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7-Business: Biotech blooms in China

-------------------------------- GENET-news -------------------------------

TITLE:  Biotech Blooms in China
SOURCE: Red Herring, USA
DATE:   1 Aug 2005

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Biotech Blooms in China

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.

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 centers 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 of 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 totaled $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 favor 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.


European NGO Network on Genetic Engineering

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