Chinese Biopharm Investment Moves Rapidly Up the Value Chain - Japanese and Western biotechnology companies are moving beyond joint ventures to take majority ownership in Chinese companies. - BioPharm

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Chinese Biopharm Investment Moves Rapidly Up the Value Chain
Japanese and Western biotechnology companies are moving beyond joint ventures to take majority ownership in Chinese companies.


BioPharm International
Volume 19, Issue 9

FROM OUTSOURCING TO INVESTMENT

The evolution that occurred at GNI was initially driven by the need to outsource. The high-end validation work GNI was doing in Japan and the United Kingdom was expensive, and the company had grown to understand that it could achieve the same quality result working with Shanghai Genomics at a fraction of the cost of working in Japan or Europe.

But as the value of the work rises, so do the stakes. If a company is going to expose its IP or invest its critical research and development budget in China, it needs a capital structure that goes beyond the "forced marriage" joint ventures that Kent Kedl describes.

This is what happened at GNI. Savoie notes that GNI's investors were wary of investing such a sizable portion of the company's research and development budget on a Chinese company without exerting more control.

"We were told if we could get equity, we could spend all the money we want," Savoie said. Venture-backed Shanghai Genomics was also game, since the acquisition by a Japanese firm offered an exit for investors through the Japanese market.

Hence GNI-Shanghai Genomics was born (through a June 2005 merger)—out of necessity and mutual advantage. The GNI experience illustrates the progression that is taking place all around. As Chinese companies move their own skill sets up the value chain—from relatively low-value testing to higher-value validation work, for example—the nature of the work that companies in biopharm and other industries will source in China will also move up the scale.

When GNI and Shanghai Genomics announced their merger last June, it established GNI's footprint in China through controlling equity in a Chinese company, rather than through one of the joint venture alliances that had been unsatisfactory for so many companies. GNI is headquartered in Tokyo and has operations in the United Kingdom, China, and the United States. Savoie cautions that China is not a market that will provide easy money to those more skilled at leveraging financial markets than running companies.

"A lot of people think China is a panacea," he cautions. "It is not for capital gains investment or financial flips. The way to make money in China is to make money."

GNI's involvement in China is not just about achieving the same or better quality service at a lower cost. Savoie also sees a great opportunity to market its products in China.

"China is an aging society," he says. "There is a huge need to fulfill demand— lifestyle drugs for cholesterol, hypertension. There may be a product liability risk, but there is virtually no market risk."

GNI, which has operations in China, Japan, the United States, and the United Kingdom, develops therapeutic pharmaceutical products internally and in collaboration with other pharmaceutical companies, with the assistance of gene regulatory networks and systems pharmacology techniques.

GNI continues to expand its China reach. Last month it agreed to form a strategic alliance with Beijing Continent Pharmaceutical Co., Ltd., by taking a minority stake in the Chinese pharmaceutical sales and manufacturing company.

GETTING CLOSER TO THE CUSTOMER

In 2005, Qiagen, which provides technologies and products for preanalytical sample preparation and molecular diagnostics solutions, significantly expanded its position in China. First, Qiagen expanded its sales presence in China by adding what is called a "representative office" in Shanghai to support its existing distributor, Gene Company (Hong Kong).

Qiagen's Martin Potgeger, associate director, business development, who led the company's acquisition efforts in China, says the decision to expand to a "representative office" was all about gaining closer access to Qiagen's customers.

"The distributor just gives you the revenues back," Potgeger says. "You have no contact with the customer. That is why we have created a representative office in Shanghai. A representative office cannot sell; it can only support the existing distributor. The advantage is that you gain a much better picture of the needs and limitations of the market."


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