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China: The Long March Marches On

01.03.2013 / Pharmaboardroom

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For every manager with a surefire strategy for China, William Keller has one piece of advice: “Let it go!” Keller should know. He founded Roche’s China affiliate in 1994 and built it into a market leader. In the meantime, he became an eminence whose wisdom is sought industry-wide, from his role as spokesman for the Zhangjiang Hi-Tech Park, the world’s highest concentration of Life Science companies, to lobbying for Shanghai’s successful bid to host the 2010 World Expo. “Don’t try to control everything,” Keller goes on, “and see what comes out. Some will fail, and some will get very good insights to go further. It’s a journey of exploration. Explorers have a different mindset than followers!

ndeed, China’s pharmaceutical journey has reached record heights. Just four years ago in 2009, China surpassed the UK, Spain, Italy, and Canada to become the world’s 5th largest market. Now it has exceeded both France and Germany to achieve 3rd place, and by 2015 will leapfrog Japan to sit behind only the US as global #2. Behind the 20%+ compounded annual growth, structural changes from the central government have put healthcare and innovation at the foremost of policy priorities.

Effective April 2011, the 12th Five Year Plan focuses for the first time away from pure growth, toward more sustainable and equitably distributed initiatives, including billions of dollars in “Strategic Emerging Industries” (SEIs). These include biotechnology, which will see RMB 12 billion (USD 1.9 billion) earmarked for new drug R&D from 2011-2015, out of a total RMB 4 trillion (USD 0.64 trillion) alongside other high value added like next-generation energy and IT.

 “In China, we do believe the government will have an even bigger role to play, because of the way the country is set up, and because of the stage the industry is evolving through,” say Sheryl Jacobson, senior partner in Monitor Group’s China Healthcare practice, speaking to the role of innovation in the sector. “We’re still at a stage where the MNCs are USD 1 billion businesses at most, and primarily commercial entities. Local companies are anywhere, in terms of manufacturing revenue, from almost nothing to USD 0.5 billion. The typical company that does innovation from the lab to in-patient trials – the traditional US or European model – simply will not work in China.”

Jacobson points to innovative industrial parks as platforms for China’s fast catch-up on innovation, and suggest that there’s potential to achieve world firsts, such as the elusive Electronic Medical Records, thanks to a scientific central approach. “What’s important for people outside of China to understand about China is the experimentation that the government does province by province, city by city. The sheer number of experimentations means there’s a huge number of opportunities for healthcare companies, and it also means that everything shifts.”

Examples include the implementation of an EDL (Essential Drug List), which Jacobson lists as one of many initiatives which can spread to the entire country, or be shut down in six months. “You really have no idea,” they continue. “And that has huge implications on how you go to market. The government does, in fact, drive a huge amount of innovation deliberately in all sorts of ways, to figure out what works best. Fortunately, they’re willing to have really good learnings, for instance what’s happening on the EDL has led to significant quality issues.”

“But now,” Jacobson concludes, “[the government is] rethinking quality, with a price premium for some of the generics that are deemed to be the highest quality, and that’s something that you just don’t see in any other market.”

 Good tidings we bring

Minister of Health Chen Zhu immortalizes his enthusiasm for forward-looking policies in this excerpt from an occasional poem he penned: “Wind and thunder move across the country, health reform brings good tidings.” The Minister refers to 2009’s ongoing “Healthcare Reform Plan” which has completed its first phase, bringing upwards of 95% of the population under some form of medical insurance, increasing accessibility and affordability, and building a network of basic healthcare facilities. Although there is still room for improvement – of total healthcare spend, drugs account for 50% (compared to only 13% for the US) and per capita spend remains among the lowest in the world, at USD 35 annually – China is not only a market anyone can afford to ignore commercially, but one that is increasingly locally competitive. This trend has resulted in an oft-lamented lopsided market split for MNCs (Multinational Corporations) with only 25% share, compared to locals at 75%. With the difference only growing in favour of locals, the Minister’s tidings are unlikely to be shared equally by all.

