The Chinese chemical and pharmaceutical industry has established itself as a significant player in the world. The number of chemical and pharmaceutical companies is continuously rising, backed by an increasing number of highly qualified scientists. This development is paralleled by increased investments in R&D activities. In a highly competitive environment - intensified by the current financial crisis - the need for R&D as a tool for process excellence, cost leadership and 
the development of new profitable products with high margins is a key factor to survive.

In the 1980s, the Chinese government launched the so-called "863 programme" for funding R&D activities of high-tech projects in industry. Ten years later, the industry received a further boost from various governmental moves: Administrative restructuring, investments into quasi-venture-capital funds and the right to grant patents in the field of pharmaceutical applications. Today, public funding and support is still at a high level. The government's support of the industry is already bearing fruit.

The history of Chinese R&D is also connected to the history of the Chinese economic development during the last 30 years. The strong economic growth supports the innovation activities. In return, the growing economy requires much more R&D investment. Chinese President Hu Jintao announced that his country would embark on a new path of innovation with Chinese characteristics. Innovation was the core of nation's competitiveness, he said, and the strategic motif of its future science and technological development. Following the guidelines, the R&D investment will increase to 2.5 % of GDP year by year (1.42 % in 2006).

When China joined the World Trade Organization (WTO), the expenditure on R&D was booming. The overall R&D expenditure in all sectors increased around 20 % every year from 2001 ($ 12.6 billion) to 2006 ($ 37.7 billion). The absolute R&D expenditure was ranked sixth in the world. And right now, around 1.5 million R&D headcount including 1.22 million scientists and engineers are working in China. These figures are similar to those in the U.S. The top four industrial areas for R&D resources are: Communication, computer and electronics industries (39 %), transport Industries (15 %), electrical machines and equipment construction industries (8.7 %) and chemical and pharmaceutical industries (4.6 %).

While the Chinese government was the major investor in R&D from the 1980's to 2000, the picture changed completely after 2001. In 2006, the whole nation's R&D expenditure was distributed to 69.1 % by enterprises and companies, 24.7 % by the government and 6.2 % by others. This financial structure is similar to the U.S.

Local Distribution

The local distribution of R&D institutions is unbalanced. Most of the R&D activities are located in the east cost area, which has a good infrastructure and attracts a lot of young talent. This belt goes from the Beijing area (including Tianjin) to the Shanghai area (including Jiangsu and Zhejiang province), down to the Guangdong area (like Guangzhou and Shenzhen). In the Beijing and Guangdong areas, the domestic R&D expenditure is in the leading position; but in Shanghai, the foreign-funded R&D dominates.

The generation of published knowledge in China is also impressive. In 2005, the total number of patent application were 476,264, the granted number was 214,003. One year later, the patent application number had increased to 573,178; the granted files were also rising to 268,002. The number of Chinese science and technology papers collected by SCI (science citation index), EI (engineering index) and ISTP (index to scientific & technical proceedings) were also growing heavily between the years 2001 (65,000 papers) to 2006 (172,000).

The Chemical Industry in China

Regarding the chemical industry in China, the number of companies and employees increased very quickly from 2003 to 2007. In 2003, 24,487 chemical plants with 5.43 million employees existed and four years later, the number of chemical plants had increased to 41,964 with 7.09 million employees.

The big competition between different companies leads to immense cost pressure. In order to achieve lower costs, lots of companies try to get rid of their waste without a proper treatment. As a consequence, China has a problem with pollution. The Taihu Lake green fungi incident two years ago was a typical example. Nowadays, the Chinese government is taking more care for environmental protection. With this background, the chemical companies have to invest money to install waste treatment to meet the authority's requirements, which also requires new technological knowledge. One way to survive is given by developing in direction of a higher value chain and substitute products with high waste amounts. This also requires R&D support.

The number of pharmaceutical manufacture enterprises is around 5,000 in China now: ca. 200 bio pharmaceutical companies; ca. 1,100 traditional Chinese medicine (TCM) companies and ca. 4,000 drug producing companies. These companies produce around 1,500 kinds of APIs with total amount of 430,000 mt per year, ranking them second in the World.

Pharmaceutical Industry in China

Overall, the development of the Chinese pharmaceutical industry is promising. The players recognized that they have to increase their R&D budget to become more competitive and innovative.

Since China joined the WTO 2001, a growing number of CRO (contract research organization) companies have been established in China. The development of a drug needs a long time and is very cost-intensive. Lots of international pharmaceutical companies do not cover all the required development by in-house services. Some of the R&D activities like discovery, small scale production or clinical tests are being outsourced to bring down cost and keeping the headcount in the in-house R&D departments on the low side. In order to further reduce the development costs, international pharmaceutical companies are seeking for more cheap resources, like China, India or other developing countries.

Business Models for R&D in China

Multinational pharmaceutical companies (MPC) normally have a number of different approaches to offshore the R&D activities and four major business models have emerged as current options in China:

1. A captive R&D centre represents a serious and committed presence by the MPC. It provides the best possible control over IP. On the downside it is expensive to set up and maintain, especially if overseas staff are kept on the site. Roche, GSK, Novartis already set their 100 % owned R&D centres in China and integrated these R&D teams in China into their global business model.
2. In opting for a partnership, the MPC offshore activities and complex parts of the development and innovation process to a local partner. The main advantages are filling the gap of pipeline bottlenecks and solving general capacity constraints. A further advantage could be the leveraging of the vendor's specialized skills. The downside is the risk of losing Intellectual property (IP) control.
3. The build-operate-transfer (BOT) model, allows a MPC to form an alliance with a local company, relying on its technical expertise and its special knowledge. After the success of the project the MPC has a contracted right to take over the partner's facility and work force.
4. The vendor-based outsourcing provides a very flexible and inexpensive means of off shoring. Only small parts of the development pipeline (e.g. sample preparation, clinical data management) are handed over by the MPC to the development partner. As a result, there is a fair degree of IP loss risk.

Currently, the major business of many Chinese CROs is serving the lower end of the value chain for international pharmaceutical giants. The major obstacles to climb up the value chain are China's clinical trial criteria which are not consistent with the international rules. In the coming years - especially after this financial crisis - in China most of the chemical companies and pharmaceutical companies without in-house R&D activities will be difficult to survive the market. The surviving ones will enhance their R&D spending to give more competition to the market. Following the globalization trends, more and more foreign companies will set up R&D facilities in China following different CRO models.