 2020 China will surpass the United States to become the world's largest pharmaceutical market.

The right price

As China has become more affluent, there has been increasing demand for therapeutics, medical devices, and other healthcare products and services. Hepatitis B and C and HIV/ AIDS continue to be major problems, but the overall Chinese disease profile is looking more and more like that of the Western world. Cancers (especially lung, liver, colorectal, and gastric) and cerebrovascular, cardiovascular, and respiratory diseases accounted for 77 percent of deaths in 2000, and it is expected that changing lifestyles will soon put the spotlight on diabetes and obesity.

Meanwhile, the expanding class of Chinese "luxury consumers" is expected to reach 100 million in the next decade. These affluent individuals have fueled the explosive entry of upscale brands such as Gucci, Armani, Cartier, and Mercedes into China and have been the force behind the rise of new private hospitals with US-style premium services. These consumers demand better healthcare, and they can afford it; they represent a lucrative market for foreign companies marketing state-of-the-art medical treatments.

China offers tremendous opportunity for healthcare companies. Chinese companies are looking for global partners on many levels: to provide novel Western pharmaceutical, diagnostics, and medical device products that will be marketed in China by local partners; to feed the country's burgeoning drug discovery, contract research, and contract manufacturing industries; and, in the long run, to market Chinese-discovered and- developed products globally. This article will look at the market, the "returnee" entrepreneurs who are transforming the Chinese life sciences industries, and some of the most important opportunities for partnership—especially in the emerging market for traditional Chinese remedies.

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Opportunities in Life Science and Healthcare

Last year, General Motors made a profit of $437 million in China—more than half its entire North American profits, at close to eight times its North American margin. In the high-tech arena, the chip giant Intel generated revenues of $3.7 billion from China last year, making the country its third-largest market in the world and one of the most profitable. With venture investment of more than $200 million in 50 Chinese companies, Intel is possibly the most dominant high-tech brand in China. By comparison, pharmaceutical companies have lagged behind in their expansion into China. According to some estimates, for example, Pfizer's 2003 Chinese pharmaceutical revenue accounted for less than 1 percent of total revenue (approximately $140 million out of $45 billion), although the company is reported to have invested more than $500 million in China since the 1980s. Pfizer currently markets more than 40 pharmaceuticals there and plans to launch 15 new drugs in China in the next five years.

In addition to Pfizer, the big pharmaceutical players in China include:

  • GlaxoSmithKline, which has invested $400 million in the country and last year reportedly generated about $300 million in revenue there.

  • AstraZeneca, which has invested $140 million in China, achieved revenues of $151 million in the country last year, and expects to increase its Chinese sales force to 900 people.

  • Novartis, which expects to see 20 percent annual growth in its China business in the next five years and has invested $70 million in China since its entry in the late 1980s. Sales have been growing by an average of 20 percent annually since 2000 and last year hit $120 million.

At least five multinational pharma companies have launched R&D operations in China or are considering such an initiative. In October, Roche announced the opening of Roche R&D (China) at the Shanghai Zhangjiang Hi-Tech Park, the company's first R&D facility in Asia and its fifth worldwide, and Eli Lilly established a research operation in the same park this year. AstraZeneca started its East Asia Clinical Trial Center in Shanghai in April 2003. Novo Nordisk China relocated its R&D center to the Beijing Zhongguancun Life Science Park and doubled its size this August. Russell Greig, president of international pharmaceuticals for GSK, said his company would consider establishing a R&D center in the country, if the government puts the correct regulatory regime in place, and Pfizer is close to making a decision about its China R&D center, according to Allan Gabor, Pfizer China's general manager.

China has about 20,000 biologists with a master's degree or higher. They are paid one-fifth to one-third what similarly qualified biologists make in the United States. This vast, competitively priced talent pool is also being explored not just by Big Pharma, but also by biotech companies, such as Basilea Pharmaceutica, a Swiss-based, Roche spin-off that develops small-molecule anti-infectives. In May 2002, Basilea set up JIPharma, an impressive R&D center in Haimen, Jiangsu province, near Shanghai. With a staff of nearly 100 people, mostly chemists, recruited from leading Chinese faculties, JIPharma works to full international standards on Basilea R&D projects.

