Besides the loss of blockbuster drugs due to patent expiry and the increased generic competition, the pharmaceutical industry has been faced with a thinning of its drug discovery pipeline. The increase of R&D spending, longer drug development times and the declining of drug approvals per year are the main reasons for this challenge.
Cost and time are critical success factors for the pharmaceutical industry. To master this challenge, pharmaceutical companies are applying different strategies, including merger and acquisition, in-licensing and outsourcing.
Whereas merger and acquisition is a short-term solution, in-licensing is more and more difficult and cost intensive. Outsourcing is a key strategy which is followed by nearly all pharmaceutical companies. Outsourcing offers financial and operational flexibility, allows the company to focus on its core competencies and will drive innovation. In the earlier days, pharmaceutical companies mainly outsourced clinical research, the manufacturing of intermediates or active pharmaceutical ingredients (APIs), routine synthesis of building blocks, or IT related businesses.
Things are changing. Outsourcing activities are moving up the value-chain. More and more core competencies such as medicinal chemistry, lead optimization and pre-clinical research are being outsourced to contract research organizations (CROs). This applies not only to CROs in the Western hemisphere but also to those in Asian countries.
The most prominent pharmaceutical outsourcing locations in Asia are China, India, Malaysia, Singapore, South Korea, Taiwan, Thailand and Vietnam. For the outsourcing of chemistry, Chinese and Indian companies head this list due to their experience in generic manufacturing, their highly-skilled workforces and strong technology basis.
Whereas virtual companies and also some biotech companies are outsourcing their entire medicinal chemistry programs, big pharmaceutical companies are very careful in outsourcing such projects as a whole. However, due to the increasing pressure on cost and time, even major pharmaceutical companies are looking for external resources to support their in house research and development programs.
Before 2000, (medicinal) chemistry services were mainly outsourced to US or Europe based companies. CROs like Albany Molecular Research (US), BioFocus (UK), ArQuel (US), ChemDiv (Russia, US) or Evotec (UK) were one of the most important chemistry service providers for the pharmaceutical industry.
This changed from 2000 onwards, due to the incorporation of IP protection into Chinese and Indian law. The fact that the intellectual property protection system in both countries is now close to western standards has boosted pharmaceutical outsourcing to China and India. This applies especially to the outsourcing of pre-clinical research and medicinal chemistry services.
Within a few years, Asian based companies such as BioDuro (China, US), Chembiotek (India), GVK (India), Jubilant Organosys Ltd. (India), ShangPharma (China) or WuXi Apptec (China), just to name a few, emerged and were able to displace many of the leading Western CROs.
For example the Chinese company WuXi Apptec started in 2000 with mainly synthetic chemistry services for the pharmaceutical industry. But soon it became the largest CRO in China offering the full range of drug discovery and development services including toxicology and API manufacturing. WuXi Apptec is now – after 9 years – the largest pre-clinical CRO in the world, employing more chemists than Pfizer. In the meantime, it has nearly all top pharmaceutical and biotech companies as customers.
Similarly to WuXi Apptec, most of these service providers in Asia have started up by offering basic or routine chemistry services, but transformed later into so-called “one-stop-shop” companies. These “one-stop-shop” providers offer “integrated drug development services” from target identification, design of molecules, biological testing and toxicology to IND submission including pilot plant API production for clinical studies.
The chemistry services provided by these “Super CROs” include for example:
- Synthesis of reference compounds
- Synthesis of building blocks, advanced intermediates and scaffolds
- Synthesis of focused or general libraries
- Lead generation and lead optimisation including the generation of structure-activity relationships
- Molecular modelling
- Route scouting and scale-up from milligram to kilogram quantities
- Process research and development including kilo-lab and pilot-plant production
- Development of analytical methods
- Impurity profiling, stability testing or salt screening
Besides outsourcing to different CROs, many of the leading pharmaceutical companies are trying to establish a foothold in Asia. Roche, for example, has set up a wholly-owned research site in Zhangjiang Hi-Tech Park in Shanghai, in 2004. The R&D Centre China LTD (RRDCC) is focusing on medicinal chemistry, including drug design, synthesis evaluation, SAR development, lead generation and optimisation. According to Roche, the center cooperates with the best academic institutes, biotech companies and CROs in China. AstraZeneca has been investing in Asia for decades and Novartis has built a R&D center in Suzhou near Shanghai.
