Dec. 27 (Bloomberg) -- WuXi Pharmatech Inc., a decade-old drug research company in the industrial outskirts of Shanghai, will employ more chemists next year than Pfizer Inc., the world's largest producer of medicines.

That's because Pfizer and rivals such as AstraZeneca Plc and Merck & Co. are turning to WuXi to help them find the next $1 billion treatment.

For the biggest pharmaceutical companies, being first with a new medicine is crucial as generic copies of their most popular brands erode sales. The shift to research labs in China is reducing expenses as U.S. and European drugmakers cut thousands of jobs. Meanwhile, WuXi is flourishing, doubling in market value in its first four months as a public company.

``The reason we exist is because the cost for research is just too high,'' said Ge Li, chief executive officer of WuXi, during an interview at the company's research center in Shanghai. ``Every company is talking about how they can't afford it.''

Outsourcing, or shifting work to contractors, may carry a risk for Western drugmakers because companies like WuXi may eventually turn into competitors.

U.S. drugmakers more than doubled their annual spending on research to $40 billion in 2004 from 1993, according to inflation-adjusted industry figures from the U.S. Government Accountability Office. Applications to the Food and Drug Administration to market new drugs rose 7 percent during the same period.

The $35,000 Researcher

``You have to have your own discovery capabilities, but you also increasingly need to source externally in order to access science and innovation,'' said James Ward-Lilley, president of AstraZeneca's operations in China, in an interview in his Shanghai office.

In China, personnel and supplies can cost 60 percent less than in the U.S., according to Boston Consulting Group. A two- month primate study to test a drug's toxicity may run $20,000 there, a 10th as much as in the U.S., according to the consulting firm Ernst & Young LLP in New York.

Entry-level scientists at WuXi make $35,000 a year, while Pfizer pays equivalent workers in the U.S. more than $90,000. The lower wages mean WuXi can hire more people and get jobs done faster, Li said. It employs 2,500 scientists and chemists.

``We firmly believe this outsourcing model will fundamentally solve the current issues in the pharmaceutical industry,'' Li said. ``This model could transform the drug research and development paradigm.''

WuXi's IPO

WuXi's strategy has attracted American investors. The company, with $69.9 million in revenue last year, raised $184.6 million in an initial public offering in August in the U.S.

New York-based Pfizer announced last year it was closing its 2,400-person research lab in Ann Arbor, Michigan, as part of a plan to eliminate 10,000 jobs, or 10 percent of its workforce. London-based AstraZeneca said earlier this year it will cut 7,600 jobs. Merck & Co., based in Whitehouse Station, New Jersey, slashed employment by 6,000 since 2005.

In addition to contracting with companies like WuXi, most of the 20 largest Western drugmakers are setting up their own research centers in China, employing hundreds of scientists, Boston Consulting Group said in a report. Many of the more senior researchers received advanced degrees in the U.S.

Turning Out Scientists

The 170 Chinese scientists working at Pfizer's two-year-old research center in Shanghai analyze data from human clinical trials and prepare drug applications for U.S. regulators.

``Everything in development will be touched by our China group at some point,'' said Lingshi Tan, Pfizer's head of research in China.

AstraZeneca, the U.K.'s second-largest drugmaker, based in London, says it will open a research facility in China in 2009. A staff of more than 100 technicians will study why some cancer treatments are especially effective in Asians. The company also signed a $14 million research agreement with WuXi last year.

Novartis AG, based in Basel, Switzerland, is building a $100 million center in Shanghai that will employ 400 people by 2010.

London-based GlaxoSmithKline Plc, Europe's largest drugmaker, is moving most of its research in neurological ailments, such as Alzheimer's disease and multiple sclerosis, to its Shanghai lab. Within 10 years about 1,000 researchers -- all with Ph.D.s -- will work in the facility, said Jingwu Zang, head of the company's Chinese research operations.

Indianapolis-based Eli Lilly & Co. said it farms out 20 percent of its chemistry research in China through a partnership with ChemExplorer Co. in Shanghai, which has 230 scientists working for Lilly.

Saving Time on Trials

Outsourcing to China also helps Western companies save money and time on human drug trials. New York-based Bristol- Myers Squibb & Co. will test every drug it develops on Chinese patients within five years, said Kabir Nath, general manager at Bristol-Myers's China headquarters in Shanghai.

AstraZeneca said it conducts more clinical trials in China than any other drugmaker, with 39 tests under way at 700 hospitals.

Recruiting patients for clinical trials takes less time in China because so many people want the free treatment, said Dennis Gillings, chairman and chief executive officer of Quintiles Transnational Corp. in Research Triangle, North Carolina, which conducts drug trials.

(Friday: Chinese `barefoot doctor' markets a gene therapy developed by Onyx Pharmaceuticals Inc. and dropped by Pfizer Inc.)

To contact the reporter on this story: Shannon Pettypiece in New York at spettypiece@bloomberg.net

Last Updated: December 26, 2007 11:29 EST