ABSTRACT: Financial crisis has caused investment shortage to the entire biotech industry. Those biotech companies that are either cash poor or still in discovery or early development stage are experiencing an unprecedented difficult time at present. Because of the significant cost saving, outsourcing to China now becomes a realistic issue for these companies to seriously think about as it could extend the runway for their R&D programs even with their current limited cash reserves. The article cites a real example to illustrate the feasibility and benefits of outsourcing drug R&D programs to China. It also provides practical advices of how to effectively conduct outsourcing in China.
Introduction: Impact of global financial crisis
The financial crisis currently spreading around the world has been felt by all industries. The pharmaceutical and biotechnology industry are not immune to that. However, it seems that the sector that is being hit hardest by the crisis is the R&D-focused biotechnology industry in particular those small-sized drug companies that are still in early stage discovery and development. For example, according to my firm’s database, in the recent three months alone (since last November) about thirty five biotech companies had announced cuts of their workforce. The percentage of job cuts within these companies ranged from 5% only to as high as 93%. A number of biotech companies also announced to reprioritize their R&D programs with more focuses only on late stage development. Several of them even completely cut early stage programs including those still in discovery and preclinical research. Some even planned to close their R&D facilities or put their programs on idle.
On the other hand, it appears that almost none of those major pharma and biotech companies have been affected at present by the crisis, largely because of their strong cash reserves. Rather, to some extent, many of these major companies would benefit from the financial crisis as they are currently posed to acquire more drug candidates in advanced development stages from those small-sized biotech companies that are financially troubled and thus forced to give up their ownership. The drug pipelines of these major companies would thus become significantly enriched. A typical example is the latest acquisitions by BMS of two late stage cancer drug candidates, XL184 and XL281, from Exelixis which announced to reduce 10% of its workforce just one month prior to the acquisition.
R&D-oriented but cash-poor biotech companies: time to think about survival
The present financial crisis created a dilemma to these R&D-oriented drug companies. On the one hand, the nature of drug research and development requires these companies to have an abundant cash reserve which, in the past, was generally realized through rounds of fund raising. On the other hand, the financial crisis has directly resulted in the funding shortage as many VCs or investment institutions either lost a big chunk of their investment elsewhere or became stuck in their current investments, which made them less flexible for other investments. Some VCs that still have cash in hand have now become skittish as they are well aware that, due to the financial situation, it is almost unlikely for biotech companies to go public in any time of near future. This is well reflected in the reported lowest number of biotech IPOs in 2008.
At this moment, most small biotech companies that are cash poor have to seriously think about how they could survive the financial crisis as many VCs are at present not favoring investing in them. Most people in the industry believe that there are two options for these cash-short biotech companies to consider at this moment:
(1) Selling their drug candidates or even their entire company to those major ones with a significant discount.
(2) Outsourcing their R&D projects to low cost areas such as China so that they could still continue their programs even with a limited cash reserve.
The first option works only to those companies that have developed a series of lead compounds. Some of them must have entered development stages and demonstrated promising results. To those that are still in discovery stage or early preclinical development stage, the current situation is extremely difficult as some VCs who have invested in startups or early stage biotech companies are currently selling their stakes in a marginal discount of as low as 10-60% of their original investment price. To these companies the second option would thus become critically important and could be the best choice.
Benefits of outsourcing to China
Due to a variety of reasons, until now offshore outsourcing of drug R&D programs to those developing countries such as China has not been a consideration to many of these biotech companies. However, the abrupt change in the financial and investment environment may now force them to change their mind. As these regions offer a significant cost saving, these companies may be able to continue their R&D programs even with their current limited cash reserves if they opt to operate them there.
For example, at present outsourcing to China can achieve a cost saving of at least 60-70%. For contract research projects in lead discovery area, the current average FTE rate in most Chinese CROs located in Shanghai or Beijing is about $85,000-$100,000. China also has abundant animal species such as rodents, rats, dogs, monkeys and non-human primates, all at low cost. For example, a monkey in China only costs about $500. For preclinical testing in animals, a two-month animal trial in primate conducted in China only costs about $20,000.
These companies may also be able to achieve a better productivity if opting to outsource to China. They can take the advantage of the 13-hour time lag (it becomes 12 hours after the day-light saving time starts) and run their projects 24 hours a day. For example, their internal staff can design and revise the directions of the project and then forward the instructions to the service provider in China whose scientists can conduct the experimental investigations while the US site is in the night. In fact, this type of operations has been practiced by a number of companies.