Fortunately, for foreign players, there is a bright side in China’s estimated 4,700 domestic manufacturers. According to Dr. Brian Mi, general manager of IMS Health China, “not all of them abide by the GMP quality standard. There’s a big gap. This makes local manufacturers perceived as lower quality and associated with less effectiveness and higher side effects. Because of that, MNCs enjoy a price premium, and doctors are very willing to prescribe the branded original products – because if the doctor mistreats a patient, it’s the doctor’s liability.”

This, Dr. Mi says, has resulted in a quasi-evergreen phenomenon, evidenced in products like Glucobay, BMS’s old oral anti-diabetic, which continues at 30%+ growth. But as he also notes, “If you ask me what will happen in five years – with China undergoing a second round of GMP and the government tightening up quality – I always warn MNCs that the party may be great, but it’s ending. When locals start to produce high-quality products, the government will have a very good reason to reference and lower your price – because why shouldn’t they? You don’t have a patent!”

 MNC vs. Locals: Illusion and Confusion

Joseph Cho, managing director of RDPAC (R&D-based Pharmaceutical Association
Committee), adds a historical perspective to Dr. Mi’s. “The Chinese pharma industry started with generics, and coverage available from a good health system was only recently available. It has really only been since 2005 that more advanced products have had the opportunity to penetrate to tier-3 hospitals in major cities.”

This view, shared by many MNCs, explains how the locals have managed to capture and maintain share. But representatives from the locals’ side, such as Yu Mingde, chairman of CPEA (China Pharmaceutical Enterprises Association), doubts the statistics altogether. “The results of comparison depend on different standards and methods employed. We can see the accurate statistics from IMS, and talking about distribution or profitability rates, MNCs have done much better than locals. But local companies have a higher market ratio than MNCs and do better in basic drug supply,” he concedes, “because most MNCs produce patented drugs while locals do generics. The basic policy is to choose the lowest-priced drugs because of financial reasons and the large population.”

With such conflicting messages, it’s imperative to separate the noise from the signals. Jay Dong, general manager, Asia Pacific Region & China, of antibody and research leader Cell Signaling Technology, acknowledges this as a widespread difficulty. “People see opportunities, but at the same time, are perplexed by the many challenges or opportunities that are not materialized or over-exaggerated. They want to capture whatever real opportunity there is, while taking China as part of a global strategy, and figuring out how to leverage it.”

Dong breaks it down: “There are two challenges to focus on. The first is identifying what’s the real opportunity. The second is developing a strategy, so that whatever signal or noise there is, you are able to identify it. An integral part of that is having the right team to capture the opportunity, implement the strategy, and manage risks.”

1.3 Billion Reasons to Smile

Ultimately, the platitude of people as number one asset is rampant in China. As some insiders put it, the talent war is a cliché as big as a house, but one that remains the most pressing issue for companies of all size. Headhunting abounds, resulting in a subgenre of employee known as the “job-hopper” – a person who will change jobs up to once per year for salary increases as little as 300RMB (USD 48) per month – although most increases result in total packages increase by 20-30%, and contribute to rapid wage inflation that has touched every segment of the Chinese economy.

Though any elementary economics textbook would suggest an easy fix for a shortage – pay more – many managers, such as Jonathan Zhu, general manager of Celgene China, have found a way around this expensive alternative. “Our statistics for turnover rate in the last 12 months are very, very low,” Zhu says bluntly. However, his HR strategy is somewhat counterintuitive: “My philosophy is that I’m not necessarily recruiting “the best” – simply because it’s so hard to define. One must take into account all the human qualities, inclusive of competence and knowledge, personality and experience. It’s very difficult to define. I’m going to recruit the appropriate talent and labor, which fit in very well for the long-term – people who speak a common language and share common values, and they will adopt the corporate values and compliance in turn. The result is a group that works together as an effective and productive team.” This has seen a doubling of headcount, from 30 to 60, in the company’s Shanghai office, in preparation for the China launch of Revlimid, a multiple myeloma drug, for mid-2013.

