China's Century Bet On Biotechnology And A Pharmaceutical Industry - Shanghai Zhangjiang Hi-Tech Park

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By Bill L. Qin (Lei Qin)

Within the last two decades, "Made in China" has been seen everywhere but mainly on consumable cheap products and it has been mocked as "trading airplanes with billions of T-shirts".

This impression has been suddenly altered by the Beijing Olympics, which presented the world a new China with modern traffic systems, skyscrapers and shopping malls.

What has happened inside China? Maybe it is time for Canadians to reconsider China’s role in Hi-Tech industries, especially the Biotechnology and Pharmaceutical industries.

Biotechnology was introduced into China as a concept in the 1980’s mainly by “returnees” trained in western countries. And as an industry it was started in the mid-1990’s with biotechnology being adopted by pharmaceutical companies, almost 20 years lagging behind Canada and the USA.

However, since 2000 this industry has experienced aggressive growth in China with an annual growth rate over 30%. In 2005, the gross revenue surpassed $50 billion USD (Data from Special Report 2007 of Shanghai Pudong Association For Science & Technology, printed in Chinese. Gross national pharmaceutical industry revenue is $402 billion RMB, transferred to over $50 billion USD based on currency exchange rate 1:8.). In this way, China would be expected to grow into the world’s 5th largest market of Biotechnology and Pharmaceutical (Biotech/Pharma) products by 2010 (many sources have the same conclusion, two of which are cited here: China as a Biopharmaceutical Powerhouse: Just a Matter of Time www.biopharminternational.com
October 2007; Seizing china’s Pharma Opportunity, Feb 2008, The McKinsey Quarterly).

So what is the secret of China’s sudden catch-up to the rest of the world in this Hi-Tech industry? The best answer always comes from the inside. There would be no better place than the economic heart of China, Shanghai, to learn China’s century bet in boosting its Biotech/Pharma industry. And Shanghai Zhangjiang Hi-Tech Park, as an experimental field in developing Chinese Biotech/Pharma industry, which has drawn persistent attention and policy priorities in last decades, thus became the target of my Biotech/Pharma trip in the summer of 2008.

Zhangjiang Hi-Tech Park and National “Drug Valley”

Shanghai has long been a biosciences centre of China, endorsed with one of the most sophisticated research systems including universities, research institutes, hospitals and pharmaceutical companies. Strong academic and industry backgrounds enable Shanghai aboard over 5% of Biotech/Pharma companies and revenue of the industry in China.

“Since1992, Shanghai has been regarded as the front line of technology and financial reforms in China. ZhangJiang Hi-Tech Park was then planned and constructed to realize and strengthen this policy,” said Renjie Qian, former CEO of Shanghai Zhangjiang Hi-Tech Park Development Company. “Biotech/Pharma sector, as a ‘sunrise industry’, attracted superior emphasis from both national and Shanghai government.”

In 1996, the Ministry of Science and Technology, the Ministry of Health, the Chinese Academy of Science, State Food and Drug Administration, together with Shanghai Municipal Government signed a cooperation agreement to co-build “Shanghai National Biomedical Industry Base” at Zhangjiang Park, which is also called the “Drug Valley”. The administrative organization of “Drug Valley” is State Biotech & Pharmaceutical Industrial Base (BPB, Shanghai). Until 2007, the Drug Valley has pooled over 30 research institutes, more than 400 Biotech/Pharma companies, hiring over 20,000 employees, with revenue over 40% of total output of Shanghai Biotech/Pharma industry. Networks of Zhangjiang companies have branched out of China to reach countries around the world.

“Drug Valley” as host of
International Biotech/Pharma Giants

“The vision of BPB is to build a cluster with world wide reputations, and attract world famous companies to Zhangjiang Hi-Tech Park by creating professional services and implementing government strategies,” said a senior manager in BPB.

Favourable policies include low cost in office rental, imbursements and rewards to innovative R&D projects, beneficial taxation rates, etc.

In 1994, Roche, a world’s leading healthcare company became “the first man to eat the crab” (meaning brave man, a Chinese saying) and invested $45 million USD to build its manufacturing plant in Zhangjiang. The plant soon became the most profitable pharmaceutical company in Shanghai, and encouraged Roche to take more activities to Zhangjiang including establishing its fifth global research center. The success of Roche apparently impressed other international Biotech/Pharma companies. In 2006, Novarits invested $100 million USD to build its eighth global research centre in Zhangjiang. At the end of 2007, many top global pharmaceutical companies opened their manufacturing plants or research centres in Zhangjiang “Drug Valley”.

In 2003, Adaltis Inc, headquartered in Montreal, became the first international in vitro diagnostics (IVD) company to build its manufacturing base in Zhangjiang, named CP Adaltis. In the eyes of Adaltis’s president, Pierre Larochelle, the creation of the China base perfectly represented the company’s strategy to achieve high quality manufacturing in a low-cost environment and built a platform for marketing their products to global emerging markets. His foresight was well supported: at the first quarter of 2005, Chinese People’s Liberation Army as well as several regional disease control centres ordered a $2 million CDN rapid HIV test product from CP Adaltis.