Due to the rapid development over nearly a decade, currently there are a large number of service providers in China for outsourcing companies to choose (please see below for more discussions). This outsourcing environment provides a great flexibility to outsourcing companies. For example, they can start with only a short term contract with a selected service provider. Also, the initial size of the project can be kept small. It can be extended and expanded anytime later if the outsourcing company feels comfortable with their Chinese partners.
Feasibility of outsourcing to China
1. Current service capabilities of Chinese outsourcing industry
Chinese outsourcing industry has been experiencing fast growing and rapid expanding in recent years. At present, the industry is composed of about 250 professional service providers with various service capacities and capabilities. Although at present none of them are able to provide a fully integrated service yet, the industry as a whole can provide all types of services covering the entire value chain of drug discovery, development and manufacturing. Besides, there are also more than 50 multinational service providers that have service facilities in China. The entrance of these MNOs has significantly uplifted the service quality and capability of this Chinese industry. In addition, growing numbers of traditional Chinese pharmaceutical and R&D-oriented biotech companies also join in the service community as they are increasingly approached for collaborations by drug companies from all over the world.
(1) Service capability in early stage drug discovery
China currently is one of the hot spots in the world for pharma/biotech companies looking for large compound libraries that possess the structural features of drug-like molecules. China has a huge pool of skilled synthetic organic chemists and biochemists. Companies specializing in synthesis of specialty chemicals, scaffolds and building blocks as well as isolation and purification of natural products from the Traditional Chinese Medicines (TCMs) spread all over the country. Many rare chemicals that could not be sourced in any other places of the world could be available in China. Also, because of low labor cost and less strictly controlled environment protection, many chemicals and biological agents that are not profitable to make in other places could be available in China at reasonable prices. This service feature has been extensively explored in the past by many major pharma/biotech companies. Currently, more than 30 such service providers possess focused compound libraries of various sizes.
Chinese service providers are not just able to provide the focused compound libraries. Their service capabilities also cover all areas of the early stage drug discovery. For example, there are more than 15 companies that provide services related to target identification and validation such as DNA sequencing, elucidation of protein structures, reconstruction of proteins, manufacturing of recombinant proteins, and disease modeling. In addition, there are more than 25 CROs providing services in medicinal chemistry-related research such as lead discovery and optimization, assay and assay method development, pharmacological property study such as determination and optimization of PK and PD. Many of them also possess the advanced techniques and experience such as high throughput screening, computer-aided drug discovery (CADD), and structure-activity-relationship (SAR) study.
(2) Service capability in preclinical research including ADME/Tox study
Currently, there are a large group (about 33) of China-based companies that provide services in preclinical research including in vivo efficacy testing, in vivo/in vitro ADME screening, plasma protein binding studies, metabolite profiling, and the whole scope of toxicity studies. However, the good quality of service in this sector was not available until recently. The rapid change of landscape in this area is largely attributed to the entrance of a large group of experienced multinational CROs, all lured by the abundant animal species in a favored regulatory environment as well as the readily available manpower resources at low costs. For example, several CROs currently offering services in China are actually the service divisions, branches or subsidiaries of the Western-based CROs. Examples include CrimsonPharma, Bridge Laboratories, and Crown Biosciences. The headquarters of these CROs are all based in the West (mostly in the US) but all or most part of their service is performed in China. In addition, several multinational CROs recently formed joint ventures or partnership with Chinese CROs. Some even acquired their Chinese partner. For example, Charles River Laboratories recently acquired BioExplorer. MPI Research formed a joint venture with Medicilon.
(3) Service capability in clinical research
Contract clinical research has been conducted in China for more than a decade. In addition to a vast pool of treatment-naïve patients, China also has many specialized hospitals that have concentrated medical facilities, specialists, and knowledge in a special disease area such as cancer. Pharma companies now have also realized that China also has a vast pool of well-trained hospital physicians, thanks to the enormous training provided by many Western companies including multinational CROs and major pharma companies. For example, Astra-Zeneca recently established a training center at No. 3 Hospital of Beijing University to train physicians there for clinical trials. Majority of these medical personnel and other medical resources are localized in major Chinese cities.
So far, most of clinical trials conducted in China were performed by major pharma companies or multinational CROs. Almost all multinational CROs including Quintiles, MDS, PPD, Covance, etc. have their clinical trial centers in China. Many major pharma companies including Astra-Zeneca, Pfizer, GSK, Sanofi-Aventis, etc. also have clinical research centers in China. An increasing number of Chinese-founded contract clinical research organizations also emerged in recent years. At present there is a total of 14 such a type of CROs in China offering services in this sector.
