Mr. Greg Lucier
President & CEO, Invitrogen Corporation
Before the
US-China Economic and Security Review Commission
“China as an Emerging Regional and Technology Power:
Implications for US Economic and Security interests”
February 12-13, 2004
Chinese investment in biotech began almost two decades ago as part of the now legendary “863” program for investment in high tech. This investment (currently ~$500-600 million/ yr) has created a strong R&D infrastructure of research institutes, labs, centers and universities. In addition, China also has a highly technically trained workforce that can conduct high quality R&D at a much lower cost than labs in more developed countries. These investments have established China as a strong player in genome sequencing, ag-biotech and gene-therapy. They should also provide a strong platform for future growth.
Commercial biotech enterprise, however, is still not a viable industry in China. Although China has mastered many of the basic technologies, it is still seen as lacking a “product” mentality needed to get new drugs/ products on the market. Most of the existing biotech companies are small, starved for funding and pursue “knock offs” of products developed elsewhere. They are also almost wholly dependent on government sponsored R&D. Private capital investment (either VC or stock market) in Chinese biotech is very low due to a lack of clarity of regulations, inadequate legal infrastructure to enforce existing laws, insufficient financial infrastructure to guarantee security and retrievability of investment, and lack of public understanding of biotechnology. Foreign investment is also hampered by insufficient protection of intellectual property (IP). Although, as part of entry into the WTO, China has adopted patent laws that are more aligned with the more developed countries, enforceability of these laws could be further strengthened. The development of local biotech is also hampered by the lack of high caliber management – individuals with both management skills and a deep understanding of biotechnology.
China’s large, increasingly affluent and health conscious population presents a huge market opportunity for biotechnology oriented companies in developed countries. China’s biotech market is estimated to be ~$3 billion currently and is expected to grow at ~13.5% annually to reach ~$9 billion in 2010. The main sources of growth are likely to come from areas such as ag-bio, genomic sequencing, biochips, leveraging leads provided by Traditional Chinese Medicine, Bioinformatics, stem cell research, bio-manufacturing and toxicology testing. Growth could be even higher as IP protection strengthens, financial, legal and regulatory infrastructure improves and there is more influx of foreign investment and managerial talent into the Chinese biotech industry. There is currently little evidence of Chinese companies investing in overseas biotech as a means to acquire technology. China, however, may be gaining access to technology and superior managerial talent by successfully attracting and repatriating Chinese scientists that have been trained abroad or are working in overseas biotech companies.
Invitrogen has a long history in China and remains committed to a continued and strong presence there. Invitrogen first entered the Chinese market in 1979 and continuously distributed its products through local distributors since that time. Given the recent easing of direct trading regulations, Invitrogen is presently considering several options to create a Chinese subsidiary. It expects to more than quadruple its current sales in China over the next five years. Beyond supporting cutting edge research in both medical and ag-biotech, Invitrogen plans to explore opportunities to source raw materials from and to conduct activities such as manufacturing and media development in China.
1) Assessment of the current technological capabilities of the biotechnology sector in China
China has had a long history of investment in biotechnology. China’s biotech program was officially initiated in 1986 by Deng Xiaoping, with a declaration that biotechnology was one of the seven technologies critical for economic growth. Biotechnology was funded as part of the now legendary 863 program (so named since it was begun in March of 1986) and has had increasing government funding outlays in each of the successive 5-year plans. It is estimated that the Chinese government spends upwards of $600 million per year on biotech R&D through its various institutes and academic centers. The total biotech market in China inclusive of all sectors is estimated to be $2.80 billion in 2001 and is expected to grow to ~ $8.78 billion by 2010 (CAGR of 13.5%).
Initially, China concentrated its efforts on agricultural biotechnology, as a means to self sufficiency in food. The challenge is particularly large for China, since it has 20% of the world’s population with only 7% of the world’s arable land. In 1988, China became the first country to commercialize a bio-engineered tobacco plant resistant to a plant virus. Since then additional research has yielded virus-resistant tomatoes, sweet peppers, peanuts, cotton, papayas. Today, China ranks fourth in the world in total area under genetically modified organism (GMO) cultivation after the US, Argentina and Canada and has developed many transgenic crops. As many as 60 plants are reported to be under research across more than 90 research institutes around the country. Research is also being conducted on more than 30 varieties of GM fish and animals. Animals under research include hogs, cattle, sheep, and domestic rabbits. Scientists have started research using GM animals to produce medical protein. GM microorganism for use in the production of feed additives, vaccines, and pesticides were developed as early as 1999. In addition, China has proven its capabilities in cloning animals. While in the past, cloning has focused on cattle, China is now attempting the cloning of the Giant Panda.
