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(Having it) Made in China: The Chinese CRO market

04 September 2014 Sophie Cairns

When entering China, test your drugs as the Chinese do. That may not be as catchy as the saying about Romans, but it's a rule that every company follows if they want to enter China's pharmaceutical market, soon to be the second-largest globally.

China is now home to dozens of R&D campuses established by global pharma players such as Merck, Sanofi, Novo Nordisk and Bayer. Still, while Beijing requires new drugs - meaning any drug new to the Chinese market - to be tested locally, companies are not actually required to set up expensive research bases. Instead, firms are increasingly farming out the clinical trials to contract research organizations (CROs), or third-party companies like Quintiles or Covance who will carry out the testing for them, on Chinese soil. The strategy has become key for multinational companies looking to reduce costs as they seek to replenish their pipelines post-patent cliff.

The result: A Chinese CRO market that kicked off much later than the United States and Europe but is growing much faster. The outsourced clinical testing industry in China grew at a CAGR of 27.2% from 2007 to 2013 to reach CNY36 billion (USD5.9 billion) last year, and makes up approximately 10% of the global market (Market Research Reports). And while a slew of foreign CROs have piled into China, the country is now also home to some 500 homegrown players.

A number of factors are fostering this trend. China is benefiting from growing experience and an increasing number of qualified graduates, and is now more able to meet the standards required by global clinical trials. There has also reportedly been a reduction in red tape as the Association of Clinical Research Organizations works with the government to provide shorter timelines for trial approvals. More generally, China has the advantages of large, relatively drug-naiive patient populations and lower operating costs.

China's CRO market is still dominated by foreign firms. But local players, led by WuXi AppTec, ShangPharma Corp and Hangzhou Tigermed Consulting, make up some 14% of total market revenue [according to Companies and Markets] are putting up growing competition and slowly but surely pulling themselves up the value chain.

Earlier this month, WuXi Pharmatech posted healthy financials and indicated continuing optimism for the sector. And rather than merely carrying out the clinical trials demanded by their clients, Chinese CROs are increasingly involved in partial drug development and new pipeline development, as well as partnering with high-profile global players. WuXi Pharmatech formed a partnership with Pacific Biomarkers in 2014 and with Bristol-Myers Squibb in 2011, and last year Beijing-based JOINN Laboratories acquired the USA-based R&D and production bases of Bayer.

Beijing is actively fostering this kind of homegrown, innovative R&D. The government spends some USD150 billion a year on drug research and development. This is only one-third that of the United States, but the amount is growing at 25% annually (Lux Research). China has made the life sciences sector a national priority, both to address the health needs of its vast population as well as challenge the dominance of foreign drugmakers. One of the aims is to cultivate world-class Chinese companies capable of producing innovative branded treatments out of a sea of low-cost generics makers. This month, Beijing's dreams of "Made in China" innovation in the pharmaceutical sector took another step forward when Hutchison China MediTech said it had completed patient enrolment in a phase II clinical trial of fruquintinib, a novel small molecule compound aimed at treating colorectal cancer.

The changing face of Chinese R&D is not without risks. For domestic CROs, moving into drug development may mean sacrificing profit from services fees to take a gamble on a particular drug candidate. As for multinational firms, the growing wave of government-supported homegrown Chinese pharmaceutical R&D firms may well eat into their share of a fast-growing market. And as always, intellectual property and other risks are always present when contracting out to a third-party agent, which may give multinationals pause for thought particularly in light of the ongoing inquiry into bribery allegations. But for now, China's CRO industry continues to grow steadily and for multinational firms, outsourcing is likely to remain a far cheaper option than splashing out on a new R&D centre.

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