Chinese government support and 'sea turtles' are spurring the sector, but investors lack exits.
As home to nearly 20% of the world's population, China bears the world's largest health burden. Yet despite the country's incredible economic growth (gross domestic product (GDP) grew by >10% in 2006), the country ranks only 81st out of 177 countries on the Human Development Index, a measure of progress in healthcare1,2. Exacerbating this is China's unequal distribution of wealth, with development in the inland provinces lagging far behind the coastal regions, and cities facing unprecedented growth as workers migrate from rural areas in search of jobs, resulting in considerable inequities. This rapid transformation presents the Chinese government with a significant challenge in delivering equitable healthcare to its citizens, particularly the 10% living in poverty3 (https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html).
China's health biotech/biopharmaceutical market is starting to take off. Between 2000 and 2005, the industry grew 30% annually to $3 billion, compared with a 19% annual growth rate for the pharmaceutical industry as a whole4. Despite this growth, the biotech market segment (which includes genetically engineered drugs, vaccines, antibodies and blood products) represents only 7.4%5 of China's entire pharmaceutical industry, for which there are an estimated 130 million daily consumers6. China's health biotech market is dominated by biogenerics (>90%), with novel products representing only an estimated 3–7% of this market segment7. Currently, 15 health biotech products are approved for sale in China, and another 60 products (including 19 antibodies and 11 vaccines) are in the country's pipeline8. This drug pipeline will continue to grow as increasing numbers of domestic and foreign companies develop their products in China—a trend that the Chinese government is strongly promoting.
In earlier studies, we examined the health biotech innovation systems of seven developing countries, including China9. Key lessons learned with respect to the Chinese system included the importance of providing long-term government support, attracting Chinese professionals to return home, ensuring that biotech development goes hand-in-hand with regulation and leveraging the large population base. Because private firms are at the heart of innovation, we have now begun to study health biotech innovation in emerging economies and developing countries at the level of private firms, particularly how firms are innovating to develop products that address local needs. Our methods involve case studies of individual firms (they are detailed further in Supplementary Methods online). In the first article in this series, we described 21 innovative Indian health biotech firms10.
This article studies 22 of China's home-grown health biotech firms. Identifying a small sample of China's most innovative health biotech firms among the thousands of companies in this sector is not a simple exercise. Therefore, we consulted literature resources, industry reports and several experts familiar with the Chinese biotech sector to identify a sample of ∼20 home-grown small-to-medium-sized firms that we deem are most influential in shaping the growth of this innovative sector. Our definition of 'innovative' encompasses not only innovative products but also innovative business models.
Although we do not specifically describe traditional Chinese medicine (TCM) companies in this survey, several Chinese drug companies and public research institutes are currently developing TCM products for international markets. In March 2007, Shenzhen-based Tongjitang Pharmaceutical Company became the first TCM manufacturer to be listed on the New York Stock Exchange (NYSE), raising $110 million. Its flagship product, Xianling Gubao, is the leading TCM for the treatment of osteoporosis in China. The company is also now conducting phase 4 clinical trials of this product in collaboration with Synarc (San Francisco) and the Department of Epidemiology and Biostatistics Lab at the University of California, San Francisco to seek registration of the product in the US market. This study is one of the first evidence-based clinical studies on the efficacy and safety of TCM with proven results according to US Food and Drug Administration guidelines11.
The situation in China is changing very fast and no study can provide a perfectly complete picture. Since we collected the data for this study in 2006, 3Sbio (Shenyang Sunshine Pharmaceutical, Shenyang), where no one was unavailable for an interview, had a successful initial public offering (IPO) on the Nasdaq stock exchange in February 2007 (http://bbs.3sbio.com/en/Index.aspx), whereas another company we studied and its CEO were indicted in September of last year by a federal grand jury in Rhode Island on charges of illegal drug distribution (http://www.usdoj.gov/usao/ri/press_release/sep2007/usa_remarks_gensci.html). Nonetheless, to our knowledge, this article is the most comprehensive and up-to-date description of China's most innovative health biotech companies that is publicly available.
We anticipate the findings will be of great interest to private companies seeking partners, foundations seeking opportunities to develop global health products, other developing countries seeking lessons for their own development of a health biotech sector, the Chinese government (for whom we offer recommendations) and the broader international biotech community who wish to peer into the 'black box' of health biotech innovation in emerging economies and the developing world.
Products and services
For the sake of simplicity, we have categorized the activities of Chinese health biotech firms into three sectors: those that produce nonnovel products; those that are generating innovative products; and those providing services.
Nonnovel products. Biogenerics make up the majority of China's biopharmaceutical market, accounting for >90% of the $3 billion market in 2006 (refs. 4,7). China's population size creates a significant need for low-cost products. Generic products represent a less risky entry point for private companies into the biotech industry. Amoytop Biotech (Xiamen), for example, manufactures several recombinant biopharmaceutical products under Chinese cGMP (current good manufacturing practice) conditions, including interleukins (ILs), interferons (IFNs) and others (Table 1). The company is working to improve the stability and delivery of these products by developing PEGylated versions of several of them.
Diagnostics also represent a less risky entrance into the biotech sector, and domestic firms are playing an important role in reducing prices for local consumers. Beijing Wantai Biological Pharmacy Enterprise (Beijing), for example, has developed and marketed a large range of blood screening tests (enzyme-linked immunosorbent assay (ELISA) and rapid immunodiagnostic tests) for diseases, such as HIV, hepatitis B virus (HBV), hepatitis C virus (HCV) and rotavirus. Shanghai Huaguan Biochip (Shanghai) manufactures and sells a wide range of fertility tests, as well as ELISA, flow-through tests and dipstick formulations for HIV, HCV, tuberculosis and several other sexually transmitted diseases. The majority of Huaguan's sales revenue is derived from exporting its products to other Asian, African and South American countries. The company is also planning on expanding into regulated markets, and it is currently pursuing the Conformité Européenne (CE) mark, which is required to sell regulated products within the European Union (EU; Brussels).
