Monitor China The Life Sciences Leader of 2020 17 Nov

A UNIQUE CONFLUENCE OF FORCES SETS THE STAGE FOR CHINA TO TAKE A
LEADING — AND POTENTIALLY DISRUPTIVE — ROLE IN LIFE SCIENCE INNOVATION.

UNDERSTANDING THE DRIVERS, THE UNCERTAINTIES AND THE POTENTIAL IMPACT
WILL BE DECISIVE FOR FIRMS AIMING TO LEVERAGE CHINA’S BURGEONING ROLE
AND BUILD NEW SOURCES OF GLOBAL COMPETITIVE ADVANTAGE.
THE LIFE
SCIENCES
LEADER
OF 2020
BY GEORGE BAEDER
AND MICHAEL ZIELENZIGER
monitor
ABOUT MONITOR
Monitor works with the world’s leading corporations, governments and social sector organizations
to drive growth in ways that are most important to them. Monitor Group offers a range of services—
advisory, capability-building and capital services—designed to unlock the challenges of achieving
sustainable growth.
ABOUT THE AUTHORS
GEORGE BAEDER
George Baeder, based in Monitor’s Shanghai office, leads the firm’s Life Science practice in Asia,
covering pharmaceuticals, medical devices, over-the-counter medicines and health care delivery.
He helps clients anticipate fundamental changes in the market and competitive landscape, and
he has led numerous corporate market entry, product launch and in-line growth strategies across
a wide range of therapeutic areas. Over more than three decades in Hong Kong, Singapore and
China, George has worked across consulting, investment banking and private equity to advise
senior executives of leading Western and Asian firms, as well as government policy makers, on
the development and effective implementation of innovative strategies. He can be reached at
george_baeder@monitor.com.
MICHAEL ZIELENZIGER
Michael Zielenziger, a Pulitzer-prize finalist for his reporting from China, works with Monitor
Group analyzing issues related to Asia and globalization and is a visiting scholar at the University
of California, Berkeley. The former Tokyo bureau chief for Knight Ridder Newspapers, Zielenziger
is the author of Shutting out the Sun: How Japan Created its own Lost Generation (Nan A. Talese/
Doubleday) which described the social malaise and economic decline that now confronts an aging
Japan. As a consultant, he advises corporations and governments on developing strategic priorities
and discerning emergent trends. He is also a former John S. Knight Fellow at Stanford University’s
Graduate School of Business. He can be reached at michael_zielenziger@monitor.com.
Copyright © 2010 Monitor Company Group Limited Partnership.

All rights reserved. Reproduction in whole or part is prohibited without permission.
monitor
TABLE OF
A UNIQUE CONFLUENCE OF FORCES SETS THE STAGE FOR CHINA TO TAKE A
LEADING — AND POTENTIALLY DISRUPTIVE — ROLE IN LIFE SCIENCE INNOVATION.
UNDERSTANDING THE DRIVERS, THE UNCERTAINTIES AND THE POTENTIAL IMPACT
WILL BE DECISIVE FOR FIRMS AIMING TO LEVERAGE CHINA’S BURGEONING ROLE
AND BUILD NEW SOURCES OF GLOBAL COMPETITIVE ADVANTAGE.
CONTENTS
THE LIFE
SCIENCES
LEADER
OF 2020
BY GEORGE BAEDER
AND MICHAEL ZIELENZIGER
EXECUTIVE SUMMARY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CHINA, THE LIFE SCIENCES LEADER OF 2020

Beijing, 2020 ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Life Sciences Today.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Forces Shaping the Life Sciences Future.. . . . . . . . . . . . . . . . . . . 8
The Global Implications of China’s Emergence .. . . . . . . . . . . 13
A Dual Crisis Demands a Search for New Models .. . . . . . . . 13
For Chinese Scientists, a Historic Opportunity.. . . . . . . . . . . . 16
The Central Role of China’s Government. . . . . . . . . . . . . . . . . . 26
A Latecomer’s Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Building the Pharma Future.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Potential Risks to China’s Life Science Boom.. . . . . . . . . . . . . . 43
INTO ACTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
CHINA’S LIFE SCIENCES FUTURE: SCENARIOS

1. Wild Flowers Bloom: 2009¬2012 ... . . . . . . . . . . . . . . . . . . . . 22
2. Planting the Garden: 2012¬2015 ... . . . . . . . . . . . . . . . . . . . . . 23
3. Cultivating the Seedlings: 2015¬2020 .. . . . . . . . . . . . . . . . . 24
4. Steady Harvest: 2020¬2025 ... . . . . . . . . . . . . . . . . . . . . . . . . 25
ADDITIONAL INSIGHTS
How China Changed the Semiconductor Game ... . . . . . . . . . 10
A Life Science Entrepreneur Leverages China’s Model .. . . . 18
One of a Thousand Talents Returns to Beijing ... . . . . . . . . . . . 28
The Health Minister Speaks for Innovation ... . . . . . . . . . . . . . 30
Manufacturing Innovation ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
monitor
EXECUTIVE
SUMMARY
China today is rapidly positioning itself to become
an important—and hugely disruptive—player in
the Life Sciences industry and, within a decade,
a global leader in drug discovery and innovation.
A confluence of forces insufficiently recognized
by many Western firms is fueling China’s rapid
emergence and offers the industry unusual
opportunities to create partnerships and develop
new sources of competitive advantage.
Quietly, and without great public fanfare, China’s life sciences indus-
try is today gathering a critical mass of highly skilled talent, savvy and
focused venture investors, and growing government support as its mar-
ket for drugs and medical devices takes off. As it marshals ambitious
government-led investments with pragmatic collaborations, China may
soon possess the potential to create a more vigorous pipeline for new drugs
than the traditional “Western” model, where competing actors often work
at cross-purposes, and where the costs of new drug approvals have become
unsustainable. Moreover, at a time when large, vertically integrated phar-
maceutical firms are being compelled to rethink their scale, scope and core
expertise, thousands of top-flight Western-educated scientists are beginning to
see China as the premier destination to pursue unprecedented commercial and
research opportunities.
Global pharmaceutical leaders already foresee explosive growth occurring within the
Chinese market, which is on track to become the world’s second largest by 2012. Yet
other forces will accelerate the pace of development:
2 CHINA, THE LIFE SCIENCES LEADER OF 2020

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• China will unleash US $124 billion generation compounds and vaccines. The
between 2009 and 2012 to build explosion of Clinical Research Organiza-
community health centers as well tions (CROs) in China within the past
as new municipal and county-level five years points to this emergent trend.
hospitals as part of its broad-based
There are risks to this forecast, includ-
health care reform.
ing the economic uncertainty across
• Central and provincial governments the developed world; China’s ability
will allocate millions to induce lead- to implement sweeping reforms and
ing scientists to repatriate; to develop enforce intellectual property protection;
biotech “science parks;” sponsor life and a tendency within China to focus
science startups and reinvigorate Chi- on shorter-term commercial gains at the
nese research institutes. expense of longer-range investments in
life sciences research.
• Chinese leaders clearly recognize that
their nation is getting older and less Still, as China emerges as a new magnet
healthy even faster than its population for life science innovation, Monitor has
is gaining wealth, and must attempt to found that:
develop new and innovative therapies
• At least 80,000 Western-trained PhDs
at consistently lower prices.
in the life sciences sector have already
Moreover, as the Big Pharma model of returned to China to work in the
drug discovery continues its rapid de- industry or in academic institutes. The
integration, ambitious Chinese scien- pace of repatriation of these highly
tists and entrepreneurs see the chance skilled scientists is likely to accelerate
to develop important new commercial over the coming decade.
opportunities along the value chain of
• An exclusive Monitor survey of
drug innovation. Just as a small com-
Chinese life science professionals now
munity of Chinese-born, Western-
working in the United States finds
educated engineers dramatically reshaped
that fully two-thirds contemplate
the global semiconductor industry two
either returning to China for good
decades ago, so too are Chinese heritage
or becoming “sea turtles:” life science
bio-scientists poised to turn China into a
professionals who constantly circulate
vital cog in the global system of design-
between China and the U.S. in pursuit
ing, testing and manufacturing next-
CHINA, THE LIFE SCIENCES LEADER OF 2020 3

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of commercial and research opportuni- will be qualitatively different in China

ties. Such “sea turtles” and the “hybrid” than in other emerging markets and
firms they create will become impor- could, in time, break more new ground,
tant drivers of China’s life sciences more rapidly.
innovation.
Other global industries, ranging from
• Unburdened by outdated “legacy textiles to automotive parts and consumer
investments,” China’s ambition to electronics, have tended to underesti-
build a wholly new medical infrastruc- mate China’s potential to transform their
ture offers a wide range of opportuni- industries. Savvy life-science firms will
ties to create the robust genomic and make the investments required to “get
disease databases that will be increas- China right.”
ingly important as personalized medi-
cine becomes a dominant trend.
These findings suggest that opportuni-

ties in drug discovery, process innovation,
clinical trials and collaborative research

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BEIJING, 2020.
On an overcast Thursday in May, the director of the
drug development bureau of China’s Ministry of
Science & Technology (MOST) convenes an intense,
three-hour briefing. Arrayed around the austere
conference room in the capital are the heads of
China’s three largest disease experiment hospitals,
the director of Tsinghua University’s molecular biology
department, and clinical directors from two of the
world’s most distinguished clinical research labs, both
based in nearby science parks. Joining the meeting is
James Liang, the chief executive and scientific director
for Dongshan Pharmascience, a seven-year-old life
sciences startup with 300 employees based in Shanghai.
Even before MOST representative Wang Li Jang calls the meeting to order,
Liang is confident of what this formal session will finally ratify: that Ala-
sapt, the world’s first biologic therapy designed to block the formation of the
free-floating proteins that trigger Alzheimer’s disease, a molecule developed by
his firm with the active support of all these players, is ready to enter full-scale
commercialization. The focus of Liang’s research efforts over the past nine years,
it seems a foregone conclusion that Alasapt will win final endorsement from this
room filled with his most powerful promoters, especially since, as a “China-created”
molecule, it has already received preferential, fast-track approval from the State Food
and Drug Administration (SFDA).
Yet its impending arrival on the global market also reflects a surprising new reality. As
the pipeline for new drugs in the West continues to suffer from disappointments and
poor investment decisions, a new and more cooperative model for drug development and
approval in China is gaining powerful new traction. Alasapt, the first blockbuster devel-
oped through this emerging Chinese system, not only has the potential to vastly improve

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the lives of patients across the globe. It closely with Dongshan Pharmascience to
will almost certainly cause new headaches prioritize which drug leads to target.
for Western pharmaceutical firms which
With SFDA approval now firmly in
have no competing compound to offer
hand, Liang knows that support by the
in China and may soon find their home
U.S. Food and Drug Administration and
markets threatened by this new, Chinese-
the European regulators is just a few
developed therapy.
months away. Ever since the SFDA was
This conclave also represents a moment dramatically revamped in 2014 to meet
of special professional satisfaction for the safety and certification requirements
Liang. Born in remote Qinghai province of its American counterparts, and the
in 1983, he earned his biochemistry PhD government launched a highly publicized
from MIT in 2007, followed by post- campaign against counterfeiters, the sta-
doctoral research at the U.S. National tus of Chinese manufactured pharmaceu-
Institutes of Health, and brief stints at ticals has risen. A companion initiative to
two U.S.-based life science research firms. ensure that Chinese production facilities
One of thousands of Chinese scientists exceed the current Good Manufacturing
lured back home with research and busi- Practices global standard has also proven
ness incentives, Liang knows he could surprisingly effective in attracting new
not have gotten this new compound to investment. So many U.S. drug manu-
market so quickly without the active facturers are now using Chinese partners
support of the drug development bureau, to produce their drugs and vaccines that
part of the MOST’s high-powered new Chinese pharmaceutical plants are grow-
initiative to speed up creation of “indig- ing in both their technical competencies
enous innovation” along the frontiers and productivity. Soon a dozen Chinese
of high-tech industry. The life sciences factories will likely take over a major
program MOST runs has helped priori- share of drug production for the world’s
tize the research focus, gotten SFDA and two largest pharmaceutical markets, the
the Health Ministry to clear bureaucratic U.S. and China.
roadblocks, and coordinated efforts by
The only real issues to be resolved at
government clinical hospitals to quickly
this congratulatory session are strategic
assemble a large pool of suitable patients
choices: How much of a premium should
for Phase II and Phase III trials. It also
Dongshan charge for licensing its new
helped craft the partnership with the lab
blockbuster compound for sale outside
at Tsinghua, whose research team worked

