A Chinese Perspective on National Life Science Innovation and Leadership
Effectiveness vs. Efficiency
An Interview with Yiwu He
By Claire Topal
May 27, 2015
NBR’s research project on the Globalization of China’s Life Science Sector examines the impact of Chinese government support for the life sciences on international scientific competition and innovation, as well as on U.S.-China political and economic relations. In this expert interview, Yiwu He (Bill & Melinda Gates Foundation) compares and contrasts the environments for innovation in the life sciences in the United States and China. He argues that China’s life science sector is likely to benefit over the long term from significant financial investments from the government and private funds that allow for R&D failures over the short term. This approach, he notes, helped the United States’ life science sector rise to global prominence over the past several decades but is now quite rare in the West. He also argues that an increasing emphasis on short-term results and profits in U.S.-led companies will ultimately diminish the country’s leadership role as a life science innovator.
What does the international community need to understand about how China is implementing its national health and life science strategies domestically?
There is a misperception that China’s life science industry works under one directive from the central government. While the central government certainly sets the overall direction and strategy for the country’s domestic life science industry, the provincial governments have significant authority and distinct resources for implementing and interpreting central government policies and directives. In fact, provincial governments have almost total authority to set the parameters and funding for implementation.
In other words, the central government sets the overall tone and national strategy, but local governments are responsible for execution. For example, in 2008 when the central government announced that research in life sciences and medicine would be a strategic economic focus for the country, local governments in many provinces began to build life science research parks. Today, there are major life science technology research parks in Shanghai, Beijing, Guangzhou, and Anhui, as well as in nearly every other major city in China. However, because each provincial government acts independently, there can sometimes be parallel or even competing efforts.
Recently, many private Chinese funds and companies are also playing critical investment roles in the domestic life science sector. These funds sometimes work closely with venture capitalists from the United States to take advantage of their existing expertise or to pool resources.
Do foreign life science companies operating in China appreciate these nuances?
Multinational companies (MNC), such as AstraZeneca, Merck, Novartis, and Pfizer, are doing well in China, where they tend to focus on research and development (R&D) to help their marketing and sales. Such companies have several advantages. First, they have extensive resources that they can leverage to help them understand and appropriately navigate the landscape of life sciences in China. Second, they typically employ returnees to lead their China operations—native Chinese who are educated abroad and then return to China. These executives know China as well as the culture and operating practices of other countries.
By contrast, the struggling foreign companies tend to be small- and medium-sized U.S. biotechnology companies that do more service-oriented work in life sciences, supporting rather than leading the R&D process. These companies generally do not have much experience operating in China and do not really understand the business practices there. They also lack the financial and human resources to master Chinese practices.
How has the presence of multinational companies benefitted China?
Multinational pharmaceutical companies that establish R&D facilities in China have done the Chinese government a great favor. These companies play a very important leadership role in the industry in China while also providing the expertise and financial resources to help the sector evolve. Essentially, these companies plant the seeds for native (rather than imported) innovation by joining their capacity, experience, and resources with the best of the best in China.
However, while most MNCs are doing well in China, they tend to be too focused on the priorities of their foreign headquarters, and not focused enough, in my opinion, on local healthcare priorities, which hinders their ability to tap fully into the resources China could offer them. If foreign MNCs focused more on research and drug development in their China businesses on diseases that are local priorities, such as hepatitis B or drug-resistant tuberculosis, for example, they could gain more positive attention and support from the government, as well broader access to the local market and talent. As it stands, I would argue that China is benefiting more from these companies’ operations domestically than the companies themselves, owing to what I see as short-sighted MNC strategies.
Do you see China shifting from being a global manufacturing hub to being a potential leader in life science innovation?
Absolutely. China has done very well producing low-cost manufactured goods, but manufacturing growth has slowed and in some cases lower-cost locations outside the country are drawing new factory investments away. China is becoming very expensive as a global manufacturing center as wages rise, the complexity of value chains increases, and consumers demand more. Indeed, “made in China” is no longer synonymous with low costs. The Chinese government understands that the country must move up the value chain to maintain its competitive edge. To do that, China needs to promote innovation domestically, which represents a shift from the past “copy and reproduce” mindset to a new “create and build” mindset. As a result, the Chinese government is promoting innovative research across many industries, including IT, aerospace, automobiles, and the life sciences. National investment in these areas is tremendous. China’s “973 Program,” or National Basic Research Program, aims to give the country a strategic edge in various science and technology fields. China already ranks second only to the United States in the number of scientific papers published and patents filed.
