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CROs in modern-day China.

INTRODUCTION

HOME TO MORE than 1.3 billion people, China represents 20% of the world's population and bears the world's largest healthcare burden. (1) Yet despite the country's high GDP growth in the past two decades, China ranks only 101 on the UN's Human Development Index. (2) In order to address these health problems, China's biopharmaceutical and biotechnology industry has begun to take off. The biotechnology industry grew 30% annually between 2000-2005 to reach US$ 3 billion. (3) However, China's biotechnology market is currently dominated by biogenerics or biosimilars that represent more than 90% of the market, with novel products representing only 3-7%. (4) To address this problem, China has begun to allocate significant resources into life sciences R&D and made biotechnology a strategic pillar industry for the 12th Five-Year Plan. (5) In addition, the current trend of multinational biopharmaceutical companies increasingly investing in Chinese R&D is likely to continue, attracted by lower R&D costs and access to the large patient population in China. Lastly, there has been some progress in creating the regulatory and intellectual property (IP) framework in China necessary for innovation. Combined, these factors will generate more demand for R&D in China.

Contract research organizations (CROs) provide support to the pharmaceutical and biotechnology industry in the form of outsourced R&D services. R&D services can include drug screening, drug development, preclinical research, clinical trial management, etc. The global CRO industry has been growing at an annual rate of 14-16% since 2007, reaching an estimated total market size of US$ 24 billion in 2010. (6) As biopharmaceutical companies face continued pressure in reducing spending and time-to-market of new drugs, it can be expected that demand for CRO services will increase in order for the industry to maintain productivity and profitability. (6) China's CRO industry began in 1996 and is still in a relatively early stage compared to well established US CRO companies. The Chinese CRO market represents an estimated 2.3% of the global market (7) (see Figure 2). However, global CRO growth is expected to dip below 10% as big pharmaceutical companies are cutting back on how much they are willing to pay CROs. (8) China's CRO market is growing rapidly at an estimated 30% per year since 20087 and the majority of the global CRO market growth is expected to come from China and India. (9)
2010    28      990

2011    29     1293

2012    33     1649

Figure 2: China's total CRO market size and growth rate.
Sources: PricewaterhouseCoopers and KPMG.

Note: Table made from bar graph.


This paper will analyze the current CRO industry in China in the context of the global biopharmaceutical environment. First, the reasons for why China is increasingly becoming a major R&D outsourcing destination is explored. Second, a detailed report and in-depth analysis of China's CRO industry will be conducted. Third, major trends in China's CRO industry will be identified along with concerning factors such as IP protection and increased competition with other Asian countries such as India and Singapore.

CHINA IS HOT FOR R&D OUTSOURCING

China's R&D sector is currently receiving significant amounts of capital from the government, private investors, and investments from multinational biopharma-ceutical companies. China is planning to spend US$ 308. (5) billion between 2011-2015 on science and technology as part of the 12th Five-Year Plan. (5) Biotechnology will be a major priority in this plan, and as a result the sector has become a strategic pillar industry in China. Between 2011-2015, investment in biotechnology is expected to generate 1 million jobs, extend people's life expectancies by 1 year and reduce infant mortality rates by 12%. (5) In addition to immense government spending on biotechnology, venture capital (VC) investment is also increasing. In 2010, total VC investment in the Chinese life sciences industry reached US$ 1.013 billion, breaking US$1 billion for the first time and growing 319% from 2009 levels. (10) Finally, multinational pharmaceutical companies (MNC) have been entering China for the past two decades and have been a strong driver for Chinese R&D. Between 2009-2011, MNCs have invested more than US$ 1 billion into building R&D and manufacturing facilities in China (9). This rapidly growing R&D environment should provide continued stimulus in demand for CRO services.