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China? The revenues generated from By 2020, we believe, it will be a critical

the higher prices Alasapt can command player in life science development and
abroad will help reimburse the govern- pharmaceutical discovery. By then, China
ment directly for some of its initial may well have developed its own, distinc-
outlays for research and will also effective model for collaboration between
tively subsidize the rate Fosun Pharma, government research labs, top university
the lead Chinese producer, will pay to researchers and private firms. With ambi-
Dongshan for its domestic manufactur- tious investments and pragmatic col-
ing license. In China, however, Alasapt’s laborations, China possesses the potential
retail price, while much higher than to create a more vigorous pipeline of
that of an ordinary generic, will still be new drugs than the traditional “Western”
capped by National Development Reform model, where competing actors often
Commission (NDRC) and the Health work at cross-purposes.
Ministry to ensure it is broadly affordable.
This conclusion will strike many as
To Dongshan Pharmascience, the ulti-
unexpected, or even disturbing. In 2010,
mate mix of domestic and foreign prices
China often commands headlines when
almost doesn’t matter: Just the fact that an
stocks of the blood thinner heparin are
estimated 27 million Chinese likely will
found to be fatally adulterated, when the
become suitable candidates for this drug
safety of food exports are questioned or
in the first year means their production
when foreign firms allege that Chinese
partner will rapidly develop the scale effi-
competitors brazenly appropriate the
ciencies required to drive down produc-
intellectual property of automakers and
tion costs as profits climb.
electronics manufacturers to create their
“Let’s get started,” Commissioner Wang own brand-name products. Even many of
says, calling the meeting to order. Liang those working in China see the emphasis
knows this is going to be a good day. on quick profits overwhelming the patient
investments and long-term strategic
Life Sciences Today planning necessary to nurture successful
innovation in the life science field. More-
At a time when the global Life Sciences
over, the focus — and concern — over
Industry faces an unsettling series of
China in the West tends to center on the
scientific and business challenges, China
scope of its manufacturing capabilities
is rapidly positioning itself to become
and the scale of its low-cost labor, not on
an important — and hugely disruptive —
its potential for sophisticated world-class
player in the industry’s future trajectory.

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innovation. Chinese can only copy, most much as Greater China, through Tai-
believe, not invent. wan and Hong Kong, altered the value
chain of semiconductor design, testing
Yet quietly, and without great public
and manufacturing in the late 1980s
fanfare, China‘s life science industry is
(see sidebar, page 10). As the integrated
today gathering a critical mass of highly-
device manufacturers of the semiconduc-
skilled talent, savvy and focused venture
tor industry were once forced to confront
investors, and mounting government sup-
new, narrowly-focused specialists, today’s
port as its market for drugs and medical
looming de-aggregation of the global life
devices rapidly expands.
sciences value chain offers Chinese firms
analogous opportunities to become major
Forces Shaping the Life
competitors and collaborators through
Sciences Future specialization and structured global
The juxtaposition between the industry partnerships. Moreover, as technologies
dynamics in the West and China is strik- shift, and as new software tools emerge
ing. Already faced with patent cliffs and to speed the design and testing of thera-
declining productivity, large, vertically pies on the frontiers of synthetic biology,
integrated pharmaceutical firms are being Chinese firms could play an outsized role
compelled to rethink their scale, scope in reconfiguring the design and pace of
and core expertise—just as a host of prag- biological innovation.
matic and flexible Chinese entrepreneurs
Says one venture capitalist deeply invested
are quickly building the clinical research
in the life sciences industry, who divides
organizations, manufacturing centers,
his time between San Francisco and
small-scale research labs and incubators
Shanghai: “When it comes to innovation
required to take maximum advantage of
in life sciences, China will be the straw
the challenges Big Pharma face—as well
that stirs the drink.”
as the budding opportunities develop-
ing within the domestic Chinese market. These conclusions would seem squarely
As integrated “Big Pharma” is forced to at odds with the conventional wisdom
slim down, break apart or seek merger currently expressed by leading global
partners to sustain growth, Chinese pharmaceutical firms. Most are indeed
actors are poised to play an outsized role convinced that China will become a
in the reconfiguration of the industry, promising contributor to revenue growth

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as the nation gains wealth, much like any ing premium prices at a time when the
other emerging market. They focus mainly state has signaled its resolve to drive drug
on how to better sell existing compounds. prices down.
If they recognize any potential competi-
In sum, this view proposes, integrated
tive challenger, it is a Chinese firm that
Big Pharma will remain the leader in
leverages huge volumes to lower pro-
global innovation and whatever enhance-
duction costs for generics. Competition
ments are achieved in global R&D can
from China-produced generics — with
be carefully and selectively transferred to
R&D focused on improving processes
the China market.
and quickly replicating western innova-
tions — commands serious concern. Chi- Yet in counterpoint to that “official
nese scientists are mainly copycats, they future,” some core drivers are rapidly
believe, incapable of conducting world- coalescing in China to help speed the
class innovation in an environment where nation’s first serious forays into drug
fraud and data manipulation is rampant. discovery. They, in turn, suggest a vastly
The lack of adequate intellectual property different future:
protection remains a major disincentive
• China can’t afford to wait for global
to invest in Chinese R&D. Moreover
pharma firms to develop the medi-
the nation, broadly speaking, lacks the
cal breakthroughs needed to provide
infrastructure required to conduct funda-
affordable solutions to the healthcare
mental, groundbreaking research. China’s
needs of the nation’s projected 1.4 bil-
opaque and heavy-handed bureaucracy,
lion population in 2020. Nor do policy
they contend, is not capable of making
makers seem inclined to replicate the
smart investments in life science research.
West’s vertically integrated corpo-
And the SFDA is so risk-averse it is
rate model. They believe China has
unlikely to approve for sale within China
no choice but to accelerate creation
any drugs not already approved by coun-
of new models for drug research and
terparts in Europe and North America.
innovation to serve the needs of a
While the impact of China’s health care
relatively poor population.
reform plan is not yet fully understood,
many wonder who in China might pay
for advanced new therapies command- Continued on page 12

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How China Changed

the Semiconductor Game
To understand how the rise of China could change the face of the global pharmaceutical
industry and drug development, it is useful to recall how Chinese investors, entrepreneurs
and manufacturers based first in Taiwan powerfully reshaped the semiconductor industry two
decades ago, taking advantage of technological innovations and entrepreneurial risks to create
a new global ecosystem.
The fact that the world’s iPhones and computers are today mainly manufactured in China is a
testament to how rapidly the ecosystem of high technology evolved.
In the late 1980s, the semiconductor industry was known mainly through its behemoths: large,
integrated device manufacturers like Texas Instruments, IBM, Motorola and Intel, who designed,
built, tested, produced and ultimately marketed the processors that powered their own com-
puter products.
Today, however, firms like Intel and AMD now compete in a vastly altered semiconductor econ-
omy. So-called “fabless” design firms like Nvidia, Qualcomm and Broadcomm design specialty
semiconductors for high-speed graphics, video game machines or cell phones, but don’t actually
manufacture these components. Tool houses like Cadence and Synopsys build the software tools
that permit niche firms like Nvidia to design, verify, and implement the creation of their electronic
circuits through computer simulations alone. Other firms package and test integrated circuits
fabricated by third parties. Meanwhile, giant foundries like TSMC and UMC in Taiwan, or SMIC in
Shanghai, bake the semiconductor chips for any firm that chooses not to make its own.
So dramatically has the gravitational flow within the semiconductor world been altered that in the
summer of 2010 the trade association for the chip industry, the Semiconductor Industry Associa-
tion, shuttered its headquarters in the Silicon Valley of California. While semiconductor giants like
Intel and AMD might still be headquartered there, the vast majority of the world’s chips are no
longer designed or made there.
Two fundamental agents of change brought about this rapid and mostly unanticipated de-integra-
tion of the semiconductor value chain. The first was a series of technical innovations that created
both the design standards and underlying software necessary for “virtual” chip design — so-called
electronic design automation, or EDA. These new tools allow engineers to sketch and design
increasingly complex circuits on computers without having to actually build prototypes to ensure
they function.

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The second crucial innovation was the recognition by a savvy group of Chinese-born entrepre-
neurs— an earlier generation of “sea turtles”— that specializing solely in the manufacture of
semiconductor chips without design or sales expertise could still generate significant profits.
Their creation of so-called “pure play foundries” helped create an entirely new industry, just
as a previous generation had assembled “motherboards” from chips built in America and air-
freighted to Asia.
The rapid breakup of the “big chip” ecosystem had its catalysts, perhaps none more important
than Morris Chang, a former senior executive with Texas Instruments, who, backed by the Tai-
wanese government, moved back to Taiwan in 1985 and founded the first “pure play” semicon-
ductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC).
The creation of such reliable foundry firms like TSMC, and its rival United Microelectronics Corp.
(UMC) in turn allowed entrepreneurial chip designers and tool makers to contemplate leaving
large, highly integrated firms and setting up their own specialty design shops, mindful that they
would no longer have to acquire the huge capital and complex technological skills required to
actually fabricate their own chip designs. (When Chang first launched his efforts 25 years ago,
significant high-tech investments were not yet feasible in Mainland China. Today however, the
vast majority of Taiwan’s high-tech manufacturers have giant facilities in the mainland and mas-
sive investments across the Taiwan Straits have become commonplace.)
The result is that while firms like IBM and Intel still tightly integrate their design and manufactur-
ing competences, many other successful firms like Nvidia or Broadcomm are able to specialize
in smaller and more focused segments of the value chain. The biggest firms no longer dominate
system architecture and innovation as they once did, and firms that specialize in designing chips
for specific uses have found new ways to compete and win. Moreover, as the foundries have
grown more proficient and efficient at producing chips, even the largest semiconductor firms
sometimes find it more profitable to hire the foundries to produce the chips they have designed.
An analogous trend may be developing within the life sciences sector. Not only is the life sci-
ences world trying to find ways to use software to develop reliable “virtual” testing regimes. But
already, key aspects of discovery, clinical testing and trials, manufacturing and marketing are
being carried out by smaller, nimbler partners of the giant life science firms. Indeed, many of
these firms are already locating in China.
For life sciences firms, the question to be considered is: Might history now be repeating itself?

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Continued from page 9
• Massive state investments. New govern- • A magnetic entrepreneurial setting.

ment funding for science parks, academic Large numbers of top Western-educated
researchers and the national health infra- Chinese scientists now see China as an
structure is likely to boost opportunities attractive site to set up entrepreneurial
for collaborative work between academic firms focusing on drug discovery or pro-
and corporate researchers and lure more cess innovation in areas like large-mole-
Chinese-born, Western-trained experts cule production. In addition, a surprising
to return. number of Western scientists now see
research, as well as commercial opportu-
• New and nimble technology. The accel-
nities, exploding across China and signal
erated diffusion of technology across
a willingness to relocate. Over time, the
borders, the declining costs for genomic
perception of a very positive research
sequencing and other technologies and
climate in China could make the nation’s
the rapid maturation of the “outsourced
“discovery engine” increasingly self-sus-
research” model in China mean rela-
taining, especially as Western drug firms
tively small and tightly-focused firms
continue to impose cutbacks and layoffs
will compete with increasing success in
at home.
drug discovery. Chinese firms are likely
to be key actors in the emerging value • Deeper and more extensive public-pri-
chain of basic research, clinical tri- vate collaboration. Improved coopera-
als, manufacturing and marketing as tion between government, academic and
“virtual pharma” firms begin to grow commercial researchers within China
more influential. could lead to imaginative collaborative
models for research and development.
• Learning by doing. The rapid outsourc-
ing of clinical trials to Chinese-based While these trends drive rapid change in
clinical research organizations (CROs) is China, we also see other, more exotic and
helping Chinese researchers gain deeper perhaps more exciting life science industry
experience in working with Western models emerging in the next decades, mod-
models of drug development and raising els that could turn the Western-centered
their credibility. The “cheaper and faster” model of drug discovery on its head and
differentiator that led to the first boom in create new opportunities for Chinese life
CRO investment is also likely to lead to science professionals to forge ahead in excit-
knowledge-based improvements, as clini- ing new ways.
cal centers rapidly move “upstream” into
more basic research and discovery.

