A Promising Frontier Develops in China for Pharmaceutical Outsourcing
On October 26, shares in WuXi PharmaTech closed at $39.35, double their $19.60 closing price on their first day of New York Stock Exchange trading less than three months earlier.
The early success of China's largest pharmaceutical and biotechnology R&D outsourcing service provider bodes well for the seven-year-old company and the whole contract research organization industry. "It is an exciting story," said Norman Chen, a partner at Fidelity Asia Ventures, an early investor in WuXi. "We have great confidence in the company and in the future of the CRO industry in China."
Indeed, industry insiders say given pharmaceutical companies' efforts to keep expenses low, that Asia, especially China, Taiwan and India, will emerge as strong CRO markets. "Pharmaceutical companies are under increasing cost pressures," according to Steven M. Hutchins, vice president of business development and collaboration management at BioDuro, a leading San Diego-based global life science outsourcing services company. "They are looking for ways to lower the cost of discovering and developing new drugs."
The pharmaceutical industry has been outsourcing research and development processes since the 1970s. CROs have evolved to cover all aspects of the industry, from discovery to post-marketing. And while the drug discovery cycle has lengthened in recent years, the U.K.-based market research firm Business Insights has found that clinical trials conducted by CROs are completed up to 30% more quickly than those conducted in-house by pharmaceutical companies.
A Fast-growing Market
The global CRO market, worth an estimated $14 billion in 2006, will grow to an estimated $24 billion by 2010, according to Business Insights. "Outsourcing to CROs and partnering with smaller biotech and pharmaceutical companies in China and India is seeing a lot of attention and will continue to over the next 10 years," BioDuro's Hutchins said.
Besides cost efficiency, the growth is being driven by the increasing pace of globalization, complicated regulatory review processes and the greater number of patents that have expired in recent years. "I think all big pharmas are looking at outsourcing," said Richard Pither, vice president of research, biologicals, at UCB Celltech, a U.K-based biopharmaceutical company.
Pither recently finished his first trip to India and China, aiming to outsource at least some elements of UCB Celltech's drug discovery process. "Big pharmas are mapping their process and trying to outsource elements of the discovery process to relieve bottlenecks," he noted. Fidelity Asia Ventures' Chen suggests there is plenty of work to go around. He calls the Chinese CRO market “still quite fragmented.” He foresees a 20% to 30% annual market growth rate in the next few years and ample investment opportunities.
Competition from India
But the Chinese market will have robust competition from India, Taiwan and other Asian nations.
According to www.clinicaltrials.gov, a service of the U.S. National Institutes of Health, China had 275 trials in process as of early June, just five more than India. Taiwan, dwarfed by the others in terms of population, had 532 active clinical trials at the same time. Japan had 328.
Yet China and India make up only a small proportion of the global CRO market. A joint publication by Indian research firms ValueNotes and Knowgenix published in April said that India's total contract research revenues amounted to $75 million annually. Other industry figures show that India conducts only about 1.5% of global clinical trials. Global industry insiders believe that the Chinese market is smaller still.
Each country has its attractions. "Compared with India, China has advantages such as lower costs, better infrastructure and better access to research-related materials," Chen said, adding that China was also making efforts to ensure protection of intellectual property.
India, meanwhile, has a large pool of English speakers and has encouraged more innovation than its competitors. Ranbaxy Laboratories, India's largest pharmaceutical company by sales, and Dr. Reddy's Laboratories have both developed pharmaceutical industry brands to the benefit of India and its CRO industry.
"The biggest challenge that China faces in the development of a pharmaceutical industry not based around traditional Chinese medicines and generics is that India has a thriving set of pharmaceutical companies that are developing their own small- and large-molecule therapies," BioDuro's Hutchins said. "This is a reason many global companies are seeking partnerships in India rather than China."
But some integrated CROs in China are starting to offer novel pharmaceutical research and development for their partners, Hutchins added, suggesting that this is a step toward developing the industry.
India's greatest advantage, however, may be the support it receives from the government. "The Indian government is playing an active role in supporting its CRO industry," said Rui Guozhong, director of the China Pharmaceutical Technology Transfer Center. It has learned in recent years from its experience with the country's booming outsourcing business in the information technology industry, Rui noted.
To support the development of its CRO business, the Indian government has exempted CROs from service taxes and is spending to upgrade CROs' capabilities. In April, India's Union Health Ministry formed a National Council for Clinical Establishments to create standards for, and periodically review, CROs. The National Council will also establish a national CRO register.
