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.
Sep 01, 2006
Volume 19, Issue 9

Joshua Brandt
For most Western and Japanese biopharmaceutical operations, the question is not whether to enter the vast Chinese market, but how. The evolution of the Chinese market in recent years has given biopharm executives many options to consider.

Kent Kedl, coauthor of The China Ready Company and a partner at Technomic Asia (Shanghai and Chicago), a firm that guides companies investing in China, describes the market's evolution this way:

"Ten years ago, a company that wanted to make a direct investment was forced to go into joint ventures, which were often arranged marriages from hell. Now, companies can step back, look at the marketplace and choose the best strategy, whether it's a green field, joint venture, licensing deal or acquiring somebody. It has really opened up."

Scientists at GNI-Shanghai Genomics' laboratory in Zhangjiang Hi-Tech Park use state-of-the-art equipment.
Most Westerners' notions of their economic relationship with China focus on using inexpensive Chinese labor to manufacture consumer items—from toys to housewares—and exporting the finished goods from China to the United States, Japan, or Europe.

Japanese and Western companies, including those in biopharm, are forging a far richer involvement in the Chinese economy to take fuller advantage of China's rapidly growing consumer market.

China's gradual relaxation of its historic opposition to foreign ownership of companies operating in China, makes it easier for Western companies to pursue capital that is structured more to their liking. This also propels further investment.

Quick Recap
We can see this evolution at work in the experience of two foreign biopharm concerns with deepening Chinese operations.

  • The Japanese-Anglo pharmaceutical firm GNI, Ltd., (Tokyo) once outsourced testing services in China. Last year it merged with the Chinese firm Shanghai Genomics (Shanghai) to create a solid foundation for developing products to the burgeoning Chinese healthcare market.
  • German pharmaceutical concern Qiagen (Hilden, Germany) once had only a distribution office in China. It now is the 100 percent owner of two Chinese companies: TianWei Times (Beijing) and PG Biotech (Shenzhen).

Part of this evolution in the sophistication of Chinese foreign direct investment (FDI) is the natural course of any economic relationship. What begins as low-value-add mutual exploitation either evolves into something deeper, or the party soon moves elsewhere, where the drinks are cheaper. Western companies understand that China has been transformed from just a labor market into a vast consumer market. And the Chinese understand that foreign direct investment will dry up if the capital structures available to Western companies are limited to joint ventures with government-owned companies.

Christopher Savoie, CEO of GNI-Shanghai Genomics, also describes in strategic terms the changing nature of biopharm FDI in China.

"There is a new trend in bio research to move outsourcing more upstream, to involve more intellectual property (IP)," Savoie explains.

How to Conduct Business in China
This trend has taken time to develop because companies have needed to gain experience to become comfortable with the idea of exposing their IP to Chinese partners.

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