Cost, Time, and HR
For U.S. companies, China is a key component of their globalization strategy, particularly as it relates to manufacturing, R&D, and clinical trials. A major consideration is the increasing cost and diminishing productivity of new drug development.
China is estimated to have some 20,000 biologists with master’s degrees or higher. Their salary scales are one-third to one-fifth of that in the U.S. For managers, the cost of expatriates is as much as five times that of local managers. In the case of CROs, the FTE rate in China is from $50,000 to $60,000, compared to $200,000 in the U.S.
A second factor relates to time. It is estimated that a Phase III study in China could be six to seven months faster. Bio-Research (Beijing) is carrying out a study in collaboration with the American Epidemiology Society and the Chinese CDC involving 100,000 cancer patients. The study will examine environmental and dietary factors associated with GI cancer. Such a study would be impossible to conduct in the US.
Labor-intensive projects pursuing drug leads can also profit from the availability of multiple teams of skilled investigators.
While these two factors pertain to productivity, foreign companies are attracted to the Chinese market because of its high annual growth rate of up to 28%. To succeed, the companies would have to expand into the “innovator drugs” category, which currently make up only 3% of sales in China.
One group of companies is trying to do just that by acquiring existing drugs and developing them to meet Chinese medical needs. A number of MNCs (e.g., Novartis, Pfizer, and Servier) are trying to collaborate with Chinese institutes and companies by developing new drugs based on TCMs. Modernized forms of these medicines would be marketed differently than the traditional preparations, possibly as prescription drugs or OTC products.
It must not be forgotten that China is a developing country emerging from a Communist politico-economic system. The opportunities for MNCs lie in their abilities to establish a platform for their R&D, manufacturing, and clinical trials.
For the CROs, China can become the main center for their activities whether in preclinical or clinical studies. Perhaps more fascinatingly, new biotech companies can become virtual pharmaceutical companies through a network of alliances and subsidiaries in China. Certainly, few can ignore China in their path to the future.
Optimism about China should not blind anyone to the intrinsic difficulties of operating in there. The country has established scientific and clinical standards, such as GLP, GMP, and GCP, but most institutions still have to meet them. Foreign firms are best served by implementing their own standards.
Location poses another difficulty. Most foreign companies have located their facilities along the Eastern seaboard within 200 miles of Shanghai or Beijing. This places increasing pressure on facilities, property, and manpower in those areas and does not take full advantage of China.
Skilled manpower remains an intrinsic difficulty as well. Allusions to the large pool of scientific/engineering manpower beg the question in that only a minority are qualified to work for international firms as regards scientific and organizational skills. The Western press has highlighted the importance of Chinese expatriates who have returned from the West. This is in part true, but it is also true that those returning from long absences abroad either may find it difficult to work in the local business environment with its network of contacts or might fall back into the old ways clashing with international practices. The demand for appropriate staff is driving up salary costs and makes for rapid turnover.
Biotech companies and CROs are likely to need financing for their China operations. Investment in high-risk, technology-intensive ventures is still not frequent. Distribution and marketing also pose intrinsic difficulties. Foreign companies cannot just plug into existing distribution networks. This is perhaps one of the most compelling reasons for acquiring or establishing a joint venture with Chinese firms.
In the U.S., business is business and government is government. In China, the state plays a major role. At a minimum, government officials can lubricate many transactions. In many cases, however, the senior managers or officials of state enterprises or newly privatized firms or consortia have had a history as cadres in the Communist party. A banquet hosted by the chairman of a private conglomerate will have both government and party officials as honored guests. So Chinese partners in a commercial enterprise might come to it with a different ideology and mindset that will be consistent with that of the Party.
U.S. firms that wish to commit to China need to have a clear idea of their objectives. At present, there is little evidence of foreign companies using experimental technologies in China. This may change if the opportunities provided by cost effectiveness and productivity can be matched with efficacy, safety, and good management.