Think and Grow Rich: China’s Napoleon Hill

Zhi Yang, managing partner, & founder of BioVeda China Fund, never intended to be a healthcare investor. But his remarkable story – from a restaurant worker in the Cultural Revolution, to being selected to earn his PhD at Harvard, and returning to China to start the first international investment fund focused on healthcare – is rivalled only by his history-making exit, the largest acquisition in the Chinese pharmaceutical industry since 1949.

In 2011, he turned his $7.8 million stake in CITIC Pharma into an approximate $550 million exit in just five years. Yang, in a brief history of healthcare sector investment in China, says that when he started BVCF in 2005, “the talk was always about “low-hanging fruit.” Later, many people began to notice that all the low-hanging fruit may be ripe and ready to serve, but ripe fruits are also the soonest to rot. When you hold low-hanging fruit in your hands, if market conditions are not right, you can find yourself holding handfuls of rotting fruit. On top of that, a lot of veteran Chinese investors now agree that the low-hanging fruit is gone. You have to look at the higher fruits which are less ripe, and find the ones that can quickly become the best fruits with the right nurturing. That means investment, like most things, is a game of differentiation and skill.”

Yang describes the field of investing with a uniquely Chinese metaphor. “Sometimes I compare investing to a TV show about appraising ancient Chinese antiques. On the show, an antique is presented to two panels: a panel of regular people, and a panel of antique experts. First, the common panel must decide if the antique is real or fake, and if it’s real, then which dynasty did it come from? These are hard questions! They look at obvious things like color and markings, feel whether they trust the antique’s owner, or even crowd-source an opinion from the audience. In reality, they make their best guess.  Most of the time they don’t get it right – obviously!”

As an example, Yang offers another successful investment, where he began by buying out the stake of a local Private Equity fund, which had priced their investment at under $100 million. “In China, that’s not a small number!” he says. “They were happy that they made good money on the deal. We were happy that we got an asset which was quickly becoming a $1 billion company.”

 View From The Top

Kewen Jin, serial entrepreneur and former executive of Wyeth and Charles River, now heads Nimbus Innoworks, a company which has most recently forged a groundbreaking partnership between Roche, Harvard, and the technology park BioBAY. He gives a brief history and future prospect on what many believe is the sector’s most promising niche:

In China, the emergence of a research-based life science industry probably is a symphony in three movements, or a trilogy.

The first movement is the emergence of China-based CRO industry. It started in 2001 with the founding of WuXi PharmaTech, followed by other CROs such as ShangPharma. Looking back, it was doing the right thing at the right time at the right place. The global industry was looking for cost-effective R&D solutions; China has very large (albeit relatively green) talent pools; and there is an overseas diaspora of seasoned Chinese scientists/managers in the West to draw from.

There were notable early successes in NCE (New Chemical Entity) discovery companies such as Hutchison MediPharma. But generally speaking, it was very difficult to get funded in those days for non-revenue generating biotech companies in the Western sense. After years of explosive growth, the China CRO business is maturing and starting to run into some headwind, such as RMB appreciation, cost increases, global R&D downsizing, etc. The early leaders are either public listed companies or acquired by global CROs, and more consolidation will come. The first movement is mostly done and it built the critical ecology, the infrastructure in both “hardware” and “software” for the innovation.

We are in the early stage of the second movement where China based companies try to leverage the early innovation in the West and utilize the discovery/development resources in China. This aligns with the status of Chinese life science. While we have “pockets” of world class excellence, and are closing the gap in many areas, on a broad perspective, China still significantly lags behind the West, particularly in early discovery biology. Companies like Zhejiang Beta Pharma and Chipscreen Biosciences are mostly using “fast follow-on” on validated targets approach. Given the deep chemistry expertise and ample patient resource, this is a very attractive strategy. Companies like BeiGene and Hua Medicine in-license compounds from major pharma companies and bring them to “proof-of-concept” in China. This probably would be the definitive and financially sensible business model in the next 5-7 years.

