The transformation of biomedical industry in China: from academic affair to commercialization.

• Author: Wu, Xiaohong

ABSTRACT

China was the only developing country that participated in the human genome project and contributed 1% of human genome sequencing in 2000. And it finished rice genome sequencing independently in 2002. China's biomedical industry, however, remains largely an academic affair. The industry is characterized by its inability to support and commercialize innovative research, which in turn has resulted in the prevalence of generic drugs. Managers of Chinese firms have been focusing on the short-term profits that can be generated by generics rather than the longer-term potential profits arising from innovative research. But the viability of such short-cut strategy is now called into question as the IPR infringements will mean hefty fines to the violators in the wake of China's WTO accession. There is hence an urgent need to make the timely transformation from academic affair to commercialization. This paper examines the reasons why biomedical industry remains largely an academic affair in China by stacking China against the key success factors of biomedical industry in the world. It then suggests the ways to make the transformation by filling the gap between basic research and commercial products and cultivating the necessary business environment for biomedical drugs in China.

Key Words: Biomedical, Commercialization, Biotech Industry, China

INTRODUCTION

China was the only developing country participated in the human genome project and contributed 1% of human genome sequencing in 2000. And it finished rice genome sequencing independently in 2002.

China's biomedical industry, however, remains largely an academic affair. The conversion rate of biotech research into commercial product is less than 0.5% (China Biotech Industry Development Report 2005). Inability to support and commercialize innovative research has resulted in the prevalence of generic drugs. Managers of Chinese firms have been focusing on the short-term profits that can be generated by generics rather than the longer-term potential profits arising from innovative research. Most companies that bother to invest in R&D only aim at improving and modifying existing formulations in areas like improving production process, dosage form variety or other "fine-tuning" process. Only a few manufacturers are actively involved in primary R&D. As such, 97% of China's bioengineering products are mere copies of foreign products (China Biotech Industry Development Report 2005).

But the viability of the short-cut strategy is now called into question as the IPR infringements will mean hefty fines to the violators. WTO membership obliges China to grant exclusive marketing rights for new medicines through 20-year patents. Foreign companies will be able to lodge compensation claims, ranging from US$400 million to as high as US$1 billion, if a patented new medicine is still in its protective period when copied. On the other hand, paying production licenses for newly patented medicines will cost--at minimum--US$5-6 million. Either way, the price for Chinese generic drug producers, will be highi. The only way out is to win in their own biomedical research, development and commercialization. This is pushing leading industry players to strengthen their support for commercializing innovative research by bridging the gaps between academic research and the industry. In other words, increased international competition and WTO compliance call for the industry's timely transformation from academic affair to commercialization.

This paper first examines why biomedical industry remains largely an academic affair in China. It then discuss what will facilitate the transformation of the biomedical industry in China.

BIOMEDICAL INDUSTRY: KEY SUCCESS FACTORS (KSFS)

THE NATURE OF BIOMEDICAL INDUSTRY

Biomedical is characterized by long-term, high-cost and high risk in drug development with huge potential return. It takes 10-15 years on average to develop a new medicine from the earliest stages of compound discovery through regulatory authority approval with cost now estimated at US$1 billion (Pharmaceutical Research and Manufacturers of America 2006; Szaro 2006). (see Figure 1) Majority of the drugs that enter clinical trials fail to reach market due. For every 5,000-10,000 compounds tested, only one receives FDA approval and becomes a new treatment (Pharmaceutical Research and Manufacturers of America 2006). Blockbuster drugs, on the other hand, can generate billions of annual sales with 20-year patent protection. (see Table 1)

[FIGURE 1 OMITTED]

As biomedical provides a more customized approach to medicine, it will revolutionize healthcare by providing better disease prevention, prediction, and management. In fact, disease prevention and management for the elderly and people with chronic condition is one of the key drivers of biomedical research. 195 drugs have been approved by FDA, and over 370 late-stage product candidates are in the clinic or awaiting FDA approval (Steven 2004).