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China’s emergence as a formidable player future at much higher prices - if they are
in life sciences within the next decade available at all.
will have broad implications for the life
Global multinationals tend to relegate
sciences industry.
China to a larger “basket” of “emerging”
pharmaceutical markets, which often
The Global Implications of include nations like Brazil, India, Rus-
China’s Emergence sia, Mexico, Turkey and Indonesia, where
The corporate response to China’s growth projections stir the imagination.
determination to become a leader in life Not all “emerging markets” are the same,
science innovation will demand focused however. China obviously falls into a class
thinking, imaginative responses and of its own as the size of its pharmaceutical
calculated investment, especially from market surpasses Japan’s to become the
multinational incumbents. After all, in world’s second largest. But in addition,
nearly every other industry in which it the research and discovery opportunities
has staked a claim - from textiles to con- as well as the entrepreneurial environ-
sumer electronics and automotive compo- ment rapidly developing within China
nents - China has dramatically restruc- will demand separate, and, we believe,
tured the global competitive landscape, special consideration. Whether the
redefining markets and fundamentally choices are about in-licensing or invest-
recasting the list of “winners” and “losers.” ment, partnering opportunities or future
research portfolios, internal alignment on
The challenge will be especially acute in
China-specific goals and implementation
the life sciences field, where investment-
strategies will be critical to help navigate
time horizons can be long and placing
new and uncharted waters.
the right bets essential, especially in an
era in which the returns from legacy
A Dual Crisis Demands a
investments are swiftly eroding as patents
expire. Strategic choices made in life sci-
Search for New Models
ences today hold the potential to reduce China’s likely emergence as a significant
risk in critical investment decisions, while new force in drug discovery and develop-
potentially generating significant future ment comes at a time when two emerging
returns. Without a clear and well-consid- crises are virtually certain to create new
ered strategy, moreover, firms risk los- and innovative responses. The first is a cri-
ing access to capabilities and potentially sis in the life sciences sector. The second is
dramatic industry-changing opportunities the crisis China itself confronts.
today that may only be obtainable in the

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The predicaments facing the life sciences China, meanwhile, has its own health care
sector seem readily apparent. In 2010, upheavals to manage. The government is
the industry is not delivering significant increasingly committed to finding ways to
medical breakthroughs at either the price deliver a real safety net of medical care and
or the pace desired by payers. The public treatment to its 1.4 billion people at prices
at large is increasingly dissatisfied with the that a developing nation might afford.
performance and credibility of the phar- While most multinational firms have
maceutical industry, and investors view the focused on the immediate implications of
industry as offering unattractive returns this for their local business - like winning
and unsustainable levels of risk. inclusion on provincial reimbursed drug
lists, or finding more effective methods to
A full decade after the complete decoding
interact with physicians - the true impact
of the genomic sequence, the promise of a
is potentially far more profound. China’s
new, profitable “biotech model” has not yet
rising needs and life science ambitions will
materialized while commercializing a pipe-
likely trigger more determined efforts to
line of promising new drugs has become less
cut development costs and reduce retail
predictable. Despite billions in investments,
prices on even the most advanced treat-
there has only been a slight improvement
ments and medications.
in the odds that a sick patient can beat back
cancer while there is a growing backlash Just on its own, the very size and acceler-
against the high costs of drugs and medi- ating growth now being observed within
cal care. The cost of moving a new molecule China’s domestic pharmaceutical industry
from the lab bench to a patient’s nightstand would be enough to drive major invest-
has skyrocketed, while failure rates of even ments in drug discovery by domestic as
late-stage trials are exceedingly high. Never well as foreign players. By 2015, China
has drug development been seen as so costly is expected to overtake Japan to become
or so risky. And rising incidence of recalls the world’s second largest drug market
and failed clinical trials have hardened after the United States. In 2009, Chinese
public sentiment against major segments consumers spent an estimated $23.8 billion
of the industry and undermined investor on pharmaceuticals while the domestic
confidence. market grew at a compound annual rate of
more than 20 percent. By 2011 its phar-
While discovery has grown more costly,
maceutical market is projected to generate
revenues are under siege. As patents for
revenues of $50 billion according to IMS
important drugs expire, governments across
Health, and by 2025, it could be almost 10
the globe are determined to rein in the
times higher, approaching $340 billion in
annual growth of their health care expen-
annual sales by some estimates. That sug-
ditures, especially the cost of medications,
gests China’s annual expenditures on drugs
as populations age and life expectancies
would grow to become four-fifths the size
continue to increase.
of America’s.

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And as it starts to assume a far greater role It is hardly clear that China will be able -
in helping to meet the health needs of its or willing - to assume growing financial
1.4 billion people- 1.3 billion of whom burdens without slowing the cost curve of
already have some form of health care health care. For unlike the United States,
coverage - China’s government is poised China is getting older and less healthy
to spend vastly more on drugs, devices even faster than it is accumulating wealth.
and facilities to bring its health standards While the diseases of affluence like dia-
closer in line with global norms. A first cut betes, hypertension and cancer every day
at massive health care reform will lead to become more commonplace across the
US $124 billion of investment within the nation, the consequences of the nation’s
next three years. (See “China Healthcare one-child policy are coming home to roost
Reform Goals” below.) in the nation’s rapid aging. At the end of
2009, China had an estimated 180 million
Yet China’s government also recognizes it
people over the age of 60, according to
cannot simply mimic a Western, private-
the China Population and Development
sector approach that permits skyrocketing
Research Center, but that figure will rise
health care costs to bankrupt its system.
China Healthcare Reform Goals
1 Achieve Universal Healthcare

› US $124 billion investment over the next 3 years
› Improve accessibility and equality of healthcare to entire population:
Public health insurance to cover 90% of population by 2011, and
universal coverage by 2020
› High co-pay requirements
2 Improve public healthcare provider system

› Build 5,000 township clinics and 2,000 county hospitals for rural
markets to establish true Primary Care in China
› Establish 2,400 Community Healthcare Centers (CHC) in urban areas
› Enforce hospital’s public service roles and eliminate profit drive
› Focus on basic needs
3 Manage healthcare cost

› Establish Essential Drug List with government-set price
› Enforce public tendering process
› Encourage generics and phase out MNC price premiums
› Encourage pharma industry consolidation in both manufacturing
and distribution
Source: Ministry of Health

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to more than 400 million by 2050 - and these scientists and entrepreneurs already
that cohort will represent a full quarter of discern a confluence of forces likely to
the nation’s population. accelerate the breakdown of large phar-
maceutical firms. In this moment of crisis,
Mindful of these pressures, China’s
they believe China can play a central
central government is likely to do more
role in undermining and reorienting the
than simply monitor and closely regulate
current system to the ultimate benefit of
its spending on existing medicines and
global health, their homeland, and them-
therapies, as it fosters manufacturing of
selves. The forces they perceive accelerat-
low-cost, mass-produced generics in order
ing the de-integration of large pharma
to drive down costs. It is likely to push
and challenging the existing Western
aggressively for innovative breakthroughs
model of drug discovery include:
that can prevent diseases, while seeking
remedies that can limit long-term gov- • An explosion in the number of new
ernment expenditures on serious illnesses. biological targets and drug leads based
on the rising importance of genom-
This element of the “innovation
ics, combinatorial chemistry and high
agenda” - finding advanced and effective
through-put screening.
treatments that can be sold at developing-
world prices - is clearly on the minds of • The increasing ability of small, focused
China’s leaders. startup firms to compete with relative
efficiency against far larger incumbents
For Chinese Scientists, in fields ranging from drug discovery
a Historic Opportunity to vaccine production.
Long before the financial squeeze began • Rising costs associated with getting a
to force giant multinational drug firms new drug approved in the West.
to contemplate laying off their research
• Rapid deployment and acceptance
scientists and scaling back Research &
of connective technologies like the
Development labs, young Chinese-born
Internet to speed the diffusion of
scientists had already become integral
scientific knowledge across firms and
players in the fabric of global bioscience.
national boundaries.
Today, tens of thousands already work in
leading Western firms. • A quantum leap in the role of
bio-informatics.
Yet while global pharmaceutical giants see
a landscape ridden with challenges and • The evolving political and economic
dangerous landmines, many Chinese see a environment within China itself.
new market brimming with opportunities
One result of this confluence of demo-
and are poised to press ahead. Schooled in
graphic, scientific and political realities is
Western research and business practices,
that, having seen the opportunities being

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created in the life science industry, China and Ph.D. students in the biological
is rapidly amassing a critical mass of sciences than the United States. The
world-class life sciences talent. Monitor number of undergraduates studying in
estimates that: the life sciences surpassed U.S. levels
some five years ago.
• At least 80,000 Western-trained
PhDs in the life sciences have already • A Monitor survey of Chinese life
returned to China to work in the science professionals now working
industry or in academic institutes. The in the United States finds that fully
pace of repatriation of these highly two-thirds contemplate either return-
skilled scientists is likely to accelerate ing to China for good or becoming
over the coming decade. “sea turtles:” life science profession-
als who constantly circulate between
• China today has the highest number
China and the U.S. in pursuit of
of recipients of U.S. doctorate degrees
commercial and research opportu-
awarded in the biological sciences
nities. (See chart below) Such “sea
among all Asian nations. In 2007
turtles” and the “hybrid” firms they
alone, some 4,500 Chinese students
create will become important driv-
received PhDs in life sciences from
ers of China’s future as a life science
Western universities.
innovator. (See sidebar: “A Life Sci-
• In 2010, we estimate that China ences Entrepreneur Leverages China’s
will have graduated more masters
When you think about your own professional future, do you think:
Emerging Potential,” page 18).
I expect to stay and work in the US for the long term
I expect to relocate and seek work in China
I expect to split my time between US and China
SEA TURTLES’
I expect to PATH: AMONG
work in another CHINESE SCIENTISTS,
Asian country
MANY LOOKING
I expect to workTO SPLIT
outside TIME
of both the US BETWEEN
and Asia U.S. AND CHINA
I already live in China
When you think about your own professional future, do you think:
I expect to stay and work in the US for the long term
I expect to relocate and seek work in China
I expect to split my time between US and China
I expect to work in another Asian country
I expect to work outside of both the US and Asia
I already live in China
Source: Chinese-American BioPharm Society

N=66

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A Life Science Entrepreneur

Leverages China’s Emerging Potential
If you want to envision how a focused, entrepreneurial and relatively nimble drug discovery
model of the future is likely to emerge from China, meet SOFIE QIAO. She’s already built such
a model once—then sold off its first, promising molecules to a larger California-based firm for
what could turn out to be a handsome return. Now she intends to try it again, with more ambi-
tious discovery goals.
Not only does Qiao personify the rapid diffusion of technical expertise that will allow China to
compete aggressively in life science innovation with the United States in a decade or sooner. She
has already proven that harnessing China’s growing technical talents can radically drive down costs
and time-to-trial in drug discovery. A decade from now, important life science innovation is likely
to materialize from companies that represent a hybrid of both Chinese and American-educated
talents able to leverage the core capabilities of both nations to create new, blockbuster molecules.
LEAD Therapeutics, her startup discovery shop founded in 2006 and funded in 2007, employed
only eight people in the United States, along with another 30 in Shanghai on a contract basis. Yet
it was able to generate promising results for LT-673 (a PARP inhibitor designed to fight cancer) as
well as a glyco-peptide that could be used as an antibiotic to fight vancomycin-resistant pathogens.
LEAD was sold in February of 2010 to BioMarin Pharmaceuticals Inc. of Novato, Calif., for $18 mil-
lion in cash and up to $79 million in follow-on milestone payouts as the cancer drug passes through
a series of clinical and regulatory hurdles.
“In less than three years investors got their money back, with a potential for attractive returns
down the road,” says Charles Hsu, a partner in Bay City Capital, a venture firm which was an initial
investor in LEAD. “Had we held on for another three or four years, I think we could have done a lot
better, but some of our partners simply wanted to cash out.” What Qiao did, Hsu says, was go one
step beyond the traditional clinical research organization (CRO) by using Chinese researchers “to
do discovery through virtual outsourcing.”
“We didn’t intend to do big innovation by taking big risks,” Qiao explains. “Instead, we wanted to
succeed by taking less risk,” by leveraging the emerging potential of China, where life sciences lab
work can be done at a fraction of the cost in the U.S. or Europe. “We intended to be low-cost from
day one.”
Born in Beijing in 1971, Qiao received her undergraduate degree in chemistry from Harvard where
she transferred after two years at Peking University, earned a PhD in organic chemistry from MIT,

