The expertise of expatriate Chinese scientists is critical because China has relatively little indigenous drug discovery and development experience. Because of past disregard for intellectual property protection and low income levels, Chinese drug sales consist primarily of over-the-counter and generic products. Almost no new molecular entities have been developed in China, so the region has little or no local talent base for critical disciplines such as medicinal chemistry, GLP toxicology, and dose formulation. Most start-up operations are limited to providing small-scale, cookbook chemistry services because they lack the expertise to do more. A key to success for these start-up operations is to pass on the skills and experience of the returning expatriate scientists to locally educated graduates.

The returning scientists' relationships with US and European colleagues are critical to the success of the new service ventures. Most of these companies do not have sales and marketing staffs and depend on their founders' relationships to bring in new business. Because the founders usually leave families behind in Europe or the United States, they travel back frequently and use those trips to make sales calls.

Those trips home are important for new business development, but they can interrupt management continuity and undermine efforts to build organizations that inspire the confidence of Western pharmaceutical companies. The issue relates to more than technical expertise; it also relates to how the operations are run.

Another example: Housekeeping standards are not always appreciated. Even in non-GMP or non-GLP discovery operations, it is disconcerting to see used latex gloves lying on tabletops in animal dosing rooms or cigarette burns on the floor. Poor housekeeping will immediately turn off a delegation from Big Pharma.

Big Pharma interest

Industry has a growing concern that the labor-cost advantage driving Western interest in Chinese drug development services may not last much longer. Labor costs for CROs around major cities such as Beijing and Shanghai are rising at the rate of 15–20% per year, meaning they are doubling every five years. In addition, companies often must provide nonwage compensation such as housing and car allowances. Competition for scientists with postdoctoral and full-time work experience at major Western pharmaceutical companies is particularly intense. Some observers believe that the combination of wage inflation and the likely appreciation of the renminbi against the dollar will greatly diminish the cost advantages of Chinese CROs in the next 5–10 years.

Despite the potential erosion of the costs advantage, Big Pharma companies are anxious to get established in China. Immediate cost savings are the main driver, but they have a longer-term objective as well: the local market opportunity. China already ranks as the ninth largest pharmaceutical market and, according to some projections, will jump to the position of fifth largest market in 5 years.

Some major pharmaceutical companies still are searching for an appropriate way to operate in China, but others have jumped in with both feet. Roche established an R&D facility in Shanghai, and Novartis announced plans for one. One of the most innovative approaches has been the ChemExplorer (Shanghai, China) venture in Shanghai between Lilly (Indianapolis, IN, http://www.lilly.com/) and Chem-Partner (Shanghai, China), a discovery services CRO. ChemExplorer was established using what has been labeled the "B–O–T" model, which stands for build–operate–transfer. Under that model, ChemPartner had initial responsibility for setting up ChemExplorer's laboratories, hiring staff, and managing operations. Over time, management of the scientific operations has been transferred to Lilly, which appoints the senior scientific staff, although administrative responsibilities have remained with ChemPartner.