(4) Service capability in contract manufacturing
Among all service sectors in the China pharma outsourcing industry, contract manufacturing is the most active by far. Service capability of this sector has been greatly improved in recent years as evidenced by the shift of service focus from the manufacturing of pharma intermediates to the manufacturing of APIs. However, many Chinese pharma companies are not professional contract manufacturing service providers. Their service is only on a seasonal basis when a spare production capacity within their organization is available.
At present there are about 70 professional contract manufacturing service providers in China. Majority of them also have strong capability in chemical processes research and development with a decent size of process R&D team as well as advanced pilot plants for step-by-step process scaling up. Their facilities are also generally supported by an internal QC/QA laboratory equipped with advanced analytical instruments (such as HPLC with both regular and chiral columns, GC, LC-MS, etc.). Majority of them have the production capacities from multi-kilograms to low-end metric tons (with reactor volumes ranging from 50 L to 3,000 L) and are able to handle a variety of chemical transformations. Technologies for some special chemistry tasks such as large scale chiral resolution are also available.
2. Geographic distributions of Chinese service providers
China-based service providers at present are highly densely localized in two largest cities in China, Shanghai and Beijing, including their vicinity provinces/cities. These two areas (including their vicinities) contain more than 90% of China’s total number of professional service providers. More interestingly, Shanghai is relatively concentrated with more CROs/CMOs in chemistry-related services such as drug discovery research and contract manufacturing, whereas Beijing is more popular to CROs that provide biology-related services such as preclinical and clinical research.
3. How to safely operate outsourcing in China
In the past IP protection has been the major concern to many companies when considering outsourcing to China. However, the situation has been greatly improved in recent years. Many outsourcing companies that have recently dealt with Chinese companies agreed with this statement. In fact, a number of small R&D-oriented biotech companies are currently conducting outsourcing in China. For example, according to the database of my firm, at present there are at least 40 of such small-sized biotech companies having a variety of outsourcing activities in China.
On the other hand, to those companies that have never had any outsourcing experience in China or worked with any Chinese service providers, following advices could be useful to them if they do decide to embrace the opportunity:
(1) Appropriately assess the projects to be outsourced: As rule of thumb, projects to be outsourced should be appropriately classified to determine their IP risk tolerance level. Based on this assessment, outsourcing companies then decide what to outsource and which service provider to choose.
(2) Identify the right service provider: When selecting a service provider, both technical skills and service quality/reputation of an interesting vendor must be considered. On the other hand, it is not always true that the big CROs/CMOs are better than small ones. In contrast, in some cases a project outsourced to a big CRO/CMO by a small biotech company may receive less attention within the CRO company as compared with the project from a big firm. It is also strongly recommended that the outsourcing companies had better to get reference from other companies that had outsourcing experience in China before.
(3) Effectively manage the outsourced projects: Once started, it is critical for outsourcing companies to appropriately manage the outsourced projects including paying attention to establishing a good relationship with Chinese service provider.
Case study
A publically traded biotech company located at Cambridge, Massachusetts focuses on discovery and development of anticancer drugs with novel mechanisms by targeting both the cancer cell surface and its nucleus. It has conducted drug R&D outsourcing in China for a couple of years. The company has been around for more than ten years and built up a decent package of technologies as it has a number of drug candidates in various development stages. It also had a series of collaborations with big pharma/biopharma companies including Wyeth, Procter & Gamble and Genentech. However, its development process hit roadblocks a couple of years ago as the above collaborations did not yield fruitful results that could make it financially beneficial. As it had invested close to $100 M in these programs and was left with only limited funding for continuous operations, it decided to go to China for cost reduction with only one goal: to be able to continue its R&D programs.
After searching among all available Chinese service providers, it eventually locked an outsourcing agreement with ChemPartner, a Shanghai-based and one of the leading CROs in China. Hiring 25 chemists and biologists at ChemPartner, the biotech company has been essentially using this group of Chinese scientists as its discovery department for lead optimizations for almost two years. The Chinese scientists at ChemPartner synthesize compounds, test them against the targets selected by the customer, and then send data back to the customer. Based on the activity data, the biotech company’s own scientists at its Cambridge headquarters then redesign new target compounds hoping to make them more potent. And they then send the structure of the new target compounds back to ChemPartner for synthesis.
The biotech company admitted that this outsourcing practice has enabled it to save as much as 80% if it is compared with performing all these tasks by its own scientists at Cambridge. And it has thus made it able to successfully continue its programs for two more years. Because of the significant cost saving, the company is now confident that its current cash reserve will enable it to smoothly go through the next stage. Most recently (December 2008), one of the company’s collaborators, Genentech, initiated a phase II clinical trial for GDC-0449, an orally-administrated small molecule Hedgehog pathway inhibitor for advanced ovarian cancer. The drug candidate was discovered and licensed to Genentech by the biotech company.