Anthony Man, Basilea's CEO, cautions that the war for talent could be highly competitive, particularly in big cities. This will drive labor cost up in a short time, eroding to an extent the cost advantages in highly knowledge-dependent technology sectors. "The cost savings will ultimately really come for businesses dealing with volume, whether this is clinical trials or manufacturing," he says. "That's simple supply and demand."

Man's advice: "Pay enough attention to risk and infrastructure and don't build a house of cards. The burning desire for a 'quick win, fast money' as seen in the Chinese real-estate market may undermine the original goal of sustained growth."

Entrepreneurs Come Home

The companies founded by "overseas returnee" entrepreneurs play a key role in China's life science world. Most of the Chinese students who came to the United States in the 1980s and 1990s to pursue graduate degrees in biology or chemistry established their scientific careers at pharmaceutical and biotech companies or academic research institutes. A small but growing number have found a second passion in the business side of healthcare. Many returned to school for an MBA or JD degree, while others found opportunities in business and management.

Back in China, armed with Western education and corporate experience, the returnees are bridging the gap of understanding between Western and Eastern business cultures. Their companies have brought new ideas and modern business paradigms to China's economy—and they often represent the best investment/collaborative opportunities for US and European companies.

One of the earliest returnees is Kevin Chen. Born in Shanghai, Chen graduated from East China Normal University in Shanghai and received his master's from Shanghai Biochemistry Institute before coming to the United States in 1985. After receiving his PhD from the University of Minnesota and doing postdoctoral training at Caltech, Chen held positions at MIT and DuPont and was hired in 1997 to establish a research center in Beijing for Novo Nordisk.

Today, Chen is president of a pair of Chinese companies. South Gene Technology (SGT) is the commercial arm of Shanghai's National Human Genome Center (NHGC), a major center for Chinese genomic research. "SGT is equipped with high-end high-throughput genotyping equipment and has the capability to churn out high-quality data at very competitive cost," Chen says. "We have the ability to access disease-associated genes discovered by NHGC and patient samples from our wide network with hospitals and universities." In addition, Chen heads Shanghai IgCon Therapeutics, a joint venture between SGT and California-based Genetastix that pursues therapeutical human antibodies.

Ge Li, another returnee, founded and runs WuXi PharmaTech, a Shanghai-based company specializing in contract chemistry research and product development services. Li grew up in Beijing, received his bachelor's degree in 1989 from Peking University and his PhD from Columbia University. He was one of Pharmacopeia's founding scientists and gained valuable experience in small-molecule drug discovery and running a successful biotech company. Many of WuXi's senior managers share similar backgrounds. For example, Shuhui Chen, the company's recently hired CSO, formerly served as senior research scientist and research adviser for Lilly's discovery chemistry division. WuXi PharmaTech has more than 60 pharma and biotech clients in the United States, Europe, and Japan, including 14 of the top 20 pharma companies and eight of the top 10 biopharmaceutical companies.

"The pharmaceutical industry is facing the challenge of escalating costs and low R&D efficiency," says Liu Ye, who cofounded Beijing Honghui Meditech, another contract chemistry research service company, with a few fellow returnees from Sweden after more than a decade of education and experience at companies such as Pharmacia and Karo Bio. "Companies that can develop effective therapeutics at more competitive cost will gain an important advantage," says Ye.

Many returnee-founded companies are involved in medicinal and synthetic chemistry, but clinical research is another key area for returnees. Because of the large patient base and relatively concentrated specialty hospitals in cities, patients (including treatment-naive patients) can be recruited for a variety of disease indications faster than possible in the United States or Europe. On average, companies can save from two to five months by conducting a Phase I trial in China. The time saving could be more significant for Phase II and III trials, says Tao Min, a returnee who founded Bio-Research, a Beijing-based contract research organization (CRO), in 2000.

Bio-Research is undertaking an eight-year study—cosponsored by the American Epidemiology Society and the Chinese CDC—of 100,000 Chinese cancer patients to identify environmental and dietary factors contributing to the development of cancers of the GI tract. According to Min, it is inconceivable to conduct such studies in the United States, not just because of higher costs but because the greater mobility of US patients makes them difficult to follow for the length of time required.