China has had a lot of success in the medical biotechnology field as well. China was one of the six countries involved in the Human Genome project, and successfully sequenced 1% of the human genome. Recently, Chinese scientists published the draft sequence of a rice genome – a task achieved in a remarkably short amount of time, beating an international consortium whose efforts had commenced considerably earlier than China’s. This feat underscored the country’s ability to reach the highest level of science while facing the array of economic and political challenges often facing developing countries. Chinese scientists have also completed genome sequencing of a number of microbes such as Leptospira icterohaemorrhagiae, Staphylococcus epidermidis, Shigella flexneri, thermophilic bacteria, which have played an important role in improving the understanding of disease-triggering mechanisms and development of medical vaccines. About 20 bio-pharmaceutical products have been commercialized so far, including recombinant medicines and vaccines. Thirty more are in clinical trials. The major products of the industry are immunodiagnostics, research reagents for biotechnology laboratories, animal vaccines, human vaccines, Colony Stimulating Factors (CSF), erythropoietin (EPO), monoclonal antibodies, medical material supplies, and feed additives. In late 2003, SiBiono GeneTech received approval to commercially market Gendicine, a gene-therapy based treatment for nasopharyngeal cancer. New Scientist reports this to be the first approved gene-therapy treatment in the world. The treatment delivers a healthy copy of the anti-tumor p53 gene through a simple adenovirus construct that does not integrate into the genome of cells. The cost of a single dose of therapy is expected to be only $360.
The successes already achieved by China in the area of biotechnology are a result of three major sources of strength.
1) Availability of research talent: China has a large pool of more than 50,000 talented research scientists in biotech industry. Unlike countries such as Malaysia and Singapore, China has a history of scientific research, and hence, has built its talent base over a 20-year period. Through its strong educational infrastructure China is expected to grow this pool by about 4500 scientists each year. In addition, China is also providing strong incentives to attract Chinese researchers that have been trained abroad. China now offers all returning doctoral degree holders at least associate professorships, and other material benefits. As a result, China’s talent pool is quickly achieving world-class status. Not only is this research pool highly qualified, it is estimated to cost less than a fifth to a tenth that of comparable US talent.
2) Strong government support: The Chinese Government actively supports the biotechnology industry as part of its High Technology Program and has reportedly increased its investment in biotech to ~$500-600 million. Biotechnology features prominently in its agenda of developing knowledge industries. In fact, government funding supports a majority, if not all, of biotech R&D in China.
3) Research infrastructure: China has several research institutes, research centers, universities and laboratories that provide the necessary infrastructure for biotechnology research. The Ministry of Science and Technology (MOST) directly funds most of these and also sets overall strategy for all government-funded biotechnology research. The China National Center for Biotechnology Development is a purely administrative body and is mostly involved in activities to promote biotechnology and the allocation of government funds. The Chinese government has also set up technology parks, the largest being in Shanghai and Beijing, to promote commercial biotechnology development. The key institutions/ organizations forming the R&D infrastructure include:
Despite the R&D successes, however, biotechnology is still not a viable industry in China. Although, China has ~150 biotech companies (40-50 publicly traded and the rest privately funded or government funded), most of these are very small and starved for resources. Most do not engage in cutting edge R&D and in addition, most of the products are knock-offs of US products due to historically weak patent protection in China. Due to intense competition in production of knock-off products, revenues and margins tend to be very low. Venture capital activity, which provides the majority of early stage biotech funding in the US, is very low in China. Most of VC funding in China comes from government or university VC, and is often linked to spin-offs of technology developed at universities. Foreign VC investment in China tends to be low due to a perception of inadequate exit options for any investment.
There are around 20 biotech-derived drugs in the market that are mostly Chinese adaptations of western products. In addition, since Chinese companies often lack the necessary quality standards, sales are limited to the Chinese market. Profitability in the industry is razor thin owing to a high level of competition and government price controls.
There are a few key factors that contribute to China’s weak biotech industry:
2) Prediction on how the sector will develop in the future
China is widely expected to become the one of the largest markets in the world and the biotech market is expected to grow strongly as well. It potential can be gauged through a few interesting anecdotes:
Frost and Sullivan expects the Chinese biotechnology market to grow at about 13.5% annually, from $2.8 billion in 2001 to $8.8 billion in 2010. Substantial amounts of this growth will come as more MNC’s conduct more R&D and production activities in China, to take advantage of the talented yet cheap labor pool. Growth will also be helped by the improving IP situation and continued government openness to foreign investment. This should also lead to increasing collaborations with international research centers and global pharma and biotech companies. China could play a big role in several potential areas, including:
Government incentives and funding will continue to support and nurture the emerging biotechnology industry. China is in the process of making its biotechnology industry more broadly market friendly, though protectionism of domestic companies still exists. Starting in 2003, China has eased some of the geographic and capital restrictions on foreign companies to operate retail and wholesale pharmaceutical (companies still need local R&D/ manufacturing investment to be able to participate directly in local currency sales without going through a local dealer). In addition, government support for biotech is changing from the current fund-oriented support for biotech research and associated industrialization to policy-oriented encouragement. The incentives planned include:
The government is also increasing its support in several existing programs as well as providing strong encouragement for universities to start businesses
3) Assessment on what role foreign companies, investors, and scientists and engineers play in the sector.