Novel product development. The Chinese government's strong push for applied research is driving Chinese firms to develop new therapies in innovative fields like gene therapy and stem cells. Both Shenzhen SiBiono GeneTech (Shenzhen) and Sunway Biotech (Shanghai) are developing novel gene therapies. SiBiono received approval from China's State Food and Drug Administration (SFDA; Beijing) in 2003 for its product Gendicine, a recombinant human adenovirus-p53 injection used in the treatment of head-and-neck squamous cell carcinoma, a cancer that accounts for ∼10% of the 2.5 million annual new cancer patients in China (Box 1)12. Gendicine was the first commercialized gene therapy product approved anywhere in the world, based on clinical trials conducted in China, and it is currently undergoing further clinical trials in the country for several new indications, including liver, abdominal and pancreatic cancer. More than 5,000 patients have been treated with Gendicine, ∼400 of whom are from overseas.
Sunway Biotech's H100 series of oncolytic adenoviruses are genetically modified with deletions (ΔE1B-55 kDa and ΔE3) and target selectively cells that underexpress the tumor suppressor protein p53. The first product, H101 (Oncorine), received SFDA New Drug Application (NDA) approval in 2005 for treatment of head-and-neck nasopharyngeal squamous cell carcinoma, and is currently being tested for the treatment of non-small-cell lung cancer in combination with standard chemotherapy. The other products in the company's pipeline (H102 and H103) are further modified to target hepatocellular carcinoma (HCC) and metastatic cancers and are currently in preclinical and phase 1 clinical trials, respectively. Many cases of HCC in China are often secondary to HCV and HBV infection, the latter of which is of epidemic proportion in China. A therapy for the treatment of HCC is, therefore, of particular relevance to the domestic population.
The Chinese firms working in the field of human and animal stem cells include SinoCells Biotech (Beijing), Shanghai Genon Bio-Engineering (Shanghai) and Shenzhen Beike Biotechnologies (Shenzhen). SinoCells is focused on very early-stage development of therapies using nerve and mesenchymal stem cells, whereas Genon Bio-Engineering is using transgenic and cloning techniques to create large animal bioreactors for the production of humanized antibodies and other protein drugs.
Beike has organized a network of satellite hospitals, clinicians and research laboratories in Shenyang, Shenzhen, Zhengzhou and Hainan to commercialize stem cell therapies. The company's method involves harvesting stem cells from the umbilical cord or amniotic membrane, in vitro expansion and administration to patients either intravenously or by injecting directly into the spinal cord. Therapies using cells derived from the umbilical cord are considered a clinical technology in China. As such, they are treated differently by the SFDA from new drug applications, and clinical trials are not required to approve these treatments. The lack of a clinical data requirement for such procedures makes it difficult to evaluate their efficacy objectively. Regardless, >1,000 patients (including over 60 foreign patients) have been treated with these therapies for a variety of indications, including Alzheimer's disease, autism, brain trauma, cerebral palsy, diabetic foot arteriosclerosis and spinal cord injury.
The government's push to encourage innovation is also driving the development of novel therapies to treat both locally and globally relevant diseases. For example, FusoGen Pharmaceuticals (Tianjin) is using a rational structural design and protein engineering to develop polypeptides that block viral fusion (Box 2). The company's HIV inhibitor, sifuvirtide, was granted a US patent and is in phase 2 clinical trials (Table 2). Other products targeted against HBV (Fusolin) and HCV (Fusopin) are in preclinical development.
Shanghai Genomics (Shanghai) has centered its strategy around developing products that address significant local health needs, including lung fibrosis, liver cirrhosis and aging. Lung fibrosis, caused by radiation treatment, is a major cause of death for the more than 275,000 Chinese who die from lung cancer every year13 (http://pub.ucsf.edu/newsservices/releases/2003072288). Hepatocirrhosis, or inflammation and fibrosis of the liver, is a side effect from HBV infection, which afflicts >100 million Chinese. Yet despite these statistics, the treatments available for lung fibrosis and cirrhosis of the liver have many side effects, are poorly efficacious or are derived from unproven TCMs. Shanghai Genomics is developing novel non-steroid, anti-inflammatory therapeutics to address these therapeutic gaps. In part due to China's one-child policy, the proportion of the population aged over 65 years is increasing rapidly and will likely rise to 22% by 2030 (ref. 1). Nearly half (44%) of the world's aged population live in Asia14. Shanghai Genomics' first product on the market, GuBang, is a nanometer biomaterial for bone void filling that can stimulate new bone growth and can also be used for controlled drug release and may be valuable for patients with osteoporosis or other age-related bone problems.
Chinese firms are also developing vaccines to address global and local health needs. Bio-Bridge Science (Beijing) is using a papilloma pseudovirus technology to develop an oral HIV vaccine. Shanghai United Cell Biotech (Shanghai) is manufacturing and marketing a novel oral recombinant B-subunit/whole cell cholera vaccine (OraVacs) that it in-licensed from the Beijing Military Medical Science Academy after the product received new drug approval from the SFDA. This product is one of only two oral cholera vaccines available worldwide and is the only tablet formulation available.
Sinovac Biotech's (Beijing) inactivated hepatitis A (HAV) vaccine (Healive) and combined inactivated HAV and HBV vaccine (Bilive) are the only vaccines of their kind developed by Chinese scientists, and were approved by the SFDA in 2002 and 2005, respectively (Box 3). The company's pipeline is closely aligned with local and global needs, with novel vaccines against Japanese encephalitis, severe acute respiratory syndrome (SARS) and pandemic avian influenza (H5N1 strain) in development.
Beijing Wantai is moving into more innovative product development, recently adding both SARS and avian influenza (H5N1) diagnostics into its pipeline. It has also commenced an expansion of its innovative capabilities by moving into vaccine development, recently starting a research group with Xiamen University, which is focused on recombinant vaccines. The first vaccine in the pipeline is against hepatitis E (HEV), a disease spread through pork, outbreaks of which often occur in rural China.
Contract services. Several Chinese companies that were founded with a pure R&D business plan recognized early on that to stay alive they needed to adopt a new plan, one that would offset risks and costs and increase in-house capabilities. Using the cost-efficiency of developing drugs in China, resulting from the low-cost scientific talent, clinical trials and raw materials available in the country (with a lowest estimate of 10% of the cost of similar expertise in the United States), many of these companies are now relying on contract services to generate revenues and stay afloat8. The services offered vary along the product development value chain and can include early-stage research, preclinical development, clinical services and manufacturing. Shenzhen Chipscreen Biosciences (Shenzhen), for example, provides drug discovery services using its proprietary chemical genomics-based platform (Box 4). HD Biosciences (Shanghai) also provides early-stage expression cloning and drug-screening services. Other companies offering services in early R&D include CapitalBio (Beijing), Fudan-Yueda Bio-Tech (Shanghai) and SinoGenoMax (Beijing).
