Recent headlines might suggest that this is an inauspicious time for foreign drug companies to be pouring R&D money into China. The nation has endured a wave of bad press for producing lead-tainted toys and exporting toxic pet food. Last July, the head of the State Food and Drug Administration was executed for accepting hundreds of thousands of dollars in bribes.

 

Yet in just the past 18 months, AstraZeneca, Novartis, and GlaxoSmithKline have launched plans to invest hundreds of millions of dollars in mainland labs, joining the likes of Pfizer and Roche. Some drug makers plan for their China R&D centers to develop into key sites for global research. Others, such as Eli Lilly, are forging high-end collaborations with local research firms.

 

That’s not to minimize the regulatory hassles that still beset pharmaceutical businesses in China, or to downplay the worries of protecting intellectual property (IP) from unsavory local firms that produce copycat drugs. Yet in the past few years, mainland-based R&D has taken on an increasingly sophisticated cast, abetted by an influx of Chinese Ph.D. scientists returning from overseas work and study. Back at home they’re boosting overall research standards. Many have taken up leading roles in the multinational push into R&D, while others are helping to build out local contract research organizations (CROs).

 

“I think on a larger scale, our research collaborations in China have really expanded over the past two or three years, both as the CRO industry has become more mature in China and parts of Asia and as companies face internal R&D productivity challenges,” says Steve Yang, head of research, Asia, for Pfizer. “We’re exploring ways to shift some of our R&D work, both to improve productivity and to tap into the talent base in Asia.”

 

The push into China is in part a response to the spiraling cost of drug discovery, which can reach $1 billion by the time a medication is approved. Conducting discovery chemistry work on the Chinese mainland costs around one-quarter to one-third the price of similar work in Western countries.

 

“We see Asia as an opportunity to try to experiment with different ways to do drug discovery,” says Guoxin Zhu, head of China chemistry for Eli Lilly Asia. “We’re not necessarily looking for lower labor costs. The problem is so many compounds fail before they go to market.”

 

Indeed, for every 5,000 to 10,000 screened compounds, only five enter human clinical trials and just one is likely to be approved by the U.S. Food and Drug Administration, according to the Washington, D.C.-based Pharmaceutical Research and Manufacturers of America (PhRMA). By dispatching R&D work to China, drug makers based in the United States or Europe can boost efficiency by ensuring that work continues globally, around the clock.

Besides R&D, many firms struggling with a time and money crunch are seeking to shift more of their clinical trials to China. Its massive population allows for swifter recruitment of human subjects—another potential source of cost savings. Drug companies are also paying increasing attention to China as a source of customers. By 2010, China is expected to vault two places in the rankings to become the seventh-biggest market for medicines in the world, according to IMS Health.

 

This growth adds urgency to foreign companies’ attempts to bolster their local credentials—and many see building out R&D as part of that process. “It’s not simply that you’re putting up bricks and mortar, but that you’re conducting activities that will help grow the local talent pool pretty significantly,” says Eric Meyers, vice president of global initiatives at Cambridge Healthtech Associates. “And it’s a self-reinforcing process, because when you’re there locally and really have built ties and have a presence, you’re more confident that the fruits of your labor will be well-protected.”

 

While expectations for China-based R&D are on the rise, it’s also true that the scale of foreign investments has so far been relatively modest. RDPAC, which represents 38 international R&D-based pharmaceutical companies on the mainland, estimates that its members have so far funneled more than $3 billion into China. But most of these funds—around $2.1 billion—have been for manufacturing. Only $500 million has been earmarked for R&D centers and $400 million for annual R&D operating budgets.

 

By contrast, just last year U.S.-based pharmaceuticals and biotech research companies invested $55.2 billion in drug discovery and development, according to PhRMA.

 

Though the pace of investment has quickened, American and European drug makers still face a daunting array of hurdles in China. For starters, IP protection is notoriously lax. Moreover, the process for clinical trial approvals in China can be frustratingly long, and the drug regulation agency is underfunded and understaffed. At the same time, foreign manufacturers must overcome serious obstacles to get permission to sell drugs into China, which aims to nurture its own domestic production.

 

On the science side, the challenge is promoting a more innovative approach to research. China has had few big pharmaceutical breakthroughs. (Its most notable success occurred in the 1970s, when Chinese scientists working with the sweet wormwood plant isolated an ingredient known as artemisinin. Today considered a potent anti-malarial medicine, one of its derivatives is now used in a drug developed by Novartis.) Its biotech research also lags behind that of developed countries. While scientists win high marks for their expertise in organic chemistry, they are less familiar with areas like animal toxicity and drug formulation.

