Go East, Big Pharma
Andreas Tschirky is a medical pioneer. As head of research and development in China for Swiss drugmaker Roche Group (RHHVF ), Tschirky in October opened a research center in the Zhangjiang science park in Pudong, the flat expanse east of downtown Shanghai that mainland authorities hope will become the heart of the country's pharmaceutical industry. The Roche facility is the company's first wholly owned research and development operation outside Western Europe or the U.S. A year from now, Tschirky predicts, he will be directing more than 40 scientists in Pudong who will be collaborating with colleagues worldwide to come up with new medicines -- while boosting Roche's profile in the Chinese market. "We can help our organization to understand the opportunities in China," he says. "We have a very nice chance to grow."
Not long ago, few pharmaceutical executives would have described prospects in China as "very nice." The country was notorious for its counterfeit drugs and disregard for Western intellectual-property rights -- and to some extent continues to be, with a pair of high-profile setbacks in recent months. Moreover, few Chinese patients have had the money to pay for brand-name Western drugs.
For all of its problems, though, China is simply too big for Big Pharma to ignore. And since joining the World Trade Organization three years ago, Beijing has adopted rules similar to those in the U.S. and Europe that make it harder for local companies to rip off Western-developed drugs. "It's getting better," says T.C. Chu, a principal with McKinsey & Co. in Hong Kong. "A couple of years ago, you couldn't discuss patent protection." Furthermore, China's fast-paced economic growth has created a sizable population that wants -- and can afford to buy -- medicine from U.S. and European pharmaceutical companies.
That has encouraged foreign companies to expand their mainland operations. Roche is adding to its Chinese manufacturing and says it will likely start making Xeloda, an anticancer drug, and CellCept, a drug used to prevent the rejection of transplanted organs, at international-standard plants in China. On Nov. 8, Denmark's Novo Nordisk (NVO ) said it plans to expand a factory in the port city of Tianjin specializing in insulin products. The company is also tripling the number of scientists, to 60, at its R&D center in Beijing. Eli Lilly and Novartis are also doing clinical trials in China. And AstraZeneca PLC (AZN ) is planning to add capacity to its three-year-old plant in the eastern city of Wuxi. Although the $130 million facility had originally been intended as an export base, the company stopped shipping its production overseas last year. "We needed the volume for China," says Steen Kroyer, president of China and Hong Kong for the company.
There's plenty of drug testing going on in China these days, too. Since opening a clinical trial center in Shanghai two years ago, AstraZeneca has conducted tests on 50,000 patients. Testing in China cuts the cost of clinical trials -- which can top $1 billion -- by as much as a third, says Robert W. Pollard, director of market researcher Synovate Health Care China. And few Chinese have access to many medicines, so it's easier to test drugs without worrying about interactions with other compounds. "There's a great patient pool," says Pollard. One continuing headache: Chinese regulators typically take as long as a year to grant companies permission to conduct clinical trials, compared with just two months in hyperefficient Singapore.
The big allure is the potential of selling medicine to the world's biggest population. China today is a $10 billion market -- which puts it in the top 10 worldwide -- and there's plenty of room for growth. While Americans spend an average of more than $500 on prescription drugs annually, Chinese spend just $6, Synovate says. The market is growing at double-digit rates and is likely to be the world's third largest, after the U.S. and Japan, within a decade, says Christopher James Shaw, president for China of Eli Lilly & Co. (LLY ). "China is important today," Shaw says. "But in the future it will be critical."
Still, that future is clouded by bitter conflicts with Western drugmakers. In July, Beijing's State Intellectual Property Office invalidated New York-based Pfizer Inc.'s (PFE ) patent on Viagra in China, ruling that the company hadn't supplied enough laboratory data in its original filing. Pfizer is appealing the decision, arguing that the data the company supplied was sufficient under regulations in effect at the time, and that the regulator is now applying newer, more stringent standards.
In the meantime, Pfizer is continuing to sell Viagra on the mainland. Seventeen Chinese companies have formed a joint venture to market a local generic version of the drug, though they don't yet have regulatory approval to sell it. Pfizer, meanwhile, has invested $500 million in China and has four manufacturing plants but is holding off on making any R&D investments, says Allan Gabor, head of China for Pfizer. While Gabor says Pfizer hasn't put the brakes on R&D because of the Viagra case, he adds that "any industry that is R&D-based looks for a predictable and transparent [intellectual-property] environment. Without that, the ability to exist and do what we do is really threatened."
British giant GlaxoSmithKline PLC (GSK ) is also unhappy with Chinese regulators. In August, GSK abandoned efforts to protect one of its patents on Avandia, a top-selling diabetes drug, after Chinese officials ruled that similar products from mainland drugmakers used a different salt compound, a key ingredient in the compound. While GSK's Avandia patent wasn't overturned, the ruling means Chinese generics makers now can legally sell similar compounds. "There is still a climate of protectionism that is working against multinationals," says Paul Carter, GSK's vice-president and area director for China and Hong Kong.
Beijing's hope is that the pharma giants will help boost the local drug business and make China a global player in yet another industry. Many industry officials believe China has that potential -- as long as Beijing reins in patent infringement. "If they do start cracking down and if that does serve as a deterrent, then things will improve quickly," says Heather Clark, who follows Asia for PhRMA, an industry trade group. That's a big "if," of course, which is why so many people are watching Pfizer's appeal of the Viagra decision. "Companies like ours will make it dependent on [intellectual-property rights] if we are going to invest in a significant way in this country," says Daniel L. Vasella, chairman of Swiss drugmaker Novartis (NVS ). It's a dilemma faced by so many foreigners in China: wait till the market is completely fair, and miss an opportunity. Or jump in too early, and risk getting burned. There's no easy remedy.
By Bruce Einhorn in Shanghai, with Paul Magnusson in Washington, Amy Barrett in Philadelphia, and Kerry Capell in London