Little-Known HEC Beefs Up R&D

HEC Pharmmay be the biggest drug company no one has ever heard of, but not for long. This year, with a $70 million R&D budget, the company is doubling its R&D staff of 500 and spending $45 million on instrumentation. And in 2012, it plans to add another 500 researchers to its payroll. A firm that recorded sales of $500 million in 2009, HEC is planning to become far bigger by establishing itself as an innovative pharmaceutical producer.

HEC is wasting no time in realizing its ambitious plans. It is starting human tests on a new drug in China and plans to keep launching new drugs into clinical trials at the rate of one per year. But its goal for innovative products is raising the eyebrows of some industry watchers.

The company’s main focus at the moment is the Chinese market. In China, HEC will initially launch drugs that are only modestly different from existing ones but that the company reckons it can sell more cheaply than the major international drugmakers can.

“We want to be the number one pharmaceutical company in China,” explains Xinfa (Richard) Tang, director of HEC’s R&D center. “But it’s an open world, so we will have to also launch innovative drugs in the international market as we strive to achieve our domestic goal.”

From HEC Pharm’s vantage point, the drug business has the potential to deliver big payouts with comparatively little investment. The firm is a member of the HEC Group, China’s largest aluminum producer. The group owns power plants and aluminum smelters in Hubei province in central China. HEC Group employs about 10,000 and had group revenues of about $1.5 billion in 2009, firm executives say. HEC has one subsidiary, Guangdong Dongyangguan Aluminum, that is listed on the Shanghai Stock Exchange and that registered sales of $365 million in 2009.

“We can invest more courageously than others because our other businesses generate more cash, and we consider an R&D center to cost little money compared with a big power plant,” says Tang, a senior HEC administrator who has been tasked with building up HEC Pharm’s R&D capabilities. “Most other innovative drug companies in China finance their drug research activities from the profits from selling generic drugs.”

HEC entered the drug business accidentally about a decade ago, Tang explains, when it found itself with a money-losing pharmaceutical ingredients plant in Hubei, obtained as part of an aluminum-related investment.

“We invested in that plant until its products met Chinese and U.S. requirements, and we eventually became the top producer of the antibiotic erythromycin in China,” Tang says. “Over time, we came to realize that proprietary products generate higher profits, and that’s why HEC committed to R&D.”

To expand beyond established drugs like erythromycin, the firm plans to conduct research in several areas, says Gary Chen, vice director of the research center. They will include antivirals and antibiotics, oncology, cardiovascular disease, and central nervous system disorders. To lead the scientific efforts, HEC has recruited proven scientists with a strong track record in the international drug industry.

HEC Pharm’s chief scientific officer, Peng Cho Tang, whom everyone calls Cho, worked in the U.S. pharmaceutical industry for 25 years, leading teams at Sugen Life Sciences that successfully developed and launched drugs. Siegfried Goldman, another experienced researcher, spent most of his career at Bayer. A hepatitis B treatment developed by Goldman is the drug HEC has in human trials.

The assignment at HEC marks the second time Cho has been charged with banging a Chinese R&D lab into shape. Until last year, he was chief scientific officer at Shanghai Hengrui, a producer of generic drugs that is also developing its own drugs. Under his leadership, Cho says, Hengrui went from no innovative capabilities six years ago to now having six drugs in clinical trials.

At HEC, Cho is setting up a drug discovery lab he claims will be far bigger than what he established at Hengrui. The facility will develop generics and biosimilars, but about two-thirds of its researchers will work on innovative drug programs, he says.

To train and lead locally recruited scientists, Cho plans to hire numerous chemists and biologists from abroad.

Unlike Hengrui, where Cho says researchers worked only on proven drug targets, HEC will be more ambitious in its objectives, Cho believes. “Initially, we will work with old targets, but it will be far more rewarding to move on to new ones,” he says. In terms of discovery technologies, he plans to acquaint HEC with fragment libraries, structure-based drug design, and X-ray crystallography.

One of the main elements of HEC’s product development strategy will be to get Chinese regulators to declare the company’s new drugs as best in class in the Chinese market. “A best-in-class drug can be different in the U.S. than in China once you consider the affordability factor,” Cho says.

One of the challenges of implementing HEC’s ambitious R&D objectives will be the difficulties and delays in procuring biological assays and reagents in China. To overcome that obstacle, HEC will make its own, Cho says. “We will bring in many biologists from abroad, and in the end, we will have one biologist for every chemist.”

Not only will HEC boast highly integrated R&D, but it will also be able to manufacture the drugs it brings to market. The company already has production facilities for active pharmaceutical ingredients and finished-dosage drugs, Chen says.

Dongguan, where HEC Pharm has its headquarters, is in Guangdong province, roughly halfway between the major centers of Guangzhou and Hong Kong. Dongguan is not one of China’s major drug R&D regions, but Cho is not concerned.

“We’re able to attract researchers originally from southern China who didn’t have many opportunities in this region before,” he says. Cho himself is originally from Macau, and he’s now able to drive there on weekends.

At nearby ChipScreen BioSciences, a drug discovery firm based in Shenzhen, just across the border from Hong Kong, Chief Executive Officer Xian-Ping Lu sees pros and cons of being in Guangdong province. “The local governments are extremely supportive of innovative drug R&D, and that’s very helpful in terms of creating a constructive environment for drug research,” Lu says. “But when you get to the clinical trials stage, which is where we are, the expertise is more in Shanghai.” Within Guangdong province, Lu adds, no hospital complies with the Good Clinical Practices needed to conduct clinical trials.

In Shanghai, a fund manager familiar with the Chinese life sciences industry expresses doubts about the ability of a newcomer like HEC to establish itself as a successful drug discovery company in the international market. He requests anonymity because he might work with HEC in the future.

“There are a lot of very smart people at well-managed companies around the world trying to bring new drugs to market, and many are failing,” he says. “I doubt that it’s as simple as HEC’s approach of investing in a lab, attracting smart people, and pumping out the new drugs.”

Moreover, HEC Pharm’s parent company has yet to really prove it has the stomach for drug R&D. “When we get to the later phase of clinical trials and it gets really expensive, we will see if HEC’s attitude to drug R&D remains as unconditionally positive as it is now,” Cho says. But, he adds, HEC’s strategy of initially developing me-too drugs and getting them designated as best in class in China is likely to bring rewarding results.