Though the cost of conducting clinical trials has increased in China, it is still only 40-60 percent of the cost for most indications in the US. In China, only hospitals designated by the Chinese State Food and Drug Administration (SFDA) are authorized to conduct trials. As a result, principal investigators at such hospitals often have extensive experience with Western companies.

One of the key differences in conducting clinical trials in China and the United States is that in the United States, the sponsoring company takes responsibility for the management and results of trials. In China, the responsible party is the clinical investigator. "We work differently with investigators in China," says Min. "These doctors are thought leaders in their own field and are extremely busy people. We need to be particularly service oriented and make the PI's work less cumbersome."

Min's advice to Western biotech/ pharmaceutical companies interested in conducting clinical trials in China is to have the right attitude and refrain from cutting corners. The Chinese SFDA modeled many of its regulatory standards and procedures after those of the US FDA; therefore, Western companies need not be overly nervous about the process in China. Having the right attitude means following SFDA instructions and processes instead of trying to bypass steps by using connections.

Licensing and Partnering Opportunities

In the past few years, a small number of US companies have successfully out-licensed clinical-stage or earlier compounds to Chinese biotech companies. Peregrine Pharmaceuticals, based in Tustin, California, is an excellent example. Peregrine licensed an Iodine-131 radio-labeled Tumor Necrosis Therapy (TNT) monoclonal antibody that was indicated for a type of brain cancer to Medipharm Biotech, an antibody therapeutics company based in Shanghai. Collaborating with Peregrine and its subsidiary Avid BioServices, a CMO, Medipharm received Chinese regulatory approval for an advanced lung cancer indication in August 2003, becoming the recipient of the first radio-labeled antibody approval in China.

The Chinese approval came before Peregrine initiated US Phase III studies for the drug. As a result, Peregrine can access robust efficacy and safety data from its Chinese partner, potentially lowering the risk of US development. Peregrine and Avid, meanwhile, are working with Medipharm to establish a cGMP facility to produce antibody therapeutics commercially in China.

Another recent example: In July, StarVax, an early-stage therapeutic vaccine developer in China founded by returnees, announced a licensing and codevelopment deal with Mologen, a publicly traded German biotech. Under the deal, StarVax is paying Mologen 1 million euros, plus milestones and royalties to license its DNABarrier II technology in treatments of several major cancers in China and other Eastern Asian markets. Mologen will pay StarVax 0.8 million euros for its clinical development program, performed in China according to international standards.

"This is one of the first international biotech-biotech deals involving a Chinese company," says Burghardt Wittig, Mologen's CEO. "For Mologen, this deal is significant in terms of future access to these rapidly growing Chinese and Asian markets. At the same time we will gain clinical data that will multiply for Mologen the value and probability of a licensing deal with western pharmaceutical companies."

Yiyou Chen, StarVax's CSO and president, was educated in Beijing and Utah and worked as a scientist at Genencor in the San Francisco Bay area before returning to China in 2003. His goal was to build a biotech company from scratch, by leveraging his overseas experiences. His partner in creating StarVax was Justin Chen, a US-trained lawyer with experience in IP and corporate transactions, and now the company's CEO.

Opportunities in Traditional Chinese Medicine

To date, Chinese companies have mostly in-licensed compounds from the Western world, but companies looking to license novel compounds from China will find an increasing number of opportunities in the next three to five years. Some of the most interesting are expected to come from the area of Traditional Chinese Medicine (TCM).

TCM products account for about one-third of Chinese pharmaceutical sales. These products are typically herbal formulations and are available for many conditions, including serious chronic conditions such as hepatitis and even cancer. The Chinese government has historically promoted TCM research and development as an integral part of Chinese culture and a symbol of national pride. In 1996, the government launched the TCM Modernization and Technology Commercialization Action Plan to promote the study of TCM using modern technology and techniques.

Chinese herbal medicines have a long history of use and strong, if anecdotal, evidence of effectiveness. Many take advantage of the synergistic action of certain plants or ingredients, much like the drug cocktails used in Western medicine. The vast resource of Chinese herbs with well-documented medical use and cultivation could become a hidden gold mine in complementing traditional Western approaches to drug discovery.