The third movement of Chinese life science industry symphony will be “de novo” innovation on a broad basis, from target identification/validation, lead generation/optimization, and preclinical/clinical development all the way to market. Surely there is already de novo innovation in China today, but these are exceptions, rather than the rule. China has started to pour serious money into academic research and upstream capability building only recently. It will take time for the investment to bear fruit and even longer to commercialize them. The U.S has been investing in early research for more than 50 years. With “China speed,” I am confident we will go through the learning curve much faster, partially as we can learn from what worked and not worked, partially because the “lack of legacy resource”, or “starting from scratch” enables us to leapfrog to the latest business models and technology. I don’t know how far away the third movement is, but the early harbinger is already here. As “de novo” innovation is high risk and (high) reward, the Western biotech industry is full of miserable failures with occasional spectacular success, I suggest we need not hurry and take our sweet time to get there.

31 Provinces, 31 Flavors

Didier Dargent, general manager of Servier’s China affiliate, is candid about differing strategies across China’s 31 provinces, and even city to city. “For MNCs, the true market is not the rural market. The fact remains that only 25% of the rural market goes to MNCs, while 75% goes to local companies, which is the opposite situation of many markets. Today, Servier-China covers 100 cities and plans to expand to 130 cities in the near future, but I’m not sure we will run after every rural area.”

“You can’t escape the fact that Beijing, Shanghai, and Guangzhou make up 63% of the total market,” Dargent continues. He emphasizes that “China is all about prioritizing, and you must learn to make choices about where to go, and in some cases be able to take the decision to stop. In some provinces, the pressure is just too high. A case in point is Anhui province [a major province just west of Shanghai], where many MNCs have given up.”

But Servier is not likely to give up. At over 1200 people, it ranks number one in personnel and uplift of all affiliates. This growth has been driven by three major products that constitute 90% of the China portfolio: Vasorel, Diamicron, and Acertil – and with more on the way. “We’ve been waiting for the reimbursement of Valdoxan, Coralan, and Coveram, but this is unlikely to happen before 2014. In the meantime, we will need to get on national and provincial reimbursement lists and win hospital tenders. The delay between marketing authorization and actual availability for the patient can be anything between 1 and 5 years.”

One way to reduce such oft-lamented delays is to partner with local CROs. But while market leaders like WuXi or Hutchison can afford to take risks and experiment with unique business models, how do China’s other 400+ CROs compete in such a tight space? Many fall back on the buzzword: integration. “It’s interesting to talk about integration,” says Dr. Chun-Lin Chen, CEO of Shanghai-based Chinese CRO Medicilon. “Medicilon was one of the first truly integrated companies. When in 2005 I came with a proposal, nobody believed me!”

Being on the leading edge has resulted in nearly 70% of the company’s business remaining international, although Dr. Chen says the Asia portfolio is growing, with goals to reach 50% of turnover from current levels at 30%. This strategic focus was one of the drivers initiating a recent buyback out of a much-publicized JV with US-based CRO MPI.

However, Dr. Chen is cautiously optimistic about integrated services: “I don’t think many companies in China can offer it. Of course, it always depends on how you define your terms. Some companies consider integration as combining chemistry and biology; others, chemicals plus animal studies; others, IND studies. Ultimately, it doesn’t matter what slogan you use. Medicilon is concerned, to a certain degree, about whether we have too many branches, that we will still remain focused! Integration, at the end of the day, is not always easy.”

Interestingly, not only is integration sometimes difficult, but often unnecessary, depending on individual needs. “For many companies, global scale is redundant when they are looking only to conduct studies in China. In that case, what use is a PM in Australia, data management in India, regulatory consultant in Taiwan, and monitoring in China?” says Albert Liou, Vice Chairman, Asia-Pacific Region for the CRO PAREXEL. “This kind of infrastructure is simply unsuitable for a smaller biotech which may choose PAREXEL to work towards marketing a single drug in China.” As a result, Liou has tailored his approach with a dedicated China team, with all the training, project management, and operational execution in China. “The operation is completely China-focused. All the resources are in China, but the quality is the same global gold standard, and we audit everything the same,” says Liou.