The central government has indicated that biotechnology is one of the country’s seven emerging strategic industries and is putting hundreds of millions of dollars into basic and translational research, along with the improvement of drug manufacturing technologies that are in compliance with standards for international good manufacturing practices (GMP). In keeping with this strategy, the central government is establishing national key labs for stem cell research, medical devices, biologics, major infectious diseases, and drug development. One of many examples is government funding in late 2014 of one billion yuan (approximately $160 million) for developing a translational science center in Shanghai, and five additional national centers in China focused on other technical and scientific areas.
These centers demonstrate the government’s willingness to invest a huge amount of money in research, and to take big risks with that money. It is also important to note that these centers are drawing top research talent from the United States and European Union, who are finding China’s environment for basic research increasingly attractive. Money is certainly an important incentive, but so is a certain comfort level with risk and failure over the short-term given the tremendous potential for gains over the long-term. I think this current approach in China makes innovative science easier than it is in the West.
The returnees I mentioned who tend to lead the Chinese operations of pharmaceutical MNCs will also certainly play a key role in China’s shift from being a low-cost manufacturing hub to an innovation center. Their experience and expertise in both the foreign and domestic pharmaceutical context give them the ideal platform from which to one day launch their own companies or to support new innovation efforts at long-established Chinese companies that have thus far primarily been manufacturers but which are now increasingly investing in homegrown R&D. Additionally, because these returnees serve as human bridges between cultures, I think they are making collaborations between MNCs and local companies easier as well as facilitating cross-border licensing and acquisition agreements.
Soon China may become the front runner in a full range of areas, such the auto industry, basic research in the life sciences, and diagnostics. While I appreciate the very significant hurdles surrounding regulatory opaqueness and patent protection, the country’s overall potential is probably still underestimated. For example, in the pharmaceutical industry, many major drugs (such as Pfizer’s Viagra and Lipitor) have already or are soon going off patent, and Chinese companies are putting an enormous amount of money into manufacturing generics. In the very near future, significant generic drug supplies in the United States could come from China. In fact, there are a few companies in China that are already producing all of the active pharmaceutical ingredients for cancer drugs in the United States and such production is set to expand. I predict that in the next five to ten years, a large percentage of over-the-counter drugs in the United States will be made in China. Very legitimate concerns about quality and safety exist regarding Chinese-made drugs, and I can say from direct experience that the Chinese government has ramped up its enforcement of the new GMP for drugs in strict ways to achieve alignment with international standards.
Tell us more about why you see China as an attractive environment for innovative research.
As I mentioned, China is providing very significant financial incentives that draw life science researchers from all over the world to its state-of-the-art domestic research parks. Incentives are important, but that does not mean the money is being used efficiently—certainly not by international pharmaceutical standards. In fact, an enormous amount of money is probably being wasted. Nevertheless, I would argue that China’s approach to investing such enormous resources is effective. With more than $4 trillion in its foreign currency surplus account, China has resources to spare. If just 20% of government investment creates some kind of positive result, that would represent an astronomical return on investment.
This translates into a willingness to risk and fail big in the short-term. The hope, of course, is for major wins and positive returns over the long-term. These risks and short-term setbacks are appreciated in China as the “tuition” required for learning and eventual success. And when big risks and failures are considered a part of the process, that indicates a certain kind of freedom in the environment.
Researchers in China are often surprised by the freedom they have in their R&D pursuits, given that China is generally not perceived to be very politically open. For the most part, entrepreneurs and researchers engaged in life science R&D are given freedom to pursue their work because the Chinese government does not see it as touching on politically sensitive issues. The government also sees that such research benefits China’s economic future. If a life science entrepreneur or researcher wants to become a politician, however, that is a different story.
