by Dan Nevrivy and Rob Bakin
Daniel J. Nevrivy, Ph.D. is the founder of Nevrivy Patent Law Group, a Washington, DC-based firm that assists biotechnology and pharmaceutical companies with their intellectual property needs. Robert E. Bakin, Ph.D., is a registered patent agent. Before becoming a patent agent, Robert was a cancer researcher at the University of Virginia and Georgetown University.
China recently announced an effort to spend $9.2 billion on technological research and development by the end of 2010 with the biotechnology sector being highlighted as a major funding recipient. China's bold and strategic announcement to increase its innovative capability came on the heels of President Obama's recent speech before the National Academy of Sciences where he proclaimed a vision for America to lead in scientific discovery and innovation and pledged to devote more than 3 percent of the U.S. gross domestic product (GDP) to research and development. While the U.S. has already ceded large swaths of the manufacturing battlefield to the Chinese, China's willingness to strategically invest their vast financial resources demonstrates a firm resolve to becoming a competing force in innovative industries such as biotechnology.
While China still has considerable hurdles to overcome before it is on par with U.S. biomedical research and development, the segmented nature of the biotech and pharma industries, and current and future cost pressures confronting these industries, provide some near term opportunities for Chinese firms to compete. In addition, the growth of the Chinese market and U.S. expertise in commercializing cutting edge research provides opportunities for U.S. firms to expand their market in China. China's resolve to enhance its innovative capability should also reinforce the U.S. commitment to maintaining a leadership role in these industries.
China takes on innovation
China's growing capability and commitment to innovative research was highlighted by recent reports that two separate teams of Chinese scientists successfully transformed normal adult cells into embryonic stem cells and subsequently produced live mice from the newly created cells. Dr. Fanyi Zeng, one of the principal investigators in the study, will be discussing her heralded work at the upcoming World Stem Cell Summit in Baltimore, Maryland.
Once a weak aggregate of individual researchers, institutes, companies, and investors, the Chinese biotech industry grew 30% annually to $3 billion between 2000 and 2005.  By 2010, the Chinese biotech market is projected to reach $9 billion. With nearly 20% of the world's population, China has an estimated domestic market of 130 million daily consumers of pharmaceuticals. Despite being traditionally dominated by biogenerics, China's biotech market is taking steps toward serious domestic innovation. Recall that in 2003, the Chinese FDA approved the world's first commercialized gene therapy product, Gendicine. Today, China boasts more than 580 biopharma companies, the majority of which have net assets of less than $10 million. Areas of major innovation include stem cells, monoclonal antibodies, cancer, HIV, and vaccine development. Licensing deals, both domestic and foreign, are on the rise and much needed reform of its intellectual property laws has been initiated since China joined the World Trade Organization in 2001.
Chinese biotech companies are highly dependent on governmental funding at all levels including state, provincial, and local. The two major state funding programs are The National High Technology Research and Development Program (a.k.a. the 863 Program) and the National Basic Research Program (a.k.a. the 973 plan). The former is geared more toward applied research and commercialization, the latter toward early-stage research.
While Chinese venture capital investment is currently limited, the Chinese government does invest in quasi-venture capital companies and helps attract capital from the private sector to support start-up and growth companies. In recent years, domestic and Western venture capital investments have contributed significant funding to China's biotech industry. In 2006, total VC investment in China grew by 22% over 2005. Multinational investment accounted for nearly 76% of this total.
Patent statistics are a reliable, albeit imperfect, indicator of innovation. In 2007, China became the third largest patent-filing country in the world behind only the United States and Japan in terms of number of annual patent filings. Between 2000 and 2006, the number of patents granted to Chinese applicants increased by 26.5%. In the same time period, Chinese residents increased their share of total worldwide patent filings from 1.9% to 7.3%, mostly due to increases in domestic patent filings. Indicative of a strong domestic interest in biotech research and development, Chinese entities make up 79% of biotech patent filings at the Chinese Patent Office. Additionally, out of over 1,800 novel molecule patents published by the Chinese Patent Office from 2000-2008, 49% of the novel molecule patents were for biologics. Moreover, while patent application filings are down this year around the world as a result of the severe recession, China appears to be bucking the global trend. The number of patent applications filed in China has risen by 12% in the year to the end of June, including a 23% rise from domestic applicants, while patent application filings have fallen elsewhere in the world. The Chinese have also increased their international patent application filings by 19% this year (albeit from a relatively low number), while U.S. international patent application filings have fallen a sobering 14% over last year.
Despite these advances, problems still exist for the Chinese with international perceptions of weak intellectual property enforcement, deficiencies in financial mechanisms that promote innovation, and drug quality issues. China will need to vigorously address these issues before it can be viewed as a potential future competitor. Moreover, Chinese firms and institutes will need to significantly increase their international patent application filings if they want to attract increased interest from international partners or investors.
However, China's future potential to compete internationally in this industry should not be underestimated. Over the past decade, China's leaders have devised and successfully executed complex economic strategies and have positioned the country to be a major force in the global economy. Few would have predicted its remarkable rise and growing influence only a decade ago. Moreover, more and more Western-trained Chinese "sea turtles" are returning home to work in the Chinese biotech industry. And who can blame them? The Chinese government is throwing vast sums of money into the domestic biotech industry. The flow of these scientists back home could provide the talent and know-how needed to position China's domestic industry to compete internationally in the future.