Ivan Y. Zhai, CEO and major founder of GCP CMIC ClinPlus, is clear about his goals, and how he plans to achieve them: “I want to make the company grow faster, and the best way is to leverage existing resources.” As a business formed by integrating three well-developed companies – the CRO DMS, an SMO, and a third medical device CRO company – GCP CMIC ClinPlus intends to leverage the strong foundations of its predecessors, formed by famous experts still leading their academic fields, or by former Chinese officials. “For instance,” Zhai says, “the medical device CRO company was previously affiliated to the Chinese Association of Medical Device Industry/CAMDI. In China, we sometimes say relationships are very important, and in addition to relationships, we are proud to have unique resources and expertise. We have a very strong senior management team, with many having worked in the pharmaceutical and/or CRO fields for 20 years or more, and many with overseas working experience.”

Here to Serve: Your Pleasure Is Their Business

Dr. Ge Li, an icon in the industry, is chairman & CEO of the NASDAQ-listed WuXi AppTec, the dominant CRO in China. Li is a thought-leader who champions an open and accessible platform to drive down costs and spur innovation, and in his typically humble way, introduces his company by saying that “WuXi positions itself as only knowing what we know. There’s a lot of things we can improve, but we begin with a belief in several things. We religiously believe in an open-access platform, which will bring in innovation to materialize and capitalize on knowledge and experience, and we believe people will pay for quality. There’s a lot of debate as to whether the Chinese will be able to pay for a lot of high-price drugs, but as long as they are high-quality, I believe they will.”

Li digs deeper into the driving force behind the first “movement” of China’s service-based industry, which saw the rise of global clients and scale. “In the last 12 years of WuXi’s history, we never knew anything our client didn’t know. In reality, who has the most completed integrated capabilities in the industry? Big Pharma! There’s no doubt about it. Our clients such as Pfizer, Merck, and GSK, they have everything.” However, Li is quick to note the advantages and opportunities that such an embarrassment of riches has provided his company and others like it. “In a sense, the industry is penalized by the huge success it experienced in the 1980s and 1990s, and built a closed system. All of a sudden, the closed system believes it’s the only way. Interestingly enough, any knowledge and experienced-based industry benefits when people take advantage of an open-access platform. When we talk about the iPhone, there’s nothing wrong with Apple developing its own maps, but you can’t offer an inferior product to the customer, because they won’t buy it! It’s the same in the CRO industry. We need to take advantage of the knowledge and experience accumulated in the industry to lift up and meet the needs and patients.” In doing so, Li concludes, the industry must never take its eyes off the true prize: “Patient needs are actually the goal of the industry. For WuXi, as long as we actively address our customers’ needs and keep an entrepreneurial spirit, and we’ll be OK.”

More Money, More Monkey

This lack of ease is one of the reasons why specialization, rather than integration, is the name of many entrepreneurs’ games. Enter Professor Piu Chan, founder and president of Wincon. Professor Chan grew the company out of his expertise and desire to conduct translational research, which he felt was a limiting environment in the US. In that environment he was a leading researcher before returning as early as 2000 to China as a spearhead “sea-turtle,” the affectionate term given to overseas returnees.

“China,” Dr. Chan says, “offers several advantages for conducting translational research: chief among these are the Chinese culture, large population and management infrastructure. For example, it is often easier to integrate and utilize clinical resources because most of the hospitals, universities and staffs are already supported by the government.” With this in mind, he returned to China with two colleagues, a neurosurgeon specializing in surgery on Parkinson’s disease, and a stem cell researcher, at a time when far fewer people were coming back. “Our main goal was to pursue translational research, with a dream of really developing something new for our patients.” This resulted in China’s first AAALAC (Association for Assessment and Accreditation of Laboratory Animal Care International) accreditation for facilities of non-human primates in 2006, and leading collaborations investigating stem cells, neuron growth factor and new drug alongside with scientists from the Parkinson Institute, Stanford, Wisconsin, and UCSF in the US, funded by the Kinetics Foundation of Andy Grove, the former Chairman of Intel.

