China and India have become R&D hotbeds and the offshoring destinations of choice for multinational companies (MNCs) in a range of industries. Whether in automotive parts, telecommunications, or computer software, MNCs already operate some 180 R&D centers in China and more than 100 in India. Motivated by such incentives as low costs, high levels of technical skill, and shrewd government policies, they are increasing Asia's role in their global R&D networks. In a 2004 survey of senior executives at MNCs across all industries, China ranked first among the most favored offshore bases for R&D; India ranked third, just behind the United States and just ahead of the United Kingdom.1

In this flurry of offshoring activity, the global biopharmaceutical industry lagged, largely because the regulatory and competitive environment in China and India was not conducive to MPC investment until recently. But things are different now. Both countries are buzzing with bold and innovative biopharma R&D projects. Investment, both governmental and private, is soaring. New service providers keep springing up. Capabilities are becoming more sophisticated and more widespread-both driving and being driven by the steady increase in R&D work arriving from offshore.

Over the past three years, the major MPCs have been rapidly intensifying their offshoring activity. Each month brings reports of new R&D centers being established or new therapeutic areas being investigated in China and India. Almost all of the top 20 MPCs have outsourced chemistry work to China, and some-perhaps sensing the great commercial advantage that a captive presence might bring-have also bought or established laboratories of their own. Others have chosen to focus on collaborations with government-directed institutes, such as the Shanghai Institute of Materia Medica (SIMM). In India, MPCs are busier than ever assigning projects to local vendors, making captive investments, or entering into codevelopment alliances with Indian companies. AstraZeneca, for example, has invested in a captive R&D center in Bangalore, where its new tuberculosis candidate drug molecule is undergoing final development. In addition, the company has forged an exciting partnership with Torrent Pharmaceuticals to work on a drug for hypertension.

MPCs have also been expanding the range of activities they are prepared to move offshore, particularly in India. Already comfortable offshoring some chemistry work (such as analog preparation and compound synthesis) and some clinical development (notably clinical data management and biostatistics), they are increasingly entrusting more ambitious activities-or whole stretches of the value chain-to Indian expertise: in vitro pharmacology to GVK Biosciences, for instance, and end-to-end chemistry to Torrent Pharmaceuticals.

Offshoring R&D work to China and India has three main attractions for MPCs: the potential to reduce costs and ease bottlenecks and other inefficiencies; the opportunity to tap the two countries' burgeoning biopharma R&D capabilities and resources; and the prospective commercial payoff from establishing a foothold in these rapidly growing markets.

Direct cost savings could run as high as 60 percent or even 80 percent on salaries in the discovery phases, and as high as 60 to 70 percent in cost per patient in clinical trials. Although some of these savings could be canceled out by the costs of managing activities remotely and by lower productivity in the offshore location, well-run projects should help smooth in-house work flows and relieve capacity constraints in the development pipeline.

When it comes to tapping the two countries' capabilities and resources, consider these advantages:

A Huge Talent Pool. In both China and India, annual graduates in chemistry, for example, outnumber their U.S. counterparts more than fivefold at the bachelor's level and more than threefold at the master's level. Even allowing for some variable standards of training, the supply of scientists and technicians (with a few exceptions that will be discussed below) seems reassuringly abundant. And India's graduates-or the great majority of them-offer the bonus of full proficiency in English.

Considerable Government Support. In China, life sciences research, having evolved mainly in state-funded research institutes, has a tradition of government sponsorship. (See the sidebar "China's Biotech R&D Is Underwritten by the Government.") Now private and semiprivate companies, too, can receive financial backing from the state in the form of both earmarked funds and tax advantages. What's more striking, perhaps, is the impressive involvement of the Indian government in promoting India's biopharma industry. After all, the country's R&D tradition, unlike China's, is one of energetic private entrepreneurship. India's Department of Biotechnology, established in 1986, has funded more than 1,800 R&D projects, helped to develop 12 vaccines, and transferred to the biotech industry 54 technologies, of which 17 have now been commercialized.

An Increasingly Favorable Infrastructure. A network of life sciences parks has developed in both countries. As of the end of 2005, there were some 60 in China-too many, perhaps, for the current workload-and 5 were fully operational in India with 17 more in progress. These parks, while raising the efficiency of the local vendor base, are also offering MPCs the basic amenities to set up shop and are throwing in several fiscal and regulatory incentives for them to do so. In addition, private companies and institutes are investing generously in new laboratories and research centers equipped with up-to-the-minute technologies.

