China is expected to replace Japan as the world's second largest drug market after the US, with annual sales of 80 billion euros by 2015.[Photo/China Daily]

China proves to be top draw for multinational drug companies planning cutting-edge research projects

Judging by current trends, it would be relatively safe to say that the pharmaceutical industry in China is poised for the big leap that could soon make it the destination of choice for cutting-edge pharmaceutical research. That, however, does in no way mean the conventional drug manufacturing business would languish. Rather, it is also poised for an equally impressive growth with health awareness and changing lifestyles the new growth drivers and prevention the new buzzword for the industry.

Many of the growth opportunities for the industry came after the government unveiled a 850 billion yuan (93.43 billion euros) reform plan in 2009 that not only intends to revamp the hospital management system in the nation, but also aims to provide universal access to healthcare through national insurance programs. Further impetus was provided when policymakers announced that healthcare would be one of the key focuses for the 12th Five-Year Plan (2011-2015).

According to French newspaper Le Figaro, China is now the fifth largest pharmaceutical market in the world, with annual growth rates of 20 percent expected till 2015.

IMS Health expects China to overtake Germany as the third largest market in 2013, while Reuters expects annual drug sales in China to reach $115 billion (80 billion euros) by 2015, and replace Japan as the world's second largest market after the United States.

There is no denying the immense growth potential in China, considering that most of the top 20 multinational drug makers are deepening their footprint and setting up more R&D facilities, joint ventures and fully owned companies even as they grow inorganically through mergers and acquisitions (M&A).

Pharmaceutical giant Pfizer has invested $1 billion in China since 1980. Its investments cover a broad product portfolio, ranging from nutrition to consumer healthcare products, while the business operations span 200 cities and over 9,000 employees.

Roche Holding AG of Switzerland expects China to be one of its top three global revenue producers by 2015. The company's current annual revenues from China are already in excess of $1 billion while its investments are around $220 million.

French drug maker Sanofi said in May that it expects about $140 million in revenue from its consumer health business in China this year. The company is also gearing up for a fast expansion and currently employs over 6,000 people in more than 200 cities spread across the country from Shanghai to Urumqi, capital of the Xinjiang Uygur autonomous region.

"The Chinese market is as important as the US market for us. In our definition, China is no longer an emerging market," Christopher Viehbacher, chief executive of Sanofi, said in a recent statement.

British drug maker GlaxoSmithKline's total investment in China exceeds $400 million. The company is setting up one of its largest research centers in Shanghai and has charted plans to recruit between 50 and 100 top international scientists and employ more than 1,000 researchers at the new facility by 2017.

"China is positioning itself not only as a vast and unique market, but also as a source and destination for high-quality research and manufacturing," says Health Minister Chen Zhu.

Though the main focus of the healthcare reforms is modernization and improvement of healthcare delivery, the overall plan to provide universal healthcare by 2020 offers immense opportunities for domestic and foreign companies in the entire value chain.

"The nation has come a long way in its development of the pharmaceutical industry. What we are seeing today is something that was unthinkable even a few years ago," says Wang Yunpeng, a former official at the Ministry of Health.

On Jan 1, 2003, China carried out its promise of drug intellectual property rights protection and opened its gates for drug sales by foreign companies according to a WTO agreement. "Such industry-friendly actions have helped buoy growth," says Wang.

But the major transformation will come with the fresh set of development goals outlined in the 12th Five-Year Plan which call for a slower gross domestic product (GDP) growth rate, while emphasizing welfare measures, public services, more equitable distribution of wealth and resource sustainability.

Biotechnology well echoes the new growth model powered by innovation and technological superiority. It has been singled out as one of the seven "strategic emerging industries" in the five-year plan, supporting the development of innovative biotech products, high-end medical devices and patented medicines.

"The demand for medicines in China is huge as the base of China's population is over 1.3 billion and medicines are a necessity like air and water," says Duan Peng, research assistant professor at Rutgers, the State University of New Jersey in the US.

At the same time, changing lifestyles have also seen the urban dwellers in China becoming increasingly health conscious and looking for high-end healthcare products.

According to IMS market prognosis, China's health spending is just 4.7 percent of its GDP, but steadily going up. The 850 billion yuan healthcare package for 2009 to 2011 will boost spending to 5.5 percent of GDP, say experts.

Data from Zacks Investment Research shows that China's share of spending on drugs out of its total healthcare expenditure is as high as 50 percent. Hospital drug sales, retail pharmacy sales and rural drug sales are forecast to grow 20 percent, 13 percent and 40 percent respectively.

"China is a cost haven," says a district sales manager from Sanofi-Aventis on condition of anonymity. "The combination of cheap labor and laboratory set-up are proving to be major attractions for global drug makers." It is estimated that the cost of developing a new drug in the West can be as high as $1.3 billion.

"The unique patient pool in China is another major attraction for pharma companies. Some studies require a wide range of patient stratification. China and India are considered ideal locations due to the availability of large number of suitable and receptive patients," Duan says.

But it is manpower that is proving to be the top draw. China offers a large pool of talent in pharmaceutical sciences, with an increasing number of them having received cutting edge education from Western universities. According to a recent report from global consultancy firm KPMG, more than 80,000 doctoral scholars in the life sciences industry from Western institutions have returned to China to work in the industry or in academic institutes, bringing with them advanced skills and knowledge.

Realizing these advantages multinational drug makers are now adopting a holistic package of strategies to cash in on the new opportunities in China.

"Mergers & acquisitions (M&A) seem to be a winning formula," says Pan Liqiong, sales manager of Mitsubishi Pharmaceutical (Guangzhou). China now ranks as one of the most attractive M&A destinations for foreign drug makers in Asia.

"Acquiring local manufacturers and generics makers provides a quick and cost-effective point of entry for launching more the expensive, branded products," says Duan.

Much like the Silicon Valley in the US that fostered the information technology industry, there are several drug valleys that are sprouting up in China. The Pudong Zhangjiang Hi-Tech Park in Shanghai, dubbed as "Zhangjiang Drug Valley", spreads over a total area of 77.45 sq km, and houses nearly 170,000 employees from 7,387 companies, one third of which are foreign funded. Some of the big names in the region include Roche, GSK and Nycomed. Sanofi has located its R&D center in the 20-story BenBen tower in downtown Shanghai and styled it the Sanofi-Aventis University.

Multinational companies have shifted focus to research and sales of drugs that can tackle entire lifestyle issues rather than medication for specific diseases.

In the last few years, there have also been several domestic companies that are now making their presence felt in the international arena. Their growth stems largely from the investor-friendly policies practiced by local governments including incentives like tax sops and direct funding opportunities to foster domestic entrepreneurship.

Last month, Wu Jinzi, the former vice-president of global HIV Drug Discovery at GSK, got an initial funding of 10 million yuan for his new start up Ascletis, from the Binjiang Hi-tech Development Zone (BHDZ) in Hangzhou, capital city of Zhejiang province. Founded this year, Ascletis develops medicines for cancer and other infectious diseases like HIV. The BHDZ has said that it will set up an annual fund of 100 million yuan for promoting talents like Wu.