There is tremendous opportunity for academics and students to conduct innovative R&D in China, which I see firsthand as an adjunct professor with the University of Science and Technology of China. The leaders in the biotech industry and in life science research are like celebrities. In the United States, you probably do not see a Nobel Prize winner in the life sciences receive much attention on TV or frequently be recognized on the street. But in China, anyone who has excelled in producing innovative research obtains national recognition and becomes a widely recognized celebrity, such as research scientists Xiaodong Wang (of the Beijing Institute of Biological Sciences) and Yigong Shi (of Tsinghua University). These individuals can mobilize resources and meet with top government officials to influence life science policy and strategy in ways that will positively impact research. Additionally, professors are encouraged to commercialize their research outcomes, and patents are usually owned by individual professors in China. Those kinds of incentives are helping to fuel the creativity and entrepreneurship boom in China.
Finally, a group called BayHelix—a highly recognized and well-resourced club of senior executives in China’s life science industry—is regularly consulted by the Chinese government when it sets a new strategy or budget for life science R&D. It also has a more flexible structure and less emphasis on regulation than comparable U.S. or European organizations representing the biotech or pharmaceutical industries.
How do issues of pharmaceutical quality, safety, and a lack of intellectual property (IP) protection in China affect the country’s potential role as a life science innovator?
For many outside China, IP protection is a major concern and rightly so. But I would argue that the Chinese government is realizing more and more that reliable and enforced IP protection will actually help its economy develop over the long term. Additionally, I appreciate that China has had problems related to the quality and safety of certain pharmaceutical products, and many complain of regulatory opaqueness; I think this is where we will see major positive shifts in the coming years. The government is paying significant attention to this issue, and safety enforcement is the highest priority of the top leadership. This message is also very clear and well-received by China’s pharmaceutical industry. Returnees in executive roles are very supportive of this. They generally have a strong understanding of the global standards in this field, were trained to respect the law, and recognize that the best way to compete globally is to produce high-quality, highly effective, and safe pharmaceutical products.
Tell us more about the difference between effective and inefficient investment in life sciences, the implications for innovation, and how China’s approach compares with those of current life science innovation leaders like the United States and European Union.
China’s economy is still advancing, and that is greatly influencing the government’s push for people to conduct innovative research domestically. As I mentioned earlier, the government is willing to allow companies and researchers to take big risks with their research and sometimes fail. Failure in this context can mean hundreds of millions of dollars of losses. The Chinese government—and I would argue the domestic life science sector as a whole—sees such failure as almost necessary. After all, the standard international “cost” of creating a new drug—from discovery through development—is measured in decades and hundreds of millions of dollars. Life science innovation is a new space in China, and as I mentioned significant short-term losses without short-term gains are considered the cost of learning or “tuition payment” as the Chinese expression goes. The assumption is that such learning (while inefficient and even loss-generating in the short term) will lead to greater effectiveness and efficiency in the long term.
By contrast, in the United States that kind of failure can cost a person’s company and career. The United States tends to emphasize efficiency and satisfying investors’ immediate needs over long-term effectiveness. Venture capitalists and investors want the highest rate of return, which means that U.S. biotech companies focus on the best idea with the lowest risk of failure. This is a sound business approach for an individual company, but it also limits the potential for major breakthroughs and innovative research in the industry as a whole. I would argue that the increasing U.S. focus on short-term efficiency, the rise of lawyers as pharmaceutical decision-makers, and the emphasis on merging and consolidating to save money will hinder the country’s life science industry and overall edge in the long term.
This comes back to my earlier point about efficiency versus effectiveness. In China, the government understands that life science research in the country is not very advanced and takes time. Investors in China are willing to receive a lower return on investment in the short term, whereas in the United States they would expect much higher returns far more quickly. At the same time, China is flush with money and so is less in a hurry for immediate results. Researchers in China can thus afford to be less efficient in the short term in exchange for being more effective and innovative in the long term. This is how the United States used to be known: a place where researchers could experiment and fail. Not anymore. In my opinion, China now plays this role.
Is China now the “Wild West” in terms of life science innovation?