CRO outsourcing has become a critical strategy for MNCs looking to reduce costs, time-to-market and to improve profit margins. Most of the world's largest drug makers have partnered with local Chinese CROs to lower costs of drug trials and gain access to China's large pool of patients. (6), (11) There are many factors that are attracting MNCs to outsource their R&D to Chinese CRO firms. First, there are cost savings. Pharmaceutical companies who outsourced their R&D to China often reap savings of 50% in animal research and 30% on clinical trials when compared to conducting research in the US. (12), (13) Second, China has a large pool of talent in the life sciences with an increasing number who have received their higher education training in the West. Third, China has a large pool of patients who are relatively treatment naive which leads to easier and more cost effective patient recruitment. Due to having a high prevalence of certain diseases and simply a large population, patient recruitment is much faster compared to developed countries. Patient attrition rates are also lower in China. (9) Lastly, China's domestic biotechnology and pharmaceutical markets have been growing at 30% and 19% annually, respectively, (3) and represent significant opportunities for biopharmaceutical companies worldwide. In 2009, China allocated US$ 124 billion to create a universal medical insurance system. (14) The Chinese pharmaceutical industry had a market size of US$ 46.2 billion in 2009 and was ranked 9th largest in the world. It is predicted to grow to the third largest pharmaceutical market in the world by 2013, with a market size of US$ 73 billion. (14), (15) China is also currently undergoing a major demographic shift, with the share of those aged 65 and older at 8% in 2010 and expected to triple to 24% by 2050, which will be higher than that of the United States. (16) These factors make Chinese CRO firms an optimal target for biopharmaceutical outsourcing.

BRIEF HISTORY OF CROS IN CHINA

China's CRO industry is still in its early stages. In 1996, US based MDS Pharma Services (now INC Research) invested in China to form its first CRO. Soon after that, other multinational CROs such as Quintiles Transnational Corp., Convance and Kendles (now INC Research) entered the country. In September 2003, the State Food and Drug Administration (SFDA) issued Good Clinical Practice (GCP) standards, clearly defining CROs and enabled CROs to conduct clinical trials on behalf of their clients in China. (17)

China currently has more than 300 CROs that are 5 mostly located in Beijing and Shanghai. (17) The majority of them are clustered in Beijing's Zhongguancun Life Science Park and Shanghai's Zhangjiang Biopharmaceutical Park. One reason that CROs are primarily located in Beijing is due to government incentives. (18) Figure 1 shows the relative locations of Chinese CROs in a subset of 74 companies. This list of 74 companies was obtained from CROChina.net. 37 out of the 74 (50%) of the CROs in this cohort were primarily located in Beijing, whereas 13 out of the 74 (18%) were located in Shanghai. Guangzhou, Sichuan, and Jiangsu each had 5, 4, and 4 CROs in this cohort and represented 7%, 5%, 5% of the total, respectively. The remaining provinces, Anhui, Zhejiang, Guangxi, Tianjin, Shandong, Liaoning, Hunan collectively represent 15% of the total CROs in the cohort. This data indicates that although the majority of CROs are located in Beijing and Shanghai, other provinces such as Guangzhou, Sichuan and Jiangsu also represent a significant share of CRO destinations. However, it is important to note that of three public CROs, WuXi Pharmatech, ShangPharma, and VenturePharm, two are located in Shanghai and one in Beijing.
Beijing    50%

Hunan       1%

Liaoning    1%

Shandong    1%

Tianjin     3%

Guangxi     3%

Zhejiang    3%

Anhui       4%

Jiangsu     5%

Sichuan     6%

Guangzhou   7%

Shanghai   18%

Figure 1: Locations of Chinese CROs in a subset of 74
companies. Source: CROChina.net.

Note: Table made from pie chart.