Yet there is cause for optimism on all fronts. Scientists are quickly gaining experience, and the government has outlined plans to boost regulatory efficiency. In August, only a month after the former head of the SFDA was executed, the agency pledged to spend $1.2 billion to upgrade drug and food oversight. The SFDA is also working to cut review time to approve the sale of priority drugs in China.

 

As China’s domestic drug market has expanded and its scientific and regulatory environment improved, foreign drug companies have been accelerating their investments in R&D. In the late 1990s and early 2000s, leading drug makers initiated research in China via a few low-key, small-scale partnerships with academics or government-run scientific institutions. More recently, they’ve begun to offload chemistry assignments on a growing scale to an emerging crop of CROs. For the most part, these have been discrete projects involving relatively straightforward work that is considered unlikely to lead to big innovations. Yet the stakes are now getting higher as some firms funnel cash into standalone research centers and embark on more sophisticated relationships with local research groups.

 

Lilly’s two flagship R&D partnerships include a five-year-old exclusive collaboration with CRO Shanghai ChemExplorers and, as of August 2007, a deal with Shanghai-based Hutchison MediPharma to study targets involved in cancer and inflammation. By collaborating with an existing firm rather than building its own R&D facility, Lilly gains greater flexibility in its research. And Hutchison can offer capabilities that Lilly may not have, Zhu says.

 

GlaxoSmithKline is outfitting a Shanghai-based R&D center to direct its global discovery and development in neurodegeneration. In the first three years the center will focus mainly on building up drug discovery capabilities related to disorders such as multiple sclerosis, Parkinson’s disease, and Alzheimer’s disease. It will then start scaling up clinical development. The center, expected to become one of GSK’s bigger facilities when it is completed, eventually will encompass drug-target identification to late-stage clinical studies. Jingwu Zang, head of the Shanghai R&D center, predicts that in a decade it will employ more than 1,000 scientists.

 

GSK’s plans reflect an increasingly common theme: China as a venue for research of global relevance. Most foreign drug makers conducting R&D are investigating treatments for diseases commonly seen in both the West and Asia.

 

There are a few exceptions. For example, Novartis has identified as one of its main research areas the hepatitis viruses that cause liver cancer and which have had a particularly damaging effect in China. About one-third of the 400 million people infected with hepatitis B worldwide live in China. Likewise, AstraZeneca initially plans to focus its research on cancer, especially the liver and gastric cancers that have such high incidences in China.

 

However, the diseases prevalent in China today increasingly mirror those seen in the West. An unfortunate byproduct of China’s economic success is the growing number of mainlanders suffering from obesity, diabetes, and cardiovascular disorders, the so-called “diseases of affluence” common in the West. According to the World Health Organization, China has the world’s second-highest number of deaths from coronary artery disease.

“Both in China and India, as income levels have increased, the standard of living and lifestyles have changed. So over the past 10 years the disease pattern, and thus the therapeutic areas of focus, have shifted from antibiotics to diabetes and cardiovascular,” says Rajiv Gulati, director, China-India strategy for Eli Lilly and Co. With one or two exceptions, he says, “We’re basically doing global research for global purposes.”

 

Drug makers are forging increasingly complex R&D strategies, not only building up their internal operations but also expanding collaborations with local CROs and universities. Consider Novartis, which is spending $100 million for the design and construction of two R&D facilities. The larger, permanent facility will house about 400 scientists when completed in 2011. In addition, Novartis plans to continue its six-year-old partnership with the Shanghai Institute of Materia Medica, which is working to identify and test traditional medicines for pharmacological properties, and maintain a handful of other tie-ups with Chinese academics.

 

For its part, AstraZeneca is setting up a dedicated “innovation center” in Shanghai, initially focused on finding drugs for cancer. This is part of a three-year plan announced in 2006 to invest $100 million in R&D in China. The lab, expected to become fully operational in 2010, will employ some 70 scientists.

 

Since launching clinical research on the mainland in 2002, AstraZeneca has steadily ramped up both the scale and level of sophistication of its research, says Karen Atkin, clinical research director for AstraZeneca China. “The nature of our research and partnerships is changing. Now we’re moving into very cutting-edge areas in translational scientific research.”

 

The same holds true for AstraZeneca’s external collaborations. It recently signed a $14-million deal with WuXi Pharmatech, which is working on lead identification and will provide chemical compounds to supplement the company’s own in-house chemical library. AstraZeneca is also working with researchers at Shanghai Jiao Tong University to identify genes that increase susceptibility to schizophrenia. The results of that research will be fed back to the company’s Sweden-based global R&D lab dedicated to neuroscience.