China has been tremendously influenced by how the United States has wisely funded R&D innovation in the past. The returnees I mentioned who were educated and trained in the United States learned a lot there about risk-taking and how to think outside the box. They are implementing this in China, as is the government, and are doing very well by allowing room for some research to fail and minimizing expectations of high returns at the early stages of R&D. Thirty years ago, the European Union had the strongest pharmaceutical industry (shown by the European origins of most pharmaceutical companies, including MNC giants GSK, Novartis, and AstraZeneca), but reduced risk-taking and an increasing unwillingness to invest in truly new ideas stifled innovation, and allowed the United States to become the land of opportunity for pharmaceutical innovation. Today this role is shifting to China.
The confidence you have in China’s rise as a life science innovator seems to be weighted in equal measure with the clouds you seem to see looming over U.S. leadership in life science innovation. Why?
I am very concerned about the life sciences in the United States, particularly the pharmaceutical industry, where R&D innovation requires a tremendous investment of time and financial resources and can really only happen over the long term. There cannot only be a focus on quarterly, short-term returns yet I see the short term being prioritized repeatedly in U.S. firms.
The United States has long been known for producing high-quality researchers and innovative breakthroughs. In the IT space, companies such as Facebook, Google, and Apple have thrived and been hugely profitable because they are innovative. These companies expended astounding amounts of money in their earliest days to build a base and capacity that will serve them in the long term. By contrast, I no longer see that happening in the U.S. pharmaceutical industry. Fewer new ideas are emerging, and pharmaceutical executives are increasingly less innovative in their promotion of great scientific ideas. The U.S. pharmaceutical industry is also not engaging as much as previously in the basic early-stage research that will allow it to be innovative later on; instead, companies are in-licensing drug candidates from biotech companies and relying on the government to fund early-stage research. At the same time, while China is increasing its government investment in basic research, U.S. government funding is has pretty much remained flat over the years. This trend does not foster an innovative culture.
One key to supporting innovation within the life science industry—whether in the United States, China, or elsewhere—is to connect with and support research coming out of universities, which is often funded by national institutes of health. I mentioned incentives for professors in China earlier, and I’d like to expand on that. I had a conversation recently with the president of a major university in China who told me that if a professor in his university started a company, he or she could have major—even sole—ownership. There is probably a spectrum in China of how liberal universities are in such cases, but for the most part I would say that Chinese universities are much more liberal than U.S. universities in this regard. This may be because the industry is relatively young in China, and policies that deal with innovation ownership surrounding professors and academic institutions simply have not yet been put into place as widely.
In the United States, however, if a professor creates a patent, it belongs to the university. The professor can start a company but he or she would need to negotiate with the university’s technology transfer office to determine the shares of the ownership. Typically, the university will get a royalty on sales from the company, or an ownership stake. There is a huge spectrum in the United States in terms of which universities best foster innovation and entrepreneurship. In the 1980s and 1990s many university professors in the United States started hugely successful biotech companies: for example, Amgen, BioGene, Genetech, and Vertex. But nowadays I see U.S. university-bred entrepreneurship waning and have a hard time naming a single major biotech company launched by an academic in the past couple of years.
What do you see as the next steps for Chinese and multinational pharmaceutical companies in the life science field?
Collaboration between multinational pharmaceutical companies and Chinese ones (including private companies) is critical. In a sense, that collaboration is already strong, but the key question is how to structure and grow future collaboration to enable win-win outcomes for both sides. The goal from the Chinese side would be to see the multinational pharmaceutical firms as partners—in the truest sense of the word—in helping address critical healthcare issues rather than seeing them through a lens of mistrust and competition. Ideally, greater levels of collaboration could fuel real health breakthroughs.
How does such collaboration grow? MNCs could begin by paying more attention to innovation in Chinese universities, hospitals, and research institutes, and by being more open to partnering with the scientists producing innovative work. As I mentioned earlier, the top echelon of Chinese scientists tends to have a great deal of domestic influence. Such partnerships could help MNCs streamline their regulatory journey in China as well as better understand China’s healthcare needs and where solutions may come from within China.
The content in this interview represents the personal views and perspectives of Yiwu He and does not reflect the views, strategies, or positions of the Bill & Melinda Gates Foundation or the National Bureau of Asian Research.
Claire Topal is a Senior Advisor for International Health at NBR.