Chinese companies are beginning not only to recognize that their experiences with domestic regulatory agencies and markets are valuable to international clients, but also to leverage this knowledge in their business plans. In addition to its services in RNA interference (RNAi)-based technology, for example, Shanghai Genomics also offers services in drug registration with Chinese regulatory agencies. Similarly, Beijing Wantai offers clients such services as medical devices registration, market consultation, clinical evaluations according to SFDA requirements and contract manufacturing.
WuXi PharmaTech (Shanghai), which was founded in 2001, is one of the first Chinese companies to market itself internationally as a pure service company, and with >1,000 employees is one of the country's largest biotechs. WuXi provides services to support new drug discovery and the chemical development of new drug candidates. The company's goal is to become a fully integrated services company, and it is working toward that goal by expanding its capabilities into preclinical toxicity, animal studies, bioassays and plant formulations. Clients, such as Merck (Whitehouse Station, NJ, USA) and AstraZeneca (London), help enhance WuXi's international credibility. The company's chairman and CEO, Ge Li, credits the company's success to an innovative approach both to operations and project management and to diligent protection of its clients' intellectual property (IP). According to Li, ensuring protection of clients' IP “is the lifeblood for a company like ours.”
Partnerships for innovation
The Chinese government's dominant role in nurturing economic growth means that many of the country's biotech enterprises are partially state-owned and unlike many other developing countries, this has served to strengthen ties between enterprises and universities; in contrast, ties are weaker between the local biotech sector and Chinese pharmaceutical firms. As yet, the resulting vacuum is not being exploited by multinational pharmaceutical companies to a large extent, although foreign biotechs are increasingly forging new Chinese partnerships.
Local collaborations. Many of the companies investigated in this survey focus on commercializing research projects that originated in domestic research institutes and universities (Tables 3 and 4). There may be more linkages between these groups in China than in other countries because several Chinese health biotech firms are partially or wholly owned by state-owned enterprises (SOEs). For example, CapitalBio and SinoGenoMax each share campuses, equipment and human resources with the National Engineering Center (Beijing) and National Human Genomics Center (Beijing), respectively. HD Biosciences and Shenzhen Chipscreen outlicensed their core technologies from the Chinese National Genome Center (Beijing) and National Engineering Research Center for Beijing Biochip Technology (Beijing), respectively. In each case, the national research institute owns a share of the spin-off company.
Sinovac Biotech is working with several local partners, including the Institute of Laboratory Animal Science (Beijing), the National Institute for the Control of Pharmaceutical and Biological Products (Beijing) and the National Institute for Viral Disease Control and Protection (Beijing) to develop novel vaccines against SARS and pandemic influenza. Government-sponsored research grants often support such codevelopment partnerships, particularly when the product to be developed addresses a significant local health need.
Other domestic companies have similar relationships with Chinese universities. SinoCells Biotech uses laboratory facilities at the Peking University Health Science Center (Beijing) and also has R&D facilities at the Peking University Stem Cell Research Center (Beijing). Beijing Wantai is working with Xiamen University (Xiamen) to develop reagents needed for the development of novel HIV diagnostics and a HEV vaccine and is working with Hong Kong University (Hong Kong) to develop a diagnostic for avian influenza. Fudan-Yueda Bio-Tech is essentially a spin-off of Fudan University (Shanghai) whose major project is to commercialize a novel HBV therapeutic vaccine that was originally developed in the laboratory of University Professor Wen Yumei. Beike Biotech was founded to commercialize the stem cell research and clinical work developed at the Hong Kong University of Science and Technology and Peking University (Beijing).
University partnerships are not limited to product development. They are also quite important in training students in advanced research techniques in an industrial setting, as well as providing companies the opportunity to train a highly qualified workforce. Several of CapitalBio's project managers originally started working with the company as Tsinghua University (Beijing) graduate students. Likewise, students working for Shanghai Genomics can work toward a PhD from Shanghai Jiao Tong University (Shanghai) and those at Shanghai Genon Bio-Engineering may earn credit toward a degree from Tongji University (Shanghai) and Jiao Tong University (Shanghai).
Our study revealed few examples of codevelopment partnerships between Chinese firms. This may be partially due to the fact that the Chinese pharmaceutical industry is heavily focused on generic products and remains relatively uninterested and inexperienced in developing novel biotech products8. An exception to this is Benda Pharmaceutical's (Hubei) recent majority acquisition of SiBiono GeneTech through its subsidiary Hubei Tongji Benda Ebei Pharmaceutical (Hubei).
International collaborations. Given that most Chinese pharmaceutical firms remain uninterested in partnering with and funding innovative Chinese biotechs, the latter are pursuing relationships with international firms. The international community, however, has been slow to warm to China's health biotech industry. There are several reasons for this, including language, cultural differences, the uncertainty around enforcement of intellectual property legislation and China's financial environment. Notwithstanding, we found several examples of international partnerships, and these tend to feature product codevelopment and market sharing arrangements (Table 5).
An interesting collaboration between a Chinese firm and a US university has been developed by Bio-Bridge Sciences (Oak Brook, IL, USA). This company, which is publicly listed on the Nasdaq 'Over the Counter Bulletin Board' (OTCBB: BGES), was founded to commercialize the work of its CEO and chairman Liang Qiao, a professor at Loyola University (Chicago). The company exclusively outlicensed a papillomavirus pseudovirus technology from Loyola University, which was developed in Qiao's laboratory, and is carrying out preclinical development of an oral HIV vaccine with Beijing Institute of Radiation Medicine (Beijing) as well as building a manufacturing facility in Beijing.
Shanghai United Cell Biotech was originally formed as a joint venture between United Pharmaceutical (Mandaluyong City, Philippines) and the Institute for Life Sciences (Shanghai) to manufacture and market the institute's recombinant human growth hormone product. Today, Shanghai United Cell Biotech is a fully owned China-based subsidiary of the parent pharmaceutical company.
