Now, as most of my colleagues in the industry know that I am one of the biggest fans of Wu-Xi and consider Dr. Ge Li (Wu-Xi's CEO) a friend; however, for Ms. Kitchens and Forbers to only focus on one company in all of China (or India or Singapore or Russia) really does no justice to the entire premise of Pharma's new "Farming-Out" business model....
"In the race to find the next billion-dollar drug, some of the world's largest pharmaceutical companies are starting in China. For the past three years industry giants such as Pfizer and Merck have quietly dished out early-stage research projects to scientists working in the whitewashed buildings of WuXi PharmaTech, China's largest drug R&D company. "We have a cost advantage and access to other resources, such as research animals, and a very good infrastructure. All of these things make us competitive," says Hai Mi, head of WuXi's investor relations.
On the surface WuXi (pronounced "woo-she") is just another wrinkle in the global outsourcing phenomenon in which work migrates to regions where there are low labor and materials costs. But WuXi--one of the first such Chinese companies to market itself internationally--also represents a turning point in the global pharmaceutical industry. "If you're in the U.S. and you think about biotechnology, you'll first think about Boston and San Francisco," says Peter A. Singer, a senior scientist at McLaughlin-Rotman Centre for Global Health in Toronto, who conducted a study examining 22 of China's homegrown health biotech firms, WuXi among them. "But even now, and certainly in the near future," he says, "that global value chain is going to include Beijing and Hyderabad."
The Chinese biopharmaceutical industry is quickly on the rise, having grown 30% a year between 2000 and 2005 to hit $3 billion. And some of its research is quite advanced: Chinese companies are among the first in the world, Singer says, to produce gene and stem cell therapies for commercial use. To Singer, China's nascent pharmaceutical industry is now like a baby dragon: "When it grows up and starts breathing fire on you," he says, "it will be very hard to ignore."
Already WuXi has made its mark globally. Founded in 2000, the Shanghai contract research firm netted $22 million on sales of $98 million in the nine months ended last Sept. 30, more than quadrupling and doubling those figures, respectively, from a year earlier, and counts among its clients nine of the world's ten largest pharmaceutical and biotech companies, most of them American. It listed on the New York Stock Exchange in August and of late boasted a $1.4 billion market cap. And it's on the move: In January WuXi said it would expand its U.S. customer base even further with the purchase of AppTec, a Minneapolis contract testing, r&d and manufacturing firm, for $163 million (including $11.7 million in debt).
WuXi's Beijing-born founder, Ge Li, 40, is one of a growing number of so-called sea turtles, the Mandarin term for Chinese nationals who were educated and employed abroad and are returning home to work. Li, a U.S. citizen, spent a decade living and working in the U.S. After earning a Ph.D. in chemistry from Columbia University in 1993, Li became a founding member of Pharmacopeia, a Princeton, New Jersey biotech startup built on the then hot field of combinatorial chemistry, which provided the quickest and most efficient method for new-drug-candidate discovery. Joseph Mollica, now Pharmacopeia's board chairman, remembers Li as one who focused not only on the science but also on the marketing. "He was always in my office, coming up with better ways to push our products," Mollica recalls. "He was clearly thinking about ways to make this a more efficient process for everyone."
On a business trip to China in 1999 Li began to see that the discovery chemistry model was something that could be replicated in China, with its well-educated, and less costly, workforce. Upon his return to the U.S., Li floated the idea to Pharmacopeia's management team, says Mi (investor relations head), but it was rejected (Mollica says it wasn't a good fit with the firm's business line at the time). "Still, [Li] felt that the idea was so compelling that he had to do this on his own," says Mi.
Li left Pharmacopeia on good terms: The biotech became WuXi's first customer. Li was on to something, Mollica says, especially since the outsourcing of early-stage drug discovery within the U.S. is going to disappear, he predicts.
WuXi is on the rise at a particularly trying time for U.S. drugmakers. A year ago Pfizer (nyse: PFE - news - people ), a big WuXi customer, announced that it would shutter three R&D labs in Michigan as part of a plan to lay off a total of 10,000 employees. And Merck (nyse: MRK - news - people ) is expected to cut 7,000 jobs by the end of this year. Yet the quest to find blockbuster drugs is tougher than ever: It can take millions of dollars, and years of research, to find just one promising compound.
That's why some of these companies are now turning to WuXi for its early-stage research, which involves screening millions of chemical compounds in the search for disease-fighting drugs. WuXi employs 2,100 scientists, whose salaries are at least 50% less than their U.S. counterparts, figures Mi. (As WuXi points out in its filing to go public in the U.S., any drug developed in China for use in the U.S. would have to conform to U.S. Food & Drug Administration guidelines.)
But WuXi is different in other ways: Of its 35 executives 77% are U.S.- or Japan-educated, which goes a long way toward establishing a "comfort level" with customers, says Mi. And in a country not exactly known for the vigorous protection of intellectual property, WuXi is trying hard to fight that image. All employees must complete IP-protection training. The labs can be entered only with the use of an electronic key card. Lab computers have no data-recording functions and no outside Internet connection, and chemistry structures are prohibited in communal work areas.
WuXi's Li understands how crucial it is for the company to safeguard its customers' IP. "It is the lifeblood for a company like ours," he has said. (He declined to be interviewed.)
Li's challenges now are twofold: He must hold on to the talent he's attracted, while staying ahead of the multinational firms that are building a presence in China. He must be doing something right: Between 2005 and 2006, according to the latest data available, Pfizer and Merck both boosted their business with WuXi. Says Li: "We have experienced 100% repeat business from our top ten customers."