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did medicinal chemistry research at Genzyme, spent a year as a consultant at McKinsey &
Company, and worked for two life sciences firms before deciding to start her own.
Her “discovery baby,” as Qiao calls LEAD Therapeutics, was deliberately designed to be a “fast
follower,” not an aggressive “bleeding edge” life science innovator. From day one, her strategy
was to find promising drug targets for which significant research data already existed, and gen-
erate best-in-class molecules. “We were looking for targets that we knew were pretty good, but
for which we knew there were clearly some defects,” she says, referring to the PARP inhibitor.
“We figured if we understood what those defects were, and a possible better direction to head
in, then we could make some good progress,” she says. She unleashed a large team of research-
ers at ChemPartners, a contract research organization in Shanghai, to conduct most of the dis-
covery and preclinical work. LEAD essentially took over a dedicated area of the ChemPartners
facility and dispatched one of its key staffers to Shanghai to oversee the discovery work.
Even LEAD, the name she chose for the firm, underscores Qiao’s strategic focus: Leverage the
best of U.S. and China; Eliminate high costs and high risks by conducting R&D activities in
China on validated targets; Anticipate changes in China and global drug discovery by being at
the right place at the right time and delivering high-quality, early-stage drug candidates; and
Deliver high-quality results. Using researchers in China “allowed us to reduce risk by taking on
multiple programs and reduce the cost for each program. Otherwise, this model wouldn’t make
sense,” Qiao says.
Her company’s work on the glycol-peptides came about because one of the scientists she
recruited to her team, Daniel Chu, had spent more than 20 years at Abbott Labs, had expertise
in antibacterial research “and is one of the world’s best in the field,” Qiao explains. “Personally,
I don’t like the idea of licensing a potential drug target and then recruiting a team to work on it.
I prefer to hire a great team and see where the research leads us.”
At the moment, most of LEAD’s scientific staff has gone to work for BioMarin, the acquiring
company. Qiao, however, is “doubling down” on China’s potential in life science drug discovery.
She is now working as a consultant with Li Chen, the former head of the Roche R&D Center in
China, to find appropriate small molecule program targets for a truly China-based pharma-
ceutical firm. Hua Medicine, Chen’s new startup, is now being established in Shanghai with
venture capital funds from China and the U.S.

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These numbers alone offer dramatic evi- as thriving centers of commerce to rival
dence of the potential for major advances Munich or Chicago, crammed with
by Chinese nationals. Yet foreign analysts high-rises and factories that create the
and business leaders sometimes fail to nation’s enormous trade surplus. This is
truly appreciate not only how quickly the first generation to grow up in a uni-
change is taking place across China. verse of unparalleled economic growth
They often underestimate how economic and opportunity.
changes and the technological transfor-
No longer beneficiaries of an “iron rice
mations of the past 20 years have dramat-
bowl,” where jobs, housing and other
ically altered the trajectory of opportuni-
aspects of daily life were rationed and
ties for its young people.
distributed by the state, young Chinese
Today’s 27-year-old Chinese-born PhD see their nation rapidly emerging from
biochemist was only six years old when years of isolation and underperformance.
the Tiananmen crisis of 1989 unfolded. Though hundreds of millions remain poor,
Many of his mentors and lab instructors tens of millions are becoming million-
may well have been street protestors. His aires. Entrepreneurship and risk-taking,
parents, in turn, saw their lives upended long central features of the Chinese char-
by the Cultural Revolution of the 1960s. acter, are once again being encouraged
The ability to travel outside of China to and rewarded. As they see their nation
study at a university or research organiza- once again become a central player on the
tion only became a concrete reality in the globe’s economic stage, young Chinese
five years before he was born - and then have also learned to appreciate the power
for just a literal handful of China’s best of engineering, math, science and tech-
and brightest. nology, rather than political advocacy or
social works, as instruments that can help
But this generation has also experienced
build their nation, while keeping them far
the unprecedented “opening up” of a
removed from the political vagaries that
state-controlled system to investments in
entrapped parents and grandparents.
technology, manufacturing industries and
new trade practices imported from the While the flow of Chinese students seek-
West. They have witnessed the emergence ing advanced graduate degrees outside
of Shenzhen, Shanghai and Guangdong China has accelerated, more telling is

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the emerging “brain gain,” as Chinese the tendencies of Chinese scientists and
who have obtained important training entrepreneurs from across the world to
and experience abroad now see vast new be in constant communication. Through
opportunities available by returning to LinkedIn, a vast network of senior Chi-
China. Chinese life scientists who return nese working in academic institutions as
to their home country speak flawless well as commercial research labs can scout
English and have often published impor- for jobs and discuss new technologies.
tant research papers in top peer-reviewed An industry networking group known as
journals and have worked in multinational “BayHelix,” comprised of senior Chinese-
pharmaceutical firms or leading research- heritage executives in the pharmaceuti-
based universities for a number of years. cal sector, serves as an informal advisor
These top-flight professionals hold the to key Chinese ministries, including
vast majority of influential research the Ministry of Science and Technol-
positions at the nation’s top academic ogy — which choose which talents to lure
and research institutions, or are form- back to China — as well as the SFDA,
ing entrepreneurial firms in the nation’s which monitors drug trials and regulatory
new life science parks. They are intent approvals for new medicines and vaccines.
on upgrading the quality of teaching Though BayHelix first started in the San
standards, even as they are committed to Francisco Bay Area, the vast majority
building world-class labs to discover and of its key leaders have already returned
develop new kinds of drugs. (See “One of to China, joining a growing pool of “sea
a Thousand Talents Returns to Beijing,” turtles” who bring their Western expertise
on page 28.) and work experience with them.
As the diffusion of technological data In addition, groups of Chinese-born

and research knowledge quickly spreads, employees of pharmaceutical research
allowing China to develop its own drug firms and universities on both the West
development agenda, the rise of Internet- and East coasts of the U.S. meet regularly
based communication has also acceler- to network and discuss industry devel-
ated the Chinese ramp-up. Chinese were opments. High-tech parks from cities
quintessential “social networkers,” long like Beijing and Suzhou regularly invite
before the term was invented. Yet the rise these researchers to banquet dinners and
of social networking software, especially conferences in a continuing effort to lure
the business-focused social network cre- top-flight talents to return back to the
ated by LinkedIn, has rapidly leveraged “mother country.”
Continued on page 26

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Could China
Fundamentally Disrupt
the Global Industry?
There is more than one way to imagine China’s future
as a bioscience innovator, of course. Based on the
incremental, yet accelerating changes already visible
on the ground, here is a plausible view of what China’s
discovery engine could look like.
1. Wild Flowers Bloom: 2009¬2012

China today is already embracing its first phase of building out the infrastruc-
ture necessary to sustain a serious commitment to life science innovation and
drug discovery over the next decade. The accelerating repatriation of sea turtles,
induced to return “home” thanks to both “hard” and “soft” incentives; growing seed
money funds accumulated by ambitious venture capitalists for early-stage life sci-
ence investment; and incentives for early-stage life science firms to set up research
operations in China can be seen as kick-starting the nation’s focus on drug develop-
ment. The maturing infrastructure for globally important life sciences discovery only
accelerates the pace and ambitions.
At the same time, the introduction of national health care reforms will continue to drive
commercial expansion of both domestic and international firms. The construction of
thousands of new hospitals and medical clinics will create enormous opportunities for
suppliers. The intention to create a single-payer government health coverage system,
and the potential creation of health care identity cards for citizens, will drive new invest-
ment in medical informatics, IT and systems integration. Foreign multinationals are likely
to continue investing in Chinese operations, even if they are mainly intended to serve the
domestic Chinese market rather than for global discovery projects.
The need by foreign firms to use China as a lower-cost center of testing and clinical trials,
moreover, will continue to drive investment and expansion by clinical research organizations,
while leading Chinese universities will continue to invest in deepening their capabilities to
perform independent research into globally vital areas of medical research. With the enormous
investment of BGI in top-shelf gene sequencing equipment, China could well become the “sequencer
of choice” for researchers around the world. As a result, its scale efficiencies could rapidly drive down
the cost curve of genomic analysis and make China a center for certain forms of genomic innovation.

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2. Planting the Garden: 2012¬2015

Buoyed by the promise of an estimated $100 billion in the nation’s 12th Five Year Plan (2011¬15) for drug
discovery and development, the Chinese Academy of Sciences, works with the key Ministries of Health and
Science & Technology to establish a dense network of researchers from universities as well as private labs to
focus on high priority diseases. A new biologic “incubator” in Shanghai begins connecting top Western and
Chinese researchers to focus on early-stage discovery. As China begins to roll out a standardized disease
reporting system across the nation’s major hospitals and health identification cards for its 1.4 billion people,
the Health Ministry also begins nearly “real time” tracking of disease clusters. The rapid collection of this
robust database helps researchers uncover potential biomarker patterns in the genomic structure of
disease sufferers and pinpoint theoretical treatment options.
Within a year of the creation of this new collaboration, the principals in the “Silver Security” initia-
tive—a name chosen to reflect the rapid aging of China’s society—announces the renewed focus
of its 28 research teams. Because of the nation’s rapidly aging citizenry, the principals determine
that these teams will focus their initial investments on initiatives to prevent, or find cures for,
diabetes and Hepatitis C as well as liver, stomach and lung cancers. These are becoming major
causes of disease and death in a nation whose diet now includes more protein and whose efforts
to limit industrial pollution and generation of greenhouses gases has only slowed the growth of
these noxious compounds, not reduced in absolute terms their production.
Even as compelling, however, the Chinese hint that they have developed a new system of coop-
erative research, in which the giant databases they are amassing from clinics and new hos-
pitals around the country are leading to groundbreaking insights into new disease pathways
and new targets for pre-clinical testing. This deep investment in database collection as well
as robust, often weekly, interactions between specialists in the field treating these diseases
and researchers in the labs, yields major new insight into target optimization and validation.
When government officials originally announced their plans to build nearly 4,000 new hos-
pitals, they did not really focus on the potential that the data collection and virtual confer-
encing technologies they built into each facility would have in accelerating the pace of drug
development. But these investments, as well as state-of-the-art data mining computers,
are quickly wielding impressive dividends. The initial research is going so well, in fact, that
the Health Ministry and SFDA agree to double to six the number of clinical testing hospi-
tals they construct across the country. This ensures that whatever new chemical entities
or large molecule therapies emerge from the Silver Security program are immediately put
into trials with willing patients.
The “Silver Security” program also offers the government another, globally significant
political trump card. As Western nations continue to battle against the scourge of
deflation, and China’s economy continues to produce more of the world’s manufactured
goods, China’s investment in its domestic medical “safety net” is being trumpeted by
Chinese at G-20 meetings and other international conferences to symbolize how China
is spending billions of its own funds in order to boost domestic consumption. Whatever
reassurance the state can offer its citizens about the health of their later years, the For-
eign Ministry argues, gives Chinese consumers the liberty to spend more now on foreign
imports without fear for their futures.

