Following last week's interview with General Biologic's Matthew Chervenak about the challenges of setting up a biotech business in China, we sought the opinion of an attorney about the legal issues Western companies face when they operate there. Attorney Arthur Mok works in the Shanghai office of intellectual property specialists Hogan & Hartson. He took the time this week to talk with BioCommerce Week about the sticky IP issues biotech firms deal with in China, and his view of the emerging life sciences industry there.
We have noticed that many life science research tool companies that we cover, i.e., Invitrogen, ABI, GE Healthcare, etcetera, are starting or expanding operations in China. What does China offer these types of companies in particular?
I can't actually talk specifically about some of those companies because they are actually clients of ours, but what I can say is parsing cost of operations is one of the primary attractants to this market. I would say that's probably the number one reason why most organizations like the ones you mentioned come here. The availability of talent [and] researchers. There are a significant number of Chinese returnees that were trained in the United States and that worked for some of these organizations that have actually returned to China and found it to be personally more rewarding for these returnees to be in China. There is a talented labor pool to harvest people from, [and] develop their own operation centers here. Those two aspects combined make a pretty compelling story to be here.
What are the main challenges faced by Western companies that want to set up operations in China?
Obviously, there is a difficulty in that the legal environment here is quite different than in the United States. There is a lot of uncertainty, a lot of regulations that can be interpreted in many different ways. People often find that legal challenges and legal obstacles tend to be higher barriers to entry or to conduct business than they would otherwise be in the United States. That's not to say that people overcome them, and they do all the time.
Can you mention one or two concrete examples of these legal obstacles?
For instance, there is technology transfer from the parent entity to the Chinese subsidiary. There are often issues of concern about transferring technology even to a wholly owned entity; they are referred to as wholly foreign-owned enterprises here in China. IP concerns are actually still very much at the top of the list here, although the Chinese government has been placing a lot of emphasis on addressing foreign investor concern in that particular space.
How have they addressed these concerns, and what must happen to make this less of a concern for investors?
The foreign investment community would like to see more transparency in the way that IP laws are enforced. They would like to see more of an enforcement infrastructure. There are actually quite a few laws on the books. The Chinese IP laws are actually in existence, it's just that it's very difficult for the Chinese government by that I mean the central government all the way down to the local municipality agencies to enforce some of the laws. There is also a cultural difference. People often times fail to realize that a little more than 25 years ago, there really were no IP laws in China. IP laws are still a fairly new concept here, so they required a cultural mindshift for people to understand the importance of IP.
In the city that I live in, Shanghai, it's been given a lot of attention by the city government. You can walk around the city and see signs literally posted around the city saying, 'Intellectual property is important to you and me, let's forward investment in our city.' It's been drilled down to the person on the street level now. It's actually very important. The government understands that it could act as a deterrent for growth in foreign investment.
IP issues are actually the main concern that we hear from US companies …
Exactly, that's been the main reluctance. It's a recurring theme that's been around for the last decade, if more. People just have to realize that things in China don't change overnight. There has been substantial progress, but the legal environment here and the IP culture is not the same as it is in the United States.
What other legal challenges are there, besides IP law, in setting up an operation in China?
There are some very basic challenges to establishing a business in China. It's not the same as establishing a business enterprise in the United States. There are certain registered capital requirements, [and] there are certain administrative hurdles that foreign businesses have to overcome to just set up a business. That often makes it a little more difficult. The government, again, is trying to streamline that process to make it easier for foreign investors to establish business operations here, and they have special enterprise zones, and they offer special incentives for people in different industries to establish and invest in businesses here in China.
Does this include the biotechnology industry?
Yes, they actually have life sciences parks where the government has designated certain areas. These are not central government designated zones; these are usually designated by provinces in China or cities. For example, Beijing and Shanghai have their own designated zones. Shanghai is in the process of promoting a new life sciences park. They are offering economic incentives, like tax concessions, possible investment matching, and other types of incentives that you find in different industry areas. For example, this was long used in the semiconductor industry. That is now pretty much over and there has been a growing emphasis on life sciences and biotechnology.
So this is not only for home-grown Chinese businesses but also for foreign businesses?
Yes. It's designed to attract foreign businesses, but at the same time, the Chinese government always likes to see the development of its own domestic industries. I don't think you can say that life sciences would be isolated from that. They really would like to see a homegrown industry, but at the same time they realize it's really important to have the multinational companies involved in the development of their industry.
How did you wind up in China, and what is your role as a lawyer in helping clients get established there?
I am a private equity and venture capital lawyer at a law firm called Hogan & Hartson. They have been involved in Asia-Pacific deals for quite some time, and my firm decided to open an office in Shanghai last year. So, I was sent out to open the office. I have had a long interest in life sciences. In fact, for several years before I moved out to Shanghai last year, I was doing primarily life sciences deals, representing biotechnology companies in capital-raising activities as well as corporate strategic investors that invest in early-stage life sciences companies. A number of these companies that I worked with had begun outsourcing some of their functions to Chinese companies, which I thought is a recurring theme and continue to see it as a recurring theme.
What kinds of functions?
Contract manufacturing activities and to some extent basic trial work. Obviously, there is sourcing of materials and other things as the thing to do these days. That's become more prevalent. I also noticed a similar level of interest in doing business with India. I happen to have more of a cultural connection; I am Chinese-American, and my firm was opening an office here, so it made perfect sense for me coming out here. I have just seen a tidal wave of interest in the life sciences community that's developing here in Shanghai amongst the foreign investors that are here. Everyone is looking for opportunities, they are especially focused on contract manufacturing and CRO investment opportunities here. There is plenty of activity, you don't see a lot of investment transactions actually being executed, but a lot of interest.
Why is that?
I think there are a lot of companies being started by these returnee Chinese, and lots of volume doesn't necessarily translate into lots of quality. It's a new industry and investors are being very careful in screening opportunities. A lot of these people have great scientific backgrounds and have tremendous skills and other resources to bring to bear for these new enterprises they are starting, but many times, these are first-time entrepreneurs, they don't have experience running businesses.
Can you name some of the clients you have worked with?
No, [but] I can say that our firm represents a significant portion of the life sciences industry in the United States.