Blockbuster product development and the merger of major drug firms characterize the current state of the global pharmaceutical industry. The next wave of structural changes is now under way with multinational corporations (MNCs) setting up new facilities in Asia as well as contracting out services to institutions and firms there. Biotechnology firms are also basing their plans for expansion on contracts and alliances in Asia.
Visits to Singapore (see GEN, April 1 and 15, 2005) and Taiwan (see GEN, April 1, 2006) have given clear evidence of the expansion of pharmaceutical and biotechnology activities by foreign firms. But in their turn, these companies and partnerships are further moving research and industrial activities to China and India.
The rationale for international activities in China has changed rapidly over the past ten years. As the CEO of a midsized Italian firm said, “We went into China a decade ago to cut costs. Now it is inconceivable that we could innovate and compete with new products without our Chinese operations.” All this is happening in a country with 1.3 billion people, with 450 million living in cities, and roughly 175 million meeting middle-class standards.
This first in a series of three articles on China will cover several topics: the activities of major multinationals and biotechnology firms, the emergence of Chinese companies that provide contract services, and the changing economic, social, and political environment (and how they impact foreign companies).
Multinational Corporations: Strategies and Implementation
The growing importance of China as a manufacturing base influenced most major MNCs to set up facilities there. IMS Health reports the existence of about 1,700 Chinese-foreign pharmaceutical joint ventures. The focus has been on Chinese capabilities in synthetic chemistry, the production of active pharmaceutical intermediates, and the potential for large-scale clinical trials.
MNC initiatives range from fairly straightforward marketing efforts to having an integrated Chinese strategy that is critical to a corporation’s global objectives. In principle, the MNCs prefer to run their own operations, but that is often not possible since they need access to land, infrastructure, skilled manpower, preferential government treatment, and guidance to navigate their way through the opaque Chinese system.
In the case of medium-sized drug companies and new biotechnology companies, China offers a different model that enables them to grow globally. Thus, foreign companies need to develop a network of Chinese partners and allies. The Table summarizes the activities of selected MNCs in China.
Most MNCs set up offices in major Chinese cities. For example AstraZeneca (AZ; www.astrazeneca.com) is located in more than 20 cities. It was one of the early MNCs to establish itself in China while pursuing a comprehensive strategy there. It has invested $134 million into its WuXi manufacturing complex, which accounts for 80% of AZ’s pharmaceutical production in the country.
The AstraZeneca Clinical Research Unit-East Asia in Shanghai is responsible for clinical trials that are part of AZ’s global trials. AZ was the first MNC to launch multicenter global standard clinical trials in China. This has been followed with the recent announcement of an investment of $100 million for the creation of an Innovation Center China as a locus for translational research, focusing on the characteristics of Chinese patients, genetics, and biomarkers. This will be part of AZ’s worldwide network of eleven research and development centers.
To leverage its own efforts, AZ has contracted WuXi Pharmatech (www.pharmatechs.com), a Chinese CRO, for the synthesis of collections of drug candidates, and signed an agreement with Shanghai’s Jiao Tong University for research on the genetics of schizophrenia. In a recent move, AZ licensed Cubicin, an antibiotic for skin infections, for development and commercialization on the Chinese market.
The rapid expansion of foreign pharmaceutical operations in China has resulted in a heavy demand for highly skilled managerial and scientific manpower, and AZ has worked with the Chinese authorities to develop its own training capabilities. The corporation also runs a business institute to train its managers and administrators, as well as the AstraZeneca Academy, which provides continuing medical education for Chinese professionals.
In collaboration with the Guanghua School of Management at Beijing University, AZ funded the China Center for Pharmacoeconomics and Outcomes Research, which is working on the reform of the Chinese healthcare system.
Manufacturing in China
Eli Lilly (www.lilly.com) has been moving speedily to increase its presence in China. The firm boasts a modern manufacturing plant in Suzhou (about an hour from Shanghai) and now carries out 20% of its chemical research (with 230+ scientists) in China, mostly in Shanghai.
Lilly entered into a novel research arrangement with Shanghai ChemPartner (Shanghai; www.chempartner.cn), a Chinese CRO, that established Shanghai ChemExplorer (www.chemexplorer.com.cn). ChemPartner set up and operates the research laboratory and will eventually transfer it over to Lilly. Lilly’s China research and development operation is intended to become its largest overseas operation, and its focus will be in neuropathy, diabetes, and cancer. Approximately 20–30% of its clinical testing will take place in China.
One of Lilly’s major strategic initiatives was to transfer its antibiotic technology to Hisun Pharmaceutical (www.http:184.108.40.206). Lilly also set up a course for 100 hospital administrators that was run by the China-Europe Industry and Business School and the China Health Economic Institute. Lilly now plans to establish 10 training centers for doctors and nurses focusing on diabetes.
GlaxoSmithKline (www.gsk.com) created a major investment arm, GSK (China) Investment, and has four manufacturing plants in China, three of which are joint ventures with domestic partners. One of these produces prescription drugs and vaccines in Shanghai, and the other makes OTC products in Tianjin. GSK’s Consumer Health Care business is also run from Hong Kong.