Shenzhen Chipscreen Biosciences entered into a codevelopment and market sharing agreement with HUYA Bioscience International (San Diego) for Chidamide, a histone deacetylase inhibitor for the treatment of cancer. Under the terms of the agreement, both companies will register and conduct clinical trials in their home countries. If the product is eventually approved for use, Chipscreen Biosciences will retain the marketing rights in China, whereas HUYA retains the remaining global marketing rights.
Shanghai Genomics has entered into partnerships with Organon (Roseland, NJ, USA and Oss, The Netherlands) and Centocor (Malvern, PA, USA) to expand their research capabilities and identify drug targets. Shanghai Genomics is working with Organon to identify more selective steroid hormone receptor modulators, whereas the partnership with Centocor is focused on receptor protein interactions and intracellular signaling cascades in inflammation and oncology. These partnerships are driving commercialization in China of research conducted in the United States, with the expectation of developing products that reach global markets.
Starvax International (Beijing) and Mologen (Berlin) have an international codevelopment partnership to produce double-stem-loop ImmunoModulator (dSLIM) cancer therapeutics. dSLIMs have phosphorodiester backbones and a dumbbell-like, covalently closed structure. In this case, Mologen is investing €0.8 million for clinical development of the technology, which Starvax will undertake in China. Mologen will have access to all clinical data derived from the program and will retain global marketing rights, with the exception of certain East Asian markets, including China, Japan and South Korea, where Starvax will retain marketing rights.
Shanghai Sunway Biotech obtained the exclusive worldwide license from Onyx Pharmaceuticals (Emeryville, CA, USA) to Onyx-015 virus against head-and-neck cancer and, after mitigating the risk of its clinical development in China, will look for additional development partners to take the product to international markets.
Elsewhere, Sinovac Biotech's collaborative agreement with LG Life Sciences (Seoul) has three foci: the companies are jointly developing Sinovac's influenza vaccine (Anflu), Sinovac is marketing LG's HBV vaccine in China and LG is globally marketing Sinovac's HAV vaccine (Healive). Sinovac also recently entered into an exclusive promotion service agreement with GlaxoSmithKline Investment (GSK; China) in which both companies will market and promote Anflu, a seasonal influenza vaccine developed and manufactured by Sinovac. GSK China's sales team will focus on the distribution of the adult dosage formulation and Sinovac will sell the pediatric dosage formulation.
Some Chinese firms—particularly those founded by Chinese 'returnees' who have experience working at Western companies—regard international partnerships as core to the business strategy. These companies are looking to expand their capabilities, particularly through transferring in new technologies or exporting products out to global markets. Zixin Qiu, general manager of Beijing Wantai, says of the company's strategy, “We do not desperately need the financial assistance; however, what we need is the [international] market.” In the meantime, Beijing Wantai is importing diagnostic equipment from Bio-Rad Laboratories (Hercules, CA, USA) and distributing it in China.
Because of China's large size, most Chinese companies are solely focused on expanding their resources to address the domestic market. However, a few are exploring marketing and distribution partnerships abroad. Amoytop Biotech has a contract with Ranbaxy Pharmaceuticals (Haryana, India) to market its granulocyte-colony stimulating factor (G-CSF) drug in India. Alpha Innotech (San Leandro, CA, USA) has the exclusive marketing rights to CapitalBio's AlphaScan microarray laser scanner for all markets except China, Japan, Korea and Australia. In an interesting twist, Bio-Bridge Science is taking advantage of China's cheaper manufacturing costs to generate early revenues by distributing in the United States a variety of class 1 surgical instruments the company imports from Xinhua Surgical Instrument (Shandong, China).
Financial environment and business models
Health biotech ventures are high risk and dependent on strong science, sophisticated investors with a long-term view and favorable government policies that consistently support innovation. Yet raising startup capital for innovative research-driven Chinese biotech companies is an enormous challenge—a reflection more of financial issues than a lack of confidence in the science and management. Small to medium-sized enterprises (SMEs) in China have little access to capital when they are first starting out because banks generally turn down their loan applications15. This scenario improved for SMEs in January 2003 when the 'Law on the Promotion of SMEs' came into effect and again in February 2005 when the State Council issued the 'Opinions on Encouraging, Supporting and Guiding the Development of SMEs'. These opinions—also known as the 36 Regulations—provide guidance in seven key areas, including market access and financing. As a result, many Chinese commercial banks began to set up special services to help SMEs overcome capital shortages. In addition, the Shenzhen Stock Exchange Small & Medium Enterprise Board opened in 2005, providing eligible biotech SMEs with another route for raising funds directly from investors. As of September 2007, 136 SMEs were traded on the Shenzhen Stock Exchange, 49 of which are categorized as 'pharmaceuticals'16.
China's financial environment and the domestic capital markets in particular, however, have requirements that differ from the more liquid markets in the West and Japan. For example, the Shanghai Stock Exchange (geared to blue-chip companies; http://www.sse.com.cn/) and the Shenzhen Stock Exchange Small & Medium Enterprise Board (geared to high-tech companies; http://www.szse.cn/) require a minimum of 15–25% of shares to be listed publicly, depending on the size of the company. These and other regulations (according to the Securities Law of the People's Republic of China and the Company Law of the People's Republic of China regarding the listings of shares) are designed to safeguard investors, but ultimately represent high hurdles to investors relative to other international exchanges. As a result, Chinese biopharmaceutical firms have looked to raise funds from public investors outside of China, with several recent high-profile IPOs on international exchanges, including the listings of WuXi Pharmatech (NYSE: WX) and Simcere Pharmaceutical Group (NYSE:SCR) on the New York Stock Exchange, and of 3Sbio (NASDAQ:SSRX) and China Medical Technologies (NASDAQ:CMED) on Nasdaq.
China also has strict restrictions on the exportation of capital, a hurdle that investors usually get around by forming an international holding company to hold title to the Chinese assets. The holding company can then seek a listing on an international exchange, giving investors an exit to repatriate their investments. Chinese regulators have recently clamped down on this strategy. When investors have few options to sell their shares and take back their investment dollars in the local stock exchanges, or exit their investments through other mechanisms, they are forced to focus on investments that will have realizable gains over a shorter time period. This ultimately hurts investments in health biotech startups, which are inherently risky ventures with long timelines to profitability.
The financial strategies that Chinese health biotech companies use are quite different from the traditional Western biotech model, where financing is often dependent on risk capital investors. In fact, Chinese venture capital investment in biotech companies is quite small. Instead, most of the Chinese biotech firms interviewed for this study received initial funding from state-owned enterprises (SOEs), including large conglomerates with no experience in biotech, and from local, provincial or state government programs.
