Drug Development Opportunities in China

Drug Development Opportunities in China

Executive Summary

Introduction

• China is the world’s largest country with more than 1.3b people.
• In 2006, Chinese sales of Western-style pharmaceuticals are estimated at $13.1b and are growing by about 30% per year; by 2020 China is expected to become the world’s leading consumer of pharmaceuticals.
• Traditional Chinese medicine currently accounts for about $12.3b but growth is considerably lower than that of pharmaceutical medications.
• China is a somewhat challenging country in which to conduct business due to its varied culture and business environment.
• The Chinese government is attempting to improve the country’s pharmaceutical industry infrastructure, particularly by enhancing patent protections, but gaps remain.
• China’s State Food and Drug Administration (SFDA) was founded in 2003 on the basis of the State Drug Administration (SDA) and has passed a range of regulations to streamline regulatory oversight while increasing consumer protections.
• Drug development in China includes initiatives targeted mainly towards the domestic market and development of products primarily for foreign markets.
• China’s domestic drug market is growing as a result of reforms that have expanded distribution channels.
• Prescription drugs continue to represent a large opportunity despite recent tightening of advertising rules.
• OTC medications are also seeing growth with increased awareness of self-medication, rising disposable incomes and high numbers of uninsured.
• Drug development for foreign markets is conducted by domestic companies as well as multinational pharmaceuticals, biotech companies and CROs.
• The low cost of conducting clinical trials in China, due to lower labor costs and speed clinical trial recruiting, is attracting high levels of foreign direct investment.

Pharmaceutical companies

• China’s domestic pharmaceutical industry is highly fragmented, comprised of a large number of relatively small players. These local players account for about 70% of the country’s overall drug market.
• In contrast, foreign pharmaceuticals operating in China are often large multinationals with expansive research budgets and global resources.
• Along with Beijing, Shanghai is a popular location for foreign-owned pharma research centers, as the area offers an expanding pharma infrastructure with excellent communications facilities and a growing cadre of businesses providing services to the drug development industry.
• For foreign pharma companies, there are two key advantages to expanding into China: economic benefit and a more flexible research environment in which controversy related to issues such as animal testing and stem cell research is largely absent.
• Over and above direct savings on facilities, overhead and salaries, the Chinese government is encouraging high-tech R&D through tax concessions, access to capital at highly favorable rates and other incentives.
• For the emerging domestic pharmaceutical players, expansion is being driven primarily by rising demand for products, both to in-country and export markets.
• Aside from intellectual property issues, there are few significant external factors constraining the growth of foreign pharmaceutical companies in China.
• China’s domestic pharmaceutical industry, however, is subject to certain challenges, the most significant of which is the country’s ongoing emphasis on GMP compliance.
• Over the past 24 months, a large number of global pharmaceutical companies including AstraZeneca, GlaxoSmithKline, Pfizer, Novo Nordisk and Wyeth have announced plans to significantly expand R&D in China.

Biotechnology companies

• China’s rapidly growing biotechnology industry has become one of the largest and most prolific in Asia.
• As of mid 2007, roughly 250 domestic companies in China are using molecular biology to create new products, with total sales of more than $3b.
• Among the more significant achievements in this area was the development of the world's first licensed gene therapy medication by Shenzhen-based SiBiono GeneTech Co., Ltd in 2003.
• Vaccines are also an emerging area of development for local players, with several players having recently entered the world stage through their investigation of avian flu.
• Foreign investment in China’s biotechnology sector is rising, but it still lags that in its pharmaceutical sector.
• At present, the growth of the Chinese biotechnology industry centers mainly on domestic companies which are benefiting from increasing access to global capital markets, an influx of Western-trained Chinese scientists, support from foreign-based Chinese, knowledge transfer from contract research work and ongoing government support.
• The factors constraining faster growth of foreign biotech activity include intellectual property issues, difficulty navigating cultural barriers and low awareness of China’s biotech resources.
• Domestic biotech growth is constrained by limited (albeit growing) access to funding and technological expertise.
• China’s emerging biotechnology industry has achieved several recent successes, most notably strong progress in the important areas of bird flu vaccines and monoclonal antibodies.

Contract research organizations (CROs)

• Contract research organizations (CROs) are becoming an increasingly important component of the drug development industry, and Chinese CRO growth is outpacing that of the industry overall due to the cost savings possible in China.
• China offers large, drug naïve patient pools, highly motivated and experienced investigators, and state-of-the-art research infrastructure and facilities.
• A growing number of both foreign and domestic contract research organizations (CROs) have established operations in China.
• China’s local CRO industry is rapidly evolving in response to rising demand for contract research services.
• Most of the leading global CROs have established facilities in China and/or Hong Kong. Many of these operations are large and growing.
• Two key trends are currently driving the growth of CROs in China: lower costs and the continuing return of Western-trained Chinese scientists.
• CROs can typically save a drug developer 30% on research costs; when this research is conducted in China, savings can approach 70% or more.
• China’s rapidly expanding CRO industry offers many opportunities for globally-trained scientists who can transfer knowledge and expertise gained abroad back into growing companies. Demand is particularly strong among CROs focusing on pre-clinical activities, which require a high degree of technical know-how.
• A rising number of conferences are being organized in China and Asia that focus on drug development and outsourcing.
• Pre-clinical service growth continues to be impeded by a lack of expertise and a dearth of capital, although both of these challenges are diminishing in importance. Clinical services are hampered by a variety of factors related both to China’s industrial and business environment as well as its clinical trial infrastructure.

Future drug development in China

• Over the next several years the drug development industry in China is expected to continue its strong growth.
• Drug development for China’s domestic markets will be driven by continued expansion in local demand for prescription medicines.
• To meet rising domestic demand, both domestic and foreign drug developers will increase the supply of products to local Chinese markets. Foreign drug companies will be attracted by the opportunity for industry-beating growth in China while many domestic manufacturers will view the local market as a means to ramp up operations in preparation for global production.
• Going forward, new pharmaceutical entities will comprise a more important component of China’s domestic pharmaceutical growth.
• With strong government support, China’s biotech industry is growing rapidly and like its pharma industry, is poised to become a major component of the global market during the next several years.
• The CRO industry largely focuses on drugs for foreign sale, with a lower level of activity in contract R&D for drugs intended to be marketed within China.
• Drug development in China for foreign markets will be driven mainly by cost advantages offered from conducting clinical studies in the country, although pre-clinical testing in China will become increasingly common.
• Foreign pharma companies have been slowly establishing satellite research facilities in China as a compliment to broader R&D networks. This trend is expected to accelerate as these facilities begin achieving increasingly significant results.
• Although few large global biotech companies are currently active in China, this is changing as some mid-size players are establishing drug development partnerships.
• The CRO industry in China has been expanding rapidly; this growth is expected to slow somewhat as more pharma companies establish their own operations in China.