Nearly everyone who does business in China these days can harken back to their "aha" moment. That’s that time when, on your first trip to the Middle Kingdom, you are awed by the countless millions on the streets, the skylines that are all cranes, the new highrises scraping up against the smog, and by the energy and ferocity of China’s meteoric rise. You realize that they may be right: this is the center of the world and this is the place to be.
Not just because being at the center of an explosive force is, well, fun, but also because there’s a sense that if you want to do business in China, the opportunities right now are colossal.
Joe Panetta first visited China in November 2009. As the president and CEO of San Diego’s BIOCOM, a trade group representing Southern California’s life sciences industry, he knew certain San Diego companies were already making inroads there, and wanted to see what China had to offer. He was impressed.
"As China begins to advance the quality of their health care programs, we’re going to see the emergence of enormous markets. Right now they’ve decided to develop biotech, and they will do it."
San Diego biotechnology companies are doing relatively well right now, at least compared to the rest of the country. Venture capital investing here increased by 16 percent in the second quarter of this year, according to an August report by PricewaterhouseCoopers. Nationally, venture capital investment in similar companies fell by three percent. Still, for key parts of this industry, like small drug development firms just starting clinical trials, or large life sciences companies with a product line to sell, it’s a critical time to get into the China game.
Chinese economic planners are showering the medical and biotech sectors with billions in state investment. They are building whole new cities devoted to medical research. That’s the advantage of a state-directed economy. While drug development and biotech innovation continue to face challenges in the U.S., due to funding shortfalls from the federal government and a slow regulatory process, in China, biotech innovation is the flavor of the month.
According to a 2010 report by Monitor Group, a global management consulting firm, China is "poised to become the global leader in drug development and life science innovation within the next decade."
Kai Zhang and Micheal Niesman
There are many San Diego-based biotech and life sciences companies that have figured this out. Life Technologies of Carlsbad is a good example. The global biotech firm manufactures tools for fundamental research in the life sciences. They’ve been operating in China for seven years, but with a staff of 800 across the country, they’re banking on the expansion of the health care market there, and on increased sales to local Chinese companies doing research and development. While sales are slumping, or are in single digits everywhere else, in Asia, Life’s sales were up 15 percent in 2010.
Still, expansion into an emerging and volatile market like China doesn’t come without a few bumps. In August, Life announced layoffs worldwide. A "challenging economic environment" was one publically disclosed reason, but another was a failed strategy to boost sales in China by bypassing an already established network of Chinese dealers outside the company.
The company says it expects sales to surge back shortly, however, with a greatly expanded sales force and warehouse capacity. "Greater China plays an important role in Life Technologies’ overall strategy," says Dr. Siddhartha Kadia, the Greater China president for Life Technologies. "With a full spectrum of biotech products and services, China presents a large opportunity for us."
Life doesn’t just peddle lab kits in China; they are also helping to provide critical technology to Chinese researchers, just as they are about to take off on a revolution in medical diagnostics. Life manufactures the Ion Torrent, one of the fastest and newest gene sequencing machines in the world. One of Life’s customers in China is the Beijing Genomic Institute (BGI), the world’s largest genome center. BGI has purchased two of these machines, along with many other gene sequencers from San Diego-based Illumina. With more gene sequencers, and more than 3,000 scientists and technicians to work with these machines, the companies have essentially taken the Chinese manufacturing model—the one that drove most textile manufacturers in the U.S. and elsewhere out of business—and applied it to bio-diagnostics: Supersize the lab, make it cheaper, and become a world leader in gene sequencing in less than a decade.
What this new gene sequencing ability can do is pinpoint a diagnostic opportunity—a genetic flaw that leads to disease, and that therefore can be a research target for drug development. Most experts believe that’s the direction that medicine is moving, and China, with the help of Life Technologies and other foreign firms, wants to get there first.
Of course, San Diego companies have a lot of competition in this exploding Chinese market. But we do have some advantages. One of them is sehai gui, or "sea turtles." They are Western-educated Chinese scientists—some 80,000 of them—who circulate between this country and China, using the scientific expertise gained here to work and prosper in the bioscience industry there. San Diego, with its concentration of advanced biological study institutes like UCSD, Salk Institute, and Scripps Institute, has spawned more than its fair share of sea turtles.
What are they going back for? To make millions. A few figures to play with: $124 billion, billion, as part of the government’s ambitious reform plan to upgrade the public health system across the country over the next three years. And $12 billion, in China’s 12th Five-Year Plan, dedicated to biotech research and development alone. That’s a relatively secure pipeline of funds for at least the next five years.