A Burgeoning Market. Another great attraction of offshoring R&D to China and India is the potential commercial payoff. China is expected to become the world's fifth-largest pharma market by 2010. Its spending on pharmaceuticals, which came to $12 billion in 2005, is predicted to reach $37 billion by 2015. MPCs with an entrenched R&D presence in China can look forward to finding favorable openings to tap this market.

India is less of a draw in this respect. Its market is dominated by generics more than China's is, and the branded drugs sold there tend to be priced markedly lower than those sold in China. India's outlay on pharmaceuticals was $5.3 billion in 2005 and is predicted to reach $16 billion by 2015.

China and India Have Differing Advantages as Offshoring Destinations

Most of the benefits of offshoring apply, in varying degrees, to both countries. But there are many differentiating factors that executives of MPCs need to consider before choosing the destination for specific R&D initiatives and developing their strategy for China and India. (See Exhibit 1.)

Viewed broadly from the perspective of strategy and investment, the attractions of the two countries can be summarized as follows: India offers a near-term and long-term productivity boost, whereas China offers lucrative near-term and long-term commercial prospects, in addition to productivity gains. India is where MPCs can turbocharge their global R&D engines, improving their cost-effectiveness and productivity levels markedly. China is where they can place their strategic bets, not just to enjoy the rewards of a vibrant R&D landscape but also to win better access to a large and evolving commercial market.

India's special advantage resides in its vendor base, which is abundant, nimble, and resourceful. It can achieve voluminous high-quality output at low cost, enabling MPCs to pursue vastly more leads, maintain a far smoother flow through the pipeline, and boost their overall efficiency and flexibility.

The investment decisions of MPCs that take a more commercial view of things, however, might be swayed by the approaching bonanza of China's pharmaceutical market. By pursuing R&D in China, a company can position itself favorably in several ways:

What's at issue here is not so much whether to choose China or India-they are by no means mutually exclusive-as how to harness the specific strengths of each country while managing the various risks.

As they welcome the R&D opportunities on offer in China and India, MPCs need to keep things in proportion. Risks remain, and the countries' capabilities are by no means uniformly world-class across the R&D value chain. In light of this unevenness, R&D activities can be classified as near-term, medium-term, or long-term opportunities. However, the landscape is changing fast, with capabilities advancing constantly, so this picture may look rather different in a year's time.

The two best bets in the near term-for both China and India-are chemistry-phase activities and clinical trials. Preclinical trials have presented some stumbling blocks and are a medium-term opportunity at best. Most biology-related activities must

be classified as a long-term opportunity even though some innovative biology research is under way at Chinese research institutes.

The rest of this section provides a closer look at the two countries' current and potential capabilities-from the earliest to the final phases of biopharma R&D-together with an assessment of how those capabilities can best be exploited. The analysis is based on a detailed survey undertaken by BCG in late 2005 involving more than 90 vendors of discovery services in China and India; it also incorporates the views of officers at several prominent government research institutes in the two countries and of senior executives at more than ten MPCs operating there.

The earliest phase of biopharma R&D-biology research-will be the last to reach its full potential in China and India. Certainly it is evolving, and some activities are already conducted with ease, but end-to-end biology research is still some way off.

The biology activities that both countries can confidently provide at the moment are the less complex ones, notably protein expression and purification, in which Chinese capabilities are moving from E. coli bacteria to mammalian cells. India has, in addition, growing capabilities in bioinformatics-easily understandable, given its celebrated IT skills.

In general, biology still lags relative to the other components of the R&D value chain. Part of the problem is that a culture of innovation in pharma is still not deeply ingrained in either country. India's pharma industry traditionally concentrated on process reengineering and on low-cost manufacturing techniques for generics, whereas China's focused mainly on generics, over-

the-counter products, and traditional Chinese medicine (TCM) remedies. So until the 1990s, little serious pharma-related biology work was going on in China and India, and there was little incentive to build capabilities for it.2 This legacy of neglect is not easy to shake off.

That said, some innovative research projects in pharmaceutical biology-notably in stem cell research, animal cloning, gene sequencing, gene therapy, and bioinformatics-are now being pursued in one country or the other. The work occurs mainly at government research centers, such as India's Centre for Cellular and Molecular Biology and China's Institute of Genetics and Developmental Biology. A recent report by British scientists observed that Chinese research groups are "at, or approaching, the forefront of international stem cell research."3

China has also won international recognition for research on transgenic animals. It was the only developing country to be a partner in the Human Genome Project, and it has made notable strides in gene therapy, too: the cancer treatment Gendicine (recombinant human Ad-p53 injection), developed by the pioneering company SiBiono GeneTech and approved for use by Chinese regulators, has excited great interest beyond China's borders.