MARKET SIZE OF CHINA'S CROS

In 2009, China's CRO market ranked second in Asia behind India but ahead of Singapore. (18) Data on China's fragmented and largely privately owned CRO market has been widely recognized as difficult. (8) In Figures 2 and 3, market size estimates from reputable global consulting firms were compiled. It is estimated that by the end of 2012, China's total CRO market size should increase to roughly US$ 1.649 billion, growing at an estimated rate of 33% in 2012. Total estimated market size and growth rate are also provided for 2010 and 2011. Clinical CROs will grow to about US$ 345 million by the end of 2012, at an annual rate of close to 20%. Estimated market size and growth rate for China's clinical CROs are also provided for 2009, 2010, and 2011. By 2012, China's clinical CRO market will represent 21% of the total CRO market. Compared to the rest of the world, China's CRO industry is still very small, representing only 2.3% of the global market. (7)
2009    18      200

2010    20      240

2011    20      288

2012    20      345

Figure 3: China's clinical CRO market size and growth rate.
Sources: Frost & Sullivan and Reuters.

Note: Table made from bar graph.


China's CRO market is currently very fragmented. Only a few of the more established Chinese CROs have MNC and large domestic biopharmaceutical clients. The majority of Chinese CROs are small and provide regulatory consultation, SFDA drug application filing, and clinical trial assistance. (17) In a cohort of 32 companies with company size data from CROAsia.net, 37.5% of companies had personnel of 50 or below, 28.1% for companies with personnel between 51-100, and only 9.4% and 6.3% in the 1000-2000 and 2000 or above groups, respectively. Figure 4 visually depicts that the majority of Chinese CROs are small companies with few employees. This is not surprising, given that there are over 300 CROs for only 2% of the world's CRO market. In contrast, there were 269 CROs in the US, but this represents 48% of the global CRO market. (19), (20)

China's CRO industry is also very new. Figure 5 categorizes CROs from a subset of 38 companies that had date of establishment data from CROAsia.net. Only 5 out of the 38 companies, or 13.2%, were established prior to 2000. These first companies were all either foreign CROs or JV CROs that were backed by large global CROs (see Table 1). The remaining 86.8% of Chinese CROs all were established after 2000, with 44.7% and 42.1% being formed between 2000-2005 and after 2006, respectively. This data not only indicates how young China's CRO's industry is, but also highlights the rapid growth of the industry after 2000. Figure 4 and figure 5 combined characterize the fragmented and emerging nature of the Chinese CRO industry.

[FIGURE 4 OMITTED]

[FIGURE 5 OMITTED]
Type          Name      Location  Est.      Services

Domestic  WuXi          Shanghai  2000  Preclinical,
          PharmaTech                    clinical,
                                        manufacturing

Domestic  ShangPharma   Shanghai  2002  Preclinical,
                                        manufacturing

Domestic  Tigermed      Hangzhou  2000  Clinical,
                                        regulatory

Domestic  HD            Shanghai  2002  Preclinical
          Biosciences

Foreign   PPD           Beijing   2003  Preclinical,
                                        clinical

Foreign   Quintiles     Beijing   1997  Clinical,
                                        commercialization

Foreign   Covance       Beijing   1998  Preclinical,
                                        clinical

JV        Rundo         Shanghai  2004  Clinical
          (Sino-Japan)

JV        KendleWits    Beijing   1997  Clinical
          (Sino-US)

JV        Pharmaron     Beijing   2003  Preclinical,
          (Sino-US)                     manufacturing

JV        VenturePharm  Beijing   1999  Preclinical,
          (Sino-US)                     clinical,
                                        manufacturing

Table 1: Examples of CROs divided by domestic, foreign, and JV


CHINESE CRO SERVICES

The services provided by Chinese CROs have evolved over time. The first Chinese CROs focused mostly on standardized chemistry-based studies. (9), (21) Clinical trials were traditionally outsourced to large global CROs such as Quintiles, etc. (21) Since then Chinese CROs have increasingly moved up the R&D value chain. In 2011, about 40% of CROs had biotechnology capabilities (9) and many CROs are moving into toxicology and clinical trials. (8) According to Figure 6, Chinese CROs are indeed increasingly providing clinical trial services for their clients and relatively well established clinical CROs have become acquisition targets, such as Excel PharmStudies (see Table 2).
Name                         Year  Deal activity

