Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
Other forces have converged on the demand side to grow China’s per capita annual health care
spending by 20% and drug sales by 28%—four times the worldwide average:
� A strong economy
� Government health care reform initiatives
� An expanding private insurance market that encourages new medicines and technologies
� An aging population
� Pandemic scares such as SARS and avian flu
� Dietary and social changes leading to AIDS, diabetes, heart disease and other illnesses.
Taiwan and the PRC have aggressively targeted life sciences investment with government incentives,
including research grants and loans; tax credits for R&D, new facilities, equipment and
training; import and business tax exemptions; and development of life sciences technology clusters.
But questions over intellectual property protection and ability to meet global compliance
standards for drug development continue to shape and constrain foreign investment.
A number of fund managers contacted for this report indicated that biotech would likely feature
prominently in new funding rounds, in part because of the opportunities outlined above and in
part because the semiconductor, IT and internet sectors are beginning to look oversubscribed.
Dr. Jonathan Wang, greater China general manager at Burrill & Co., sees opportunity in active
pharmaceutical ingredients; gene therapy; and production of testing compounds. But the most
promising area so far for foreign investors has been preclinical research. Wang notes that China
is developing quickly as a center for innovation, based on scientists trained in the Bay Area and
elsewhere in the U.S. who have returned to China, often maintaining research facilities in both
countries. Looking at the China market, he sees health care spending growing 15–20% per year,
and pharmaceutical sales growing much faster than the global average—28% vs. 7%.
Cost Control for Drug Research
The opportunity for cost control in drug research is another factor playing to China’s advantage.
Preclinical drug development costs in Taiwan and the PRC are 40% and 25%, respectively, of
comparable costs in the U.S. Companies can draw from a nationwide talent pool of some
200,000 research scientists with strong, though perhaps not cutting-edge, skills. China has large
numbers of “naïve” patients with no previous exposure to any drugs, who are particularly valuable
in human trials. Animal and stem cell research do not face the same obstacles as in the U.S.
and the quality of data coming from pre-clinical and clinical trials is high. These factors are important
for pharmaceutical and biotech companies where the time from discovery to market can
take as long as five years, stretching the funding from investors. In these conditions time is
money, and shifting trials to China has proven an effective way to save both.
Epitomics Inc. of Burlingame produces monoclonal antibodies for medical research, diagnostics
and therapeutics, with a unique technology using rabbits instead of rats. In 2004 the company
rented and built out a 20,000-square foot laboratory outside Shanghai, with clean rooms, in
only six weeks rather than the approximately nine months it took Epitomics to set up in Silicon