 Specialization Nation

The head of MicroConstants China, Q. David Yang, co-founded the China operations in 2007 after 10 years of operations in San Diego with a vision to set up the same quality system in China using local talent to duplicate success across the Pacific. As proof of this approach, says Yang, MicroConstants China is the first Chinese bioanalytical lab to receive OECD GLP certification, which is a very strong branding. This branding has attracted attention from international pharmaceutical companies including Big Pharma and biotech which now comprise the majority of Yangs portfolio, an impressive achievement in such short time frame in regulated bioanalysis field. As Yang continues, We realized the strong demand for global quality system in clinical studies in China early on and teamed up with the Phase I Unit of No. 307 Hospital in Beijing to expand into site management (SMO) business to ensure that our partnering clinical sites can also meet ICH GCP standards.”

In China, the focus is expanding to domestic pharmaceutical companies, especially those developing novel drugs and generic drugs who want to ensure their data can be accepted by global regulatory agencies and big pharma. Now these domestic companies can conduct their clinical studies in China according to global standards and submit USFDA NDA or ANDA applications with data generated in China Yang concludes, and MicroConstants can help them to achieve this. 

Zhongguancun Biomedical Garden, on the other hand, has focused on attracting local innovative companies concerned with new drug discovery. The entity, which began as a subsidiary to the Haidian sub-park of Zhongguancun Science and Technology Park, now counts all services and supports concentrated on the commercialization of new products, including drugs, diagnostics and medical devices. CEO Liu Rongyao says this focus has paid off: “Based on 8 years of joint efforts, among our members, there are two companies which have gone public, one in China and the other in Singapore. Two medical device companies have earned three registration certificates from the SFDA (The State Food and Drug Administration) and six members have successfully completed new drug clinical approvals from the SFDA.”

Buchang Group: By The Numbers

While most college students are too busy studying to work, Dr. Zhao Tao, Chairman of Buchang Group, made time to take a different path. In his first year of medical school, where he trained in Western medicine, Dr. Zhao earned money by providing a photography service to his classmates. “By my third year, in 1987,” Dr. Zhao says, “I had opened a video gaming room, and made RMB 10,000 (USD 1,600) – an amount 20 times more than my RMB 500 (USD 80) annual expenses.”

But this was pocket change in the grand plan of his ambitions. When he graduated and began practicing in the cardiovascular department of a hospital, he learned Traditional Chinese Medicine (TCM) theory, and in 1992, attended an acupuncture conference in Singapore. There he cured a longtime-paralyzed elderly lady and gained a reputation as a miracle worker. “4,000 patients wanted my services,” Dr. Zhao says. “I was 27 years old, and I made USD 900,000 in three months, which I used to invest to create Buchang Group.”

USD 900,000 in three months might satisfy most 27 year olds – but not Dr. Zhao. Buchang Group’s first and most successful drug, an extract from a plant to treat cardiovascular patients called Naoxintong, modified a 2,000 year old recipe and has so far treated over 50 million patients since its launch in 1994, and will reach sales of 3 billion RMB in 2013.

What’s the secret to Dr. Zhao’s success? The devil, as they say, is in the data. “Buchang Group has an unmatched sales and marketing penetration, reaching 100,000 hospitals and 200,000 retail sites, with 20,000 sales reps. Such a deep coverage has allowed us to become China’s most profitable private pharmaceutical company.”

Within five years, Dr. Zhao expects Buchang Group to have five blockbuster drugs on the market, and 20 products with over USD 100 million in sales – a feat now unimaginable to even top-ranked MNCs. But then again, no top-ranked MNC has Dr. Zhao as its chairman.

If You Can’t Beat ‘Em…

Dr. Wu Xiaobing, country manager for Pfizer China, the country’s #1 MNC, assesses the big picture of growth to come. “MNCs will certainly continue to bring innovative products to China, but China is a huge country and to change takes time. But ultimately it doesn’t matter whether growth comes from MNCs or locals. I differentiate only between innovative products and generics, regardless of the source, and if it benefits people, everything it will be accelerated.”