"In China there has been no coherent national policy so far to encourage the development of CROs," Rui said. "I think what China is facing is a lot of people see CROs as a fast-growing industry just from the business angle and give no thought to how to use the CRO industry to promote the pharmaceutical industry as a whole."
Chinese scientists, he added, "should learn from their work with multinational companies through CROs how to enhance their management abilities and innovation. However, not many people see this opportunity. It will be no good for the development of its own pharmaceutical industry if Chinese CROs are happy just to provide efficient and low-cost service for global players."
China currently has about 400 CROs, mainly concentrated in Shanghai's Zhangjiang High-Tech Park and Beijing's Zhongguancun Life Science Park. "Integrated services will be the future of the CRO industry in China and India," Hutchins said. "Just being good in one service, like chemistry, will not be enough in the future. You must be able to offer chemistry, biology, DMPK, toxicology and clinical trials in an integrated fashion and as one-off services."
A CRO Alliance
The point isn't lost on industry participants. In June, three CROs -- Sundia MediTech (Shanghai) Co., United PharmaTech and HD BioSciences Co. -- set up a CRO service alliance in Zhangjiang High-Tech Park. The idea was for the companies to complement each other in drug research and development.
Just two weeks after the alliance was formed, Sundia MediTech and United PharmaTech said they would merge and become subsidiaries of Sundia Investment Group, the British Virgin Island-based owner of Sundia MediTech. Tang Ming, Sundia MediTech's chief operating officer, said the company could still acquire other CROs to accelerate expansion and reduce recruitment costs.
In Beijing, the Alliance of Bio-Box Outsourcing China (ABO) estimated that its revenue from CRO services this year would amount to $40 million, almost double its 2006 revenue.
Founded in 2005 by the Beijing Pharma and Biotech Center, a local-government health research agency, ABO serves as an umbrella for 16 leading biotech outsourcing providers, including SinoGenoMax Co., Beijing Genomics Institute and the National Center for Safety Evaluation of Drugs, to provide "one-stop-style CRO service" -- including drug discovery, preclinical studies, clinical trials and contract manufacturing.
The ABO members have established partnerships with global pharmaceutical players including Novartis AG, AstraZeneca, Merck and Bristol-Myers Squibb, mainly through brand sharing and marketing collaboration. "The Beijing municipal government will play an active role in promoting the pharmaceutical and biopharmaceutical R&D outsourcing services in the years ahead," Liu Chunhui, an official with the Beijing Science and Technology Association, said at an ABO news conference on Oct. 20. "The government will tackle the key problems that current CRO companies are facing, which include the establishment of infrastructure, training talent and trying to help CRO services meet global standards."
WuXi's Rapid Success
WuXi PharmaTech's rapid success shows just how promising the industry can be for China.
Founded in late 2000 by Li Ge, an overseas returnee, WuXi PharmaTech has become Asia's largest CRO, with research facilities in the Shanghai Waigaoqiao Free Trade Zone and the Tianjin Economic and Technical Development Area, and a "Good Manufacture Practice" plant in Shanghai's Jinshan district.
Last month, WuXi PharmaTech started construction of a "Good Laboratory Practice" center in Suzhou which is expected to become the largest modern drug safety evaluation center in China upon its completion in 2009.
By offering global pharmaceutical and biopharmaceutical companies diverse outsourcing services in combinatorial, medicinal and synthetic chemistry as well as manufacturing, WuXi PharmaTech has developed a client list more than 80 strong, including many of the world's largest pharmaceutical companies. Its largest clients are Pfizer, the world's largest drug maker, and Merck. Contracts from these companies accounted for 29% of net revenue last year.
On October 18, WuXi PharmaTech was named to the Deloitte Technology Fast 50 China 2007, a ranking of the fastest-growing technology companies in China as recognized by Deloitte Touche Tohmatsu. It was WuXi's third straight year on the list. The awards program ranks technology, media, and telecommunications companies in China and Hong Kong. Winners are selected based on their average revenue growth rates over the last three years. Last year alone, WuXi's revenue doubled, to $69.9 million from $33.8 million in 2005. Its gross profit rose to $34.3 million last year from $18.3 million in 2005. Two weeks earlier, WuXi was ranked by Renaissance Capital's IPOhome.com, a leading global source for IPO research, as one of the five best-performing initial public offerings of the third quarter.