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Drug firms seeing China R&D deals as market entry point - BCG

02.17.2006, 12:02 AM

BEIJING (AFX) - Global pharmaceutical companies are increasingly looking at reseach and development (R&D) deals as ways of securing footholds in China's drug and medical supply market, The Boston Consulting Group said.

'Offshoring R&D to China is less a route to near-term cost savings than a long-term play in a growing commercial market and future R&D center,' BCG said in a market report.

The consultancy said the biopharmaceutical industry in China is booming, and multinationals are keen to establish an early presence.

'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, as China will likely leapfrog many European markets to emerge as the world's fifth-largest for pharmaceuticals by 2010,' BCG said.

Establishing R&D operations and marketing channels are important, but making key contacts with government and industry officials was also critical to establishing an early critical mass in China's health care product market, BCG said.

'The decision how and when to invest in R&D in China is a strategic choice,' said 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,' he said.

But research cooperation will hold out few commercial advantages for foreign partners in the short term.

'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,' the report said.

'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.

'By 2010, China's market for pharmaceuticals will likely reach 25 bln usd -- 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 pct from 1999 through 2004,' the report said.

BCG sees China achieving a true global presence in pharmaceutical R&D operations.

'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.'

andrew.pasek@xinhuafinance.com