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THE CHINESE call them sea turtles—people who left the country, either as children or college students, only to return years later with Western educations. Referring to the turtles' habit of coming back from sea to lay their eggs—and to similar pronunciations for the words "turtle" and "coming home" in Mandarin Chinese—the term gained momentum as the Chinese economy began generating opportunities for skilled expatriates.
For several entrepreneurs in the pharmaceutical chemicals sector, however, the phenomenon has a twist. They are chemists with experience in the U.S. drug industry who, in starting their own U.S.-based chemistry service firms, returned to China to do the research and manufacturing, but remained in the U.S. to do the business.
The mixes of research and manufacturing vary, but the business model of three of these firms—Asymchem, Pharmaron, and ChemPacific—is the same: provide Western drug and biopharmaceutical companies with key business and technical contacts in the U.S. and offer the significant cost benefits of research or manufacturing done in China. The companies' founders claim they are leveraging their knowledge of language and culture, as well as their personal, academic, and industry connections in China, to build world-class labs and factories that operate to Western standards.
Now each company is poised to take the next step with investments in the manufacturing of active pharmaceutical ingredients (APIs). Executives at all three claim that their companies have grown to be globally competitive based on a hybrid U.S.-China business model that will work for them going forward.
According to James R. Bruno, president of the consulting firm Chemical & Pharmaceutical Solutions, the influx of Chinese chemists to the U.S. has spawned a template approach to launching chemistry service operations based in the U.S. but operating in China. "You have a couple of models, but there is a general theme," he says. "You put someone in a U.S. office or research facility so that, in principle, customers have a contact. These people have worked at a large pharma company—it doesn't really matter what they did there, but that they have a pedigree. They are intelligent people who can interface with drug companies like Merck."
WHAT'S MORE, Bruno says, the Chinese chemists founding such businesses in the U.S. are highly entrepreneurial. "They get over here and see a shot," he says. "They are willing to take a chance. It is an interesting dynamic; they have pedigrees from companies like Novartis, and they can work with the Chinese. Language issues go away."
Yet Bruno points out that U.S. pharma and biotech managers still perceive risk in doing business with companies that operate half a world away. This perception has limited the appeal of such organizations to large pharmaceutical companies that have less at stake than small biotech firms and more to gain by making connections with Chinese producers. "Skittishness about China has not gone away," he says.
Still, the cost and quality standoff between East and West has shifted over the past 10 years. Drug companies have gained experience with suppliers in China, and the Chinese government has stepped up enforcement of safety and environmental protection laws, especially in the run-up to this summer's Olympics. Meanwhile, China is becoming more practiced with Western standards of technology and quality, thanks to the increasing number of firms manufacturing APIs at plants certified to the Food & Drug Administration's current Good Manufacturing Practices (cGMP) standards.
Asymchem, founded by Hao Hong in 1995, has over the past decade amassed a headquarters in Morrisville, N.C.; a business office in Beijing; and operations throughout China that provide services including manufacturing of APIs for clinical drug trials. This year, the firm broke ground on its first commercial-scale API plant, in Dunhua in northeast China.
Hong is typical of the Chinese entrepreneurs who have launched U.S.-based pharmaceutical chemistry firms. Born in Dalian, he received a Ph.D. at the Chinese Academy of Medical Science and researched anticancer drugs at North Carolina State University. A group of investors from Singapore hired him in 1993 to start a small U.S. pharmaceutical company, but Hong soon left that project, seeing a better opportunity in building a small custom synthesis firm of his own in North Carolina.
In 1998, Hong set up a manufacturing subsidiary in Tianjin. The company added its first pilot plant in Tianjin in 2006 with $10 million in bank loans and private and government investment. In 2003, Asymchem hit $5 million in sales and has grown since at an annual rate of nearly 70%, Hong says.
Asymchem has also been beefing up in North Carolina and this year hired nine Ph.D. chemists with experience at major U.S. drug companies. James R. Gage, vice president for chemical development, and David Houser, director of business development, for example, are former Pharmacia staffers whose jobs Pfizer eliminated in 2003 when the companies merged.
Hong says he does not view the company's business model as simply competing on low cost. "I don't think that contract manufacturing in China is only about low-cost labor and materials," he says. "You have to be worldwide player, providing world-class quality but at a low cost."
The new facility in Dunhua will allow Asymchem to pursue commercial-scale projects for major drug companies. At the same time, the firm is also interested in growing its business with smaller biotechnology firms. Currently, about two-thirds of the company's business is with big pharma.
Elut Hsu, Asymchem's vice president of business development, acknowledges that small biotech firms, often reliant on a single drug candidate, are more reticent to do business in China. "They want to deal with Western firms," she says. "But once they send an auditor out, they see we look like a Western company. We are not operating to a Chinese standard."
SIMILARLY EXPANDING its range is Pharmaron, a medicinal chemistry research contractor founded in 2003 in Louisville, Ky. It operates research facilities in Beijing and expects to open its first cGMP manufacturing plant in Tianjin next year. "Our strength is small-scale chemistry, but we are expanding to large-scale synthesis capability," Chief Executive Officer Boliang Lou says. "We are moving from discovery chemistry to development chemistry."