WuXi PharmaTech              2007  IPO on NYSE

VenturePharm                 2007  IPO on HKEX

AppTec                       2008  Acquired by WuXi PharmaTech

Excel PharmaStudies          2009  Acquired by PPD

BioDuro                      2009  Acquired by PPD

ShangPharma                  2010  IPO on NYSE

MedKey Med-Tech Development  2011  Acquired by WuXi PharmaTech

Table 2: Recent deals involving Chinese CROs

             Domestic  Foreign & JV

Preclinical       54%           39%

Clinical          23%           48%

Regulatory        23%           13%

Figure 6: Relative proportions of services provided by a subset of
56 CROs in China. Data gathered from respective company websites.

Note: Table made from pie chart.


In order to characterize the general services that Chinese CROs provide, the companies can be first divided based upon their funding and ownership mechanism. CROs in China can be divided into three classes as follows: domestic, foreign owned and joint venture (JV) (see Table 1). Domestic CROs are defined as entities that originated from China and are owned by Chinese parties. The majority of domestic CROs are small, private companies. Foreign owned CROs, in contrast, are large multinational companies that have significant global market share and have strategically entered the Chinese CRO market. Almost all foreign CROs provide clinical trial services. Lastly, JV CROs are defined as companies where both a Chinese and a foreign entity own stake in the CRO. Table 1 lists examples of some of the relatively well established CROs in China, categorized by their distinction as a domestic, foreign, or JV. The location, establishment date and examples of their R&D services are also provided in this table.

There are some differences in the services that domestic and foreign and JV CROs provide when viewed in their respective groups. For this analysis, foreign and JV CROs were merged as one category to contrast with domestic CROs. Domestic CROs provided more preclinical and regulatory services, while foreign and JV CROs accounted for a greater portion of clinical services. Preclinical services are defined as all R&D done before clinical phase I trials, such as drug discovery, chemistry, biology and animal toxicology studies. Clinical services are defined as clinical phase I-IV trials. Regulatory services include correspondence to the SFDA on behalf of clients for drug filing, regulatory form submission, clinical trial registration, and other consultation services. A subset of 39 domestic CROs and 17 foreign/JV CROs was generated from various news and journal articles. (7), (8), (10), (12), (13), (17), (19), (20) It was found that 54% of domestic CROs provided preclinical services, compared to 39% in foreign CROs. However, 48% of foreign and JV CROs provided clinical services, whereas this percentage is only 23% in domestic CROs. In the regulatory services category, domestic CROs lead with 23% of companies providing this service, while only 13% of foreign and JV CROs provide regulatory assistance. This data characterizes the current Chinese CRO landscape, with the majority of foreign and JV CROs dominating clinical trials, which are more resource intensive, and many domestic CROs historically specializing in preclinical and regulatory services.

RECENT CHINESE CRO DEALS

Initial public offerings (IPOs) and merger and acquisition (M&A) deals offer financing and strategic benefits to companies, while providing exit opportunity to investors. There has been three notable Chinese CRO IPOs since 2007. WuXi PharmaTech's IPO in the summer of 2007 on the New York Stock Exchange (NYSE) raised US$ 185 million. (22) Also in summer of the same year, VenturePharm's IPO on the Hong Kong Stock Exchange (HKEX) raised US$ 12.4 million at 2007 exchange rates. (23) WuXi PharmaTech and VenturePharm's IPOs are significant because they represent the first public Chinese CROs. In October of 2010, ShangPharma rasied US$ 87 million on the NYSE, beating forecasts of US$ 46 million to US$53 million. (24) Total IPO activity was much higher in 2010, with 33 total IPOs in the life sciences industry, which represents a 47% increase over 2009. (24) Therefore, IPO financing for Chinese CROs has been relatively declining compared to total life sciences IPOs.