However, these investments are tiny compared with the amount the pharmaceutical companies are spending on R&D in the West.
But what makes China and India so attractive?
- Due to the large and growing population and increasing prosperity, both countries will be attractive consumer markets in the future. By 2015 China is expected to be, beside the United States and Japan, one of the top three prescription drug markets in the world.
- Multinational pharmaceutical companies have recognized that a research site in China and India helps to build up connections with authorities and regulatory agencies in these countries.
- The ability to communicate in the English language across the whole organization is one of the advantages of India.
- Numerous returnees with long work experience in the western pharmaceutical industry are going back to China and India. Many of these returnees are setting up their own service companies or are working in key management positions of service providers. These returnees are very familiar with western culture and business behavior, and speak fluent English.
- Last but not least, labor costs are (still) much lower as compared to western CROs.
To be price-competive, some western CROs are offering a so-called hybrid model. These companies are subcontracting (part of) the outsourced projects to emerging countries. Evotec for example, one of the leading western CROs for integrated drug discovery and development service, has in addition to its research sites in Abingdon (UK) and Hamburg (Germany) a research center in India offering a synthetic chemistry service to its clients. NiKem, another European CRO based in Baranzate (Italy), does not own facilities in emerging countries but has prefered outsourcing partners. Depending on the client’s wish, NiKem outsources specific synthetic chemistry tasks to its preferred partners and passes the savings on to the client.
In the future, labor costs in China and India will increase. In China for example, due to governmental policy which is supporting areas such as Shanghai or Beijing, labor costs are increasing rapidly in these costal areas. In the long run, the cost advantage which CROs in China and India offer will diminish. One consequence might be that outsourcing of routine synthetic chemistry will move ahead to even lower cost countries in Asia or even Africa.
Currently, it does not appear that outsourcing to China and India will lead to a massive reduction of R&D spending in the pharmaceutical industry. Outsourcing of routine synthetic chemistry and medicinal chemistry is more regarded as an add-on. Pharmaceutical companies have the opportunity to run more drug discovery projects at the same time while internal resources can be maintained at the same level. The advantage of having more active projects at the same time will – this is the hope – increase the probability of success.
Pharmaceutical companies often stick to a few “preferred” outsourcing partners with which they have built relationships and trust. This will strengthen the position of the already existing CROs.
In my opinion, within the next 10 years, Big-Pharma is going to increase outsourcing of medicinal chemistry programs. In the same time the currently fast growing market for medicinal chemistry outsourcing will consolidate. What remains are a few leading CROs located mainly in Asia and some in Europe and the United States. Some of these service providers will probably move ahead and set up their own drug discovery programs.
Irrespective of one’s attitude towards the political system in China, it makes it easier to enforce decisions than it is in India. An example of this enforcement power was the organization and performance of the Olympic Games. Nothing was left to chance. This will help China to further increase its economic power and will probably push China towards a position as a leading economy, with India on its coat-tails. Strategic relationships with CROs in Asia facilitate desirable lower-cost base operations while assuring quality products and access to the growing Asian markets.
By Siegfried Schneider, Boehringer-Ingelheim RCV GmbH & Co KG
(The opinion expressed in this article are entirely personal and do not reflect those of Boehringer-Ingelheim)
Address of the author:
Dr. Siegfried Schneider M. Sc.
Boehringer Ingelheim RCV GmbH & Co KG
Research / Department of Medicinal Chemistry
Dr. Boehringer-Gasse 5-11