Pharmaceutical executives toying with pill boxes and clipboards sat behind rows of booths at the recent EU-China Partenariat in Chengdu, a kind of speed-dating event to link local and European firms. All were seeking partners and distributors in Europe and all boasted original products and interesting R&D-driven product pools.

One exhibitor, Shanghai-based Nabio, sends trained scouts up to the Qinling Mountains in central China to pluck some of 10,000 herbs there for the company's R&D centre at the Northwest University of Xi'an. A 30-strong research and development staff tests the herbs for export value - hardly cutting-edge stuff. The company South East Asia has proved an export market, says company chief executive Wang Tong, but so far the only exports going to more valuable European markets are a cancer-fighting herb shipped to the UK in 10-kilogram sacks. The company hasn't yet secured EU quality certification for its best-seller, a 100-gram box of Reseveratrol which sells for RMB200 in China. Nabio has a patent for the anti-ageing tablets, produced from a chemical found in wine grape skins. "But we don't have a patent for the drug," says company boss Dr Wang Tong.

Wang Tong jealously guards the know-how behind the potion. "No one copied it,"

he says. "We have a licence from the state." But Reseveratrol is hardly very new - the potion dates it to a 1997 Science magazine article showing how it reduces cholesterol and blood fat.

Wang claims "very good sales" for Reservatrol since putting the product on the Chinese market in 2004. Now he's seeking an established European brand to package the drug under licence from Nabio. "It's a product that will sell well in the West. It's modern and scientific." On some things he may be more accurate: "China has many health products, but quality control is poor," says Wang, who boasts ISO and Swiss quality marks for his products.

Rising GDP growth in China is generating sales of medicines and wellness products like Wang Tong's pills. An ageing population and improved - especially private - healthcare facilities are driving demand for drugs. And China's new found prosperity is also causing hitherto uncommon illnesses: diabetes, heart disease and cancer.

But the stuff on China's pharmacy shelves, like Nabio's Reseveratrol, is outdated. European pharmaceutical firms - some of them are among the top ten investors in pharmaceutical R&D in China - complain slow-moving red tape makes it hard to develop and sell new drugs here. "It typically takes 11 months to get clinical trial approval here and new drugs come onto the market three years behind other territories," explains Chris Baron, a pharmaceuticals industry consultant.

Favouritism means poorer-quality domestic products are prioritized for licences and purchase lists, says Baron, whose Beijing-based CJB Consultants advises foreign pharmaceutical companies on market entry. "It's absurd that there's a need for clinical trials for products which have been used in millions of cases in USA, EU. This takes months and is a barrier to trade."

New will to innovate

Newly patented medicines typically account for 50 percent of market share in the EU and the US, according to the EU Chamber's 2007 Position Paper, but only 5 percent of medicines in China relate to Chinese patents, and 15 percent to international patents. Market growth is slowing down - an average 12-15 percent annual growth clip has been dragged back by the slowness of reform, according to the position paper. But there have been glimmers of hope, says Eric Bouteiller, who chairs the Chamber's pharmaceuticals working group. In 2006 China started to show a "very direct and explicit will" to support pharmaceutical R&D, says Bouteiller, who runs the China operations of Ibsen, a mid-sized pharmaceuticals group manufacturing mostly drugs for stomach problems and cancer treatment.

Chinese President Hu Jintao's frequent utterances on the need for an innovation-driven economy were a "very, very important step in the right direction ... and compensated for what has been missing," Bouteiller says. Bouteiller now wants China to match words with deeds in a promised update to the patent law to protect innovators in pharmaceuticals when the National People's Congress sits in 2007.

The EU Chamber wants China to simplify restoration and renewal of patents and to guarantee data exclusivity (a period of time during which competitors are not allowed to rely on the data generated during the development process) for foreign companies seeking marketing licences in China. The reforms, the pharmaceuticals working group suggests, would encourage smaller firms with unique products and provide incentives for local firms to register the drugs in China as licensees. "We have a lot of new ideas from doctors and chemists," says Bouteiller, "but the system for legal protection and the patent system have been very poor."