Research networks at “Drug Valley”

The government of Shanghai city acted as the most enthusiastic advocator in moving biomedical research centres into Zhangjiang. “Not only function as base of manufacturing plants, Zhangjiang “Drug Valley” is also designed to be an innovative “Engine” of Biotechnology and Pharmaceutical Industry in Shanghai and China.” said Qian, “For this reason we have been committed to build healthy research and educational networks in Zhangjiang by proactively recruiting educational and research institutes.”

The first national research institute of “Drug Valley” was the National Human Genome Center at Shanghai (CHGC), which was founded in 1998 with the help from Zhangjiang Hi-Tech park. In last 10 years, CHGC has attended many international projects, including human genome project (1%), rice genome project (Chr. 4), and Chimpanzee genome project (16%). The efforts of CHGC scientists have significantly promoted Chinese research capacity in genome sequencing and functional study. To some extent, CHGC has been regarded as an experiment in transforming “Drug Valley” into a talent pool of Biotech/Pharma research. Its success encouraged more research institutes to build their branches in Zhangjiang and even completely relocate to the Hi-Tech Park, just as Shanghai Institute of Materia Medica (SIMM) did.

These research centres, including Shanghai University of Traditional Chinese Medicine research network to transform “Drug Valley” from a manufacturing base to talent pool of innovative research and development activities.

Business models of “Drug Valley”

Biogeneric medicines constitute the majority of drugs produced in China, estimated over 90% of the market. One mission of BPB is to build “Drug Valley” as the largest biotech/pharma innovation, industrial and export base in China. With persistent efforts, this policy began to pay off. Within the last five years, more than 30 leading drug candidates have been selected from laboratory research and animal testing, of which 10 drugs have been approved to enter clinical trial. All these products have registered their intellectual property (IP) primarily in China. Research institutes and private R&D pharmaceutical companies are major contributors of these innovative products.

For example, huperzine A (HupA), a novel alkaloid isolated from the Chinese medicinal herb, Huperzia serrata, was found to be a potent, inhibitor of acetylcholinesterase (AChE) and a new drug to treat Alzheimer’s disease (AD).

Originally developed in SIMM, now the medicine is under clinical trial in 35 hospitals across the world. As another example, recombinant human Neuregulin-1 injection will be used as anti-heart failure drug, which was developed in Zensun Sci & Tech Co. Ltd and is currently under clinical trials nationwide.

However, drug discovery is a lengthy process demanding high investment and faces high risk of failure. These obstacles have steered most “Drug Valley” enterprises away from innovation activities, most of which were small businesses with few employees. “R&D of novel drugs cost on average a billion US dollars with a 10-12 year timeline. Even the cost in China could be cut largely, it is still over the expectation of most Chinese biotech companies.” commented Dr. Mingdong Zhou, CEO of Zensun Sci&Tech.

This is a true reflection of immature venture capital environment in the “Drug Valley” and has to be handled in coming years.

To survive the “dead valley”, many Zhangjiang start-up life science companies have engaged themselves in carrying on outsourcing services from abroad to achieve financial independency. As it was proclaimed by the vice president of Shanghai Biochip Company (SBC), Dr. Guoping Zhao, “A financially healthy biotech company must have a positive cash flow. If the cash flow became negative, the company will easily go bankrupt even if it owns tens of millions of dollars of fixed assets. And that is the risk of running a biotech company.” With global outsourcing services going main stream, contract research has become a primary business in some “Drug Valley” enterprises, like Chem Partner. Adapted to this business trend, BPB is speeding up its step in creating industrial clusters for contracted research organizations (CROs).

Optimistically speaking, the creation and development of Zhangjiang “Drug Valley” is a successful experiment of China in developing its Biotech/Pharma industry.

And Zhangjiang model is currently copied broadly by other cities across the country. However, industrialization of this Hi-Tech industry sector is not just building a cluster of small and medium enterprises, nor building state of the art infrastructure. There will be a lot of homework to do before “Drug Valley” embraces the commercial success and becomes an icon of national competency.

Urgent tasks include introducing sophisticated professional service systems including IP protection, business consulting, financial services and employment services. Professional training represents another need in recruiting qualified employees familiar with international industry standards or regulations (e.g. FDA, GLP, GCP, ICH, cGMP). This will help Chinese life science enterprises gain international credit and change skeptic attitude from developed countries, which are critical for them to enter the global market.

Conclusion

Biotech/Pharma companies in Zhangjiang “Drug Valley” represent the most advanced level in Chinese Hi-tech industry. Favourable government policies, booming innovative process and continuous investment are casting China as an emerging power in the industry with a supersized market and global competency.

Canadian companies should seize the historic opportunities and grow their business with this nascent market.

Many Canadian Biotech/Pharma companies have taken actions explore the China market, such as MDS Inc, Anogen-YES Biotech and Adaltis. And their achievements are impressive. After four years of aggressive growth, CP Adaltis has hired over 300 employees in Shanghai and owns a global GMP licensed manufacturing facility on an over 120,000 square foot property. In 2007, the sales of Adaltis IVD products in China increased by 74% and will continuously support the global revenue growth of the company by backing up its marketing activities in emerging global markets like Brazil, India and Mexico. Though it is still an uncommon practice for Canadian companies to build China-based companies like Adaltis, its success in China apparently supports such a business model: outsourcing low profit margin activities to low cost environment and leaving company headquarter in Canada to coordinate global marketing and key R&D activities.

Bill L. Qin is the founder and CEO of Biocomplex.