 

“We’ve gone from focusing on operations and clinical trials delivery to now also working with external partners in China who can be equal partners with our AstraZeneca scientists in other parts of the world, really shaping things from an early discovery point onward,” says Atkin.

 

To be sure, GSK, Novartis, and AstraZeneca are unusually ambitious in their goals for China R&D. Many other foreign drug makers have opted for a more cautious approach; they don’t expect their work in China to function on par with flagship R&D centers anytime soon. “We’re not exploring the same kind of work in Asia right now,” says Yang of Pfizer. “Sites such as Ann Arbor [Michigan] and Nagoya [Japan] can perform a whole range of R&D functions, whereas the partnership here is just exploring a small set of disciplines.”

For now, Pfizer has opted to work via smaller-scale collaborations. But Yang says the company remains “open-minded” about attempting new approaches in China. Late last year it launched a research partnership with Tsinghua University to study the structural biology of kinases, a type of enzyme known to have therapeutic implications. It has sponsored similar work with academics at Peking University and the Chinese Academy of Sciences. Pfizer also has ongoing partnerships with local CROs such as WuXi Pharmatech (although Yang declined to discuss the nature of that research).

 

Seven-year-old Wuxi, which counts Pfizer as its number-one customer, now does R&D outsourcing for nine of the top 10 global pharmaceutical firms. Though bigger than most, it represents the ambitions of a new breed of CROs that have sprung into being in just the past few years.

 

China is now home to hundreds of such firms, many based in Shanghai’s Zhangjiang Hi-Tech Park or Beijing’s Zhongguancun Life Science Park. While some manufacture active pharmaceutical ingredients and conduct outsourced clinical studies, a smaller number, like WuXi, offer more sophisticated drug discovery research and are quickly building out their portfolios.

 

Earlier this year WuXi branched out from its bread-and-butter business—drug discovery work for foreign companies—into drug metabolism and pharmacokinetics and general toxicology. With almost 2,000 employees, its business has grown sufficiently fast to justify a listing on the New York Stock Exchange last August.

 

Granted, the sheer youth of China’s drug research industry imposes some limitations. With the exception of a few elite local companies such as Hutchison MediPharma (a pharmaceutical firm backed by Hong Kong conglomerate Hutchison Whampoa, which has developed two of its own drug candidates now in clinical development), most R&D is conducted by CROs focused on discrete specialties. This means that foreign companies that want to contract out R&D work in China may have to link up with a number of research firms, each with different specialties, such as chemistry, animal toxicity, formulation development, and so on.

 

“China is great in functional capability, but you don’t find all the capabilities in one single company, with some exceptions,” notes Gulati. In the future, that’s bound to change, he says. But for now, China requires a more involved outsourcing strategy than India, which has a longer private sector history and has given rise to export-oriented giants like Ranbaxy Laboratories and Dr. Reddy’s Laboratories. “You’ve seen that most pharmaceutical companies in China are either setting up their own R&D or having multiple relationships with contractors, then trying to integrate cross the chain,” says Gulati. “Whereas in India you can have a relationship with one, two, or three independents which span the full spectrum, from the molecule to the launch stage.”

 

Still, one factor likely to work in China’s favor is the perception that its IP protection regime—while still far from ideal—is better than India’s. In August Novartis CEO Daniel Vasella, angered at losing a patent protection case in India, warned that he might pull research funding out of the subcontinent and redirect it to other countries, including China.

 

China has made big strides since 1993, when pharmaceutical patents first won legal protection. A series of amendments followed in 2001 before China joined the World Trade Organization, and now a third round of amendments is under way. “The situation has improved in the past several years, both in the number of enforcement actions people have taken and the favorable judgment for IP owners, including in the pharma space,” says Tony Chen, a patent and life sciences lawyer for Jones Day in Shanghai.

 

Pfizer’s legal victory in protecting its Viagra patent is a case in point. After the State Intellectual Property Office revoked Pfizer’s patent on Viagra in 2004, Pfizer took the unusual step of fighting back in court. The drug maker was rewarded last year when a Beijing court ruled in its favor.

 

There’s still far to go, of course. Privately, local industry insiders offer up a lengthy wish list of IP improvements they’d like to see, both in regulation and enforcement.

 

What’s striking is that China has turned into enough of an R&D center to warrant such concerns. It’s becoming more feasible for top Chinese scientists to work on cutting-edge research without having to leave home.