In India, IBM has been funding substantial computer research in protein structures. In general, however, such activities are concentrated in just a few institutions, and the overall level of biology capabilities is far lower than in China.

Despite their limited capabilities in biology, the two countries have attracted some interest and investment from MPCs in this phase of the innovation chain. At one end of the offshoring spectrum is Johnson & Johnson's outsourcing of basic biology work to Chinese vendors, for example; at the other is AstraZeneca's aforementioned captive R&D center in India, which is continuing the company's longstanding biology research on tuberculosis. AstraZeneca has invested about $15 million in this center so far and is committing another

$30 million over the next five years. The center's biology capabilities include target identification using comparative genomics, target validation using knock-in and knock-out transgenic-animal-model techniques, and assay development. All have contributed to AstraZeneca's new tuberculosis candidate drug molecule, developed entirely in-house at the center.

Other advances, perhaps more modest, will no doubt continue to be made in the two countries. In China they will occur mainly at government-sponsored research centers. In India they will increasingly result from private initiatives as well, both at domestic pharma companies (working autonomously or in collaboration with an MPC) and at the captive research facilities of MPCs.

In both China and India, chemistry is held in high regard, studied very widely, and pursued with considerable flair. Both countries offer a package

of basic chemistry work-including analog preparation and combinatorial and analytical chemistry, for example-equal in quality to that of the United States, Europe, and Japan but at one-third or even one-fifth the cost. Leading MPCs have been availing themselves abundantly of this bargain service since 2000.

The rising demand has sparked a proliferation of vendors. And it has spurred some of them to expand their skills and equip themselves to pursue high-end chemistry activities. Here India has greater experience and depth, allowing it to readily provide a more complex suite of services, including assay development, for example.

As vendors fill in the gaps and approach end-to-end chemistry capabilities, MPCs can consider a new type of relationship, moving from piecemeal outsourced projects to large-scale collaborations. Under this model, the MPC would hand over the active target (perhaps one that cannot be advanced in-house owing to capacity constraints), and the provider would carry out end-to-end chemistry followed by early-stage development before passing the baton back to the MPC.

Such codevelopment arrangements are already proceeding successfully. In China, GlaxoSmithKline has enjoyed a research partnership with SIMM since 1997, and several similar broad collaborations have been launched in India, notably the alliance of AstraZeneca with Torrent and that of GlaxoSmithKline with Ranbaxy. Whereas India currently has the edge in the range and versatility of its chemistry-service offerings, China can claim one unique advantage that is increasingly likely to interest MPCs: its pursuit of serious scientific research in traditional Chinese medicine. (See the sidebar "New Opportunities from Ancient Wisdom: Research in Traditional Chinese Medicine.")

Despite the attractions of both venues for chemistry offshoring, MPCs remain cautious, mainly owing to concerns about protecting data and IP rights. Such concerns are well founded but no longer as intense as they used to be-and certainly not grounds for staying away altogether and forfeiting the advantages of China- or India-based R&D. For one thing, vendors, especially in India, have learned to maintain strict standards of confidentiality, taking measures such as keeping an MPC project well separated from in-house R&D programs, assigning different pieces of a project to different scientists, and even making sure that the MPC client's name remains confidential.

In addition, the legal environment has changed. Both countries in effect became bound by the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement following their accession to the World Trade Organization-China in 2001 and India in 2005. In the past few years, China has thoroughly overhauled its relevant legislation and launched an awareness campaign to increase compliance. (Widespread flouting reportedly persists in other industries, however, and the biopharma industry is unlikely to be immune.) As for India, the Contract Act and various trade-secret provisions afford alternative statutory protection within the country, particularly for sensitive R&D data and know-how from the discovery phase. Although these protective measures have not yet been tested in pharma cases, precedents in the outsourcing of IT and business processes show that the laws can be enforced.

In both countries, preclinical ability can best be described as budding rather than blossoming. What's on offer is essentially the standard safety and metabolic profiling: services in PKDM and ADME, and toxicology tests in rodents. Vendors aspire to greater scope and scale in their preclinical trials but have struggled with administrative and regulatory obstacles-whether approval hurdles or restrictions on the sourcing of biological materials-as well as with internal deficiencies, such as a shortage of specialist pharmacologists.