The unmet needs and immense growth opportunities of the Chinese healthcare market present a prime opportunity for foreign biotechnology/ pharmaceutical companies and investors to tap into. Their ability to play in this market has been considerably eased by China’s admittance to the WTO. However, foreign companies, investors and governments can play a role by ensuring that they can help bring the best treatment options to the Chinese market, make a fair profit and preserve their intellectual property in doing so. By increasing the ability of the Chinese to meet their healthcare needs and their ability to participate in the global market through products developed in China, these external agents could provide the greatest incentive for China to become a full participant in the global biotechnology industry.
As discussed above, one of the key issues perceived to be holding up the growth of the Chinese biotechnology industry is the lack of technologically savvy management. Foreign companies and investors can play a critical role in bringing in talent that has been trained in more developed biotechnology environments. It will also be instrumental in training local talent in management best practices. Foreign investment could have spin-off benefits in forcing a more thorough evaluation of company technologies and economic prospects, a broadening of potential markets for products, and most likely encourage more investment in biotech in local capital markets.
Participation of foreign companies is also likely to improve the level of collaboration between Chinese biotech companies and those in more developed markets. This will have the effect of speeding products to market as well as improving their potential value once they are there.
As has happened with semiconductors and other high tech markets, a greater foreign involvement in the Chinese market will also increase the level of services outsourced to Chinese industry – manufacturing, lab animal toxicology testing, etc.
4) What domestic and international factors promote and constrain the development of biotech in China?
Key factors that promote the development of biotech in China (most have been discussed above)
Key factors constraining the development of biotech
5) In particular, are any of these constraints created by inadequate intellectual property protection and market access limitations.
China has recently taken several steps to revamp its legislative and regulatory environment to protect intellectual property. As part of its joining the WTO, it has made several specific reform commitments and is also a contracting party in the Patent Cooperation Treaty. Its patent statutes align well with international norms and its Intellectual property office is perceived to perform much better than its counterparts in other developing countries such as India and Brazil.
Despite these advances, however, the US and other developed countries have a major role to play in encouraging China to adequately enforce intellectual property rights. The Biotechnology Industry Organization (BIO) has identified three major areas for improvement
China will have to further address these issues before foreign investors and companies become more comfortable with investing in that market.
China is in the process of making its biotechnology industry more broadly market friendly, though protectionism of domestic companies still exists. Starting 2003, China will allow foreign companies to operate retail and wholesale pharmaceutical businesses with no geographical or capital restrictions. In addition, government support for biotech is changing from the current fund-oriented support for biotech research and associated industrialization to policy-oriented encouragement. The incentives planned include:
However most foreign participants still face difficulties while going about doing business if they do not have the “right connections” or “Guangxi”. The regulatory framework and enforcement continue to be relatively weak. For example, contract laws are often not enforced uniformly thus bringing mistrust into the business deals and undermining collaborations and partnerships.
In addition, Chinese stock exchanges are perceived to be set up primarily to deal in shares of state-owned enterprises being privatized – no capital market exit strategy to motivate growth of venture capital. Plans are underway by government to create a stock market modeled after NASDAQ but status is uncertain.
6) Are Chinese firms and other organizations are investing overseas as a way of transferring technologies to China.
There is little evidence of direct Chinese investment overseas in biotech companies. Chinese biotech/ pharmaceutical companies tend to be very small (revenues of even the largest ones are under $1 billion). EBITDA margins and free cash flows also tend to be low as well. Hence, companies have little “currency” to make foreign acquisitions. Most of the large conglomerates in China are government-owned and do not yet have an M&A mindset. The fact that the Chinese currency is not yet freely traded also hampers the ability of Chinese firms to make foreign acquisitions. China, however, is actively recruiting expatriate scientists back to China by offering associate professorships and other incentives. Anecdotal reports indicate that it is having a lot of success in doing so.
Also, there is increasing collaboration between Chinese scientists and their counterparts in more developed countries. Some examples cited by NES include:
The Shanghai “Medical Valley” already has several top 20 global pharmaceutical companies with a local presence. There is also evidence of increasing investment by foreign pharma/ biotech firms in China. For example, Roche recently announced that it will establish an R&D centre at Zhangjiang Hi-Tech Park in Shanghai, China. The centre will support the Roche Group's worldwide R&D activities and its strategic business development efforts in the Chinese market. It is scheduled to be fully operational by the end of 2004, the Shanghai facility will initially be staffed by 40 chemists.
In closing, the large, increasingly health conscious and increasingly affluent Chinese population presents a significant opportunity for biotechnology and pharmaceutical companies that are looking for new avenues for growth. Governments of countries, in which these biotechnology and pharmaceutical companies are based, also stand to gain through increased tax revenues from companies’earnings in the Chinese market. In addition, China also provides a highly talented labor pool of dedicated scientists who could be leveraged to provide the burst of innovation and productivity that biotech and pharmaceutical companies in more developed countries are looking for.