By Joanne Chiu

HONG KONG (Reuters) - Shangpharma Corp, the second-largest pharmaceutical and biotechnology research outsourcing firm in China, is considering an initial public offering at a time when investors are lapping up Chinese stocks.

Global private equity firm TPG (TPG.UL: Quote, Profile, Research), through its TPG Growth Fund and TPG Biotech Fund, have invested more than US$30 million in the company, its top executive said on Tuesday.

The 5-year-old firm, which provides research and development in a hyper-competitive, poorly regulated -- but booming -- Chinese drugs market, hopes to use TPG's capital and expertise to expand its client list beyond Eli Lilly (LLY.N: Quote, Profile, Research) and others.

Analysts say global drug giants are increasingly outsourcing portions of research once deemed exclusively in-house, including to China to save time and costs -- despite the country's patchy record of enforcing intellectual property rights.

"Following the company's speedy growth in the past few years, it needs more talent and facilities to expand its business," Chief Executive Officer Michael Hui told Reuters in an interview. "We can't just rely on our own resources."

He did not elaborate on the intended IPO, which comes at a time when stock markets in Shanghai and Hong Kong are hovering near record highs.

Hui said the sector had huge potential, with global R&D expenditures for pharmaceutical and biotechnology companies rising to US$55.2 billion in 2006 from US$47.6 billion in 2004, the last year for which data was available.

Shares in Shangpharma's rival, WuXi PharmaTech (WX.N: Quote, Profile, Research) (Cayman) Inc (WX.N: Quote, Profile, Research), rose as much as 38 percent in their U.S. market debut on Aug 9. 

Foreign investors are also seen snapping up shares of companies in China's growing but under-regulated pharmaceutical sector, attracted by low costs and projected soaring demand as the nation's huge population ages rapidly.

Shangpharma hopes to leverage the financial strength and industry expertise of TPG, formerly known as Texas Pacific Group, to further develop its business, Hui said.

It plans to expand beyond chemistry outsourcing to provide more integrated drug discovery and early development services.

Transnational pharmaceutical and biotechnology firms have increased outsourcing their R&D to China and India.

"They come to China is not just for cost saving but for its substantial talent pool and huge domestic market potential," Hui said.

Founded in 2002 by Hui, Shangpharma controls Shanghai ChemPartner Co Ltd and Shanghai ChemExplor Co Ltd, whose customers include Eli Lilly & Co (LLY.N: Quote, Profile, Research).

Shangpharma, which provides customized services to international pharmaceutical, biotech, agrochemical and chemical companies, plans to build a production base that will churn out drugs for trials.

It's expected to be completed by 2008.