China Carves Niche in Pharma Outsourcing

In drug discovery services for global Big Pharma, the mainland has the potential to thrive like India has in software outsourcing

With America caught up in a credit crunch causing the subprime lending crisis, August didn't seem a particularly good month to list on the New York Stock Exchange. No one told this to Wuxi Pharmatech, a Shanghai-based pharmaceuticals and biotechnology firm.

Having raised US$185 million through its initial public offering, Wuxi then saw its share price open 30%, up on a day when Wall Street plunged.

Industry watchers believe the strong reception for China's leading pharma outsourcing firm is an indication of the country's massive potential in this field.

"It's a very significant move," said Tony Chen, a pharmaceuticals and biotechnology patent specialist for law firm Jones Day in Shanghai. "It tells the market that you can be very successful in building a service industry in drug discovery in China."

"It may be the harbinger for China to establish itself as a leader in pharma outsourcing like India is in software outsourcing," Chen added.

Wuxi provides drug discovery services to about 70 clients last year, including nine of the world's top 10 pharma firms.

Matthew Chervenak, president of General Biologic, a biotech consultancy in Shanghai, puts the company's success down to its "strong client services mentality." But it is just one of a number of local firms that have emerged as outsourcing players in the last few years.

SUPERIOR SERVICEWith the senior staff often Western-trained, these companies offer the lower operational costs of China and an understanding of foreign clients' needs, whether it is meeting quality standards or protecting intellectual property.

"It's a very nice symbiotic business relationship and there is no reason for companies based in China to infringe on the IP of their multinational customers," observed Chen.

When Japan-based drug developer GNI, which uses gene network analysis as the basis for its treatments, outsourced some chemical work to Shanghai Genomics in 2004, they were so impressed they bought the company.

"We gave them the most difficult project we could and the work was beautiful," said Dr Christopher Savoie, chairman and CEO of GNI.

"Our Cambridge people were really surprised that the work was so good and the Shanghai Genomics guys, who all have PhDs, were actually a little bit insulted by this. The equipment and the conditions in which they were working were as good as you find anywhere - they just happened to be in Shanghai."

GNI now operates according to geographical comparative advantage - it has access to human cell samples at its base in the UK, processes the data using the supercomputers at its Fukuoka research institute and runs clinical trials at minimal cost in China.

STEPPING STONESDr Zang Jingwu, head GlaxoSmithKline R&D China, also reports favorably on the standard of outsourcing in the country, noting that some domestic firms use the business as a platform from which to develop their own drug discovery capabilities.

Although a number of firms do currently operate as both service provider and drug developer, surviving on the demand for services and reinvesting the revenues in their own-brand work, the link between the two may not be sustainable. Savoie believes that, as the market matures, the two business models will separate completely.

"It depends on where you are in the value chain but, ultimately, you can't do work for a Big Pharma company and then go away and develop your own compounds for the same kind of drugs," he said. "It's untenable from an IP protection point of view."

Savoie sees the California biotech system - whereby smaller partners on a project get a slice the revenues from the finished drug proportionate to the contribution they made - as a more likely model for China to follow.

There is also the issue of government policy to consider.

Dr Luo Ying, president and CEO of Shanghai Genomics, argues that outsourcing will remain a niche market in China simply because Beijing wants a healthy domestic pharma industry.

"China's goal is not to be a service lab for the rest of the world," he said. "The government wants to encourage the development of domestic IP."

The question is whether Chinese companies are able to provide it.

Chervenak recalls that the only reason some of these firms got into outsourcing was because government funding intended to launch them in drug development dried up. Others produce foreign drugs under license or find a place in the vast but low margin generics market.

The publication of China's first mid- to long-term science and technology development plan last year saw new funding schemes set up to encourage IP research by domestic firms. Local authorities also offer tax breaks and refunds of money used for investment.

MONEY WORRIESHowever, Song Shipeng, CEO of medical equipment manufacturer Shanghai GammaStar, argues that it is still difficult for companies to find capital.

"Government funding usually goes to universities and state-owned enterprises," he said. "Private companies, especially small ones, still struggle to get financial support. Even though the government is encouraging high-tech companies, the sums on offer are quite small."

Using much of his own money, Song developed the gyro knife, which uses targeted radiation to destroy tumors, in 2004 after 10 years of research. The technology received regulatory approval in China in 1996 and in the US a year later. According to Song, there is only one other patented technology like it in the world.

But he is pessimistic on the chances of other innovative products coming out of the domestic medical equipment market, concluding that, although China holds some leading patents, it is still more of an imitator than innovator.

This is not an attitude shared by everyone, though.

Luo is confident about the long-term impact of foreign pharma companies in China. He sees the Big Pharma R&D centers serving as innovation hubs, training up local staff who then move on to develop their own ideas within their own companies and generate their own IP.

"Everyone knows generic drugs are not good for long-term growth but most companies are still at a very early stage of development. They need time to accumulate information and capital to move from a generic drug focus to IP reach research," he said.

"There haven't been many breakthroughs so far but in next five to 10 years you should start to see more."

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