The Great Call of China

Authored by Susan Macdonald

Pharma companies are flocking to China in the manner of some latter-day gold rush. It isn't hard to see why. Labour costs are lower and so are most other costs. Not only is it cheaper to manufacture in China, it is also cheaper to do drug development.

That's not all. There is a host of other advantages to encourage companies to operate in China. Consider some facts.

In 2006 China accounted for $2.2 billion of the global spend on R&D; it expects that to grow to $10 billion by 2010. According to the BBC, it has already passed Japan for R&D spending. Its R&D budget is growing at 20% p.a.

The country has moved ahead of India in numbers of registered clinical trials being conducted. In 2007 they were virtually level at around 270. By July 2008 China had completed 870 compared with India's 737, according to a report by PWC. (You get slightly different figures if you go to clinicaltrials.gov, but the trend is clear.) Whilst this is small beer on the global scale of such things, the numbers - and the rate of increase - are climbing rapidly. That's hardly surprising when you learn that the cost of drug trials in China can be as little as a tenth of what it would be in the USA or Europe. As well as that, researchers in China are far less expensive to employ. Often American-educated, the scientists in China tend to earn around half the salaries of their equivalents in the USA or Europe.

China's huge patient populations also mean that there is a ready supply of subjects for clinical trials. The country has millions of people with chronic and infectious diseases including cancer, diabetes and heart disease. Without clinical trials many of these people would have little hope of treatment for their suffering, still less of being able to afford it.

China's huge population makes it a growing market in its own right: it bought $13.6 billion worth of medicines in 2006 - a figure expected to double by 2010. Some commentators are predicting that the figure will be around $200 billion by 2017.

Of course firms moving to China still have concerns about their intellectual property rights, but China is showing signs of willingness to tackle this issue. In October 2007 a Chinese court ordered a local company to cease using Pfizer's logo on its website and slapped a $25,000 fine on the offender. Another Chinese court awarded Pfizer the right to maintain patent protection on its erectile dysfunction treatment, Viagra, until 2014. The CEO of Novartis is one who has spoken warmly of China's "enlightened" patent laws. Many new entrants to China would echo the sentiments of Daniel Vasella when he said: "The Chinese (authorities) have made tremendous progress and taken the steps to show they have the right priorities."

By way of contrast, an Indian court ruled against Novartis in August 2007 in its attempt to protect the patent on its leukemia treatment, Gleevec (Glivec). Novartis will now implement its plan to shift trials away from India and invest more in China than it does in India, according to its CEO. Many commentators have said that India has shot itself in the foot with this decision and ensured that its pharma future would now be as a generics house.

All this might lead you to believe that the many challenges you have heard about concerning doing business in China have somehow evaporated. They haven't.

Protecting intellectual property rights remains a concern. Whilst Pfizer has won a few cases it has also lost a few so there is a long way to go. Nonetheless it is encouraging that the Novartis CEO can say some complimentary things about China's patent laws. And let's not overlook the fact that China now has a State Intellectual Property Office - a huge step forward from what we have known in the past.

On balance the benefits of operating in China far exceed the risks, though the cost of vigilance is high. The pharma companies that have set up there have done so with their eyes wide open.

Meanwhile what does the great call of China mean to the service businesses that support the pharma industry? Put simply, it means many of them have to answer the same call. If your clients set up in new places, you must follow; a service business needs to go where it can continue to serve its clients. That's what one company in the executive search business is doing. RSA has embarked on a joint venture to help global clients identify and retain the key executives they need to support their business growth in China. It has teamed up with Foster Partners, an executive search firm with 15 years' experience and 11 offices in China.