Wall Street Journal - November 19, 2004
Laura Santini, laura.santini@wsj.com

Opening a new frontier of outsourcing, global pharmaceutical companies overwhelmed by the rising costs of producing new drugs increasingly are turning to China to conduct low-cost research and development. They are finding highly educated scientists who work for a fraction of the cost of their Western counterparts, and vibrant and growing biotech businesses. They also are beginning to sink significant amounts of money into investments that will further boost China's capabilities.

"We see the rapid emergence of a Chinese biotech industry," said Daniel Vasella, chief executive of Novartis AG.

This month, Roche Ltd. unveiled an R&D center on the outskirts of Shanghai, where the drug giant will employ 40 local scientists. Pfizer Inc. 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 that it also is considering building its own R&D center in China. Novartis, for its part, is collaborating with one Chinese R&D institute and is seeking to partner with a Chinese biotech company on further projects.

With the expense of bringing a new drug to market sometimes topping $1 billion, major pharmaceutical companies are increasingly desperate for a low-cost edge. Some highly complex R&D, such as studying the biology of how the body responds to disease, must be done in the West. But drug companies have found that China, where a scientist with doctorate in chemistry earns no more than $25,000 a year compared with nearly 10 times that in the West, makes a good place to carry out chemical testing of drug compounds to determine their effectiveness as possible treatments.

The savings are needed as Big Pharma comes under growing pressure to expand its 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, said Drew Senyei, a health-care venture capitalist at Enterprise Partners.

At Roche's R&D operation in Shanghai, for instance, scientists will focus on medical chemistry -- screening various compounds that have shown promise as possible antiviral treatments or as cancer drugs. The group will have access to R&D conducted at the drug giant's other research centers in Basel, Switzerland, and Nutley, New Jersey -- and will share its findings with scientists in those laboratories.

Roche executives said they didn't build their $11 million facility simply to save money. "There is very good chemistry done in China," said Jonathan Knowles, the company's global head of research, with many Chinese scientists on the same educational footing as their U.S. counterparts. Instead, the laboratory helps Roche establish strong ties with Chinese authorities, something that could prove valuable as the company seeks to expand operations in China.

Novartis recently formed a partnership with the government-run Shanghai Institute for Materia Medica. Scientists there will screen compounds derived from traditional Chinese medicine, which Novartis scientists may be able to develop into new drugs.

Still, conducting R&D from start to finish in China is years away for Big Pharma. Lingering discomfort with intellectual-property-protection standards remains a problem, drug industry executives said. 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 headquarters in Basel and subsequently transferred them back to China to continue R&D efforts. Mr. Vasella, Novartis's CEO, however, observes that Chinese biotech companies rapidly are adopting Western research standards and knowledge. "It is only a matter of time before China catches up," he said.

The China strategy isn't just for Big Pharma -- Western start-ups are moving into China as well. The lower costs buy them more time to prove the viability of their drug prospects between rounds of funding from venture capitalists.

For instance, TargeGen Inc., based in San Diego, is developing small-molecule drugs for treating cardiovascular disease but has shifted chemical screening of various compounds to WuXi PharmaTech Co. of Shanghai. "We pay WuXi to do research on our compounds and then use the results for further development" in the U.S., said Mr. Senyei of Enterprise Partners, a venture-capital investor in TargeGen. Mr. Senyei said he would like to replicate that arrangement at some point with another U.S. biotech company that is developing cancer treatments.

For biotech companies whose research projects have stalled or whose cash has run dry, positive results achieved in China can help persuade venture-capital investors to give them more money. Mologen Inc. of Germany, for example, is collaborating with Starvax Inc., based in Beijing, on a colon-cancer drug undergoing clinical trials in Europe. Rather than spending on expanded R&D in Europe, Mologen is having Starvax do preliminary screening to determine whether the compound might be effective treating other types of cancer.

Starvax, in turn, is typical of a new breed of Chinese biotech companies run by entrepreneurial Chinese returnees. It was started last 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 as a scientist and a patent lawyer, respectively.

Yiyou Chen previously worked on developing vaccines for viruses that cause cervical cancer and hepatitis B at Genencor International Inc., based in Palo Alto, California. 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 arrangements.

So far, Crimson has purchased the rights to four compounds, aimed at treating HIV, developed by Octamer Inc., based in Tiburon, California. Crimson hopes to develop the compounds into drugs with regulatory approval and then re-license to a Chinese pharmaceutical company with sales and marketing muscle, chief scientist Sam Lou said.

Crimson and Starvax got off the ground with $2 million in seed financing, a pittance compared with the tens of millions of dollars needed in the U.S.

Although it is unclear which Chinese start-ups will hit the jackpot and which will go under, Western scientists see the burgeoning industry as a positive for drug development in China. 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 biotechs are doing.

Kenneth Chien, director of the Institute of Molecular Medicine at the University of California, San Diego, also thinks a homegrown biotech 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 said, and local companies will begin to demand regulatory cover for their breakthroughs. "Without [intellectual property] protection, you have no industry," Mr. Chien said.

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