This is why many MNCs – including Pfizer, who signed a USD 500 million deal with Hisun to develop high-quality branded generics – have embraced a local flavour to spice up local generics penetration.

Some, like Sanofi, are still testing the waters. Despite a strong global generics presence with Zentiva in Europe, Kendrick in Mexico, Medley in Brazil, and Nichi-Iko in Japan, Sanofi has yet to make a big play in China. Jean-Luc Lowinski, senior vice president, Asia Region & vice president, Greater China Global Operation, speaks to the predominance of generics in China: “First of all, Sanofi in China has faced this reality since day one – when we launched Plavix, there was already a generic in the market!” However, despite the presence of generics, Sanofi’s brands have flourished, with Plavix the most successful drug in the Rx market in China, and Amaryl which continues to gain market share over generics. “Globally, we’re not unfamiliar with the situation where there are generics,” Lowinski continues. “Having said that, even though Sanofi is now number three in the market, we’re not covering as many of the Chinese population as we would like to.” Lowinski wants to play a bigger role in China in generics. “There’s lots of moves in the industry, we’re looking at them and studying what makes sense for us, and it’s definitely part of the market where we think we should also be there, the way we are in other countries.

 Critical Mass, Critical Competition

There is no shortage of up-and-coming bioparks in China – 51 at last count. How does a biopark make itself standout?

“The greatest question is about BioBAY’s positioning,” says Yuwen Liu, chairperson & CEO of BioBAY, “because geographically we are very close to Shanghai, but we are not in downtown Shanghai where there are many research institutes and universities. However, Suzhou as a location is still relatively convenient.” Ms. Liu compares BioBAY to Silicon Valley, a megacluster that takes a one or two hour drive from north to south, which she uses as a model. “Our long-term vision is to have a similar scale for the greater Shanghai region, including Suzhou, and maybe even Hangzhou or Wuxi. Among these, we need to find our unique positioning, and we hope we will be the headquarters for the most promising start-up innovator companies, covering drug discovery, medical devices, reagents, and materials sciences.”

So far, so good. With over 550 companies in the park, Ms. Liu refers to the local government’s strategy of “walking on two legs.” One leg is still the high-quality manufacturing companies, both MNCs and domestics, which already have the capability of launching products and making sales and contributing to the economy with industrial output and tax revenue. Many, including Eli Lilly and Becton Dickinson, are expanding capacity. Baxter recently set up an R&D centre and J&J opened an innovation centre.

“The other leg, which is innovative companies,” Ms. Liu continues, “may have many years to survive and grow before they really contribute to the local economy.”

While they grow, BioBAY wants to nurture them in a comfortable environment, accommodating to the fact that most startups are relatively cost-sensitive, and may like a less fast-paced location that retains the amenities of the big city. “While it may be easier to find people in Shanghai, companies often prefer a more tranquil kind of environment that still has easy access to abundant resources. In a sense, Suzhou has all the benefits of being near Shanghai, without the drawbacks.”

Summing up BioBAY’s offering to those smaller companies it has so successfully courted, Ms. Liu says, “Startup companies simply don’t have full teams for logistics, sourcing, or QA/QC departments, so if we can provide services with economies of scale, we can really assist them.” And she wryly adds: “Of course, other parks can offer similar services – but I would emphasize that the devil is in the details, and the quality of the execution!”

 Swing Your Partner

Andras Gizur, chief representative of Gedeon Richter in China, whose expertise in the country dates back almost 20 years, has a realistic assessment of the sometimes rosy views of the market from outside. “Everybody thinks China is big,” Gizur says, “and it’s therefore very easy to make a successful business – but that’s not true, because it’s very complicated, everybody’s here, and the competition includes all the big MNCs plus the local companies, which are good and getting better.” One way around it is partnering, a longtime necessity for Gedeon Richter, a company which counts 90% of its sales originating from outside its native Hungary. Enter GRmidas, the new OTC company, which will enable Gedeon Richter to be one of the only players at its level to offer full service for both Rx and OTC lines.