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3. Cultivating the Seedlings: 2015¬2020

By now, the Silver Security program is beginning to yield its first
attractive therapies.
An innovative new biologic that eliminates the risk of acquiring throat cancer for
90 percent of the Chinese population is deemed ready for large-scale trials. The quick
progress in creating this vaccine was aided by a new form of genomic sequencing
developed in China by BGI, now the world’s most pre-eminent genomic sequencer. This
sophisticated sequencing directly aided researchers find the genetic target for a treat-
ment thought to permanently disengage a protein that is believed to trigger the onset
of the disease. Another innovative new biological therapy, which seems to prevent the
formation of the proteins that leads to Alzheimer’s, performs surprisingly well in its first
clinical trials.
Suddenly, faced with a slew of potential commercial opportunities that could pour forth
from its own domestic labs, Chinese regulators rapidly work to reinvent the clinical
testing process in order to make it more efficient and globally accepted. The result-
ing testing procedures announced by the Sino FDA enables the “fast track” testing of
Chinese-formulated compounds. Essentially, the new process dramatically abbreviates
the Phase I and Phase II trials used in the West and hugely expands the pool of subjects
used in Phase III trials. In some cases, moreover, the SFDA decides that if the initial Phase
I trials resolve toxicity issues, it will permit “trial launch” of certain experimental com-
pounds because it has created its own “virtual,” computer-based testing regimen that
simulates the effects of putting a specific new compound in the human body, much as
aerospace manufacturers test an airplane’s performance on a computer simulator before
they ever build it. Scientists in England and the United States are also working to perfect
such a “simulate and test” model, but the Chinese insist they have lapped the competition
and are eager to fast-track drug approvals to help benefit mankind.
To minimize the reaction of foreign human rights groups, however, the SFDA also invites
international hospital monitors to visit China to guarantee that patients desperate to try an
innovative compound are properly informed of the risks before proceeding. Since the drug
treatments are free, Chinese researchers have little difficulty recruiting 5,000 patients for its
initial test of another drug just coming out of the labs, a small molecule compound researcher
believe can conquer some forms of stomach cancer.
In 2018, when the stomach cancer drug proves to be both safe and efficacious, a slew of licensing
executives from multinational pharmaceutical giants descend on China, hoping to win the rights to
sell the medicine, Yulizhen, globally. The auction is held under the auspices of the Chinese govern-
ment, which will gain a significant piece of the proceeds.
Winning the rights to test and potentially market this new blockbuster drug doesn’t necessarily give
Western firms the right to sell Yulizhen, however. They still must complete three or four years of testing in
their home country, because the U.S. and many European regulators won’t yet accept the SFDA data as suf-
ficient for local registration. Because of this gap, thousands of stomach cancer patients begin to fly to China
in search of treatment, while others go to Thailand and India, whose governments have accepted the SFDA
findings as sufficient to market the drugs in their own countries.

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4. Steady Harvest 2020¬2025

Yulizhen is now the poster child of China’s evolving success in drug discovery, with Alasapt, the anti-
Alzheimer’s therapy, gaining new converts. The international royalty fees these two drugs generate,
estimated to be about US $3.5 billion each year, help the Chinese government create more research
centers while guaranteeing ordinary Chinese citizens that the costs of their medications will never
grow out of control.
Moreover, the Chinese model of collaboration and integration, which unites the rigors of basic scientific
research with the development of “druggable” targets for commercialization, is becoming a model for
success in creating a new pipeline of breakthrough therapies. Success yields more success. Increas-
ingly Chinese graduate students go abroad for study with the explicit understanding that they will
return to the “motherland” in four or five years, with lab positions awaiting them. Foreign venture
capitalists, as well as veterans within China’s booming pharmaceutical sector, are eager to put
funds into pools of investment centered not on company-specific initiatives, but on disease-
specific research, where targets for lead optimization have already been identified and pre-
screened. Others are making investments in developing new information technology tools to
manage the enormous database of disease clusters and genomic data China’s 38,000 fully
electronic hospitals develop every month.
Things look promising on the manufacturing side as well. As China’s drug manufacturers
gain new expertise in process innovation, especially in the complex realm of large molecule
therapeutics, their growing dominance leads them to acquire rivals in Europe and North
America and to begin charting global expansion programs. Chinese drug manufacturers
have become so important in the American market that they now hold a prominent seat
at the table in U.S. FDA meetings on improving drug manufacturing, since they have long
proven their ability to create top-quality biologics.
The innovative capacity of China has now become so crucial that large drug market-
ers from Europe and the United States seek alliances with local Chinese counterparts.
After all, Chinese firms now sell potential “blockbuster” drugs two or three years before
they are available in Western markets. Meanwhile, the Chinese consumer is able to
find a rich assortment of treatment options at fixed, affordable prices. Western firms,
however, still need to wrestle with marketing considerations, since health care reform
in the United States has only slightly curtailed the rising prices of new drugs and many
U.S. consumers are forced to make the uncomfortable choice between “legacy” generic
compounds that are cheap, and “exotic” Chinese drugs that doctors say are safe and
effective, yet cost 10 times as much. Much as Japanese automakers stole a march on
their American competitors in the late 1970s, U.S. multinational pharmaceutical firms
now acknowledge that they never saw what was coming.

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Online linkages among Chinese scien- logical progress, especially the new and
tists and networking groups like BayHelix high technologies including biotechnol-
are far more relevant and influential now ogy and life sciences. There is no bound-
that the central government is bringing ary to the development of biotechnology
its active support and strategic focus, as and life sciences, which are closely linked
well as significant investments by impor- with human survival and indispensable
tant regional players, to guide China’s to people’s daily life. China has a large
rising ambitions in life sciences. population, and biotechnology and life
sciences enjoy great development and
The Central Role market potential here. China is willing to
of China’s Government strengthen cooperation with companies
As Chinese wages continue to rise, its all over world which have advanced tech-
supply of cheap labor begins to reach nologies. The Chinese government will
its limits and the value of China’s cur- create opportunities for you and (we) ask
rency gains strength against the U.S. you not to squander those opportunities.”
dollar and Euro, China’s leadership is
also staking its future on developing an THE SARS EPIDEMIC
innovative society where science and THAT DAMAGED
engineering investments lead to techno-
logical breakthroughs and the creation
CHINA’S REPUTATION
of high-paying jobs. ALSO GENERATED THE
As Premier Wen Jiabao himself said DOMESTIC POLITICAL
in December 2007, as he urged faster WILL REQUIRED
progress on developing homegrown
innovation, “In today’s world, science and
TO DEVOTE THE
technology is the ultimate deciding factor RESOURCES NEEDED TO
of a nation’s overall competitiveness, with BEGIN CHANGING THE
indigenous innovation acting as the bones
to support the rise of a nation.” Earlier COUNTRY’S HEALTH
this year, to add explicit emphasis to his CARE SYSTEM.
earlier comments, Wen told delegates
to the China Development Forum, China’s focused determination to develop
“Our hope for the future of the Chinese a globally competitive industry within
economy relies on scientific and techno- life sciences can be directly dated to

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April 2003, as the nation was seized with greater transparency a central tenet of
a crisis of credibility over SARS, or Sud- health reform. “The health and security of
den Acute Respiratory Syndrome. When the people, overall state of reform, devel-
reports of this mysterious and highly opment and stability, and China’s national
contagious virus first were reported in interest and international image are at
November of the previous year, Beijing stake” Premier Wen said.
at first tried to downplay the serious-
The SARS epidemic, played out in the
ness of the outbreak, even though it most
glare of the international press, served as
likely originated in southern Guangdong
a national wake-up call. It highlighted
Province. In an age of jet travel and
the fragile nature of China’s public health
porous borders, the plague quickly spread
infrastructure and the growing inequal-
from China across the globe, killing more
ity within the country. For despite its
than 800 patients and making more than
socialist legacy and Communist rhetoric,
8,000 seriously ill. China’s official denials,
China’s “market Leninist” system offered
however, did not keep other nations from
its citizens a rather flimsy safety net of
imposing quarantines on Chinese visitors,
social services, including health care, even
and soon tourism, international air travel
as tens of millions grew wealthy. The
and other forms of commerce were on
public discontent and political damage
the verge of collapse. White gauze masks
to China’s reputation also generated the
covering the nose and mouth became
domestic political will required to devote
commonplace in the streets of Hong
the resources needed to begin changing
Kong and Shenzhen. Officials began to
the system. Confronted with the fact that
fear enormous economic consequences for
its health care system was inadequate for
China’s export sector, the key to domestic
a new century, the central government in
job growth and political stability.
2009, after three years of study, formally
That fateful April, however, the central adopted an ambitious and costly national
government made a sudden and dramatic health care reform plan designed to intro-
about-face. It fired its Health Minister as duce universal, safe, affordable and effec-
well as the mayor of Beijing as it closed tive basic healthcare by 2020, and lessen
schools across the country to limit the the gap between rich and poor.
disease’s spread, and pledged to make

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One of a Thousand Talents

Returns to Beijing
The distance from the Ivy League halls of Princeton University to Beijing’s Haidian district is not as
far as you might think. Just ask YIGONG SHI, a world-class structural biologist who now runs the
life sciences program at Tsinghua University.
“My goal is to perform cutting-edge research in China, to cultivate many brilliant young scientists,
and to help improve the research culture in China,” says Shi, who is determined to create a top-
flight research and discovery lab at one of China’s most prestigious technical universities, often
referred to as the MIT of China. The ambition is evident at the entrance to his modern new bio-
science lab, which displays the cover pages of seven research papers produced and published in
Nature, Cell and similarly prestigious Western journals since his return two years ago.
“I would like to build one of the best centers for research into structural biology in the entire world,”
says Shi, 43. “To be truly successful you can’t just limit yourself to your lab or center. You will need
a healthy research culture and a sustainable research system. I hope to contribute to improving the
research culture in China.”
Shi’s track record reflects his extraordinary talents and his drive to succeed.
After a decade at Princeton, he held an endowed professorship of molecular biology, supervising

14 post-docs and a $2 million annual research budget from the U.S. National Institutes of Health.
Yet he gave it all up in 2008 to return to China and his alma mater, to help build an innovation
engine for China’s rising biotechnology ambitions.
“I think Princeton was shocked when I offered my resignation,” Shi says. But he felt pulled by the
opportunity to help create a leading center for biological research in his native China. He was also
convinced that, after three decades of opening up to the outside world, China now commanded
sufficient hardware, infrastructure and home-grown talent to make significant biological discovery
a viable pursuit.
It didn’t hurt that the Chinese central government, acting as a recruiting “head hunter,” has targeted
top-flight overseas-educated Chinese scientists like him with hundreds of thousands of dollars
worth of incentives to come home. The Chinese Academy of Sciences also promises to allocate at
least 10 million yuan (about $1.5 million) to every talented scientist who agrees to return.

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Shi and his sometimes research collaborator, Xiaodong Wang of the University of Texas South-
western Medical Center in Dallas, are two of the nation’s most prominent recruits to its new
“Thousand Talents program,” a program initiated in 2008 that aims to lure 2,000 top scientists
and entrepreneurs back to China over the next five to 10 years. “These high-end talents are a cru-
cial resource that the country is short of,” says Li Yuanchao, the powerful member of the Political
Bureau of the Central Committee of the Communist Party.
Recruits like Shi are known as hai gui or “sea turtles” because after years of wandering offshore
to study and work in the U.S. or Europe, they return home. Top stars like him are being offered
funds to relocate and additional grants to help them staff their research labs. Shi and Wang, who
together focused significant amounts of their joint research on apoptosis, or programmed cell
death, are also putting new emphasis into research into Alzheimer’s disease and anti-cancer
treatments. While Shi says he is primarily research-focused at the moment, Wang is in advanced
talks with Western biotech venture capitalists and intends to launch his own China-based
biotech company, Beigene, in late 2010 to focus on oncology. Wang has already been part of one
biotech firm which sold a promising anti-cancer compound to Genentech.
Shi acknowledges that he must challenge traditional teaching methods on a Chinese campus—
where students are seldom encouraged to “think outside the box,” take risks or accept failure as
an important benchmark on a road to potential success—to help stimulate innovative thinking.
“The educational culture here may be the biggest challenge,” he says.
Yet he also argues that he has “better interaction with the students here” than he did while at
Princeton, and says that overall his Tsinghua students work harder and are more cooperative.
“In the end, I think I can go further with my students here…and they will work harder” than their
American counterparts, he says.
He also says that as an Asian scientist working in America, he felt the presence of a “glass ceil-
ing” that kept him and many other prominent Chinese life scientists away from “the decision-
making bodies”. “Better to be the head of a chicken than the tail of a phoenix,” he says, invoking a
famous Chinese proverb, a sentiment voiced by many other returnees.
Does he have much doubt China will become an important life science innovator in a decade’s
time? “None at all. Listen, I came back to China to go beyond what I could do at Princeton.”
With the university planning to hire hundreds of faculty and build the research infrastruc-
ture at Tsinghua needed to support them, Shi’s optimism carries considerable weight.