It all sounds like a no-brainer. China wants a more high-tech economy and the country's 11th Five-Year Plan pledges the government to reinvigorating China through science and innovation. But incredibly, of ?100 billion invested into pharmaceutical research and development worldwide every year China is contributing only a fraction.

Pharmaceutical R&D is sophisticated, patient and expensive work. It takes up to 12 years and ?500 million to get a drug to market, and only one drug in 5,000 makes it, according to the working group's estimates. Only 5 percent of the market share of R&D-based pharmaceuticals industry in China relates to Chinese patents (and less than 15 percent to international patents). Newly patented medicines account for 50 percent of market share in Europe and North America.

Despite Hu's broad intentions on innovation, China lacks a clear-cut strategy to develop an R&D-based pharma industry. And yet European pharmaceutical firms are beginning to pour money into R&D in China. UK-based AstraZeneca is spending ?100 million on a new R&D centre in China and collaborating with local universities to come up with new cancer-fighting drugs. Swiss drug maker Novartis announced in late 2006 its own plans for a US$100

million research facility in Shanghai. Spending on research and development has been relatively insignificant so far - EU Chamber estimates for drug R&D vary between ?5-10 million - compared to the US$1 billion spent by European firms to build over 20 factories around the country. Most foreign pharmaceutical companies in China - 75 percent - are manufacturing only, estimates Baron, while 25 percent are doing R&D here.

Rising local star?

A few innovators are emerging locally too, with government help. China's domestic pharmaceuticals sector is a story of prodigious numbers of generic drug makers churning out licensed drugs, often for multinationals. But SARS was a rude reminder that China needs to come up with its own new drugs to fight evolving viruses. When Beijing-based Sinovac Biotech Ltd. announced a successful clinical trial on its proprietary vaccine for the H5N1 avian influenza, it didn't neglect to thank the Chinese Centers For Disease Control and Prevention, which co-developed the drug. Neither did it forget the National Development and Reform Commission, which provided funding to help Sinovac get its seasonal influenza vaccine plant ready to produce 20 million doses per year, the kind of mass quantities of vaccines China will need in the event of a bird flu outbreak.

Sinovac, described by a spokesman as a Chinese biopharmaceutical company "focused on research, development and commercialisation of vaccines," sells Healive, a trademarked hepatitis A vaccine, and the hepatitis B drug Bilive. Yet the company "... has nothing new," says Baron, himself formerly general manager of GlaxoSmithKline's vaccines business in China until 2001. "They have flu technology that is 40 or 50 years old. Their work on avian flu is very far behind international firms like Glaxo." Very little true innovation goes on in the Chinese pharmaceuticals sector, according to Baron. China's manufacturing processes lag behind India which, unlike China, exports pharmaceuticals to the EU and USA. China may have big biotech ambitions, but it will have to match them with R&D spending, he says. "It takes up to US$800 million to develop a drug. I don't see any Chinese company that spent that or close to it." Yet, he concedes, China has plenty of doctors and scientists, the "right recipe" to become a power in drug research.

IPR or die

China's R&D dreams won't be fulfilled without proper intellectual property rights protection - no local company will invest if it knows it will be copied, says Baron. Drugs with no active ingredients or containing highly toxic substances make up between 10 and 30 percent of the market in developing countries (compared to 1 percent in Western Europe), according to IMPACT, a medical anti-counterfeiting group run by the World Health Organisation and which has been encouraging co-operation between police, customs and other officials to squeeze out fake drugs coming out of China, Indonesia and Vietnam. Worryingly, droves of new illegal internet pharmacies have been selling counterfeit medicines worldwide, according to an IMPACT spokesman.