GSK has spent about $10 million on research and development in China. Because of this, the company is considering the establishment of a research and development center and is doing due diligence on an appropriate site. It cooperates with the Shanghai Institute of Materia Medica to screen approximately 10,000 herbal medicines and carry out collaborative research at a cost of $7 million. From 2000–2005, GSK ran clinical trials with 10,000 patients, 18% of whom have been used as part of their global studies.
Traditional Chinese Medicine
Novartis’ (www.novartis.com) CEO, Daniel Vasella, has been bullish not only about the opportunities in China as a major operating base for pharmaceutical MNCs, but also as a major market for its products. In a manner analogous to AZ, Novartis follows an integrated strategy with six major investment projects, including the $83 million drug-production facility in Changsu, East China. The company also recently moved toward doubling the size of the existing Changping plant in Beijing.
Novartis is building a $100 million R&D center in the Zhangjiang Hi-Tech Park in Shanghai. The center will initially focus its research on diseases particularly common in China (e.g., esophageal and liver cancer, hepatitis B and C).
“The Shanghai center will allow us to combine modern drug discovery approaches with those of traditional Chinese medicine that have been used to treat patients in China for thousands of years,” Vasella says. “The Shanghai center has the potential to become a global center for biomedical innovation.”
Novartis’ effort on drug discovery based on Traditional Chinese Medicines (TCM) is in line with its collaborative research with the Shanghai Institute of Materia Medica, projects with the Chinese University of Hong Kong, and the Kunming Institute of Botany, as well as a contract with WuXI Pharmatech. The company also created a China Learning Center that provides business training to senior managers. The program is provided by the International MBA program at Beijing University and staff from Novartis China.
Novo Nordisk (www.novonordisk.com) created Novo Nordisk (China) Pharmaceutical through a joint venture with Suzhou Hongda Group (www.chinasuhongda.com). The company has a factory for enzymes and a second plant in Tianjin. It also established a $10 million research and development center in Beijing with a focus on diabetes, which is a serious and growing problem in China. Novo Nordisk works with the Ministry of Health on educational campaigns.
Pfizer (www.pfizer.com) made a major investment of $500 million in China with production facilities in Dalian, Suzhou, and Wuxi. Its Pfizer China Regional Headquarters is located in Shanghai along with its investment arm, Pfizer Investment. Pfizer plans to launch 15 novel products in China, three times the number from the past five years. Pfizer also established its R&D center in Shanghai with a budget of $25 million over three years.
The Center is responsible for study design, data management, and analysis for global clinical trials. In addition, it will provide training in good clinical practices for its staff. Pfizer also had a landmark intellectual property case for its major drug, Viagra. Chinese authorities rejected its patent application.
Roche (www.roche.com) is the other Swiss MNC that has a major commitment to its China operations. Roche China Investments serves as its financial arm and four companies cover its principal businesses: pharmaceuticals, diagnostics, vitamins, and flavors and fragrances. Two of its manufacturing plants are located in Shanghai. A significant proportion of their operations involves joint ventures with Chinese firms. Roche has invested $11 million in creating a research and development center in Shanghai that is focused on medicinal chemistry. Another important research area is genetic epidemiology in the Chinese population.
Servier (www.servier.com) is the largest independent French pharmaceutical company and was an early foreign presence in China. It set up a joint venture manufacturing plant with the Tianjin Huajin Pharmaceutical company in Tianjin. In 2001, Servier established a research and development company in Beijing with the objective of treating diabetes, cancer, and cerebral aging by taking advantage of TCM formulations and running clinical trials that are integrated into Servier’s global network.
Even though the pharmaceutical MNCs have invested hundreds of millions of dollars in their Chinese projects, the complexity and changing nature of China means that these are only the first steps in a larger game. In general, the MNCs pursue their own global objectives, for which China is an important or even crucial platform. As a manufacturing base, the MNCs produce drugs that are new to the Chinese market, but will certainly move toward supplying the global market (as they have done in Singapore and Ireland).
The MNCs research and development capabilities enable them to take advantage of labor-intensive activities such as organic synthesis and drug screening, and several of them are exploring the use of TCM for new therapeutics. The large patient pool and the existence of major hospital complexes provide an opportunity for rapid, economic clinical trials.
The MNC initiatives exploit cost and productivity advantages and position the companies in the rapidly growing Chinese market. However, the more innovative and comprehensive strategies, such as those of AstraZeneca and Novartis, are riskier and will take longer to play out. They also confront challenges that are characteristic of the Chinese environment: manufacturing and regulatory standards, intellectual property, financing, skilled manpower needs, and the opaqueness of a political/economic system that is evolving from communism to a form of authoritarian capitalism.
The Chinese government places a high priority on developing its pharmaceutical and biotechnology industries. One important step is to promote the establishment of new CROs to service both foreign and Chinese companies.
The next article in the China series will examine a different model in which foreign biotechnology companies use a China strategy to drive their own growth from early-stage to full-fledged pharmaceutical entities. This involves complex arrangements with an emerging group of Chinese startups designed to provide high-value services to Western client firms.