For multinational corporations, China is a critical stop in the drive toward globalization. In part I of this three-part China series (GEN, April 15, 2007), I summarized the Chinese activities of several multinational corporations (MNC). In this article, part II of the series, I will review Chinese-based R&D, clinical studies, and manufacturing, all of which could enable small and medium pharmaceutical and biotechnology companies to expand and become global. This access to modern technologies and international markets could accelerate globalization for many chinese companies.
Many MNCs were early entrants into the Chinese medical environment. As the cost and complexity of clinical trials in the West escalated, China was able to provide clear cost advantages, a vast pool of patients, and a relatively developed medical infrastructure.
The largest CROs have established Chinese offices and some, such as Quintiles (www.quintiles.com), Covance (www.covance.com), and MDS Pharma Services (www.mdsps.com), have clinical central laboratories in either Beijing or Shanghai. Kendle (www.kendle.com) has run 60 studies in China since 1987, and Japan’s largest CRO, InCROM (www.incrom.com), has significant operations in China as well. Multinational CROs often face a difficult choice—expand their activities in China or farm them out to Chinese CROs.
As an example, the Center for Basic and Clinical Research, a Denmark-based group focused on diseases associated with menopause, particularly osteoporosis, recently created a center for clinical testing in Beijing.
CROs in China
The majority of Chinese pharmaceutical companies are owned by the state or government-affiliated institutions. These firms are often characterized by their antiquated equipment and out-of-date product lines. The government has thus promoted the creation of contract research organizations that interact with foreign companies and can acquire new technologies and modernize the industry. There is now a small but growing number of CROs whose activities range from chemical analysis to drug discovery and clinical trials, however, at this time, only a few of them would meet technical and business world standards.
Shanghai Genomics (www.shanghaigenomics.com) was established in 2001 and has just under 100 employees. The company has technology platforms in signaling pathway mapping, gene-expression profile studies, protein expression and purification, animal modeling, antibody generation and purification, and CentocorOrganon (www.organon.com) for identification of more selective steroid hormone receptor modulators. In 2006, the company received approval from the State Food and Drug Administration (SFDA) for its first product—a synthetic bone graft.
Starvax (www.starvax.com) was established in Beijing in 2003 and now has a staff of 30. It offers a variety of preclinical services. The company has a licensing and co-development project with Mologen (www.mologen.com), from which it has obtained its DNABarrier II technology for x1 million.
Crimson Pharmaceutical (www.crimsonpharma.com) was established in 2002 and operates in New Jersey and Shanghai. Crimson’s business strategy is to acquire and develop therapeutic compounds specifically for the Asian market. It performs preclinical research, including organic synthesis, formulation, analysis, and QC and clinical development. Crimson carries out drug development on its own products as well as for international pharma/biotech firms. Crimson recently licensed three drug candidates from Octamer (www.octamer.com).
Chem-Explorer (www.chemexplorer.com.cn) is essentially owned by Eli Lilly (www.lilly.com) and is an example of a B-O-T (build-operate-transfer) model. It is a joint venture with Chem-Partner (www.chempartner.cn), which established and staffed the labs and runs the operations. Eli Lilly chooses the scientific projects, which tend to focus on chemical research.
Basilea Pharmaceutica China (www.basilea.com.cn), located in Hiamen, Jiangsu, is another B-O-T, though it is somewhat more complex than Chem-Explorer. The Swiss parent company, Basilea Pharmaceutica (www.basileapharma.com), is a spinoff of Roche (www.roche.com). This Chinese CRO focuses on R&D, specifically for compounds that will be used against bacterial and fungal infections and skin diseases, especially those strains that are drug resistant.
The key compounds under development are Ceftobiprole, for treatment of methicillin-resistant S. aureus; BAL8557, an antifungal azole for the treatment of immunocompromised patients; and Alitretonin, an oral dermatological drug. The expectation is that the R&D in China will accelerate the identification and development of novel drug candidates that can then be moved into the parent company’s pipeline.
Two of the largest CROs in China were designed to provide full services to their clients. Venturepharm (www.venturepharm.com) was established in 1999 and has operations in China, U.S., and Canada. Venturepharm Group, the parent company, has a number of subsidiaries and aspires to become a major international CRO by providing a full range of services.
Venturepharm employs some 300 scientists in China and counts among its clients GSK (www.gsk.com) and Ranbaxy (www.ranbaxy.com). The company’s initial focus was on development of active pharmaceutical intermediates and drug formulation. This has been expanded to include clinical trials, drug registration, manufacturing, sales, and marketing. The company has a network of eight R&D centers, three GMP integrated manufacturing facilities, and four bulk API production facilities, most of them located in China.
