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Biotech in China may still be in its infancy, but with Beijing pushing hard,
the industry could grow up quickly. In its sleek, modern lab facilities in
the Waigaoqiao Free Trade Zone on the outskirts of Shanghai, WuXi PharmaTech
may have discovered a cure for the ailing Chinese biotechnology sector:
outsourcing, August 2005 .

While its robust IT and telecommunications industries have grabbed
headlines and drawn billions of dollars in foreign and domestic investment,
China?s biotech success stories have been few and far between. Investors
have been decidedly wary. The high costs, low success rates, and long time
horizons associated with drug discovery dull any allure that China?s
fast-growing domestic drug market holds out and, for many investors,
outweigh any cost savings that development and production in China might
yield.

But WuXi PharmaTech and companies like Beijing-based CapitalBio, which makes
protein, DNA, and tissue chips, as well as related instruments and software,
have found ways to leverage the country?s conspicuous strengths?chiefly, its
deep pool of highly skilled, relatively inexpensive scientific talent and
its low manufacturing costs. They fill the existing needs of developed
biotech markets by providing competitively priced services, equipment, and
materials. Their solid successes are critical to building a biotech
ecosystem that, in China, is still not in place.

These companies have helped make a strong case for high levels of commitment
in both funding and support from key government ministries?funding not only
for development and applications, but more fundamentally, for the basic
science that China hopes will yield real innovation and sustain the country?
s competitiveness in life sciences in the long term. And reliant as they are
on rigorous protection of their clients? intellectual property and their own
proprietary know-how, they?ve helped to promote respect of intellectual
property?a perennial impediment to the development of China?s biotech
sector.

Cheng Jing, a former director of the Biochip R&D Center at Beijing?s
prestigious Tsinghua University, notes that Chinese President Hu Jintao has
paid three visits to the Chinese Academy of Sciences this year already,
stressing the importance of creativity, innovation, and the pursuit of
patents each time. ?Without these things,? says Mr. Cheng, paraphrasing
President Hu, ?a country has no core competence: you can show people many
things that are made in China, but nothing invented in China. This really
struck the Chinese scientific community.?

The approach taken by WuXi PharmaTech may lack the glamour?and perhaps the
enormous potential payoff?of drug discovery plays resulting in commercial
blockbuster drugs, but prospects for the sector it is targeting look bright:
the total global R&D outsourcing market is expected to grow to $36 billion
by 2010, according to a Reuters Business Insight report.

Medical equipment?CapitalBio?s sector?reached $9 billion in 2003 and is
expected to nearly double to $17 billion by 2008, according to a KPMG
report. The market is growing at more than twice the world average of 7
percent, galvanizing both government and scientists into action.

On February 29, 2000, Mr. Cheng gave a two-hour lecture on his research to
China?s State Council, a body roughly equivalent to the U.S. Cabinet that
includes all ministerial-level officials. Mr. Cheng?s eyes were on one man
in particular: then-Premier Zhu Rongji, China?s economic czar, known for his
interest in promoting China?s high-tech industry. To Mr. Cheng?s chagrin,
though, the premier ?had his eyes closed for about two minutes? at one
point.

But as Mr. Cheng?s talk moved quickly through the origins of the technology
and current state of the art into a discussion of how biochips had been
successfully commercialized in other markets?what products had been
launched, how much revenue had been generated, how many companies had gone
public?the premier went ramrod-straight.

?Premier Zhu was busily taking notes, and finally looked up to ask one
question: ?How do you think this business can be done in China??? recalls
Mr. Cheng. He wasn?t fazed when Mr. Cheng told him the U.S.-trained
researchers China needed would cost $100,000 a year. ?We can afford that,?
said the premier. By the end of the day, the State Council had agreed to
expedite R&D and commercialization of biochips.

China?s Strengths

?I just don?t think China?s infrastructure is ready for normal drug
discovery yet,? says Ge Li, the Columbia University-educated founder and CEO
of WuXi PharmaTech. ?A lot of people are still buying into the drug
discovery approach, based on the U.S. model. But I was doing drug discovery
for eight years at [San Diego-based] Pharmacopoeia, and I know what it takes
to get a drug moving forward.? And China, says Dr. Li, just doesn?t have
it?at least not yet.

What China does have, and can provide at competitive prices, are
?preclinical services, clinical services, and formulation,? he says. WuXi
Pharmatech, the company Dr. Li came back to his native China to launch in
February 2001, now performs chemistry R&D outsourcing work for 18 out of the
world?s 20 largest pharmaceutical companies, and boasts a client roster that
includes Merck, AstraZeneca, and Pharmacopoeia.

Richard Soll, chief science officer of San Diego-based TargeGen, says that
by outsourcing process chemistry to WuXi Pharmatech, ?costly
chromatographies were eliminated, alternative chemistries to produce the
lead molecules were developed, and yield improvements were realized, thereby
streamlining the cost of producing lead compounds.? TargeGen still utilizes
WuXi Pharmatech for analog chemistry, for scale-ups of intermediate
compounds and lead molecules, and in the synthesis of standards. ?This
allows the small group of TargeGen chemists to efficiently focus on the
discovery of new compounds for TargeGen research programs,? says Mr. Soll.