M&A deals in domestic CROs have been due to companies seeking to consolidate and to expand their range of services. For example, WuXi PharmaTech acquired AppTec Laboratory Services Inc., a US Minnesota CRO, for US$ 151 million in 2008. (25) This allowed WuXi PharmaTech to gain expertise in biotechnology, complementing the firm's traditional chemical services. 25 In 2011, WuXi PharmaTech acquired MedKey Med-Tech Development Co. Ltd. and Jiecheng Med-Tech Development Co. Ltd., two CROs based in Shanghai that specialize in regulatory affairs and Phase I-IV clinical trials.26 Through these acquisitions, WuXi PharmaTech gained clinical trial expertise and can now provide clinical services to build an integrated R&D service platform for its clients.

M&A deals have also involved global CROs purchasing domestic Chinese CROs as a way to better engage the Chinese market and as a strategy to gain more market share as the R&D outsourcing market in China matures. As an example, Pharmaceutical Product Development Inc (PPD) acquired Excel PharmaStudies and BioDuro in 2009. (27) Excel PharmaStudies was a clinical CRO that conducted Phase II-IV clinical trials, while BioDuro specialized in preclinical services. (27) Through such deals global CROs are gaining Chinese market share and expanding their service platform in China.

TRENDS OF CHINESE CROS

China's CRO market should move toward consolidation from its current highly fragmented state. Such consolidation of domestic CROs will enable them to compete better with global CROs but will also increase their competition with each other. In Shangpharma's IPO prospectus, it is stated that WuXi PharmaTech, Covance and other leading CROs are its competitors, and that competition in the CRO sector will increase. (28) Another way that Chinese CROs are working together is by forming strategic alliances. Sundia Meditech, United PharmaTech, and HD BioSciences entered into a CRO Service Alliance in 2007. (29) The alliance was meant to expand the range of R&D services that these companies could provide. NovaSecta, a European company, joined the alliance in 2008. Another example is the Zhongguancun Bio-pharmaceutical R&D Outsourcing Alliance, formed in 2006. The alliance is headquartered in Beijing Zhongguancun Life Science Park and contains more than 50 CROs. Its goal is to provide support to expand breadth of services and increase overall competitiveness of its member companies. While the CRO industry as a whole in China is relatively young and very fragmented, it is expected to continue to grow and consolidate, increasing its global competitiveness.

Another trend for Chinese CROs is growth in toxicology and clinical trial management services. Toxicology and clinical studies are more lucrative and an increasing number of Chinese CROs will move into these areas. (8) Toxicology services require non-human primates, of which China has an abundant supply. It is estimated that non-human primate studies can be performed 40% cheaper than in the West. (30) China's larger CROs are moving toward standardization and more facilities are gaining Good Laboratory Practice (GLP) and Good Clinical Practice (GCP) accreditation. As cost savings and increased service quality drives demand for more preclinical toxicology and clinical services, China's CROs should be expected to move into more lucrative and sophisticated services.

Global CROs have been expanding rapidly in China. They are building facilities and growing their service offerings. In 2009 Convance, for example, invested US$20-25 million in a preclinical facility in Shanghai. (31) Similarily, PPD opened a vaccine clinical research center in Taizhou to provide clinical services for MNC and local companies for testing new vaccines. (32) It is evident that global CROs are focusing on emerging markets such as China for increased growth for the upcoming years.

CHALLENGES FOR CHINESE CROS

Major concerns of MNCs that are considering to outsource R&D to China include regulatory and IP related issues. China's domestic regulatory landscape remains complicated despite efforts to comply with World Trade Organization (WTO) commitments since becoming a member country in 2001. (13) For example, it typically takes Chinese CROs 9-12 months to secure approvals for clinical trials, while in India it takes only 3-4 months. (33) Many efforts to improve regulation of biopharmaceutical products and IP protection have been made in recent years. China's drug regulatory agency, the SFDA, was formed in 2003. The SFDA has issued new GLP standards, requiring all new drug safety evaluations to be done in GLP certified laboratories since January 2007. (34) The SFDA has also introduced more robust regulations regarding new drug approvals and registrations to improve transparency and efficiency, (35) encouraging innovative R&D in China. Larger domestic CROs in China are increasingly complying with SFDA and international standards, (13) such as US Food and Drug Administration (FDA) and Organization for Economic Cooperation and Development (OECD) GLP accreditation. This has allowed Chinese CRO firms to file investigational new drug (IND) applications in China and abroad. The SFDA is also considering deregulating the prices of certain drugs to counteract concerns of strict price regulations, which are revised every two years. (7)