One of the most successful and rapidly growing CROs is WuXi Pharmatech (www.pharmatechs.com), which was established in 2001 as a full-service drug development company. The firm’s services range from chemical research, drug identification, analytic and biological services, and full development up to commercial manufacturing. It has put in place a technological infrastructure that includes a bioanalytical laboratory that meets FDA GLP and OECD guidelines for clinical trials; 608 FTEs working on lead optimization, library preparation, analytical services, and process research; and an ISO 9001:2000 and SFDA GMP-certified manufacturing plant.
WuXi clients include AstraZeneca (www.astrazeneca.com), with a deal worth $14 million for synthesis of drug candidates. WuXi also works with smaller biotechnology companies, for example, testing small molecule compounds for cardiovascular disease for TargeGen (www.targegen.com).
Finally, one of the best models of a transnational CRO is Bridge Pharmaceuticals (www.bridgecro.com). Bridge Pharmaceuticals is a preclinical CRO with facilities in Beijing and Gaithersburg, Maryland, providing U.S. GLP-compliant preclinical drug development services. The development of Bridge has included the raising of $39 million mainly from U.S. venture capitalists and the acquisition of Gene Logic Laboratories, the preclinical services division of Gene Logic (www.genelogic.com).
Bridge Pharmaceuticals is a U.S.-headquartered company focused on high-quality and cost-effective preclinical drug development services for the pharmaceutical and biotechnology industries.
The CRO business in China has been limited with estimated sales of RMB 500 million ($62.6M) in 2004. This is projected to grow rapidly as foreign companies expand their R&D and clinical trials in China. At present, Chinese CROs operate on the basis of full time equivalents, by which, corporate clients pay the firm for the number of employees working on the project. No future royalties or payments will accrue in the case of a successful drug. However, some of the more established CROs are expected to develop partnerships in which they will share both the risks and the eventual success.
Restructuring the Pharma Industry
The central reality of the Chinese pharmaceutical industry is that a vast proportion is state-owned, equipped with outdated equipment, and not profitable. One of the priorities of the Chinese government is to restructure and modernize this industrial sector.
The China Huayuan Group, which is state owned, is a leading player in the pharmaceutical industry. Its subsidiary, China Huayuan Life, acquired a 40% stake in Beijing Pharmaceutical Group for $113 million. The Beijing Pharmaceutical Group is owned by the Beijing city government and includes some of the most well-known drug companies. This acquisition illustrates the tensions between the central government and regional or local governments in liberalizing state enterprises and rendering them more modern and profitable.
Saddled with large, inefficient, overmanned state enterprises and limited in investment capital and access to new technology, the Chinese government has been amenable to foreign participation in state drug companies. The Harbin Pharmaceutical Group Holding (also known as the Hayao Group) has been a major state pharmaceutical group with over 29 companies, with sales in 2005 of RMB 10 billion ($1.29B).
Hayao sells over 700 products, its core business is antibiotics, but it is also involved in Traditional Chinese Medicine (TCM) and has a major distribution network. In 2004, Warburg Pincus and two Chinese financial groups acquired 55% of the Hayao Group for $246 million. The Harbin city government remains the single largest shareholder with 45% of the company’s shares.
One of the most interesting transactions involves Guangzhou Baiyunshan Pharmaceutical (www.gzby.com). The Guangzhou government created Guangzhou Baiyunshan through the merger of four companies. This group now consists of 11 companies whose manufacturing facilities meet GMP standards. Its 2004 revenues were RMB 2.5 billion ($323M), earned mostly on sales of antibiotics, however, TCM products are an important aspect of its business.
Hutchison Whampoa, a major Hong Kong financial group, invested $20.86 million in a joint venture, Baiyunshan Hutchison TCM (www.813zy.com), that focuses on research, production, and marketing of TCM, primarily for cancer and immunological disorders. Another company in the Hutchison Whampoa Group, Hutchison MediPharma (www.hmplglobal.com), recently invested $30 million in a new TCM R&D center in Shanghai.
These strategic moves allow for the infusion of new capital into companies that are either state-owned or have government (national or regional) involvement. The new investors acquire manufacturing facilities, distribution networks, and established product lines.
In most of these cases, TCM products are an important part of the mix. These efforts are directed toward expanding market share in China. However, these acquisitions and consolidations address only the need for new financing. It is less clear how they will deal with the need for R&D and new technology.