Press Release
February 15, 2006

BOSTON - Biopharma in China is booming. Already growing rapidly, China will likely leapfrog many Western European markets to emerge as the world's fifth-largest national market for pharmaceuticals by 2010. Biopharma R&D in China is also keeping pace. Stimulated by government spending, leading multinational pharmaceutical companies (MPCs) are playing a key role by outsourcing chemistry-based R&D to China. These companies must now decide whether to raise the stakes, The Boston Consulting Group (BCG) concludes in its recent report, A Game Plan for China.

"The decision how and when to invest in R&D in China is a strategic choice," asserts senior vice president John Wong, regional chairman of BCG's Asia-Pacific region and a coauthor of the report. "By investing more heavily and in more complex areas of R&D in China, an MPC can signal its commitment to the Chinese market and strengthen relationships with key opinion leaders and officials there -- thus increasing its chances of thriving in the health care market now taking shape in China."

Greater R&D investment in China likely won't achieve major cost savings for global biopharma companies, however, even though these companies might relocate lab work and clinical trials from North America or Europe to capture lower wages, rentals, and overhead. "Not only is there a cost incurred by relocating Western staff and importing research equipment and supplies, but -- even more important -- there are inherent costs in lost productivity as the leaders of new lab sites negotiate language, cultural, and regulatory differences," said Kim Wagner, a BCG vice president and another of the report's authors.

Additional challenges include: training and optimizing the large but raw talent pool; driving local providers to meet international quality standards; wrestling with regulatory and bureaucratic burdens; and last, but by no means least, navigating the minefield of a still-evolving environment for the protection of intellectual property rights.

By 2010, China's market for pharmaceuticals will likely reach $25 billion -- almost double the current total. Furthermore, total pharmaceutical sales in China for the top ten MPCs registered a compound annual growth rate (CAGR) of 15 percent from 1999 through 2004.

In fact, China is currently a hotbed of R&D investment, in part because the Chinese government is encouraging high-tech R&D through tax concessions and other incentives. In particular, China has placed a special emphasis on fostering biotech applications and innovative drug discovery.

As a result of these actions and the concerted investments in China by MPCs, China's R&D expenditure boasts a CAGR of 24 percent during the four-year period from 1999 through 2003 -- more than double that of India. During that same four-year period, pharma patent applications from local Chinese companies rose from 283 a year to 1,696 a year. Today, approximately 30 innovative drugs are in preclinical development or actual clinical trials in China. "Taking a long-term view, we fully expect China's eventual emergence as a full-fledged R&D hub in any global network," Wong said. "Capabilities in chemistry and clinical research are already well established with great potential for rapid growth in biology and preclinical development."

As MPCs proceed, however, they must bear in mind that their actions today may have game-changing implications down the road -- negative as well as positive. That's why the report outlines issues that MPCs will need to consider as they decide which types of research activities and topics warrant further investment, as well as which business models and organization structures will foster success.

"Flexibility," BCG vice president Simon Goodall advises, "is the key to any China game plan. The breathtaking year-by-year advances of China's economy make it likely that pharma R&D capabilities in China will expand dramatically. As a result, MPC decision makers must try to cater to that expansion by formulating plans that are not just clear but also flexible. That's the only way that MPCs can make all the necessary moves -- resizing local operations, for example, or redefining the role of a research center -- quickly enough to capture the greatest opportunities."

A Game Plan for China is the latest in BCG's series of reports examining R&D productivity in the pharmaceutical industry. Three previously released companion reports analyze in greater depth the individual prescriptive measures that are outlined in the framework described above. Future publications in this series will cover the opportunities in India, as well as other approaches for enhancing Biopharma R&D productivity.

Source: The Boston Consulting Group