Multinational pharmaceutical companies are eying this gold mine. In the past three years, Shanghai Institute of Materia Medica (SIMM) in partnership with Novartis has isolated 1,828 natural compounds from Chinese herbs for treating a wide range of diseases, including diabetes, cancers, and central nervous system disorders. The two organizations recently extended their research agreement through 2007, by which time they expect to isolate another 1,500 new compounds.

A few companies have made significant strides in developing therapeutics derived from traditional medicine with the scientific rigor and sophistication of Western medicine. In 1998, for example, PolaRx Biopharmaceuticals, an early-stage US biotech company, obtained commercial rights for arsenic trioxide, a small-molecule compound developed to treat acute promyelocytic leukemia (APL). Arsenic trioxide, originally developed by a Chinese medical school from a TCM compound, has been found effective in treating APL, which affects about 2,000 new patients each year in the United States.

PolaRx set an industry record by obtaining FDA approval in 30 months after the first US patient received treatment in a corporate-sponsored clinical trial, beating the record set by GSK's Gleevec (imatinib). PolaRx was later acquired by Cell Therapeutics Inc. (CTI), a publicly traded biotech company in Seattle that develops oncology drugs. CTI's product, Trisenox, generated more than $22 million in revenue last year and is poised to gain approval for additional cancer indications.

At least two more compounds based on TCM are currently in development:

  • A researcher from the Connecticut Institute for Aging and Cancer (CIAC) has successfully developed an herb mix for prolonging the survival of patients with advanced nonsmall cell lung cancer. This product is the first health-improving anticancer product and composite herbal mix funded by NIH to enter a multicenter, FDA-supervised Phase III trial. Interestingly, FDA is allowing the product to be sold as a dietary supplement while the trial is in progress, significantly lowering the cost of clinical development.

  • SIMM has identified a novel cholinesterase inhibitor from a Chinese herb that shows efficacy in Alzheimer's disease. SIMM has licensed the compound, ZT-1, to Debiopharm, a Swiss pharmaceutical company that is conducting Phase II clinical trials.

In the future, there is likely to be an increasing number of therapeutics derived from both single-ingredient and combination-ingredient herbal formulations. International alliances in the R&D and commercialization/modernization of TCM may well reap big dividends.

The Patent Question

When companies consider venturing into China, their greatest concern typically involves intellectual property protection. Historically, most Chinese pharma companies lacked R&D capabilities and produced undifferentiated generic drugs, competing primarily on price. Before 1993, China did not grant drug patents. New drugs were quickly copied, often by several local companies, causing price erosion and loss of profits. For this reason, multinational pharma companies have hesitated to introduce innovative drugs for fear of losing control and not getting proper protection for valuable assets.

China's entry into the World Trade Organization in December 2001, however, coupled with the Chinese government's desire to attract foreign investment and its mandate to protect the country's own "high technology content" industries, has definitively improved IP protection and enforcement in the past few years.

The WTO agreement requires China to:

  • enhance protection of intellectual property rights by enforcing foreign and international patents in accordance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mandates at least 20 years of drug patent protection.

  • increase foreign companies' participation in the Chinese pharmaceutical distribution industry. By the end of 2004, China's entire retail and wholesale drug markets will be open to overseas entities, after an initial opening in selected cities.

  • comply fully with international regulatory standards. This includes making China's regulatory agencies transparent in their decisions on drug approval.

  • reduce tariffs on imported pharmaceuticals from 9.6 percent to 4.2 percent on average.

Says Doug Olson, an IP lawyer with the firm of Paul, Hastings, Janofsky & Walker: "China is working hard to make patent protection in China the functional equivalent of Western patent systems. Although the Chinese court system does not yet appear to grant damages on the same scale as in the US, injunctions to stop infringement are routinely granted."

For example, several Chinese citizens were fined and sentenced to up to two years in prison for counterfeiting three GSK products—the antimalarial Halfan (halofantrine) and the antibiotics Ampiclox (ampicillin and cloxacillin) and Amoxil (amoxicillin). One violator who sold counterfeits of J&J's Band-Aid adhesive bandages was sentenced to six years in jail. The counterfeit products were destroyed.

