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Outsourcing Trends in China
Compared with its counterparts in other countries, the Chinese pharma services industry has been developing extraordinarily fast in the past decade. Although only having a short service history, it has attracted a large number of pharma and biopharma companies almost from all over the world for a variety of outsourcing opportunities.
Initially, all of them were primarily attracted by China’s cost-saving advantage. But in the recent couple of years, they have realized the value of a large talent pool. The industry, in particular major pharma companies, have thus established large facilities in the country, including R&D and manufacturing sites. While multinationals are constantly expanding their presence in China, local companies also have growing outsourcing needs and are becoming more diverse. This article analyzes and summarizes evolving outsourcing models in the Chinese market.
Multinational Companies De-Risking Drug R&D
Recently, a number of multinational drug companies including major pharma have out-licensed their early-stage drug candidates to Chinese drug companies or those companies that are based in China’s neighboring countries but primarily target the Chinese market. In almost all cases these China-based companies plan to further develop the in-licensed drug candidates in China. While shouldering the China development cost, they will also gain the market rights of these drugs in China and other Asian countries if they successfully get approved.
The multinational companies provide technical assistance to their partners during China clinical trials and can use the clinical data for their marketing applications in the rest of the world. In other words, they give up the market rights of certain Asian countries to their China-based partners in exchange for the development cost of conducting early- to mid-stage clinical trials in China.
To a large extent, this strategy is almost risk-free to these multinational drug companies; however, it may be full of risk to the Chinese companies. On the other hand, it is a shortcut for Chinese companies to gain experience in drug R&D.
Firms Moving Traditional Operations to China
There are signs that major pharma companies are becoming less and less interested in conducting small molecule drug discovery in-house. Instead, they now either directly license drug candidates from outside companies or outsource this part to professional service providers. In fact, both traditional operations of small molecule drug discovery and manufacturing are now gradually being shifted to low cost regions where local companies possess the necessary technical capabilities and skills to handle them.
Among the low cost regions, China has become one of the primary choices for major pharma. In addition to building their own large-scale facilities for both R&D and manufacturing, outside companies are also increasingly using local service providers. It is estimated that outsourcing demand for small molecule discovery and manufacturing has been growing at about 20% a year in China.
Partnering with Local Service Providers
Recognizing that China is gradually becoming a powerhouse of science and innovation, pharma is now looking for extensive collaborations with local Chinese organizations including CROs and CMOs to build a real presence in the country. For example, Pfizer recently announced that it intends to establish close partnerships with Asian companies with more focus in China. It is particularly interested in those organizations that possess strong capabilities, knowledge, and expertise in the diseases that not only prevail in Asia but also fall within its therapeutic focuses such as cancer, diabetes, and Alzheimer disease.
Pharma is taking full advantages of China’s benefits. Virtually owning part of a Chinese CRO’s facility and meanwhile relying on their service is another strategy they are currently pursuing in that country. For example, in September 2011, Merck Serono announced its first China R&D facility. What is interesting is that the R&D center is based within the Chinese CRO Pharmaron’s new campus at the Beijing Economic and Technological Development Area. In fact, this is the third example in which a major pharma takes part ownership of a local Chinese CRO; the other two are BMS and WuXi PharmaTech and Eli Lilly and ShangPharma.
We believe that this is just the beginning. Following the same pattern, more big pharma companies are expected to gradually expand their China presence in the same way.
Demand for Omics Research
To improve their R&D productivity, drug companies are focusing more on development of new technologies including genomics and proteomics. Companies are working on developing special animal disease models, more effective diagnostic and imaging tools, and better biomarkers.
Outsourcing demands for genomics and proteomics services has become strong in the recent years. Globally, this area still has a young service industry. Merck & Co. in September 2010 forged a close partnership with BGI. In the collaboration the two organizations work closely together on discovery and development of biomarkers and other genomics-related technologies that could be applied to drug discovery, development, and diagnostics for a range of therapeutic areas.
Outsourcing Demand by Local Chinese Companies
When multinationals out-license drug candidates to Chinese firms, their aim is to develop these candidates in China until they pass the proof-of-concept stage. In addition to support from government, the move is also fueled by the growing availability of funding in China, including venture capitals.
Most these young Chinese drug companies operate on a virtual model. They thus have to use services from local CROs/CMOs. Presently, their outsourcing need is primarily centered in the early-stages of development. Although, this part still accounts for a small portion in the total China pharma outsourcing market, as more of these companies emerge in China and their programs progress forward, more outsourcing needs is expected from these companies in the near future.
Outlook of China’s Services Market
At present, multinational companies are still the main customers for almost all China-based CROs and CMOs: 60–65% of customers is pharma, 20–25% is small biotech, and 10–15% is domestic companies. The future growth of the Chinese market is thus still largely dependent upon the development of the global pharmaceutical and biotechnology industry.
Many pharma companies have also realized that China is becoming the R&D center of Asia and even the world as well. China’s rich availability of large talent pools provides firms with advantage and ease to form a networked partnership while they establish their own R&D facilities in the country. Therefore, in spite of the less optimistic economic environment currently surrounding the global pharma and biotech industry, the Chinese pharma market is believed to experience healthy growth in the near future.
Jim J. Zhang, Ph.D. ([email protected]), is president and managing director of JZMed, a market research and consulting company that is specialized in the research of the global pharmaceutical outsourcing industry. This article is written partially based on the firm’s latest research report titled China Pharma Outsourcing Annual Review 2011. Ph.: (518) 477-4831.
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