Healthy Skepticism Library item: 724

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Publication type: news

Santini , L .
Drug Companies Look to China For Cheap R&D
THE WALL STREET JOURNAL 2004 Nov 22

Full text:

Long known as a place to produce clothes and toys cheaply, China now is providing the West with another opportunity: developing drugs at lower cost.

Opening a new frontier in outsourcing, pharmaceutical companies overwhelmed by the rising cost of creating drugs are turning to China to conduct research and development. They are finding highly educated scientists who work for a fraction of what their Western counterparts are paid, as well as vibrant and growing biotechnology businesses. And they are beginning to sink significant amounts of money into deals that will further boost China’s capabilities.

“We see the rapid emergence of a Chinese biotech industry,” says Daniel Vasella, chief executive of Novartis AG, a Swiss drug maker that recently formed a partnership with the government-run Shanghai Institute for Materia Medica. Scientists there will identify compounds derived from traditional Chinese medicine that Novartis scientists may be able to develop into new drugs.

This month, Roche Ltd. of Switzerland unveiled a research-and-development center on the outskirts of Shanghai, where the drug giant will employ 40 local scientists. Pfizer Inc. of New York is spending $175 million on establishing a new regional headquarters in Shanghai. Although the office will oversee existing manufacturing and marketing operations, Pfizer said last month it also is considering building its own R&D center in China.

With the expense of bringing a new drug to market now sometimes topping $1 billion, big pharmaceutical companies are increasingly searching for a low-cost edge. Drug companies have found that China, where doctorate-level scientists command $25,000 a year, compared with nearly 10 times that in the West, makes a good place to test drug compounds and their efficacy. While some other highly complex R&D — such as intricate biological testing — still is mainly performed in the West, China can save companies money, since about 80% of their total R&D costs go toward scientists’ salaries.

The savings for the drug-industry giants comes amid increasing pressure on them to expand their pipeline of potential blockbusters. “Doing research in a low-cost setting should allow drug companies to deploy the dollars” they spend in the U.S. and Europe more effectively, says Drew Senyei, a health-care venture capitalist at Enterprise Partners. Despite lower research-and-development costs, however, companies so far aren’t planning any corresponding drug price cuts.

At Roche’s new Shanghai operation, scientists will focus on “medical chemistry,” screening various compounds that have shown promise as possible antiviral or cancer treatments. The group will have access to research conducted at the drug giant’s other research centers in Basel, Switzerland, and Nutley, N.J., and it will share its findings with scientists in those laboratories.

Roche executives say they didn’t build their $11 million facility simply to save money. “There is very good chemistry done in China,” says Jonathan Knowles, the company’s global head of research, with many Chinese scientists on the same educational footing as their U.S. counterparts. The laboratory also should help Roche establish strong ties with Chinese authorities, something that could prove valuable as the company seeks to expand operations in China, as well as explore new market opportunities there.

Yet conducting research and development start to finish in China remains years away for the industry’s big players. Lingering discomfort with the country’s level of protection of intellectual property remains a problem, drug industry executives say. Also, scientists still require training in the West to gain understanding of cutting-edge techniques and equipment. In the past, Novartis has trained Chinese scientists at the company’s Basel, Switzerland, headquarters and then transferred them back to China to continue research efforts.

The labor-intensive screening process for potential new drugs involves testing how a biological target, such as a protein or gene, responds to certain compounds and repeating the process hundreds of times to make sure it is a uniform response. Some companies have broadened their R&D operations to include clinical trials in China, where patient enrollment is easier and associated hospital fees much lower.

It isn’t just the industry’s giants that are being lured to China; Western start-up businesses are moving here as well. The lower costs buy them more time to prove the viability of their drug prospects between rounds of funding from Western venture capitalists. Germany’s Mologen Inc., for example, is collaborating with Starvax Inc. of Beijing on a colon cancer drug now undergoing clinical trials in Europe. Rather than spending on expanded research and development in Europe, Mologen is having Starvax carry out R&D to determine whether the compound might be effective in treating other types of cancer.

TargeGen of San Diego, for instance, is developing small-molecule drugs for treating cardiovascular disease, but it has shifted chemical screening of various compounds to Shanghai’s WuXi PharmaTech Co. “We pay WuXi to do research on our compounds and then use the results for further development” in the U.S., says Enterprise Partners’ Drew Senyei, a venture-capitalist investor in TargeGen. Mr. Senyei says he would like to replicate that arrangement at some point with another U.S. biotechnology company trying to develop cancer treatments.

Through companies such as WuXi, Western drug companies soon will be able to conduct complex animal testing in China, another vital research tool that is used to find out whether a compound is safe, not just whether it fights disease. WuXi, for instance, has an empty building it plans to use for animal testing on a contract basis by mid-2005.

For biotechnology companies whose research projects have stalled or whose cash has run dry, showing positive results in China can persuade venture capitalists to give them more capital.

Starvax is typical of a new breed of Chinese biotechnology companies run by entrepreneurial Chinese returnees. It was started in July by two former classmates at Peking University, Yiyou Chen, 33 years old, and Justin Chen, 34. The like-named friends both spent more than a decade in the U.S. earning graduate degrees and working, respectively, as a scientist and a patent lawyer.

Yiyou Chen previously worked on developing vaccines for viruses that cause cervical cancer and hepatitis B at Genencor International Inc. of Palo Alto, Calif. Now Starvax is working on discovering vaccines in the same areas.

Another Chinese upstart is moving beyond simply offering research for hire. Crimson Pharmaceutical in Shanghai plans to license Asian sales rights from its Western partners and conduct its own development studies to create proprietary products. Chinese drug companies are eager to secure such exclusive deals.

Patent protection, of course, remains an issue. But with China now a member of the World Trade Organization, some of those concerns are abating. Kenneth Chien, director of the Institute of Molecular Medicine at the University of California, San Diego, believes a homegrown biotechnology industry in China will spur progress in intellectual-property protection. Scientists trained in the U.S. generally should have greater understanding of patent rights, he says, and local companies will begin to demand regulatory cover for their breakthroughs. “Without IP [intellectual property] protection, you have no industry,” Mr. Chien says.

So far, Crimson has purchased the rights to four compounds aimed at treating HIV developed by Octamer Inc. of Tiburon, Calif. Chief scientist Sam Lou says Crimson hopes to gain regulatory approval for the drugs and then re-license them to a Chinese pharmaceutical company with sales and marketing muscle. Both Crimson and Starvax got off the ground with just $2 million in seed financing, a pittance compared with the tens of millions of dollars often needed in the U.S.

Although it remains unclear which Chinese start-up businesses will hit the jackpot and which will go under, Western scientists see the burgeoning industry as a positive for drug development. Johnson & Johnson and Pfizer, for instance, recently visited the “incubator building” in Beijing’s Life Sciences Park, where Starvax is located, to find out what the new biotechnology companies are doing.

Mr. Vasella, Novartis’ chief executive, observes that Chinese biotechnology companies are rapidly adopting Western research standards and knowledge. “It is only a matter of time before China catches up,” he says.