Shanghai Sunway Biotech, for example, secured significant investment from state-owned groups, including Shanghai Alliance (Shanghai) and Shanghai Industrial Investment (Shanghai), which is listed on the Hong Kong Stock Exchange (HKEx: 8018HK). Some other companies that have received funding from state-owned enterprises include the following: Fudan-Yueda Bio-Tech, Huaguan Biochip, Tianjin SinoBiotech (Tianjin) and Genon Bio-Engineering. Although a few of the firms interviewed had some small investments from private sources, this strategy was not representative of the sector as a whole.
Chinese biotech companies are highly dependent on government support at all levels, including state (central), provincial and local. The central government is the largest supporter of science and technology, and provides several sources of funding to encourage innovation. The two major state funding programs that support biotech in particular are the National High-tech R&D Program ('863 Program') and the National Basic Research Program of China ('973 Program'). The 973 Program funds projects more focused on early-stage research, and grantees are expected to publish academic research papers on the supported work. The 863 Program is more focused on applied research and commercialization. Often, provincial and local governments will provide additional financial or other support (e.g., tax incentives or real estate space) to projects already funded by state grants, or vice versa. For example, local funding may help a small company fund its early-stage R&D projects, whereas larger state research grants may come in only after these projects have progressed to the commercialization stage. Nearly all the companies studied here received some form of government funding, including FusoGen (from the Tianjin government) and Beike Biotech (from the Shenzhen government) (Table 6). Although this funding is extremely valuable for getting a company off the ground at the startup stage, it is not nearly enough to support a company at later stages of expansion.
Ultimately venture capital is needed for a high-risk sector like health biotech. China's venture capital sector is young and relatively shortsighted, and is not yet sufficiently accustomed to the idiosyncrasies of biotech enterprises and their business models. For example, investment opportunities in R&D-intensive companies that will not achieve profitability in several years tend to pale in comparison to most other Chinese industrial sectors that have more definable growth. Despite this general trend, some domestic venture capital has begun to flow into China's health biotech sector, but it is mostly from state-owned or state-sponsored enterprises, such as Shanghai Sunway's investor, Shanghai Alliance Investment (Shanghai). International venture capital investors remain skeptical about China's health biotech industry, as major obstacles to its development remain, including poor IP rights protection for drug innovation, a lack of clarity concerning the business environment, a scarcity of cGMP-certified manufacturing plants and the paucity of investment exit mechanisms mentioned above15.
Although most company managers interviewed in the survey want to see more Chinese venture capital flowing into the sector, a common feeling expressed was that “Chinese VC [venture capital] can help with money, but nothing else.” These entrepreneurs opined that the Chinese venture capital community needs to improve its capabilities to make smart investments in high-tech ventures and provide better managerial and strategic support. There is a general feeling that Chinese investors will have more confidence to come together and make investments in Chinese health biotech companies once they see more successful examples. In the meantime, the Chinese government is attempting to encourage investors to pay more attention to innovative industries, including biotech, by offering tax breaks and other financial incentives.
Dependency on government support, however, not only makes the business environment less fair, but also undervalues the importance of 'smart investments', funding that comes with financial value, strategic intelligence and management. This added value comes from having a venture investor's representative on the board of directors, for example, or from interacting with a network of other portfolio companies. Because many firms perceive that the Chinese venture capitalists do not yet bring this benefit to the table, they are instead hoping to attract international investors.
Overseas investors bring credibility as well as an exit strategy, including access to financial markets and other international financial resources. It is interesting to note that the companies pursuing these strategies often have returnees on their senior management teams, including Shanghai Genomics, whose major shareholder is GNI (Tokyo); Chipscreen Biosciences, with investors from the United States and Hong Kong; and Bio-Bridge Science and Sinovac Biotech, which are listed on US stock exchanges (OTCBB: BGES and ASX: SVA, respectively).
Given China's current financial environment, a pure R&D business model is unsustainable and nearly impossible. As a result, several of China's small and innovative biotech companies are generating revenues by selling noninnovative products, providing services and/or outsourcing their early products. These strategies exploit the low-cost advantage of doing research in China and the significant size of the domestic market. Selling noninnovative products, such as biogenerics and simple diagnostics, is a low-risk strategy for entering the health biotech space and generating short-term revenues. Thus, Amoytop Biotech, United Cell Biotech and Sunway Biotech entered the market with biogenerics; Beijing Wantai and Huaguan Biochip entered the diagnostics market with relatively simple products. Fudan-Yueda Bio-Tech sells the immunology reagents that make up its therapeutic HBV immunological complex for research purposes and Genon Bio-Engineering sells animal protein products. Companies that have turned to offering research services on a contractual basis while maintaining in-house R&D groups include Shanghai Genomics, HD Biosciences, SinoGenoMax and Starvax International.
Barriers to development
During the course of this study, we identified four major obstacles that are hindering development of China's nascent biotech sector. These are discussed in further detail below.
Financial mechanisms to support innovation. The Chinese government has made innovation in science and technology a strategic priority in advancing the country's development. Yet, the government has not followed the sage advice of Xian-Ping Lu, president of Shenzhen Chipscreen Biosciences, who states that “the most important thing for any nation—particularly developing nations—is to identify the mechanism of financing to support the innovative economy.” Therefore, despite the fact that the Chinese government is investing millions of renminbi (RMB) to support an innovative industry and attract entrepreneurs to commercialize novel health-biotech products, potential investors are deterred from making substantial investments by the lack of exit strategies and the uncertainty of the financial system.
Although the companies presented in this study were specifically sampled primarily because of a focus on innovative health product development, the majority of Chinese biopharmaceutical companies are selling biogeneric drugs and do not invest in innovative R&D. Some of our interviewees said this is because these companies lack the technological capabilities to develop an innovative drug or they have limited access to the financial resources to do so. The lack of favorable conditions to support an innovative biotech sector may be actively discouraging its growth, and, in fact, it appears that very few firms are investing in drug discovery. Some of the firms that are pursuing innovative R&D have incorporated hybrid business models, first, to fund the firm's survival through contract services or noninnovative products and then to fund R&D activities. Such hybrid models, however, can dilute resources and have paradoxically fallen out of favor in the West, as a well-defined targeted strategy is preferred by venture capitalists over a mix of models that mitigate commercial risk. As price-based competition among domestic manufacturers continues to put pressure on profit margins, even fewer firms may be able to support in-house R&D programs.