KEY SUCCESS FACTORS (KSFS)

The success of biomedical industry depends on the industry's ability to convert basic scientific discoveries into commercial products and the ability to shorten timeline to profitability. The key success factors are interlinked, and base on the author's own research, can be summarized in Figure 2.

[FIGURE 2 OMITTED]

THE ABILITY TO CONVERT RESEARCH INTO PRODUCTS

The ability to convert basic scientific discoveries into commercial products hinges on the following factors:

* Markets: large market that pays premium price for innovative drugs. Given the high-cost of bringing a new drug to the market (estimated at over US$1 billion), what really concerns the industry can be boiled down to a single and overarching question: How do we pay for the cost of developing new drugs? (Szaro 2006)

The U.S. consumers have been known for their willingness to pay premium price for innovative drugs as the country is aging and 125 million Americans have one or more chronic conditions (e.g. congestive heart failure, diabetes). Per person, seniors consume about five times the drugs of their working-age counterparts. And chronic diseases account for 75% of all health care expenditure in the U.S. (Steven 2004).

* Money: Multiple channel financing, including pharmaceutical companies, venture capital, and IPOs, are needed to finance many of the players for fifteen to twenty years before they are profitable and self-sustaining. A recent biotech industry survey found that the availability of financial resources (71%) and financial incentives (76%) were critical or very important factors for the success of the biotech industryii. Government funds can push a project's initial research and development, but they are insufficient to pull the production through clinical trials, manufacturing scale-up and commercial launch, all of which cost hundreds of millions of dollars.

New investments, especially those from the capital markets and venture capital, are typically awarded to companies with near-term commercial opportunities targeting large patient populations, as investors have demonstrated a greater proclivity for investment in companies based on expected returns within their investment horizons, rather than on excitement about scientific potential, especially in the wake of the burst of dotcom booms in the early 2000s (Szaro 2006; Hildreth 2006; Ernst & Young 2006a; Sasson 2005; Baskaran et al 2006).

Such proclivity explains the continued success and stability of the US biotech industry, as the US biotech sector consistently deliver strong product approvals and solid financial results (Sasson 2005; Hildreth 2006). Standing at US$344.4 billion, the market capitalization of the U.S. biotech was over ten times that of Europe in 2003 (Steven 2004).

* People: a rich supply of full-dimension talents who are versed in both technological and commercial operations to facilitate the linkage of key components throughout the value chain.

The industry was made possible by key scientific breakthroughs, but it took the vision of entrepreneurial scientists to make the connection between advances in the lab and the potential for commercial applications. In the US, many of these breakthroughs, and the founder of the sector's earliest companies, came from academia. Others left jobs at big phama, willing to mortgage their future on the growth prospects of fledging companies that were pursuing cutting-edge ideas with dreams of reinventing medicine (Ernst & Young 2006a). Such an endeavor between the research and bio-industry accelerates the commercialization of the discovery work, which in turn further strengthens the strategic alliance between politics, basic research and the pharmaceutical industry (whether biotechnological or not) in U.S biotech clusters. In fact, there is a dense network of investors, business angels, ventures and banks ready to get involved in the setting up if companies (Sasson 2005).

* Public policies that foster commercialization: IPR protection and generic drug regulation, for instance, are needed to support company's ability to recoup R&D cost and to maintain R&D incentives.

In the U.S., supportive government policies helped bridge crucial gaps in biotech development. Apart from stringent IPR protection and generic drug regulations, laws like the U.S. BavhDole Act and Prescription Drug User Fee Act (PDUFA) unshackled biotech companies, giving them incentives to innovate and enabling them to bring drugs to the clinic more quickly (Szaro 2006). The number of drugs in clinical or later development more than doubled from more than 1,300 in 1997 to more than 2,700 in 2005 (Adis R&D Insight 2005). On the contrary, the number of drugs in development has declined in Europe where rigid government policies, including price controls and access restrictions, have discouraged continued pharmaceutical discovery (Adis R&D Insight 2005).

SHORTEN TIMELINE TO PROFITABILITY

Despite the growth in drug pipeline...