“In the last 10 or 15 years, Gedeon Richter focused on Rx, which was the strong point because of our long term experience and the fact that most of our products are Rx. However, our strongest therapeutic area consists of gynaecological products which account for some 35-37% of global sales – and in China, these products are mainly OTC. This focus on OTC was one of the main reasons we established the new JV GRmidas Pharmaceuticals, and we have also opened a new business line to further develop primarily the gynaecological and women’s healthcare business line as well,” which currently includes Postinor, the emergency contraceptive known in the US as Plan B. “Earlier we were not present with this portfolio in China, but it’s an area we want to develop in the coming years,” Gizur says. “Every step is difficult, but we’re on the right track.”

Investment company Vivo Ventures specializes in therapeutic products in clinical development in the US and China, and is a different kind of partner altogether. Managing Partner James Zhao gives the example of Kanghui, a former Vivo investment recently acquired by Medtronic for USD 816 million, of how his firm can help local companies innovate and accrete significant value.

“By the end of 2008, Kanghui had two products in the pipeline in trauma and spinal. Right now, they have three, and the third, a joint product, was brought in by Vivo after our investment. This joint technology comes from a company Vivo is very familiar with, based in Sacramento [California]. One of the reasons why Kanghui invited Vivo to come onboard is that, while they were not short of cash, they lacked technology. Chinese people are very smart – and they are rightfully well-known for their ability to copycat products very soon – but technology like the one Vivo introduced to Kanghui represents a fine art of technology and manufacturing to duplicate the natural mobility of the joint.”

Zhao is clear about the value Vivo provided as a partner: “Were it not for Vivo, it would have taken Kanghui five to seven years to build up such a capability in-house and bring the final product to a commercial stage. But Vivo introduced both companies to establish an OEM opportunity for Kanghui, which is now the official OEM supplier worldwide. With this third product line in joints, Kanghui can call itself a true orthopaedic company, and a total solution orthopaedic provider. Without Vivo, this would not have happened, and this demonstrates in a very clearcut way how what we do is different.”

Inside the Chinese Mind

For a last look at the sector, two of its shining stars explain the mindsets behind their approach, and give a brief slice of advice for future collaborators and competitors.

Fosun Pharma is the pharmaceutical subsidiary of the multi-billion dollar industrial conglomerate, whose interests run as diverse as steel and real estate. As an integrated company with operations from API to finished products, distribution, medical devices, and retail, the group is famous in China for its entrepreneurial spirit, and the slogan of “Cultivation, Teamwork, Performance and Contribution to the Society”.

Qiyu Chen, the company’s chairman, admits this success is not always translatable. “It is hard to explain this to foreigners,” Chen says, “because it is one of [China’s] core cultural values. In ancient times, scholars who have strong ambition abided by these values. For Fosun, I think we should put our eyes on stability, self-discipline and environmental protection. We should make a difference and contribute to the whole society. The result of our contribution should be measured by some statistics, but we should always bear in mind that we should be grateful to the society however big our contribution is and however the business scale is.”

Some humble values, echoed by another industry leader, Dr. Henry Sun, the president and CEO of Tasly Pharmaceuticals, China’s TCM leader – and if upcoming phase III FDA trials of its flagship angina drug are successful, possibly the world’s. “For foreign companies to penetrate the China market, it’s the same as Chinese companies going global: you have to have local experience,” Dr. Sun says. He extols the common view of partnerships and long-term relations, and how one might choose Tasly as a jumping off point. “Tasly, with almost 10,000 employees in China, is well-equipped to help out,” he says, with benefits accruing not only to potential Western partners, but to bring better medicine and more options to Chinese patients. “And that’s good for everybody,” Dr. Sun notes. In this vein. He concludes by predicting that TCM, some day, will become a vehicle for cultural understanding and exchange. “When people more and more know your product, they will be interested to know your culture and background. As I have described here today, TCM history can be related in an engaging story. Such cultural exchange will bring people tighter together, and bring more peace to the world,” Dr. Sun concludes.

 

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