International credibility. The international community has historically approached the Chinese biotech industry with skepticism, but has become more receptive in recent years. Several multinational pharmaceutical companies, including Eli Lilly (Indianapolis, IN, USA) and Roche (Basel), have opted to take advantage of the opportunities the country has to offer and are establishing a domestic presence. Yet despite this progress, several Chinese firms report that they must continually work to build international relationships and credibility. International firms are the primary target customers for the many Chinese companies that are opting to provide services as part of a hybrid business model. Yet trust remains the main obstacle in attracting foreign customers, particularly in discussions that involve IP protection. Other barriers to international partnerships involve language, travel, culture and differences in project management styles.
International partnerships are vital to the growth of China's young biotech industry. In our survey, some small companies state that they are looking to international partners to expand their capabilities in some modern technologies, whereas other companies feel that to engage international markets, they need international partners that can navigate the regulatory approval process or provide the financial resources to do so. Given the importance of the international community to the industry, some firms suggest that the Chinese government should develop a bridging program to help introduce small Chinese biotech companies to their counterparts in the West and, thus, facilitate partnerships and technology transfer.
The SFDA is the central agency that was created in 1998 (as a merger of the state food administration and state drug administration) to oversee the regulation, law enforcement and establishment of national standards. In the nearly ten years since its establishment, the SFDA has worked to raise the standards for its drug approval processes to comply with international norms and establish itself as an credible regulatory body.
Unfortunately, a recent scandal dealt a major blow to the SFDA's credibility. The agency's former director, Zheng Xiaoyu, pled guilty to accepting bribes in exchange for approving drug production licenses, and in July 2007 was executed17. Concerns that some of the drugs approved during Zheng's tenure may be substandard have grown after dozens of people fell ill or died from ingesting poor-quality drugs. As a result, more than 170,000 production licenses issued by the SFDA are being reviewed, particularly those approved between 1999 and 2002 (ref. 18). Unfortunately, this scandal has severely weakened the SFDA's standing in the eyes of the global community and calls into question the legitimacy of thousands of products currently on the Chinese market.
Timely regulations. Although the Chinese government has driven and initiated the growth of the domestic biotech sector, it also needs to ensure that its policies continue to support the industry at all stages of the value chain as it matures. For example, some companies working in the area of stem cells are at a bit of a standstill while they wait for the state to release its official policy on stem cell research. Another company, which is developing novel diagnostic technologies to be used in clinical and hospital settings, has run across difficulties in selling these products because its customers are dependent on a government fee schedule that does not include these innovative products. As more and more Chinese companies are becoming service providers, additional programs and policies are needed to support these firms, including the following: policies to expedite importation of necessary equipment and reagents; reduced customs tariffs and taxes; and small business loans in addition to research grants focused on product development.
After China joined the World Trade Organization (Geneva) in 2001, it made several changes to its IP legislation to comply with the Trade Related Aspects of IP Rights agreement and to promote nationalization of IP. Even so, several of the companies we interviewed state that they cannot afford the legal costs of protecting their IP, and that the cost to maintain multiple patents in multiple countries is prohibitively expensive. As an alternative, some Chinese companies have been advised by their legal consultants to keep their IP confidential and maintain it as a trade secret. This is an inherently risky strategy for companies because it will exacerbate problems in forging international partnerships and entering into discussions with international regulatory agencies, particularly in developed countries. Moreover, as the size of the sector increases, so will turnover of employees, thus increasing the risk of breaching trade secrets. SinoGenoMax is taking advantage of a new government program that helps to subsidize the costs associated with patent applications and maintenance. Although this program is a step in the right direction, the costs still remain prohibitively expensive for many small innovative companies, and additional programs and policies may be needed to protect Chinese IP in the global marketplace.
The issues surrounding IP also go beyond laws and regulation. In time, China will need to expand its capabilities in protecting IP by refining civil procedures, developing a body of jurists, and accumulating a body of precedent and custom for assessment of damages.
Reaching the domestic market. For the most part, the healthcare needs of China's large domestic market are not being adequately met by existing products. The health system across the entire country is weak, and in many cases, clinicians, facilities and products are not reaching rural or isolated regions. Nationally, there are only 1.5 doctors per 1,000 people1. For Chinese biotech firms to begin to tackle this problem, they need tools to truly identify the gaps in health services and the mechanisms needed to reach the domestic population. Accurate market statistics are nearly impossible to obtain in China, and several firms have called for a central institute, independent of government, not only to accumulate such data but also to make them publicly available.
Sales and distribution also present huge barriers for small Chinese companies. Patients need to be educated about the benefits and risks of new products, and the endorsement of a medical expert is often key to acceptance. Yet frequently there is no medical expert or allied health professional in rural areas. This becomes an even bigger problem when addressing more complicated diseases like HBV, for which patients require a doctor to prescribe an adequate array of treatments. The significant human and financial resources needed to develop the market for a new product, and further support and monitor it, represent a challenge to small Chinese biotech companies. For Chinese companies ultimately seeking entry into Western markets, the expectation that they will exercise postmarketing surveillance will be critical.
Another challenge facing China's biotech industry is to address the disparities between the costs associated with developing an innovative health product and the price that the domestic market can pay for that product. Novel biotech products are very expensive, and despite China's economic growth, and growing middle class, it is still a low-income country. Official figures show that in 2004, expenditure on health stood at $91 billion, 53.6% of which came from private individuals1. Chinese companies cannot sell their products at the high prices that are common in Western markets. One option is for the government to develop procurement programs to get the products to people who cannot afford to pay out of pocket. However, it is simply unsustainable for the Chinese government to subsidize the cost of innovative biotech products to the tune of millions or billions of dollars every year.
On the basis of the barriers identified in the previous section, we have made recommendations for further development of the Chinese health biotech sector (Box 5). The three main drivers of China's home-grown health biotech sector are government support, the returning 'sea turtles', and the health needs of the large domestic population. We discuss these in more detail below.