?There is a real cost gap across the Pacific,? says Jonathan Wang, who heads
the life sciences merchant bank Burrill & Company?s Greater China group. ?In
preclinical drug development, for example, animal testing costs on average
only 20 percent of what it does in the U.S. Given that from concept to
market, the average cost of developing a new drug is more than $1 billion
and takes well over 10 years, a major savings in preclinical costs can
reshape the dynamics of the entire industry,? he says.

This cost gap was, not surprisingly, the kernel of WuXi PharmaTech?s
business model. Dr. Li estimates that hiring a chemist with a master?s
degree in the United States would cost upwards of $60,000 a year. ?But for
us, we can easily get one for $15,000 to $20,000.? The company currently
employs 400 scientists, about 40 percent of whom hold master?s degrees;
another 10 percent have Ph.D.s. There are hidden costs, he quickly adds:
?The Chinese educational system is still not at international levels, and we
have to provide new hires with rigorous training to bring them up to speed.
Managers, who have international experience, have to give a lot more
attention to employees. It?s not like in the U.S., where they just throw you
in the lab and that?s it.?

WuXi PharmaTech had $21.5 million in revenues last year, says Dr. Li, and
has been ?slightly profitable, by Chinese accounting practices, since 2003.?
He admits, however, that high costs of equipment purchases (leasing is not
available in China, he says) have made cash flow an issue, and the company
is not currently cash-flow positive.

Prospects for the market look bright. This year, WuXi PharmaTech is
expanding beyond the drug screening and basic chemistry it now does into
outsourcing for animal testing, where not only are cost differentials
pronounced, but a decidedly more permissive ethical climate prevails.
Shanghai is, so far, beyond the reach of PETA and the Animal Liberation
Front.

One area in which China has tried to take shortcuts, as many Western
pharmaceutical companies allege, is in intellectual property. While China
has, by most counts, made substantial strides in IP protection since joining
the WTO, Beijing?s image suffered another setback last year when a Chinese
court ruled Pfizer?s patent of Viagra invalid, leaving the company impotent
to fend off a host of Chinese copycats. ?The truth is, Pfizer doesn?t have
IP protection for Viagra in Canada or the U.K. either,? says Burrill?s Mr.
Wang. ?But that?s not spicy enough for the media.?

Contrary to the way the case has usually been presented, the Pfizer case in
China actually demonstrates progress in Beijing?s IP regime, asserts Mr.
Wang. ?In China, Pfizer filed an application for a group of claims and a
group of chemicals?10 claims in all. In China, a patent holder must show one
claim for one chemical at a time, and the burden is on the patent holder,
not the challenger. It was a transparent, law-based trial, and the decision
was based on the law.?

Mr. Wang says WuXi PharmaTech takes IP issues carefully into account. ?If
they didn?t manage IP well, they wouldn?t have clients,? he says. The
company enforces non-compete agreements for employees, physically separates
lab space and access protocols for work for individual clients, and has all
its lab notebooks and data notarized by the Shanghai Notary Public?s office,
says Dr. Li. ?Our customers audit all our IP protocols before they engage
us. IP protection is vital to our existence.?

The climate is attracting foreign companies, which are also eyeing the
outsourcing and chemical materials business in China. In December 2004,
Carlsbad, California-based Invitrogen acquired Shanghai-based Bio Asia, a
sequencing reagent and specialized R&D supplier, for $8 million in cash, and
announced plans to increase its investments in China by $20 million.

Leap Day for Biochips

For China?s biochip industry, February 29, 2000, when the State Council
agreed to expedite R&D and commercialization of biochips, was a real Leap
Day. But Premier Zhu and the powerful National Development and Reform
Commission (NDRC), which followed up with Mr. Cheng, were not about to start
pumping money into his Biochip R&D Center. Instead, they wanted him to
launch a commercial spin-off. Dissatisfied with the progress of the 70-odd
academic centres they had funded to date, Premier Zhu and the NDRC were
convinced that only a for-profit company would have the incentive to
innovate. ?They gave us one-off funding, and then we were on our own,? says
Mr. Cheng. ?After that, we could only raise money from VCs and strategic
investors.?

Mr. Cheng, who was born in Beijing, grew up in Chongqing, and graduated with
an electrical engineering degree from Shanghai?s Tongji University, had
never run a company before: the extent of his experience in the business
world was limited to a three-month, self-designed training course offered by
the Scottish Enterprise Group called ?How to Start Up a Business,? which he
took after completing his Ph.D. in forensic science from Strathclyde
University in Glasgow.

