China gets serious about biotech (Page 2)

What will China's emergence and commitment to its biotech and pharma sectors mean for the future of the U.S. biotech and pharma sectors?

China's rise presents challenges as well as opportunities for the U.S biotech and pharmaceutical sectors.  If China continues to make progress addressing the problems identified above, the highly segmented nature of biotech and pharma markets will present opportunities for the Chinese biopharma industry to carve out niches where it can be competitive.

The severe recession and lack of access to capital underscore cost pressures that some drug development firms are facing.  In addition, health care reform in the U.S. will likely put significant pressure on drug developers to reduce drug prices.  Future U.S. efforts to "bend the health care cost curve" lower in order to pay for health care reform and address U.S. fiscal deficits might mean that the often quoted figure of over a billion dollars to bring a new drug to market will no longer make economic sense in some situations. Consequently, these firms will come under pressure to preserve profit margins by finding new ways to lower their costs, perhaps by utilizing foreign contract research and development services. China appears poised to compete in this niche, and the Chinese government is actively encouraging this market. Large U.S. pharmaceutical companies are already investing resources in China to take advantage of lower research and development costs.  Drug developers and domestic contract research organizations will need to find ways to increase their productivity and lower their costs to counter these threats to their business.

Many Chinese biotech and pharma companies provide contract research services "on the side" as a means to raise revenue.  These firms can provide contract research services for international partners at a very low cost. This is a segment of the market that is growing; however, a potential bottleneck to growth arises from partners' concerns over safeguards of confidential and proprietary intellectual property.  Firms that compete in this area have to go to great lengths to address these concerns.

China could also prove a fertile ground for sprouting biotech or pharma startups if the quantity of high quality, innovative scientific research increases and is sustained. Dr. Fanyi Zeng's work highlights China's capability to carry out leading biotechnology research. As biotechnology and small pharma investing is becoming more globalized, an increase in investment capital flowing to Chinese startups could mean a reduced flow of investment capital to U.S. firms. As these companies mature, they will compete with U.S. firms for follow-on investments or partnering opportunities with larger firms. Currency factors also might play in China's favor, as many speculate that the Chinese currency is undervalued vis-à-vis the U.S. dollar.

Despite these challenges, China's growth as a market brings great opportunities for U.S. biotechnology and pharmaceutical firms. There are tentative signs of an improving intellectual property environment in China. Recall in 2004 when China's patent review bureau sided with local generic drug makers invalidating Pfizer's sildenafil citrate patent--the main ingredient in Viagra. Soon afterwards, the Beijing Intermediate Peoples Court reversed the lower court holding, upholding the patent.  

More importantly, as China's domestic innovative capability develops, there will be increased internal pressure to strengthen IP laws. After all, in order to have one's own IP rights respected, one must respect the IP rights of others. A stronger patent system coupled with China's estimated domestic market of 130 million daily consumers of biopharmaceuticals will almost certainly bring increased opportunities for U.S. firms to expand their market. Indeed, major U.S. pharmaceutical companies already have facilities in China and the Chinese biopharma industry's relative inexperience in commercializing its domestic discoveries has led to a considerable increase in licensing deals with Western companies.

China's commitment and emergence into this sector should motivate U.S. lawmakers to increase their strategic commitment to biotechnology and pharmaceutical research and development. Unlike manufacturing, the U.S. should not cede this battlefield to China. Obama's recent speech recognized the importance of international competition in innovation and scientific discovery. Recalling the great advances made during the space race with the Soviet Union 50 years ago, the Obama speech highlighted the importance of investing in scientific research and development in order to maintain U.S. dominance in scientific innovation. Quoting Abraham Lincoln, Obama stressed that innovation is the engine of U.S. growth requiring us to add "the fuel of interest to the fire of genius in the discovery of new and useful things." Obama then noted that as a result of the erosion of federal funding in the sciences over the last quarter century "other countries are now beginning to pull ahead in the pursuit of this generation's great discoveries."

Obama's pledge of increased research funding underscores the U.S. commitment and resolve to lead in innovation.  China's emergence will hopefully reinforce and strengthen this commitment and resolve. As President Kennedy said (and Obama repeated) when he addressed the National Academy of Sciences more than 45 years ago: "The challenge, in short, may be our salvation."

References:

[1] (http://english.gov.cn/2009-05/13/content_1313699.htm)

[2] Nature Biotechnology 26, 1235 - 1240 (2008) Source: All data extracted from WIPO Statistics Database.

[3] Nature Biotech, Vol. 26 Number 1 January 2008.

[4] WIPO Statistical Review 2008.

[5] Nature Biotechnology 26, 1235 - 1240 (2008) Source: All data extracted from WIPO Statistics Database.

[6] http://www.ebdgroup.com/partneringnews/?q=node/189