Opportunities in China Pharmaceutical Research Outsourcing

Battered by economic uncertainty and under pressure to deliver better medical products in more cost-effective ways, pharmaceutical companies are increasingly driven to outsource their research and development to clinical research organisations (CROs) in Asia. This trend in the biomedical sector is poised to make China one of the most popular CRO destinations within the next 10 years. This week, RightSite looks at how investors can profit from the growth of China's CRO industry.

Creating a Structure for Growth

Compared with the rapid development of China's manufacturing outsourcing industry, China's pharmaceutical R&D outsourcing, formally referred to as Clinical Research Outsourcing, has lagged behind. This slower development can be traced to the slow development of China's biomedical sector, as well as to earlier failures to protect the intellectual property which is critical to industry confidence. However, improvements over the past decade such as the government's heavy investment in the bio-medical industry and stricter enforcement of intellectual property laws have provided a major boost to the country's medical research ability. (Read more about government initiative and the health reform in “China Medical Zones Provide Opportunities”). Industry development has also been driven by the growth of demand for medical products and services from China's burgeoning middle class.

Strengthened IP Rights Protection of Pharmaceutical Products

China's progress on the protection of pharmaceutical IP rights offers a better investment environment for multinational pharmaceuticals that sow millions of dollars every year into R&D. According to the Patent Law of PRC, which came into effect in 1993, once a new pharmaceutical product is approved for entering the market in China, the State Food and Drug Administration (SFDA) will impose a monitoring period to observe the safety of the product. During this period, no other companies will be granted the approval to market the drug in China. This law was revised in 2000 to allow the patenting of pharmaceutical compositions, which established a major improvement over the previous practice of only allowing the patenting of a method to make or use a drug.

More important than the establishment of such statutes, however, has been the change in the attitude of the local authorities toward the enforcement of intellectual property protections. According to research published by Australian law firm DLA Phillips Fox, China has put new measures in place to raise the penalties for patent infringement from 300% to 400% of illicit profits and increasing damage payments from RMB 50,000 to RMB 200,000, even if there is no profit from infringement. These changes are just part of the changing attitudes toward protecting patents and other intellectual property that is making China more attractive for research dependent industries such as CRO.

Downsizing Creates Openings

The recent downsizing of businesses in the developed world has led an increasing number of multinational pharmaceutical companies to transfer their non-core R&D activities to countries that offer both low manufacturing costs and access to a large talent pool. This downsizing not only has created opportunities for CROs in Asia, but also has helped multinational pharmaceutical companies to remain competitive even in an economic downturn. “Usually the research process of developing a new drug takes 8 to 12 years, in this sense, outsourcing the R&D process to CROs would be a more reasonable solution” Zhang Wei, the director of China SFDA pointed out.

In fact, CROs now undertake about a third of new drug research work globally, making this a USD 20 billion business. With pharmaceutical outsourcing bases start to take shape in China and India, the global CRO market, which grows at 16% every year, is expected to reach USD 30 billion by the end of 2010.

China CRO Industry On the Fast Track

At present, the CRO industry in China is still in the early stages of development. Before 1997 only a few in China had heard of CRO sector, however, the rising global demand appears set to multiply the level of demand over the next five years. According to a report published by PricewaterCoopers on the growth prospects for Asia's CRO industry, the market value of China's clinical research outsourcing operations was around RMB 260 million in 2008, marking a ten-fold increase from 2005. The report also indicates that the CRO market value for China in 2010 could reach RMB 430 million.

And China has already surpassed India to become the most popular CRO destination in the world. By June of 2008, the number of on-going and completed clinic trials registered in China reached 870 while during the same period, India achieved only 737 such trials.

This fast growth of China's medical industry has attracted large amounts of foreign investment into the sector. After Quintiles Transnational's entry in Beijing as the first CRO in the country, Convance, a leading multinational, opened a preclinical laboratory in Shanghai's Zhangjiang Hi-Tech Park in late 2007 (which is its fifth CRO lab worldwide). At present all of the top four CRO multinationals, Convance, MDS Pharma Services, Quintiles Transnational Corp, PPD, have set up presences in China.

Cost Competitiveness Lures Foreign Investment

Among the primary reasons for multinationsals to invest in CRO facilities in China, cost reduction is the most commonly cited. “The US and Europe are the biggest two CRO markets in the world, accounting for 48% and 29% of the global market share. However, the cost advantage that Asian countries can offer will draw more pharmaceutical companies to set R&D facilities or cooperate with local CRO companies in these country in the future.” a senior manager from Schering-Plough China said. Indeed, according to some sources, the cost of clinical trials in China is only 22% of that in the US and other more developed nations.

More Good Reasons for Global Players to Go Local in China

Localization can also help international pharmaceuticals to get approval for new medical products more quickly from the State Food and Drug Administration(SFDA). Pfizer China, which just invested in a new R&D facilities in Hubei Wuhan last month, are planning on cooperate with up to 500 medical institutions in China by 2010 which involves the participation of 2000 medical professionals.

In addition, locating clinical trials in China can provide advantages for multinational pharmaceutical companies developing treatments for illnesses more common in developing nations. Studies that rely on finding a pool of participants who have been exposed to diseases or other ailments common in developing countries can often find it easier to source the participants they need within China than in their home markets where such illnesses may already be relatively rare.

With more foreign investors joining the competition and more government supports in place to facilitate the grow of the CRO industry, it is likely that China's CRO will grow into another strong brand for the country in the next decade.