Foreign biotech companies can already grasp the benefit of China's membership in the World Trade Organization as the government is dismantling many of the regulations which excluded foreign competition. Credit: Agence France Presse/GOH CHAI HIN

Invitrogen's acquisition of Chinese competitor BioAsia is the first major acquisition by a foreign company in the life science sector. The move has been made possible by recent changes in the Chinese legal framework surrounding mergers and acquisitions (M&A) by foreign companies in China. Although, until now, foreign biotech companies have been mainly interested in outsourcing production and some aspect of their research programs to the country, opportunities in acquiring R&D capabilities may not be quite ripe yet.

Invitrogen of Carlsbad, California, a provider of biotech research equipment and reagents, acquired Chinese sequencing reagent company BioAsia of Shanghai, in December 2004 for $8 million, thus acquiring 18 sales offices across China. Since December, foreign direct sales of pharmaceutical and biotech products are allowed into China without the need to have a Chinese agent, a change triggered by China's accession to the World Trade Organization effective since 2001. “The opening up of the markets to foreign [multinational companies] has made this entire process more transparent and flexible,” explains Jeff Greenberg, Invitrogen's General Manager, Asia-Pacific Region, located in Shanghai. He believes that this acquisition will enable Invitrogen to reach out to the Chinese markets in a more suitable way than if his company created a joint venture or established a wholly foreign owned enterprise.

According to Tony Chen, a lawyer from the Shanghai Office of law firm Paul Hastings, the Invitrogen move has also been made possible by a recent change in the Chinese law that allows foreign companies to invest in China more easily. In October 2004, the Chinese government released a new policy whereby foreign investment undergoes a 30-day fast-track approval process. From now on, investments below $100 million need ratification only by local authorities; previously, approval by the central government was required. These investments are scrutinized solely on the basis of their potential to interfere with environmental or state safety considerations.

In addition, in its Catalog for the Guidance of Industries for Foreign Investment, updated in early 2005, China listed biotech research, development and production as a sector in which the country is keen to stimulate foreign investments. This means that companies in that sector are eligible for a low rate of corporate income tax—on average, about half of the 33% paid by domestic companies. Other incentives include eligibility by foreign companies to contract loans from Chinese banks.

[Foreign companies] come to China not only for the emerging huge market, but also for the rising local innovative capabilities Jun Wu, Executive vice president Shanghai Genomics

Foreign R&D centers can also import equipment without tariffs, and any revenue generated, if reinvested in research, will be tax free. Although, Invitrogen's deal focuses more on penetrating the Chinese market than taking advantage of local research capabilities, other biotech companies, outside the reagent field, are likely to benefit from the new R&D incentives. “As far as I know, many leading US biotech companies have been seeking Chinese partners for businesses from outsourcing research to forming joint ventures,” says Jun Wu, executive vice-president of Shanghai Genomics. For example, US companies like Tanox, Genzyme and Genentech have been prospecting in China and some of their European counterparts, including Hybrigenics and Mologen, have already signed extended R&D collaborations (see Box 1). “[Foreign companies] come to China not only for the emerging huge market, but also for the rising local innovative capabilities,” Wu adds.

This does not mean that foreign companies are ready to acquire Chinese companies for their R&D capabilities yet. their reluctance stems from concerns over intellectual property protection in China and also from a lack of awareness about opportunities in China. But primarily, according to Luyang Zhang, professor at the department of international finance at Fudan University in Shanghai, foreign companies stay away because China's financing system is not strong enough to support R&D of new biotech drugs by Chinese companies, let alone that of foreign ones.