Political will to prioritize R&D. According to the Chinese Government's Tenth Five-Year Plan (2001–2005), issues of national priority include more involvement in large-scale international research programs in life sciences and biotech, and additional international cooperation activities (e.g., biotech R&D projects) to support development of the national science and technology economy (http://www.most.gov.cn/eng/). Thus, the government has consistently promoted biotech as a priority industry and continues to fund mechanisms to support both research and product development. The 2005 China Science and Technology Development Report describes the infrastructure and resource planning of Chinese science and technology development for the next 15 years, including the changing structures of China's innovation sector, science and technology policies and laws, strategic high-tech research, and international collaborations (http://www.most.gov.cn/kjfz/kjxz/). Likewise, the Innovation and Development Plan (2006–2020) provides a detailed roadmap of China's biotechnologies (http://english.gov.cn/2006-02/09/content_183426.htm).
In the more recent Chinese Government's Eleventh Five-Year Plan (2006–2010), programs that support the national science and technology agenda include the following: the 973 Basic Research Plan; the 863 High-Tech R&D Program (863 Program); the National Science Support Plan, with policies that support technology development; the Technology Resource and Platform Construction for prioritizing and reconstructing platforms necessary for technological innovation and implementation; and the Policy Renovation program for creating a positive policy environment to enhance innovation, encourage private R&D, and promote product implementation and technology transfer (http://en.ndrc.gov.cn/hot/t20060529_71334.htm).
The program review board of the state-sponsored 863 Program lists as a priority in its 2007 report19 the improvement of “overall national health and the ability to respond to a sudden national health crisis” (http://www.863.org.cn/english/index.html). The 863 Program allotted in 2007, 400 million yuan (∼$52 million) to projects representing 11 priority biotech research areas, including product commercialization, gene therapy, and cell and immunotherapy for major epidemiological diseases20 (http://www.863.org.cn/english/index.html). Commercialization is an ultimate goal of the 863 Program, and expected deliverables of the grants include published patents, commercialized products or contributions to the country's GDP.
Other programs and policies that are meant to expand the country's innovative capacity in biotech have focused on developing training programs, promoting international collaborations, encouraging publications in international journals, improving research ethics guidelines, updating IP protection and regulatory mechanisms, and creating biotech industrial parks. These efforts are clearly having an effect as, according to the Institute of Science and Technology Information of China (Beijing), China became the world's second largest scientific research publisher (the United States remains the first) in 2006 (http://www.istic.ac.cn/Eng/index_en.html). These figures underscore China's improved research and innovation capacity and its scientists' deeper involvement in the international academic community.
The Chinese Government is also supportive of the TCM segment of the health-biotech sector. For example, TCM modernization was one of the 12 focal points in China's Ministry of Science and Technology's (Beijing) Tenth Five-Year Plan, and several initiatives to standardize and promote TCM worldwide have recently been announced in the 'Innovation and Development Plan 2006–2020' and the 'International Traditional Chinese Medicine Program for Cooperation in Science and Technology'21. In a joint effort with the European community, the same ministry recently led the 'China-Europe General Assembly on Traditional Chinese Medicine' in June of 2007, reaching consensus in five key areas on promoting TCM worldwide. Altogether, China has marked $130 million for TCM modernization (http://www.hkjcicm.org/enews/en_page_2_15.asp).
Sea turtles and highly skilled indigenous workers. Historically, China has placed a strong focus on encouraging the return of Chinese scientists and entrepreneurs who left the country to study or train abroad, and to turn 'brain drain' into 'brain gain'22. China's health-biotech industry has benefited greatly from the return of these highly qualified personnel, known as 'sea turtles', who bring with them scientific talent and international credibility. Although the sea turtle phenomenon is beneficial, the country's industry might be better served if Chinese residents in the West built “transnational companies” with a footprint in both China and the West. Indeed, this practice is already common, but regulations and taxation policies to encourage this approach would address many of the concerns of private and public capital, assure prospective alliance partners and add depth to the pool of experienced managers. Such an approach would also promote China as a codevelopment partner rather than a purely low-cost venue to international companies to contract services.
China is making great strides in developing indigenous talent. For example, in its early days, CapitalBio recruited talented human resources from overseas by publishing job announcements in prestigious international scientific journals and offering salaries comparable to those in the West. Now that the company has established itself, it no longer needs such mechanisms to recruit talent, and has even hired several graduate students who completed their training with the company to stay on as project managers. In the past 20 years, the number of scientific and technological personnel in China has skyrocketed to 55.75 million in 2004 (ref. 23; http://english.gov.cn/2006-02/09/content_184084.htm). This low-cost scientific talent will be a primary driver of the growth of the health biotech industry. For example, many of WuXi PharmaTech's 1,000+ personnel were recruited from within China and are critical to the company's cost effectiveness. Although talent to meet the company's expectations may be difficult to recruit right away, there is no shortage of hardworking employees willing to be trained.
A mix of foreign and indigenous expertise may also address the needs of those domestic Chinese companies that provide services to international customers. In particular, domestic companies need project managers who can bridge cultural and language differences. Likewise, Chinese companies that are looking to market their health products internationally are looking for talented individuals who understand not only the science behind the technology, but also international regulations and standards for IP protection, manufacturing and product registration. Many firms are looking to returnees with experience abroad to bridge cultural gaps and spur international partnerships.
Market size and disease burden mirror global health issues. China serves as a microcosm of the greater global health community. Addressing the health needs of the large and diverse domestic population presents a significant challenge to the entire health innovation system, including the government, the private sector, public research institutes and universities and healthcare providers.
One of the key interests of our broader study is to identify how companies in emerging economies can serve global health needs. For example, one of the most important modern drugs to address a globally neglected disease was discovered in China, when Chinese scientists in 1965 isolated the active ingredient from the Artemisia annua, or 'sweet wormwood' plant. Today, that herbal derivative, artemisinin, is recognized by international groups including the World Bank (Geneva) and the United Nations Children's Fund (UNICEF; New York) as a first or second line of therapy for malaria8.
Although our study provided little evidence of export of innovative Chinese health-biotech products to lesser developed countries, in some respects addressing the health needs of 1.3 billion people is global health. Nearly 120 million of the >400 million people worldwide infected with HBV live in China24. Treatments for HBV patients in China cost around $1.1 billion each year. In 2006, the Chinese government allocated ∼$390 million to fund research on HBV and related diseases24. The fact that the prevalence of HBV is so high in China and it is known as a 'national' disease motivates Chinese scientists and firms to develop new treatments to address this significant need. Of the firms interviewed for this study, Fudan-Yueda Bio-Tech, and Shanghai Genomics are currently developing HBV therapeutics. According to Fudan-Yueda's General Manager, Bi Zhi Gang, “for our company our purpose is not always profit, but also social responsibilities.”