China may be starting to take counterfeiters more seriously. The EU Chamber's pharmaceuticals working group is "very impressed" by new pressure from the government in the last year and a half against fake medicines, says Bouteiller, who has been doing business in China for 20 years. "There is the will now. We see more pressure and raids. Fake medicines are still a big issue, but decreasingly so."

In the summer of 2006 US pharmaceutical firm Pfizer got a favourable judgement against 12 local firms seeking to use the multinational's patented ingredients. Weak links remain in the licensing process. "You file the product details with local authorities and, in many cases, it's been very easy for someone to copy the file." There has been a push for confidentiality, says Baron, but enforcement of copyright laws remains patchy.

Paying for innovation

Artificially low prices are also preventing innovation, says Bouteiller. "China bases its calculations on the generic cost of producing the medicines, not on the cost of innovation. Most innovation is done by foreign firms. Local companies don't want to invest in 10 years research. It's too costly for them."

If government price cuts continue - there have been 17 in the past five years - there will be less incentive to spend on R&D, according to the EU pharmaceutical working group's 2006 position paper. "We need a clear policy and stability," says Bouteiller. "You need such a long time to develop a drug, if you don't have adequate return afterwards for five or 10 years, you can't seriously do R&D." He sees hope in a recent document from the policy-setting National Development and Reform Commission (NDRC) which recommended high-stability pricing for certain products. "They want to encourage more innovation," Bouteiller says.

Rather than keeping prices low, China needs to spend more on healthcare so that locals can obtain better medicines, says Baron. "New medicines mean more savings through less over-prescription of services and medicines. Governments in the West realise that new medicines can keep people out of hospital. It's a real payback. Chinese doctors and pharmaceutical companies would do well also by being able to work with new medicines."

As part of its 2006 blueprint for a "Harmonious Society" China has promised more money for health care, particularly in rural areas. Earlier reforms liberalised distribution and pricing and promised wider lists of medicines covered under the reimbursement programme. But the money hasn't been coming through. China spends 5.5 percent of GDP on healthcare compared with an average of 28.2 percent in OECD countries. To properly tap China's massive market, European firms need to get on China's National Reimbursement List. However, the list should be updated annually to get new products listed, suggested the EU Chamber's pharmaceuticals working group in its 2006 position paper.

Public spending is static but foreign companies are profitable here, "or they wouldn't be spending more on investment," says Baron. Multinationals which hitherto took 25 percent of business from 20 percent of geography in coastal regions are now inching into second-tier cities. "Typically multinationals' products are not big sellers in rural areas," says Baron, who while at GlaxoSmithKline made the hepatitis C drug Heptadin a top seller in China.

New entrants

When you consider that China's anti-flu vaccination rate is negligible compared to neighbouring Korea (where 30 percent of the population is vaccinated) the potential of the local market is huge. "The long-term outlook is positive, if only because China knows it needs to develop its biotech industry ... No one is divesting - most foreigners are investing more," says Baron, who predicts consolidation among the "huge" number of domestic firms. As China liberalises its pharmaceutical distribution scene some of those locals may find willing partners among European SMEs, faced with the same market entry challenges and testing fees as multinationals, only on a smaller budget.

"They have interesting products and they are under pressure from shareholders to get on the ground here," says Baron. Companies can, in theory at least, now distribute more easily, under WTO liberalisation. "In the 1980s manufacturing was the only way to come in. Now there's a new generation of small companies seeking entry. You pick a distributor to get you access to each region."

The best way for foreign companies to enter and ally with ambitious local firms like Nabio, suggests Bouteiller's working group, would be for China to switch from a manufacturing licence system to a marketing licence system. China currently distinguishes between drugs based on whether they're made locally or abroad, whereas other markets operate according to a "marketing authorization" system. The latter allows the licence holder to choose a domestic manufacturer through whom local marketing and promotion becomes more cost-efficient (while the original innovator keeps its name on the licence) and registration requirements are the same for domestic and imported drugs, according to the group's position paper. "This would allow the innovator to keep spending on R&D rather than building a manufacturing facility in China."