IP protection in biopharmaceutical products is improving in China. Pharmaceutical compositions became patentable when the Chinese patent law was amended in 1992. (35) In 2009, China revised its patent law to bolster Chinese innovation. (36) This revision has made Chinese IP laws more in-line with international standards and increased penalties for IP violations. (36) The increasing numbers of IP litigation is one indication that IP laws are being enforced in China. Between 1998-2002, Chinese courts adjudicated 26,636 IP cases, 40% more than the period between 1993-1997. (37) One example of this enforcement was Beijing High People's court's rejection of the patent challenge from 12 domestic generic companies for Pfizer's sildenafil (Viagra), and providing patent protection for sildenafil until 2014. (35) The improving IP environment in China was also critical in the decision for Eli Lilly's China R&D Center in Shanghai and the reason that it was able to outsource most of its research to CROs surrounding it.36 Most patent pirating issues exist in the area of production and not in the field of research. (36) However, a number of domestic Chinese CROs have been developing and bringing their own drugs to market, so companies should still consider conflicts of interest in IP when choosing a CR0. (9)

Competition is also increasing in China's CRO industry. Such competition mainly comes from three sources. First, there will be increased competition between emerging Chinese CROs. Second, MNC investment in China can be viewed as a double edged sword for Chinese CROs. While such investments do increase demand for outsourced R&D, MNC's in-house research facilities are also competition for qualified personnel. (28) Employee turnover is relatively high in Chinese CROs, as there is still a skill shortage and the candidate pool is relatively small. (38) Lastly, there is increased competition from other emerging markets such as India, especially in clinical services. Such competition has led to significant price cuts by clients. (39) At the same time, employee wages are increasing 20% annually. (40) Combined, this competition is impacting the profit margins and growth of Chinese CROs.

CONCLUSION

China's CRO industry is growing at a rapid pace due to increased R&D outsourcing by global biopharmaceutical companies. While the industry is still very fragmented and represents a small share of the global market, large domestic companies such as WuXi PharmaTech and ShangPharma are increasingly becoming global outsourcing players. Global CROs are also rapidly expanding their presence in China by building new facilities and acquiring local CROs to take advantage of the growth in this sector. As the CRO industry matures in China, it is expected that companies will continue their transition from standardized analyses to more high-value services such as clinical trials and toxicology, and meet other biotechnology needs. This growth is accompanied by increased competition domestically and globally, resulting in price cuts and lower profit margins as well as rising wages for employees to reduce turnover. Furthermore, IP and regulatory issues are still points of concern when global pharmaceutical companies look for outsourcing partners. It is in this complex global environment that Chinese CROs must survive, expand and innovate.

ACKNOWLEDGEMENTS

I would like to thank Yali Friedman and Christian Walker for providing valuable advice and feedback.

Received: April 16, 2012; Accepted July 21, 2012

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Correspondence: Steven Ma, US. Email: steven@stevensma.com

Steven S. Ma is currently a biomedical research associate and technology commercialization consultant based in Maryland, USA. He is interested in bioentrepreneurship and has spent six years studying abroad in China. He received a B.S. in biology from Oregon State University in 2010.

doi: 10.5912/jcb.548
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Title Annotation:Original Article; contract research organizations
Author:Ma, Steven S.
Publication:Journal of Commercial Biotechnology
Article Type:Report
Geographic Code:9CHIN
Date:Oct 1, 2012
Words:5105
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