Likewise, HEV infections also represent a substantial burden on Chinese healthcare. Outbreaks often occur in rural areas, where pork (a zoonotic source of HEV infections) is a diet staple. As no vaccine is currently commercially available for the prevention of HEV infection, Beijing Wantai is working with Xiamen University to develop a vaccine. Even so, the company's general manager, Zixin Qiu, expresses concern about his company's ability to deliver this vaccine to its intended rural market where it is most needed—a concern shared for the company's inactivated HAV vaccine (the first HAV vaccine developed by Chinese scientists). Although the Chinese government does have an immunization program that provides essential vaccinations to all Chinese citizens with vaccines that include HBV, Bacille Calmette Guerin (BCG) against tuberculosis, oral polio, diphtheria, tetanus and pertussis (DPT), diphtheria-tetanus (DT) and measles, it has not put HEV or HAV vaccines on this list25.
The obstacles that Chinese companies face in delivering affordable products are large enough that they may actually deter future investment in innovative products for local markets. Thus, in addition to the research dollars and incentives that the Chinese government has devised to 'push' domestic innovation to develop novel products that address local health needs, additional government-sponsored incentives and procurement programs are needed to ensure that innovative products reach their intended end users. Looking at the genesis and prospects of the Chinese biotech industry, it is reasonable to expect that products will be developed in concert with the evolving mechanisms of health services. We believe that further investigation will be needed to monitor the parallel process of growth of the industry and changes in health services.
Apart from hepatitis infections, another key health problem in China is HIV/AIDS. Currently, Chinese government statistics place the country's HIV prevalence rate at 0.1%3 (https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html). There is international concern that in the years to come HIV/AIDS will develop into an epidemic in China, as it has in other parts of the world. Thus, affordable products developed for the Chinese market can also have significant impacts in other developing countries. For example, Bio-Bridge Science is developing an HIV vaccine based on a novel orally delivered papilloma pseudovirus vector and FusoGen Pharmaceuticals is developing a novel HIV fusion inhibitor intended for Chinese markets. Both companies realize that to address the local market, their products must be affordable. FusoGen's chairman, Jason Genfa Zhou, puts it this way, “if this drug [is] too expensive, [then it's] only good for a very few people.” However, despite the intentions of these and other Chinese companies to make their products available to other developing countries, very few have actually engaged global health organizations or developed international strategies.
With the financial backing of the government, returnees have founded innovative Chinese biotech companies that have commercialized the world's first licensed gene therapy drug, developed leading-edge stem cell therapies and treated thousands of Chinese patients. With the Chinese state providing continued commitments to fund biotech and innovation, an increasing pool of indigenous skilled workers and a growing cadre of Chinese with management experience in life science entrepreneurship, the prospects for biotech ventures look promising. China is also making progress tapping into indigenous TCM knowledge, quantifying and characterizing TCM active ingredients according to scientific principles (e.g., efforts currently under way at the Hong Kong Jockey Club Institute of Chinese Medicine) and exploit this to build IP and develop novel therapies proven using clinical testing.
Despite these advances, several problems remain. Both domestic and foreign investors are still reticent because no clear mechanism exists for financial exit. At the same time, Chinese companies clearly need the help of global health organizations to increase global access to their products. Shanghai United Cell Biotech, for example, manufactures and markets the only capsule formulation of an oral cholera vaccine available worldwide and is currently marketing the product predominantly to the niche travelers' market. Although the small company is very keen to make this product available in cholera-endemic developing countries, it is difficult to do so with its limited resources. Not only would Shanghai United Cell Biotech require a partner to provide financial assistance to carry out additional clinical trials (if they were required to adhere to international standards), but they would also need introductions to the proper decision makers in each country that they would hope to enter. According to the company's executive deputy general manager, Lee Ker Yin, “We need to seek the WHO [World Health Organization] to help reach [the developing world]. In turn, we can help Africa.” Lee and others feel that both the WHO and UNICEF are unaware of China's capabilities in innovative health product development, and they hope that the SFDA will engage these groups and initiate a dialog with the broader international community.
The examples cited in this article illustrate that there clearly are Chinese companies that are capable and motivated both financially and morally to develop innovative health products to address local and global health needs. The responsibility now lies with both the Chinese government and the international health community to support these companies in their ventures and ensure that their products reach their intended users. As Bi Zhi Gang of Fudan-Yueda Bio-Tech says of his company's duty to improve Chinese citizens' quality of life, “this is a small company [with] big responsibility.”
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We gratefully acknowledge the valuable comments of Christopher Earl, Insiya Essajee, Charles Gardner, Mario Gobbo, Hannah Kettler, Victor Liu, Maya Maliakkal, Hassan Masum, Beatrice Seguin, Yi-lun (Sandra) Shih, Gabriel Sin, Andrew Taylor, Wendy Taylor, Halla Thorsteinsdóttir and Marsha Wulff. The McLaughlin-Rotman Centre for Global Health, Program on Life Sciences, Ethics and Policy is primarily supported by Genome Canada through the Ontario Genomics Institute (the primary sponsor of this study), the Ontario Research Fund and the Bill and Melinda Gates Foundation. This study is also funded by the Rockefeller Foundation (New York) and BioVentures for Global Health (Washington DC), and through in-kind contributions from Burrill & Company (San Francisco) and Wulff Capital (Dallas). Other matching partners are listed at http://www.mrcglobal.org/. A.S.D. and P.A.S. are supported by the McLaughlin Centre for Molecular Medicine. P.A.S. is supported by a Canadian Institutes of Health Research Distinguished Investigator award.
Peter Singer has been the recipient of consulting funds from Merck Frosst Canada. Stephen Sammut is affiliated with Burrill & Co., an international biotechnology venture capital firm with activities in China. He does not have a direct economic stake in the firm's activities in China.
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Frew, S., Sammut, S., Shore, A. et al. Chinese health biotech and the billion-patient market. Nat Biotechnol 26, 37–53 (2008). https://doi.org/10.1038/nbt0108-37
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