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The Health Minister

Speaks for Innovation
The face of health care reform in China today is neither a party apparatchik nor a life-long govern-
ment bureaucrat, but a French-trained scientist without any Communist Party affiliation—still a
rarity in the upper reaches of the Chinese government.
CHEN ZHU, 57, the son of two Shanghai doctors, was dispatched to a dirt-poor village in Jiangxi
province as a teenager during the Cultural Revolution, yet taught himself enough medicine to
become a “barefoot doctor.” An expert in hematology and gene cloning who received his graduate
degree from the Hospital Saint-Louis in Paris, he was appointed Minister of Health in 2007 and
has made improving access to care and upgrading the nation’s medical infrastructure major priori-
ties under the slogan of “health care for all.”
A fluent speaker of English, Chen recognizes that reorganizing the nation’s system of hospitals,
providing essential drugs to a relatively impoverished population, improving the training of medi-
cal staffs and creating a priority list of diseases to conquer pose daunting challenges in creating a
cost-effective health care delivery system.
Yet he also recognizes that innovation in China has been hampered by a weak foundation of
technical research and insufficient funding for research. “Very often there is insufficient bench-to-
bedside translation, or separation of research from technological innovation,” Chen told a Global
Health Forum conference in February 2010. “We need to pay much more attention to the innova-
tion of enterprises. They should be the major players in (creating) technological innovation.”
Buoyed by the revenues from its enor- A Latecomer’s Advantage

mous trade surplus, China has already
decided to unleash US $124 billion in Because China’s leaders are now commit-
spending from 2009–12 to begin to ted to implementing major health care
address the nation’s major health care reform, the nation’s surging economic
shortcoming. It has already begun to growth opens floodgates of additional
offer medical insurance to 1.3 billion government funding. Nor is the nation
people as it moves to equalize the dis- burdened with a vast network of outdated
parities between rural and urban areas. “legacy systems” that need to be rewired
for the 21st century. As a result, strategic

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government spending will also acceler- Already China’s pharmaceutical industry

ate the nation’s ability to become inno- and the nation’s most prominent scientific
vators in health care delivery. Chinese researchers are benefiting from increased
officials already contemplate the creation government spending. We have identified
of a system of clinical research hospitals nearly 150 national, ministry-level and
across the nation, modeled after the U.S. locally created programs designed to woo
National Institute of Health’s Clini- foreign-trained Chinese experts in the life
cal Center to speed the testing of new sciences to return from overseas.
drugs in thousands of Chinese patients.
Most prominent is the “thousand tal-
A plan to issue national health insur-
ents” program which actively recruits
ance cards could include genomic data of
senior researchers and academics who
each citizen, in order to better screen for
have been living abroad to return from
biomarkers that could speed the develop-
overseas to help China become a more
ment of personalized medical treatments.
successful scientific innovator in bio-
And as China for the first time develops
pharma. The program, initiated by the
standardized diagnoses for its diseases,
Central Organization Department, part
the accumulation of phenotypic data from
of the Communist party’s governance
hospitals and health centers around the
structure, offers a one-time reloca-
country could prove of immense useful-
tion allowance of one million RMB
ness to Chinese researchers as they seek
($146,000) as well as significant research
the best targets for drug treatments.
support, while similar plans undertaken
Even as it moves to build new medi- by local governments are no less gener-
cal delivery facilities and data capture ous. The Chinese Academy of Sciences,
capabilities, however, the government National Science Foundation and Min-
also recognizes that drug discovery and istry of Education have also launched
pharmaceuticals development represent their own programs to induce talented
areas for important scientific innovation hai gui or “sea turtles” to repatriate.
as well as opportunities for high-margin
The government’s deep interest and
businesses in which China can choose to
growing involvement in fostering China’s
play a prominent, global role. Develop-
life science capabilities is not without
ing a life sciences industry is part of a
its potential drawbacks, however. Across
newly articulated drive to move beyond
the globe the pharmaceutical industry
labor-intensive manufacturing and into
remains one of the most heavily regu-
higher-value fields of “indigenous innova-
lated, and many Western-trained scien-
tion” in areas like information technology,
tists worry that the Chinese government
material sciences, aerospace and advanced
lacks adequate understanding of how the
energy systems like solar power.

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industry actually works. Some business currently not permitted in China unless
leaders note that municipal officials, who the active pharmaceutical ingredient was
know how to supervise or regulate a sim- originally produced within the country.
ple textile factory or electronics assembly
Other forces also coalesce to turn the
plant, don’t understand what takes place
SFDA into a something of a bottleneck.
within a life science firm, especially labs
American bio-scientists work in an
which conduct complex research and
environment where research into new
development. Developing “software,” they
medications can continue unless vetoed
note, is not the same as erecting buildings.
by government regulators within a fixed
Import of reagents, chemicals, radioac-
duration of time, the so-called “objection”
tive isotopes and other supplies important
system. Chinese scientists, however, must
in biological research are strictly regu-
win explicit approval from regulators to
lated, environmental regulations must be
move ahead with certain projects. Indi-
enforced, and the paperwork burdens on
vidual regulators, rather than the agency
new firms can be quite significant.
as a whole, can be held accountable for
Similar concerns are also voiced about the errors. This level of personal responsibility
nation’s drug regulator, the SFDA, which tends to make agency officials extremely
models itself after its U.S. counterpart. cautious and conservative when it comes
Because many of its regulatory standards to approving new pharmaceutical projects.
appear to be holdovers from an earlier era China’s current regulatory environment
when China tried to protect an unsteady also does not significantly differentiate in
domestic industry, the SFDA appears as the review of clinical protocols between
a major roadblock for foreign drug firms. innovative products and simple generics.
For example, the time required in China
The agency itself recognizes many of
to obtain a clinical trial approval often
these challenges. Senior SFDA official
takes 9 to 12 months, with some approv-
have acknowledged that the agency lacks
als taking up to 18 months, compared to
some of the deep scientific knowledge
just 11 to 25 weeks in many other coun-
and financial resources available to its
tries. Moreover, many of the rules govern-
American counterpart, and lacks in sheer
ing how certain drug trials are conducted
numbers of researchers and regulators.
are actually more restrictive in China
(Staffing levels in the SFDA can be one-
than they are in more developed markets.
tenth the size of their U.S. counterparts.)
First-in-human trials for new drugs are

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Building the agency’s staff and capabili- Yet over time, major change within the
ties, however, will require an explicit deci- SFDA is foreseeable, even likely. The
sion to bolster its financial resources. generally accepted evolutionary path
suggests the agency will organically
ALREADY CHINA’S mature and grow more confident and
capable as it begins to interact more
PHARMACEUTICAL
regularly with global life science firms
INDUSTRY AND THE and wins more resource commitments
NATION’S MOST from the central government.
PROMINENT SCIENTIFIC But there are other options more likely to

fit with the growing urgency to develop
RESEARCHERS
China’s life science innovation capabili-
ARE BENEFITING ties. China could also choose to “out-
FROM INCREASED source” key parts of its regulatory mission
to imported experts and world-class
GOVERNMENT
local labs that are tasked with upgrad-
SPENDING. ing its capabilities. It might even ask
counterparts like the U.S. FDA for more
While many foreign drug manufacturers guidance and greater collaboration as it
and research firms hope the SFDA might becomes clear that assuring the quality
quickly change its policies to adopt more and effectiveness of Chinese-produced
Western standards, there is an equally pharmaceuticals and Chinese clinical
compelling counter-argument that such trials will be of critical importance to the
regulatory upheaval is not likely in the life science industries of both nations.
near term. A spate of scandals involving (While the U.S. FDA does already have
production of contaminated or coun- a newly expanded monitoring presence in
terfeit drugs has put a harsh spotlight China, its staff acknowledges that it does
on the SFDA. Moreover, the execution not currently have the resources or where-
of the agency’s director, Zheng Xiaoyu, withal to carefully monitor the scope of
convicted in 2007 of taking bribes worth pharmaceutical work taking place within
some $850,000 from eight separate com- the country.)
panies, suggests that risk-averse bureau-
crats may not be so eager to implement
radical changes in their policies in the
near term.

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These options still assume that the U.S. or “guanxi”- an important component
FDA will continue to represent the of cementing business in China - and
immutable global paradigm for analyzing not necessarily reside with those who
and approving new drug discoveries. But offer the best scientific talent or research
China could also choose to set off on a proposals. Some Western-educated
divergent path. Chinese regulators could Chinese scientists have already organized
determine that, in the interest of speed- themselves into informal advisory groups
ing the approval time for important new to help Chinese leaders create and imple-
therapies, it would create a new set of ment a workable strategy for life science
reliability standards for innovative drugs innovation. But those carrying U.S. pass-
produced locally and targeted at domestic ports can be disadvantaged.
patients. Once the therapies were being
used safely within China, manufacturers ADVANCED DRUG
could always pursue regulatory approval
DEVELOPMENT LABS
from other nations as a second step.
AND STATE-OF-THE-
Regardless of the means ultimately
chosen, however, combating counterfeits, ART MANUFACTURING
ensuring the safety and effectiveness of FACILITIES ENCOURAGE
Chinese-produced medications as well as
CHINESE-BORN
the credibility and reliability of clinical
trials conducted within China will be key SCIENTISTS TO RETURN
metrics in determining China’s ability to HOME AND DRAW
stake a global role for itself in the devel-
INTEREST FROM
opment of innovative drugs and therapies.
WESTERN SCIENTISTS.
Despite the need for reliable regulation,
some observers worry that any intense The crisis of confidence infecting the life
central government involvement and science industry naturally affects Chi-
investment in various life sciences initia- nese researchers working in the West.
tives could force the industry off course. It should not be surprising that Chinese
Such involvement could mean that funds researchers laboring in Western labs
and influence will become centered on worry for their job security. Declining
those with the best political connections

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profitability of their firms could make Building the Pharma Future

their jobs increasingly vulnerable. Some
Chinese working in the U.S. say they The situation across China, by contrast,
believe a “glass ceiling” prevents them seems to beckon with vast new opportu-
from achieving the top ranks in man- nities. Expected to overtake Japan as the
agement, or as editorial advisors in key second largest market for drugs in 2015,
scientific journals. The U.S. recession and China may well be the world’s single larg-
the slowdown in venture capital financing est market for pharmaceuticals by 2030,
translate into a perception that oppor- even though leading drugs will retail for
tunities to join new firms, or become far less than in the United States. The
involved in ambitious new ventures, will infrastructure for first-class scientific
slowly but inevitably diminish. inquiry, including advanced drug devel-
opment labs and state-of-the-art manu-
CHINA RISING IN THE RANKS: THE COUNTRY PROJECTS TO BE THE

SECOND-LARGEST DRUG MARKET IN THE WORLD WITHIN THE DECADE.
2009 Top 101 2010 Top 101 2015 Top 101
US ($300 Bn) US ($310 Bn) US ($355 Bn)
Japan Japan China
France China Japan
Germany Germany Brazil

China France Germany
Italy Italy India
Spain Spain France
UK Brazil Russia
Brazil Canada Spain
Canada UK Italy
Source: 1IMS forecast, GSK EM Conference 2009, Sanofi-Aventis EM IR Seminar 2009,

“Assessment of the Opportunity for Pharmaceutical Manufacturers in Emerging Markets” by
JMCP, Monitor Analysis