There are still challenges ahead. In July, the Chinese Patent Re-examination Board decided that a patent for Pfizer's Viagra (sildenafil) was invalid, stating that Pfizer's application failed to accurately explain the use of the drug's key ingredients. The news sent shock waves through the industry, causing some critics to doubt the progress China has made in protecting IP. However, a closer examination reveals a more complex picture. In fact, long before the Chinese court intervention, Eli Lilly, Icos, and Bayer, whose drugs for erectile dysfunction compete with Viagra, successfully overturned Pfizer's patent in Europe, using the same strategy that was later used in China. (The UK court and the European Patent Office revoked the Viagra patent in 1999 and 2001, respectively.)

To Tony Chen, head of the China IP Practice Group at Paul Hastings and a returnee from the US, the Chinese court decision "demonstrates the evolution of the Chinese intellectual property dispute resolution system, which is quickly following its Western counterparts." He has observed an increasing number of IP disputes in China. In part this is because a growing number of Chinese companies are incorporating litigation into their strategy, but it is also because of the increasing number of Chinese patents. The China Patent Office received 105,318 applications for inventions in 2003—about the same number filed in the United States. Forty-six percent were foreign, representing a growth of more than 30 percent since 2002.

Pfizer is appealing the Viagra case, and the company has made it clear that IP protection and enforcement will have a direct impact on Pfizer's future development in China. A Pfizer spokesman said the company has signed two memorandums of understanding with the Shanghai government to provide training and other resources to assist the Chinese government in promptly identifying counterfeit products and closing down factories involved in illegal activities.

Simon Luk, chairman of the Hong Kong practice of Heller Ehrman White & McAuliffe LLP, a US law firm with a comprehensive life sciences practice, says that multinational companies should take note that more Chinese companies are stepping up their efforts to overturn the validity of patents of multinational companies in China, and that Chinese laws "are sometimes construed by the authorities in an unfavorable way to foreigners."

Where to Locate?

As Western pharmaceutical and biotech companies look to expand into China to establish R&D, commercialization, and manufacturing operations either with a local partner or by means of a wholly owned subsidiary, the question of location becomes particularly important. There are several factors to consider when choosing among different cities and industrial parks. These include:

  • the availability of local talent for required functions

  • proximity to leading research institutions, potential partners, and regulatory agencies

  • quality and completeness of infrastructure and services
  • quality and quantity of other enterprises in the same community

  • the cost of doing business compared with other sites

  • availability of required land and possible future expansion

  • support of the local and central government and specific incentives for overseas companies.

Among the high-tech and life science industrial parks suitable for Western life science companies, the China Beijing Bioengineering and Pharmaceutical Industrial Park (CBP) and the Shanghai Zhangjiang Hi-Tech Park are two of the top choices. CBP, in Beijing's Daxing District with close to 7,000 acres land available for development, is the largest industrial park in China that is dedicated to life science companies. For a large Western drug company planning a serial expansion in China, the CBP is particularly attractive because of the large parcels of land available.

About 40 prominent Chinese pharmaceutical companies and institutions have signed leases to move into the CBP park in the next two or three years. The industrial park also boasts the highest concentration of research talents in its surroundings, given its proximity to more than 100 universities and top-notch research institutions. More information is available on the website: www.cbp.net.cn.

The Shanghai Zhangjiang Hi-Tech Park has enjoyed an impressive growth in the past 10 years, attracting dozens of local and overseas life science companies, including Roche and Eli Lilly. Shanghai's pragmatic commercial culture and flexibility make it an attractive destination for international businesses. The top leaders of the new Shanghai Pudong area and Zhangjiang Hi-Tech Park are also looking into the possibility of establishing a life science venture capital investment fund modeled after successful US VC funds. The goal is to help stimulate and promote the growth of the nascent Chinese biotech industry in the park and leverage the proven US VC model in terms of screening, evaluating, and managing investment opportunities. Zhangjiang Hi-Tech Park's website is www.zjpark.com.

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