China will spend billions on biotech, even as the industry struggles in the U.S. to turn research into gold. Will U.S. biotech become the next Detroit?

By Fortune Editors
August 15, 2011

By David Ewing Duncan, contributor

FORTUNE — Now it’s China’s turn to fling lots of cash at trying to come up with cures.

For more than a decade, the U.S. has lavished funding on efforts to transform a wealth of biological breakthroughs in the lab into actual therapies and profits. After spending nearly a trillion dollars in public and private investments since 2000, however, the biotech and pharma industries have produced an average of only about 21 new drugs a year in recent years — only two-thirds of the output from 1996 to 2004. Drugs now take a dozen years to be tested and approved, and 90% of meds that reach human clinical trial fail.

This meager yield is causing investors to abscond and business models to be questioned, with only one in nine venture dollars in the U.S. last year going to biotech, down from a ratio of nearly one in six in 2009. Revenues are also down, with a handful of large biotechs like Amgen AMGN making the lion’s share of money while the majority of biotechs struggle to raise funds, especially for early stage projects.

Meanwhile, across the Pacific Ocean, the Chinese government has decided that now is the time to take some of its massive national reserves of cash and launch a spending spree on biomedicine — $308 billion over the next five years. “The development priorities of the 12th Five-Year Plan – biopharmacy, bioengineering, bioagriculture, and biomanufacturing – will bring benefits to Chinese people,” said Chinese State Councilor Liu Yandong at a recent meeting, according to China Daily. The article in this state-funded newspaper goes on to report the ambitious goals of this investment: “From 2011 to 2015, it is expected to generate 1 million jobs, extend people’s life expectancies by one year and reduce the infant mortality rate to 12 percent, as well as reduce emissions of the most common pollutants by 10 percent, Ma elaborated.”

This commitment mirrors the attitude in the U.S. in our giddier days of 1998, when President Bill Clinton joined with Congressional leaders to champion a doubling of the NIH’s budget over five years. This major bump up in biomedical research came as the Human Genome Project – which completed a draft “map” of human DNA in 2000 – kicked into high gear and scientists believed that the burgeoning field of molecular biology soon would be producing a plethora of new drugs and treatments during the decade of the aughts.

Avoiding a Detroit analogy

What happened in the U.S. is both a cautionary tale and an opportunity – neither apparently lost on the Chinese.

The cautionary tale is what happens when governments — and in this case the private sector in Big Pharma — throw money into research without a real plan to translate all of the discoveries, which can be dazzling as science projects, into tangible products. A mere 4% of the NIH’s budget goes to so-called “translational medicine,” an oversight acknowledged by NIH Director Francis Collins late last year when he hastily announced plans to form a new Institute for Translational Medicine and Therapeutics (ITMAT). This is great idea, although this new entity is having to make due with no overall increase in translational funding.

The opportunity for the Chinese – and, of course, for the U.S. – is to learn from this overemphasis on the “R” (research) in the “R&D” equation, and to focus more on the “D” (development). The other opening for China (and others) is to take the mass of basic research bought by America’s trillion-dollar investment, which is readily available in journals and databases, and turn it into products – and into gold.

Like Japan vis-à-vis Detroit in the 1970s, China finds itself with cash and without an ingrained way of doing things in biotechnology, allowing them to come up with fresh approaches. Also like the Japanese 40 years ago, China has sent its brain trust of students and young researchers to our universities and to work in our companies to learn what’s gone right – and wrong.

No one, including China, is even close to truly challenging the U.S. in biotechnology – not yet. Nor is this industry in the U.S. as calcified as Detroit during its heavy-metal doldrums of the 1970s, with American “R” still highly innovative and globally focused. U.S. life science companies, ranging from big pharmas such as Merck MRK and Pfizer PFE to biotechs such as Biogen-Idec BIIB are also eagerly collaborating with Chinese counterparts.

Yet there is a question of whether America in the long run can maintain its edge as the biotech colossus. I suspect that it won’t – though as the “New Detroit” is discovering, this may not necessarily be a bad thing for consumers, or for the company’s bottom line, even if it may be equally painful to make a transition from the old to the new.

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