Lou, like Hong, was educated in China, receiving a Ph.D. from Shanghai Institute of Organic Chemistry. He did postdoctoral work under Stephen Hanessian at the University of Montreal. In 1994, he worked for Cytel, a carbohydrate-based drug discovery company; later, he joined Ontogen, a pioneer in combinatorial chemistry. Both companies are in San Diego. He followed his supervisor at Ontogen to Helios Pharmaceuticals in Louisville, where he worked for seven years. Lou says the need he saw for intensified medicinal chemistry prompted him to start his own company.
"I feel that as chemists, we have a lot of work to do to contribute to drug discovery and development," he says. "Very clearly, the entire pharma industry was looking forward to seeing the high-quality compounds for genomics-driven targets."
Lou says he envisioned a "hybrid business model" that put China's chemistry manpower to work. He noted that WuXi Pharmatech, a large Chinese contract research firm, and other companies are already conducting medicinal chemistry in China, but they lack a U.S. headquarters and thus what he considers a true global presence. "I thought about Indian companies like Dr. Reddy's that had generic businesses in the U.S.," Lou says.
Pharmaron began renting a 20,000-sq-ft space for research in Beijing in 2004. The company moved to an 80,000-sq-ft facility in 2006. It opened a second building, about half that size, in 2007 and a third building this year. The cGMP facility is under construction in Tianjin.
Katherine Lee, vice president of business development at Pharmaron, stresses the importance of integration between its U.S. and Chinese operations. Lee, who works in the company's newly opened office in Irvine, Calif., says the U.S.-China connection is registering with smaller drug companies. "The comfort zone is broader for outsourcing," she says. "The integrated model is important, but chemistry is the focus."
For Asymchem and Pharmaron, research and production happens primarily in China. But at Baltimore-based ChemPacific, manufacturing of APIs for generic drugs takes place in both countries. Last month, FDA inspected the firm's new cGMP plant in Zhapu in China's Zhejiang province.
"But in the U.S., we have already had three inspections," says Chen Zhou, chairman and cofounder of ChemPacific. The company has had 10 generic products registered with the FDA, three in the past year alone. Zhou says the company plans to register four per year. Much of the manufacturing is done in Baltimore in quantities ranging from 100 mg to multiple kilograms.
The company's roots go back to 1996, when Zhou and his original partners started working at a technology incubator at New Jersey Institute of Technology, in Newark. There, the group developed its plan to leverage China's largely untapped resources in pharmaceutical research and manufacturing.
"At the time we started in the mid-1990s, everything developed very fast," he says. "And there were a lot of people like us who came to the U.S. in the late-1980s to finish school and work. At that time, the pharmaceutical industry and chemical industry were booming in Shanghai and Zhejiang." The firm moved into a Baltimore facility owned by one of its customers.
ACCORDING TO Rebecca Chiu, president and CEO of the company, ChemPacific is making a significant change in direction with the new plant in Zhapu. "We are gradually moving up to becoming a pharmaceutical company," she says. "Before, we only did starting chemicals. We have mostly generics in our portfolio, but now that we have cGMP certification, some of the biotech companies want us to make kilogram quantities for Phase I or II" clinical trials.
Zhou says low-cost Chinese labor is only one facet of an integrated U.S.-Chinese contract chemistry operation. Pharmaron competes with other Chinese producers, as well as with firms in the U.S. and Europe. The goal is to compete on technology and quality, combining the strengths of its U.S. and Chinese resources. "Do we want to offer the best of both worlds? No," Zhou says. "We want to offer the best of one world."
Jacob Slotky, president of Snow Chemicals, an API sourcing agency in Closter, N.J., says ChemPacific is one of the key suppliers of chemicals for his pharmaceutical and biotech industry customers. He says the company is good at complex chemistry and problem solving. "They are very enthusiastic and nice to deal with," he says. "Nothing is easy, but they have a good plan for developing products."
ALTHOUGH INDIA and China offer many options for API supply, Slotky likes dealing with a business based in the U.S. He doesn't think of ChemPacific as an Asian source. "They don't fit into the category of a Chinese producer," he says. "They are a U.S. producer with Chinese capacity."
Although they won't name names, the three suppliers all claim to do regular business with the top drug companies and generic pharmaceutical firms. Asymchem's Houser actually assessed his employer's capability when he vetted potential R&D partners for Pharmacia. "There were not many companies in China in 2001 that had the technical capabilities," he says. "They had a technically savvy staff. We could show them a target and didn't need to give them a technical package for them to go to work on it, which was unique in China."
In fact, Asymchem will receive a 2008 supplier award from Merck & Co., one of its first large pharmaceutical customers. "The quick growth of Asymchem's business at Merck is the result of their successful execution of each project, ability to meet aggressive timelines, superior customer service, and high quality levels," says Ralph P. Volante, vice president of process research at the drug company.
Executives at Asymchem, Pharmaron, and ChemPacific agree that acceptance of Chinese suppliers has risen considerably, and they see their operations as competitive in the world market for contract services. As they invest in the next increment of manufacturing and extend into new markets, they will continue to leverage what they see as a high-tech, low-cost Chinese advantage.
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