In China's tougher drug market, minnows open back door for 'Big Pharma'

By Adam Jourdan

SHANGHAI (Reuters) - Armed with Beijing funds and friends in the right places, Chinese drug minnows are thriving, luring money from 'Big Pharma' majors struggling to restore the strong growth they once enjoyed in the world's second-largest medicine market.

Chinese healthcare mergers and acquisitions nearly tripled last year to more than $50 billion, helped by giants like GlaxoSmithKline PLC and Eli Lilly and Co tapping small biotech and research innovators. The targets offer vital regulatory know-how as Beijing builds a domestic drug industry.

For Big Pharma, acquisitions, licensing deals and joint ventures offer a back door into a market where Beijing expects healthcare spending to rise to $1.3 trillion by 2020. The majors need the opening: their China growth has stalled to low single-digit pace from over 20 percent just four years ago as branded generics have lost their shine.

"As a China biotech (company) we have the advantage of knowing policy, understanding the environment and being able to mobilise resources to get things done," said Li Chen, 54, chief executive of Hua Medicine. Hua has a deal in place to develop drugs including a diabetes treatment licensed from Swiss giant Roche Holding AG .

While firms like Hua can help global drugmakers navigate complex regulatory risks, speeding up approvals in treatment areas like diabetes and cancer, they get something in return - access to what Hua's Li calls "good assets" and in some cases potential partners to sell their wares overseas.

For Li, a former Roche scientist, Hua's partnership deal brings the advantages of a tie-up with a global industry leader to a company with a staff of around just 25 people, which he founded himself in Shanghai five years ago.

"We were looking for assets around the world so that's a really great match - and I know this asset really well," Li said. Among his firms peers, interest in such tie-ups is growing.

M&A BOOM

The buzz around China's healthcare industry has helped it outstrip hotspots like India to become the most active region in Asia for pharmaceutical tie-ups, said Wei Zheng, healthcare analyst at BMI Research.

Chinese healthcare M&A last year surged to $54 billion from $18.8 billion the year before, according to Thomson Reuters data, not including the value of numerous joint ventures and licensing deals.

There have already been deals worth more than $9 billion this year, the data shows, showing demand for the assets remains robust. As well as acquisitions, partnership deals are increasingly being sought after, industry executives say.

"A lot of firms are coming here to tap into a cost-effective way of doing drug development," said Mireille Gillings, chief executive of U.S. firm HUYA Bioscience International, which has scouts around China hunting for drug development breakthroughs.

At the same time, other small firms are keen to find overseas partners to push their drugs overseas. HUYA has in-licensed a Chinese immunotherapy cancer treatment that is undergoing trials in Japan and the United States.

LOCAL NETWORKS

Shanghai-based research firm WuXi AppTec is one company that may fit that bill. It now employees around 11,000 people worldwide and said this month it was setting up a joint venture with U.S.-listed Juno Therapeutics Inc to develop innovative cancer drugs - in China.

"Honestly, if you manufacture locally, test local and file local, that will give you a time advantage," the firm's chief executive, Ge Li, told Reuters. "It's as simple as that."

The tilt in strategy for the majors comes as Beijing accelerates efforts to promote a 'Made in China' drug industry.

GlaxoSmithKline's China head, Herve Gisserot, told Reuters late last year that Beijing was putting pressure on off-patent generics, reining in prices and trying to cut out low-quality drugs - positive moves longer-term, but which created short-term challenges.

"The only thing for pharma is that some of the things will happen sooner than others. Price erosion will likely be faster than the accelerated approval of new medicines," he said.

'SEA TURTLES'

Chinese partners bring an extra dimension: The domestic start-ups aren't shy about their government backing and political connections, an important element to help attract funding and navigate complex regulations.

Samantha Du, chief executive of Shanghai-based Zai Lab, which has in-licensed cancer treatment drugs from Pfizer Inc and struck a partnership in March with German pharmaceutical giant Boehringer Ingelheim, said her firm had "lots of government funding".

Du, 52, like Hua Medicine's Li Chen, is a so-called "sea turtle" - one of China's best and brightest, who has returned home after studying and working overseas. She has served on various government-linked committees, she said, noting this had done nothing to harm the firm's prospects.

"Over 18 months, we've raised around $140 million and haven't even spent the first round," she said. Her firm, founded in 2013, employs 30 staff in-house. "There's plenty of money to spend."

(Reporting by Adam Jourdan; Additional reporting by Brenda Goh in SHANGHAI and Elaine Tan in MANILA; Editing by Kenneth Maxwell)