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facturing facilities are rapidly coming on market. Novartis and others are now
line, as hundreds of clinical research orga- expanding into discovery.
nizations and independent pharmaceuti-
• Many of the Chinese-born scientists
cal manufacturing firms take root. These
working for multinational firms can
trends are not only encouraging Chinese-
be expected to eventually be tempted
born scientists to return, but are also
to start their own firms based on
drawing new expressions of interest from
knowledge and experience gained in
Western scientists who think China could
leading Western firms. Already, the
become an important new center for bio-
former head of the Roche R & D lab
logic discovery. A reliable flow of Western
in China has set off to found his own
scientific talent into China could, over
drug discovery start-up, with venture
time, make the nation’s “discovery engine”
backing from Western and Chinese-
increasingly self-sustaining.
based investment partners.
Already, within China the building
• Both the central Chinese government
blocks for this new industry are coming
and individual regions are allocating
into view:
billions for the creation of “science
• Virtually all of the leading multi- parks” for life science entrepreneurs,
national pharmaceutical firms are most prominently in Shanghai,
expanding their research and develop- Suzhou and Beijing. One of the
ment capabilities in China, and at the largest centers, in Taizhou, has been
same time seeking partnerships with created as a “legacy” to President Hu
prominent academic research centers. Jintao. When Monitor worked with
In late 2009, Novartis committed to the Shanghai Municipal Government
spending $1.25 billion over five years to develop the overall Life Science
to enhance its already substantial development strategy for Shanghai’s
R&D presence. The firm plans to add Zhangjiang Science Park in 2004, only
1,000 additional staff at its main R&D a handful of firms — local and mul-
site, which employed 160 researchers tinational — were committed. Today,
in 2009. Traditionally, many multi- Zhangjiang’s success has made it the
national corporate research facilities leading model for other centers across
have focused primarily on developing the country.
existing compounds for the Chinese

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• Even before the shape of Chinese drug the right targets for new treatments,
discovery takes its clearest form, Chi- they are also seeking the help of clini-
nese scientists with deep experience in cal research organizations to screen
the West are setting up sophisticated compounds or conduct toxicological
new manufacturing facilities to pro- studies. In addition to lower costs
duce vaccines and other large-molecule and building future collaborators for
treatments in labs that can win U.S. multinational firms, this process is also
regulatory approval. (See “Manufac- likely to seed future competitors, as
turing Innovation” on page 38.) This CROs gain a more sophisticated array
manufacturing capability, which has of processes and talents.
long been a roadblock within China,
Charles River Labs’ proposed $1.6 bil-
will create a clear commercialization
lion buyout of WuXi AppTec, one of
pathway for entrepreneurial Chinese
China’s most well-respected clinical
to build relatively small research firms
research organizations — a deal ultimately
to develop “follow-on biologics” - large
shot down by U.S. shareholder objec-
molecule compounds that are either
tions — demonstrated how significantly
less toxic or more efficacious than
Chinese-based research facilities have
current drugs - that can serve the
emerged as key players in drug develop-
Chinese and foreign markets. Because
ment and clinical trials for global firms.
passage of Health Care Reform in the
An estimated 300 CROs are now operat-
U.S. extends the patent life for such
ing in China, and with annual growth
“me-better” products, developing new
estimated at nearly 20 percent per year,
treatments for known targets repre-
the industry’s revenue could readily top
sents a relatively simple means for
$600 million by 2012, according to recent
Chinese firms to gain R&D experi-
analyst estimates. Consolidation in the
ence and cash flow, as they build more
sector is likely over the next five years,
formidable life science teams.
as those research labs doing relatively
• As Western pharmaceutical firms unsophisticated chemical screening are
sense greater urgency to their need upstaged by those moving rapidly
to reduce costs and more quickly find

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Manufacturing Innovation
When it comes to manufacturing complex, large-molecule protein antibodies, you could say JOE ZHOU
helped write the book on the subject.
Zhou, who won his PhD in biopharmaceutical sciences from Queen’s University in Belfast, holds 10 pat-
ents, supervised process purification at Amgen Inc. in Southern California, and has written more than
three dozen research articles on process optimization for biological labs.
So in 2008, when he told his boss at Amgen that he intended to move back to China and build his own
biologics manufacturing facility, the response of his colleague, Tim Tressel, was tellingly straightfor-
ward. “Well, at least you aren’t going to Genentech,” Tressel said, referring to Amgen’s chief U.S. rival.
“It’s a great opportunity for you and for your country.”
Now as CEO of Shanghai-based Genor Therapeutics, Zhou is building an advanced and flexible contract
manufacturer for antibody and protein therapeutics in China, precisely at a time when monoclonal
antibodies, biomarkers and other large-molecule treatments are increasingly important to the prod-
uct portfolios of pharmaceutical firms around the globe. Until now, existing Chinese laboratories have
lacked the quality, capability and capacity to be competitive, most analysts believed.
Now Zhou may be changing that equation, almost single-handedly.
“My goal is to build better, not cheaper,” says Zhou, who can thank the giant Wison Corporation, a
US $1 billion energy and engineering conglomerate based in Shanghai, for wooing him to return to his
native country. Wison has invested about $15 million in his ambitions to build a world-class facility.
“There have been a number of bottlenecks for biological manufacturing in China until now, but we are
confident that the biologics markets will grow together with the Chinese economy,” Zhou says.
In the manufacture of small-molecule chemical compounds for conventional drugs, the chemical for-
mulation, not the actual manufacture of the pills themselves pose the greatest challenge. In producing
large-molecule biologics however, “the process is the product,” Zhou says. As Chinese and multina-
tional labs focus greater attention on developing “me better” or follow-on biologics—treatments that
focus on known targets, but which are less toxic or more effective than their predecessors—possessing
top-flight manufacturing capabilities for vaccines and antibodies could well become a crucial strategic
advantage for China. It is clearly signaling its intent to invest more heavily in gene therapies, vaccines

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and regenerative stem cells. And the recently enacted U.S. health care reform offers life science
firms additional incentives to target follow-on biologics for focused investment because the pat-
ent protections for these “me better” products has been extended by 12 years under the new law.
As he engineers and builds out his new facility, Zhou is able to take advantage of new technologies
like disposable bioreactors and filters that permit smaller production runs, faster product change-
overs and higher yields at smaller costs than previous generations of manufacturing plants could
achieve. He also has recruited more than 50 R&D scientists from other Western labs like Abbott
to turn his latecomer status into a potential advantage.
“We are at a pivotal moment in this industry in which we are moving from large dinosaur plants…
to much smaller facilities,” Tressel, Zhou’s former Amgen boss, explains. “You used to need a
7,000-liter reactor to make 10 kilograms of product. Now you can get by with a much smaller line.”
“I don’t think there’s any reason to think China can’t compete with us when it comes to manufac-
ture of vaccines and other biologics within three to five years,” Tressel adds.
Nor is Zhou content to simply manufacture antibodies and so-called fusion products for others.
While his unit has already signed contracts to produce large-molecule products for Western and
domestic firms, he intends for Genor to become a force in developing its own line of follow-on
biologic products. It might then be positioned to use the cash flow those sales generate to boost
the lab’s capability in drug discovery, especially in oncology and Alzheimer’s, diseases which
plague Chinese as well as foreign patients.
“Working on biosimilars will be the first number one goal,” he explains, “but there’s no reason we
can’t succeed in discovery a bit later, as we build out our capabilities. Most Chinese are copycats.
They aren’t innovative. But we are starting to do real innovation.”
“When it comes to emerging therapies like gene therapy, biomarkers and use of stem cells, we in
China are no further behind than anyone else,” he adds. “So we have lots of room to grow.”

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upstream into more sophisticated areas from international research programs,

of clinical and animal testing, where which will be able to access BGI
China will be able to achieve significant services without having to enter the
cost advantage over those operating in Chinese Mainland.
the West, where regulatory regimes are
Some experts in the field suggest this
more stringent and where drug testing on
massive investment will allow BGI to
animals is more politically charged.
achieve in genomic sequencing what
• China is also signaling that it intends China has already accomplished in
to stake a major investment in the many areas of manufacturing: the ability
emerging field of gene sequencing and to do it cheaper and faster than anyone
testing. Late in 2009, BGI, the former else, meaning there will be growing
Beijing Genomic Institute announced incentive for foreign firms to seek BGI’s
that it had placed an order for 128 expertise when it works on sequencing.
new high-performance DNA sequenc- The firm could also become the reposi-
ing instruments from the U.S. firm tory of choice for genomic data from
Illumina, based in San Diego, mak- across the globe.
ing this the largest sequencers order
In addition, “China’s sequencing power
ever initiated. (128 is a lucky number
has the potential to tip the balance in
in Chinese.) The purchases not only
innovation, the inventions and ideas
represent a stunning investment of at
that currently underlie the success of
least $60 million in this cutting-edge
U.S. biotechnology,” argues Dr. Jeanne F.
technology, but will give BGI nearly
Loring, a renowned stem cell researcher
twice the number of instruments as the
who is now director of the Center for
largest sequencing center in the United
Regenerative Medicine at the Scripps
States, the Broad Institute at MIT.
Research Institute, writing in the journal
By the end of 2010, BGI is expected
Science Progress. “China’s investment in
to have nearly 5,000 employees — not
sequencing will allow the country to build
all of them PhDs — working in Hong
a valuable intellectual property portfolio
Kong and Shenzen and has already
because new discoveries will be made at a
signaled its desire to seek international
furious pace,” she continued, noting that
collaborators as well as fee-for-service
the emerging field of epigenetics — which
clients. BGI is clearly creating a sig-
can help determine how “switches” in cells
nificant laboratory presence in Hong
can be turned on or off — will demand
Kong to cater to the expected demand
more intensive sequencing and computer

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resources than mere genome sequencing. cost labor, it seems likely that BGI may
Already the home of the world’s largest well create a very different model. At a
supercomputer, China is rapidly building time when the average age for first-time
the infrastructure to support integrated principal investigators on grants from the
computational biology on a massive scale. U.S. National Institutes of Health is 42,
this new experiment in human resource
“CHINA’S INVESTMENT management is likely to bear as careful
scrutiny as BGI’s broader research agenda.
IN SEQUENCING WILL
The investment strategy also illustrates
ALLOW THE COUNTRY how technology is becoming as important
TO BUILD A VALUABLE as medical insight in establishing new
paths for drug discovery.
INTELLECTUAL
With regards to embryonic stem cell
PROPERTY PORTFOLIO,”
research, China has also signaled a
NOTES ONE STEM CELL deepening commitment to investment
RESEARCHER and research. Chinese are now the
fifth largest publishers of peer-reviewed
Likewise, BGI’s model of employing papers on stem cell research in the
brute mechanistic strength in pursuit international scientific literature, and
of bioscience innovation is likely to test the Ministry of Science and Tech-
the corporate resources model typically nology has made up to $293 mil-
used in the West. Instead of demand- lion available for stem cell research
ing post-graduate life sciences training, alone between 2006 and 2010, with an
it is hiring about 500 college graduates additional $20 million per year being
to supplement its research team. Some contributed from the Chinese Academy
Western experts argue that such lightly of Science. The 12th Five Year Plan
trained technicians will be unable to grasp (2011–15) now being drafted is likely
the ethical aspect of their work, includ- to increase the level of spending on
ing the need for data integrity, protection such research to as much as $1.5 billion.
of confidential human subject data and
These scientists effectively benefit from
the maintenance of rigorous scientific
the fact that research rules governing stem
standards. But just as China transformed
cell research in China are significantly
manufacturing processes using lower-
more permissive than those in many

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jurisdictions in the United States, and competitive advantage in developing its

are more similar to what is permitted in own unique set of regulations and testing
Great Britain. These regulations permit standards to better fit the needs of a surg-
therapeutic cloning, the use of surplus ing Chinese market.
embryos or discarded fetal cells from
The U.S. regulatory approach to ensuring
abortions, and embryos created from
safety and efficacy which emerged follow-
somatic cell nuclear transfer or partheno-
ing the thalidomide debacle half a century
gentic split blastocytes, and in some cases,
ago well reflects the litigious nature of
the fusion of human genetic material with
American society. Since winning approval
nonhuman oocytes.
from the U.S. FDA is assumed to be the
primary objective for any new discovery,
THE SCALE OF THE based on the knowledge that the U.S. is
CHINA MARKET AND ITS the world’s most lucrative drug market,
MORE COSTLY HEALTH global practices have evolved to reflect a
U.S. registration standard. Hence CROs,
CARE CHALLENGES for example, must follow international
COULD LEAD TO A standards for animal and human testing
if the results are to be used for product
PARALLEL REGULATORY
registration in the U.S. Yet what might
PROCESS DESIGNED FOR be the impact if China were to adopt a
CHINA ALONE. different set of guidelines? Not rules that
were necessarily less scientifically rigor-
Firms already find it quicker and easier to ous, but instead were based on different
recruit naïve patients within China, and trade-offs between individual safety or
the costs of such recruitment are far lower animal rights. These rules might accel-
than in advanced nations. New and less erate development of a breakthrough
restrictive collaborations between univer- therapy capable of solving a large looming
sities, government labs and private firms healthcare threat, like diabetes or hepatitis
could help slingshot China into a leading C –much as U.S. scientists made unprec-
position in certain fields of leading-edge edented choices in the 1950s as they sought
research and discovery. And it is pos- to perfect the polio vaccine. The scale
sible that China might find significant of the China market and critical nature