However, his relative inexperience is nowhere in evidence at the
headquarters of the company he founded in 2000, CapitalBio. The
260,000-square-foot, leaf-shaped facility in the Zhongguancun Life Science
Park?a 45-minute drive north toward the Great Wall from Beijing?houses
state-of-the-art labs, libraries, meeting rooms, office space, and even a
gym.

CapitalBio?s core business line is in DNA-, protein-, cell-, and
tissue-based chips, which can be used for everything from detection of
banned substances in athletes?CapitalBio has the contract to supply chips
for doping screening for the 2008 Olympic Games in Beijing?to detecting SARS
or avian flu antibodies. The company also makes scanners and other imaging
equipment used to read its chips, software, and databases for a variety of
laboratory and clinical applications. And with the acquisition last year of
Beijing-based Wandong, add to that list medical equipment, including MRI
machines, X-ray facilities, digital radiograph (DR) systems, and cardiac
imaging systems.

While the China market in medical equipment is showing strong growth, most o
f CapitalBio?s revenue this year has come from sales overseas?a shift from
last year, when the preponderance of sales was domestic. CapitalBio recorded
$61 million in revenues in 2004, boasts a headcount of over 300, and expects
to break even by the end of next year. The company has filed 53 patents
globally, and has already been awarded six from the U.S. Patent Office.
?There are companies that make individual products?DNA arrays,
microfluidics?with higher performance than CapitalBio?s,? says Gajus
Worthington, CEO of South San Francisco-based microfluidics chipmaker
Fluidigm. ?But no other company I?m aware of can match the impressive
complement of technologies they offer.?

Mr. Worthington is also impressed with the ?very aggressive business model
[CapitalBio] has in terms of businesses that they own or have invested in.?
CapitalBio has taken a stake in two biotech startups?Aviva Biosciences in
San Diego, California, and Chipscreen Biosciences in Shenzhen, in South
China?s Guangdong province?through the transfer of its patents. Using
CapitalBio?s bio-, cell-, gene-, and tissue-chip technology, Chipscreen
hopes to be able to substantially compress the long drug development process
by speeding up screening of chemical compounds and performing early-stage
efficacy and toxicity testing. The company now has compounds for Type II
diabetes, head and neck carcinoma, and osteoporosis in final stages of
preclinical evaluation.

Back to Basics

In the absence of substantial private-equity investment, Chinese biotech
research, whether commercial or institutional, remains very much dependent
on government funding. While that funding is growing, Beijing?s spending on
the biological sciences is still dwarfed by spending in the U.S., even as a
percentage of GDP. In 2002, China?s total budget for basic biosciences
research totalled $242 million, or 0.02 percent of GDP, while the U.S. spent
roughly $30.75 billion, or 0.3 percent of GDP, according to Burrill.

Historically, R&D spending in China has been skewed in favour of applied
research, and especially development, which has led many observers to
comment that ?R&D in China is all D and no R.? And while it?s true that the
ever-pragmatic Premier Zhu was obsessed with commercialization, there are
signs that the current Chinese administration under President Hu, who took
the reins in early 2003, appreciates the importance of basic science.

?In the past 10 years or so, the country has been focused mainly on
development, and on moving quickly to production,? says Mr. Cheng. ?But more
recently, government officials have been aware that this can?t last forever.
They realize that if a country wants to have real competitive creativity,
you have to come back to address many basic issues in science and
technology.?

A clear example of Beijing?s commitment to basic research, says Mr. Cheng,
is the generous funding given to Beijing?s National Institute of Biological
Sciences, located at the Zhongguancun Life Science Park, where CapitalBio is
based. The institute was founded in 2003 with an initial investment of
nearly $109 million from China?s Ministry of Science and Technology, the
Beijing municipal government, and the NDRC, with a mandate to hire 30
U.S.-trained professors in the life sciences and recruit 600 graduate
students. Already, says Mr. Cheng, a dozen professors have returned to China
to work at the institute. ?This institute is dedicated to basic research,?
says Mr. Cheng, ?and not to development.? The goal, he says, is to get
papers into the SCI, or Science Citation Index, which catalogs widely cited,
peer-reviewed papers.

China?s push toward basic sciences may already be paying off. ?A few years
back there were one or two papers from Chinese scientists a year in Science
and Nature. The situation has changed dramatically. In Cell alone this year,
four Chinese papers have been accepted,? says Mr. Cheng.

?China can do world-class R&D,? says BioVeda?s Zhi Yang. ?We did the first
sequence of the whole rice genome, and have produced more transgenic animals
and plants than anyone else in the world, and China was the first to
synthesize insulin as a live molecule. This proves China can do the work.
China still lags far behind international standards. But can we do
world-class research? Yes, we can.?

With government funding in place, an expanding talent pool that includes an
ever-greater number of foreign-educated Chinese life scientists drawn home
by opportunities in their native country, and companies like WuXi PharmaTech
and CapitalBio laying the foundation for a biosciences ecosystem in China,
there is every reason to believe that China?s biotech industry will blossom.

www.checkbiotech.org

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