It’s that kind of real money that has drawn the likes of Greg Scott of ChinaBio, a San Diego- and Shanghai-based biotech consultancy. Scott was an angel investor in biotechs until 2006, when he first visited Shanghai.
"Something exciting is going on here," I thought. "I’m not sure what it was, but I made the instant decision, this is where I wanted to be."
Scott set up an office in Shanghai and another office in San Diego in 2007. His company is now the chief organizer of investor forums for Chinese and Western biotech and pharmaceutical companies. ChinaBio also consults with American and European companies wanting to come into the Chinese market. Business is doing so well that Scott and his partners have now established their own merchant bank in China to bankroll further biotech development.
Although he loves the challenge, Scott admits the pace of change and development is daunting. "The main thing that people need to understand about China is ‘China speed.’ We have to do things three times faster than we’d have to in the U.S. And we have to move very fast to stay in front of the game. Others are coming in and it’s getting noisier all the time."
Scott is the first to admit that it’s fun being at the center of this hurricane, especially compared to the doom and gloom of the U.S. economy. "In San Diego and throughout the U.S. we see a lot of companies struggling. They have a product, but are not growing as fast as they could and are having difficulty raising money. What we say is, we can raise the money here. With the help of the government agencies we work with we can quickly get them started in China and put cash in their pockets."
That’s not exactly what happened to another San Diego company, but close. MingSight Pharma had a product, but no way to develop it. So MingSight went to China to find partners to fund research and development. Just last month, the very young company announced that they had acquired the worldwide rights from Pfizer to develop, manufacture, and commercialize two new compounds to treat diabetic eye disease.
The compounds were originally developed at Pfizer here in San Diego under the watch of Michael Niesman. When Niesman left that company in 2009, he went in search of partners to help him continue to develop these key compounds. He found those partners in Kai Zhang, a Chinese-American businessman and physician, and in a Chinese pharmaceutical company back in China. That joint venture gave MingSight the financial backing it needed to go back to Pfizer and buy the rights to continue experimenting and developing these compounds.
And here’s another critical part of the Chinese biotech game: contract research organizations, or CROs. Outsourced labs, these CROs do basic research for domestic and foreign biotech and pharmaceutical companies. They’ve proliferated to the point of becoming a potent industry in China over the past few years. By 2015, some estimates say, 25 percent of global biotech research and development will be done in China.
Niesman and Kai Zhang’s plan with MingSight is to continue, at a Chinese CRO, the very promising research and development begun on these compounds by Pfizer, and to take them through successful clinical trials.
"The long term goal is to get good data in China and to use that data to convince Western pharmaceuticals that we would be a good company to purchase for the worldwide licensing rights to this compound," says Niesman.
In other words, develop the compound in a cost-effective manner in China, and then flip it, like a newly renovated Hillcrest Craftsman.
Many industry observers see a virtual company like MingSight as the wave of the future as big pharma and biotech in this country are more and more streamlined. Funding from cash-rich Chinese firms, intellectual capital from U.S. innovators, research and development muscle in
Chinese CROs, all add up to a new kind of speedier, cheaper drug development model.
Speed. That’s the key concept that comes up over and over again when discussing China and the biotech world. Its all happening very fast and if you’re not in there now, move quickly. That’s what BIOCOM’s Joe Panetta has been preaching since 2009. He’s more convinced than ever that the time to engage with China is now—or maybe, yesterday.
"We know the opportunity exists, we know where and with whom. The challenge is to get in now at the early stages. [Many San Diego companies] are watching and waiting, sitting on the sidelines. We need to appreciate how quickly things are happening. We don’t want to miss the train because it’s left the station."
THE SCIENCE DEFINED
Biotech or biotechnology: Applied biology using living organisms and bioprocesses to engineer new technologies and medicines.
Life sciences: The industry that uses technological advances in molecular biology and biotechnology to develop new products to advance health care and diagnostics.
Angel investor: An affluent individual or a network of individuals who provide capital for a business start-up.
Contract Research Association (CRO): Also called a clinical research organization, CRO is a service organization that provides research support to the pharmaceutical and biotechnology industries.
Clinical trials: A set of procedures in medical research and drug development that are conducted to determine the safety and efficiency of a new drug or medical device. There are a number of stages new compounds must go through in order to get FDA approval for sale in the US market.
Medical diagnostics: The process of identifying a possible disease or disorder.
Gene sequencing or DNA sequencing: Determining the order of the nucleotide bases—adenine, guanine, cytosine, and thymine—in a molecule of DNA. These sequences are critical for basic biological research, diagnostics, biotechnology, and forensic biology.