Like biology, preclinical work in China is conducted predominantly at government-run institutes-for example, the Institute of Pharmacology and Toxicology at the Military Academy of Medical Sciences in Beijing. In India some government institutes have preclinical capabilities, but most of this work is carried out by independent private vendors (typically through an outsourcing contract) or by larger integrated pharma companies (often through a drug development collaboration with an MPC) that have learned the necessary skills from their in-house R&D programs. (See the sidebar "Developing Preclinical Capabilities in India," page 16.) Vendors have a particular advantage for MPCs: with their knowledge of the "system" and local customs, they are adept at cutting through red tape, expediting approvals, and generally reducing administrative headaches.

If preclinical capabilities in China and India are to mature to global standards, some impetus will have to be given to this particular stretch of the R&D value chain. In fact, regulators are responding positively. Genetically modified animals are being made more available to laboratories; government-supervised vivariums are being established to supplement the existing private vivariums and to meet the increasing industry demand; and approvals are becoming quicker and more predictable.4 In India an improved modus operandi for preclinical trials is now in place thanks to the June 2005 amendment to Schedule Y. This measure provides clear guidelines on the use of animals in preclinical tests and ensures that neutral scientists and experts, rather than animal rights lobbyists, predominate on the institutional animal ethics committees.

However, regulators have to keep a very firm hand. To earn international credibility for preclinical trials, they need to impose standards of laboratory practice that equal those of the United States, Europe, and Japan. As of early 2006, only six labs in India had secured good laboratory practice (GLP) certification, although another dozen were about to. China had 20 GLP-certified labs, but GLP standards might have been applied fairly loosely to reach that total. Since January 2005, China's State Food and Drug Administration has refused to grant drug registrations if the application contains data based on tests done in labs without GLP certification.

Thus, although the preclinical scene is certainly improving in China and India, it is still far from being in full flower. MPCs need to see more evidence of progress-far more GLP-certified labs, far more specialist pharmacologists, and further normalization of approval times and sourcing-before they wholeheartedly embrace preclinical opportunities in the two countries.

In contrast to the preclinical phase, clinical trials in China and India are flourishing. Given the two countries' low cost base and huge potential patient populations, they seem tailor-made for hosting trials and are duly offering services in abundance. Almost all the top MPCs have already offshored some clinical-trial work to India, and many have offshored it to China as well.

The surge has been extraordinary. In 2002 about 40 global trials were being conducted in India; in 2005 the number was about 200. Ten years ago the vendor base in India was so meager that go-getter MPCs had to set up captive bases of their own to run clinical trials; today there are more than 20 eager contract research organizations (CROs) with established capabilities in handling Phase II through Phase IV trials, not to mention dozens of energetic smaller vendors. And in China, after a slower start, the top ten local vendors have been registering annual growth rates of 50 percent, even as 200 to 300 smaller vendors have muscled in and several international CROs have set up shop. In both countries the boom looks set to continue. Double-digit annual growth in the number of clinical trials is predicted for the next five years at least.

In offshoring a particular trial or particular aspects of a trial, an MPC will often find India and China equally appealing. The two countries' capability profiles are very similar. In some respects, however, India may have the edge. It has a long record of conducting clinical data management (CDM) and biostatistics work for MPCs and may expect to receive the lion's share of such work in the future. (See Exhibit 2, below.)

Overall, the advantages of conducting clinical trials in the two countries are compelling. The wage bill is low. Indian and Chinese patients are often more treatment-naïve than their counterparts in the West-that is, they have not been exposed to as many treatments or medications-which arguably means that they yield more reliable results.5 Enrollment in trials can be fast and easy because of the large number of patients with unmet medical needs. And efficiency is high, since more patients can be recruited per site. Combine all these factors, and you have a unit cost per patient that is less than half, and often just one-third, that of the United States, Europe, or Japan.

Clinical trials differ from the other phases of the innovation chain in one crucial respect: by their nature they involve the public; hence, they are directly linked to future commercial activity. Most MPCs will not conduct clinical trials in countries where they do not intend to market the drug being tested. Accordingly, trials represent a major commercial commitment, giving MPCs a chance to develop relationships with physicians and patients. Since these are the people who will prescribe, request, buy, and promote the drug once it reaches the market, such relationships are crucial to enhancing the drug's sales potential.

From the perspective of market access, China seems the better bet, as noted above. For one thing, its government-unlike India's-plays

a central role in the biopharma industry, and MPCs that earn governmental goodwill by participating in the country's R&D advancement stand to earn favorable treatment as well. For another, the Chinese market is already far larger than India's, and the difference will be vastly greater in years to come.

Of course, China and India have potential drawbacks, too. MPCs remain worried about data security and, with more reason, about timing. Drug approvals have traditionally been slow in coming through, especially in China. Another looming concern is capacity constraints. Staffing levels and infrastructure could get overstretched if clinical-trial work continues to expand at current rates.