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of its more costly health care challenges Chinese new credibility, she says, while
could lead to the development of a parallel government support for key labs as well as
regulatory process designed for the China targeted venture investment can accelerate
market alone. Further investment to satisfy the rollout of new platforms and collabo-
U.S. or European registration requirements rations needed to bring about successful
could come at a later stage. discovery. “You could say that Heaven and
Earth are all aligned.”
With all the government investments
taking place in the life science sector, it
is hardly surprising that venture capi-
Potential Risks to
talists and private investors are getting
China’s Life Science Boom
enthusiastic about putting money into WHAT COULD GO WRONG?
China, even as the IPO and stock mar-
Any prospective view of the future entails
kets in the United States have cooled.
uncertainties and risks. This is particu-
Investment firms like Orbimed, Qiming
larly true today as the world undergoes a
Ventures and Arch Ventures are establish-
tectonic shift: from an era in which the
ing themselves as key dealmakers helping
U.S. effectively sets the globe’s political,
Western-educated life scientists develop
economic, financial and scientific agendas
the business plans and funding neces-
to a century in which responsibility must
sary to build discovery-focused labs and
be shared-and may, in some cases be
bioscience startups. Orbimed and a major
redefined-by China. China will periodi-
international consulting firm sponsor a
cally stumble as it continues its transition
“business-plan” contest each year to help
on a path from a “century of humiliation”
life science professionals write their own
towards global leadership. Similarly, the
business plans and get funding.
U.S. will not easily adapt to a decline in
“There seems to be no question to me its relative power and authority.
that China is going to be a significant
As the future unfolds, tracking these
global player in new drug discovery,” says
uncertainties can help shape firm-
Nancy T. Chang, who leads the China
specific strategies and bring into sharper
investment team at Orbimed Ventures.
focus a vision of how the broader land-
“The creativity and innovation in China
scape will evolve.
are just beginning to emerge now.” The
surge of investment in clinical research
activities within China have already given

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1. Cross-border regulatory regimes. community and the flow of technology

Few industries are as regulated as and scientific insight across borders could
drug development and pharmaceutical be terminally undermined or irreparably
manufacturing, and in an ideal world, damaged unless China operates effectively
harmonization across borders would be within the current global IP regime - or
speedily achieved. But in reality, different develops a more attractive one.
approaches governing everything from
4. Chinese innovation policy. China has
clinical trial approvals to how biologi-
already attempted to impose its technical
cal materials are imported could create
standards on others in fields ranging from
unexpected barriers. A major scandal
Internet protocols to wireless telecom-
involving adverse reactions or deaths
munications. Multinationals might
among patients in a drug trial or the
find themselves scared off if they believe
biologic equivalent of an industrial acci-
Chinese officials will deny market access
dent would have major repercussions.
to innovators from other parts of the world
2. Drug quality assurance. World- unless they transfer new technologies.
class innovation can hardly thrive in an
5. Chinese life sciences policies. China’s
environment where drug counterfeiting
leaders could make policy choices that
is rampant and many legitimate, locally
emphasize short-term gains instead of
produced products fall below global
long-term investments in life sciences.
standards. China’s newly revised good
Officials in the capital may truly hope
manufacturing practices standards will
to centralize and coordinate a long-term
drive local firms closer to global levels, but
research focus on compelling diseases,
should lax enforcement and corruption
but immediate commercial opportunities
persist, risks remain that the industry’s
may prove too attractive to life science
credibility could be undermined.
researchers eager to make their mark.
3. Protecting intellectual property. A focus on “me-too” drug development,
Opportunities for entrepreneurial firms rather than on cutting-edge research,
to take root or for “seed level” research to could slow the momentum regarding
be funded could be hampered if Chi- true innovation within China (as it
nese policy-makers depart radically from has in the West) if, for instance, more
existing global norms. The economic investment is targeted at creating easier
aspirations of China’s budding life science “follow-on biologic” therapies rather

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than being focused on completely new The challenges and risk for policy makers
remedies and cell targets. A focus on are indeed formidable. But CEOs face
“fast followers” could also absorb criti- similarly dramatic threats from the risk of
cal talent needed to propel more basic inaction. The ability of Western compa-
scientific breakthroughs. nies to move rapidly enough to develop
deep firm-specific insights on the global
6. Unique cultural challenges. A growing
challenges and opportunities that Chi-
pool of Chinese researchers has learned
nese innovation will create — and then
from its collective experience in the West
to frame clear strategic choices on which
that aggressive, critical questioning;
they can act — remains perhaps the big-
creative, robust research; risky “out of the
gest uncertainty of all.
box” inquiry; and effective collaborations
can lead to superior scientific outcomes.
After generations of hierarchical thinking
steeped in the Confucian tradition, and
the formation of a Communist state that
brooked no dissent, will China be able to
recalibrate its education system to induce
innovative thinking? Will China’s politi-
cal leadership ratify and empower creative
questioning in the scientific and technical
realms, even if it still seeks to maintain
one-party control of the political agenda?
While some of these uncertainties will

be determined by uncontrollable exog-
enous factors, the most formidable risks
stem from inaction: failure of Chinese
policy makers to create a more effective
regulatory infrastructure, reform educa-
tion, allow public private partnerships to
drive research or defaulting to guanxi as
the primary driver behind allocation of
scientific resources.

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INTO ACTION
Now that China is positioning itself to leverage
its raw talents, economic muscle and outsized
ambitions to inculcate innovation and become
a powerhouse of life sciences discovery and
development, which strategic responses are the
most urgent and appropriate?
Since ours is an exercise in imagining the future — by definition a per-
ilous undertaking — we cannot offer definitive predictions. We don’t
own the future, nor possess all the right answers. Yet by systematically
probing within your organization — grounded in what you already
know and can infer about China’s likely life science future — a more
coherent strategic path, and fresh insights on new sources of competi-
tive advantage, are likely to emerge. One way to start this process is to
assess the gap between your current efforts and where you know you will
need to be within a few short years.
Consider these benchmarks:

1. Y
ou know that China is not just another emerging market, but
the fastest-growing pharmaceutical market in the world and soon
to become the second largest. It is spawning an emerging core of
world-class research talent. In industries ranging from simple tex-
tiles to complex electronics, it has already demonstrated its capacity
to drastically reshape the competitive landscape-usually far more
quickly than incumbent global leaders anticipate.
Ask: H
ave I devoted enough resources and capabilities in China to get where
my firm needs to be a decade from now? Have I clearly articulated how
I see that future? Opportunities in drug discovery, process innovation,
clinical trials and collaborative research will be qualitatively different
in China than in other emerging markets and could break more new
ground, more rapidly. How can we play and win? Roche, for instance,
recently reframed its global strategy to focus on patient needs in seven
leading markets. China weighs in at number three.

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2. Y
ou know that fragmented initiatives won’t get you there.
Ask: How well-aligned is my team on the future scenarios specific to our
business? Have we synchronized therapeutics targets, research teams and
management to build success in China? Have we differentiated ourselves
sufficiently? Are we gaining maximum leverage from our scale and
global reach?
3. Y
ou know the team is aligned, but you are convinced they are not sufficiently
ambitious.
Ask: W
hat are our core innovation capabilities and where are the gaps? How
can China help fill these gaps, particularly if we start with a blank piece of
paper? Such an exercise may demand that you conduct a deep assessment
of your firm’s core strengths and develop a more nuanced understanding of
how business — and specifically innovation — actually operates in China.
But an internal corporate team is almost certain to generate a handful of
incremental recommendations solidly anchored in the status quo. Try turning
the tables: use a team of young Turks and external provocateurs to evaluate
your R&D capabilities using the perspective of a Chinese firm that might
consider acquiring your existing global R&D infrastructure. See what sort of
breakthrough recommendations emerge from this radically different perspec-
tive. Use these to challenge the management team.
4. Y
ou know that China will generate or attract major new investments in indig-
enous discovery from both government and private capital.
Ask: W
hich of these resources do we most want to access and how do we position
ourselves to do that? How do we network ourselves properly to understand
the new partnerships, government programs and promising startups taking
shape? “Competitive intelligence” will no longer simply involve monitor-
ing the activities of other foreign firms, but will demand ongoing, internal
mechanisms to stay abreast of the cascading research emerging from univer-
sities, quasi-public research institutes and start-ups.

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5. Y
ou know the cultural metabolism of your company. Large organizations tend
to revert to the mean, reject foreign ideas and resist radical change.
Ask: H
ow do I ensure that our aggressive new plan to leverage China’s innovation
capabilities will be effectively implemented? How can we avoid haivng these
initiatives sabotaged by a “business as usual” mindset at the project team
level? What might happen if I give the China team its own “clean sheet of
paper,” sufficient resources and a series of strict deadlines — but also offer
them enormous research autonomy to attack the mission as they see fit? The
results — entrepreneurial research with “Chinese characteristics,” you might
call it — might surprise you. Another advantage: a wholly new “startup-like”
project which won’t compete with existing efforts, and likely would stir less
bureaucratic resentments back at headquarters.
6. Y
ou know that the life sciences industry faces an inflection point, and demands
radical new thinking.
Ask: H
ow can I tap some of the energy, entrepreneurial hunger and pragmatic
innovation now so visible across China to reinvigorate my own organization’s
competitive metabolism? Whole new industries are being forged overnight
by driven and energetic minds who seek opportunity in an environment
seemingly teeming with limitless opportunities. How then do I let a bit of
this “Chinese virus” infect my own firm?
In the next two decades the best companies won’t just sell
to China. They will also learn from China.

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A UNIQUE CONFLUENCE OF FORCES SETS THE STAGE FOR CHINA TO TAKE A

LEADING — AND POTENTIALLY DISRUPTIVE — ROLE IN LIFE SCIENCE INNOVATION.

ABOUT THE AUTHORS

Copyright © 2010 Monitor Company Group Limited Partnership.

CHINA, THE LIFE SCIENCES LEADER OF 2020

CHINA’S LIFE SCIENCES FUTURE: SCENARIOS

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CHINA, THE LIFE SCIENCES LEADER OF 2020 3

of commercial and research opportuni- will be qualitatively different in China

These findings suggest that opportuni-

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CHINA, THE LIFE SCIENCES LEADER OF 2020 5

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China? The revenues generated from By 2020, we believe, it will be a critical

CHINA, THE LIFE SCIENCES LEADER OF 2020 7

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CHINA, THE LIFE SCIENCES LEADER OF 2020 9

How China Changed

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CHINA, THE LIFE SCIENCES LEADER OF 2020 11

Continued from page 9

• Massive state investments. New govern- • A magnetic entrepreneurial setting.

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CHINA, THE LIFE SCIENCES LEADER OF 2020 13

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China Healthcare Reform Goals

1 Achieve Universal Healthcare

2 Improve public healthcare provider system

3 Manage healthcare cost

Source: Ministry of Health

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Source: Chinese-American BioPharm Society

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A Life Science Entrepreneur

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As the diffusion of technological data In addition, groups of Chinese-born

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1. Wild Flowers Bloom: 2009¬2012

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2. Planting the Garden: 2012¬2015

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3. Cultivating the Seedlings: 2015¬2020

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4. Steady Harvest 2020¬2025

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Continued from page 21

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CHINA, THE LIFE SCIENCES LEADER OF 2020 27

One of a Thousand Talents

After a decade at Princeton, he held an endowed professorship of molecular biology, supervising

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The Health Minister

Continued from page 27

Buoyed by the revenues from its enor- A Latecomer’s Advantage

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government spending will also acceler- Already China’s pharmaceutical industry

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