Is the Chinese CRO Industry still the “Low-end Laboratory” of Multinational Pharmaceutical Enterprises?

The Chinese CRO unicorn WuXi AppTec was officially listed on Shanghai Stock Exchange on May 8, with stock code of 603259 and issue price of RMB 21.60/share, and it hit the daily upper limit when opened, with quote of RMB 31.10 and total market value reaching RMB 32.406 billion. WuXi AppTec took 50 days from the pre-disclosure update on February 6 to submission, second only to Foxconn that took 36 days for submission.

WuXi AppTec, the leading CRO in China, positions itself as a platform, is the largest lead compound R&D company in the world that covers and involves each link of new drug R&D, and is also the drug R&D service company that has the largest number of certification from global authoritative institutions, with a total 26 global R&D and production bases and branches, and having served more than 3,000 global innovation partners. Its main business income reached RMB 7.765 billion in 2017, and its compound annual growth rate exceeded 25.9% in 2015-2017.

Operating income

Hidden worries of the CRO industry under rapid development: "low-end laboratory"?

The global CRO industry could be traced back to 1974 when the founder of Quintiles: Dr. Gillings undertook the biostatistical analysis projects of many pharmaceutical companies in his office at University of North Carolina, and then the business mode of CROs as professional contract service institution rapidly developed in the world.

China has been constantly integrating into the global pharmaceutical product R&D system in recent years. There is a broad spectrum of disease and sufficient clinical trial samples in China owing to its huge population base. According to statistics, the study and trial costs in preclinical and clinical trial stages of China are only 30%-60% of those of developed countries, showing a significant cost advantage. In the context that the global new drug R&D costs are sharply rising, China has attracted the international R&D outsourcing orders of a large number of multinational pharmaceutical companies, and is becoming one of the core R&D outsourcing bases of global pharmaceutical enterprises.

Comparatively speaking, Chinese CRO industry started late. Distinct features of CROs in their early development include small scale, single services, and business mode generally of the simple "Cash on Delivery" traditional mode. Many clinical CROs undertake outsourcing orders for non-core parts stripped from the huge R&D projects of multinational pharmaceutical enterprises.

In view of this, the hidden worries that Chinese CRO industry serves as the "low-end laboratory" of multinational pharmaceutical enterprises have always been there. Indeed, if Chinese CROs were always satisfied with low-end services of pharmaceutical R&D during the labor division and collaboration on global pharmaceutical industry chain, then eventually they would be very likely to be reduced to the processing plant for pharmaceutical product R&D of multinational pharmaceutical companies, which is an issue worth paying attention to. Here, I’d like to discuss this issue from perspectives of the rise stage of innovative drugs in China and CRO business mode changes in China.

Chinese innovative drugs are rising, CROs are breeding new drugs

Chinese innovative drugs represented by apatinib, conbercept and icotinib, etc. are rising in recent years. The above new drugs are secondary innovation targeting the known mechanisms or drug targets and based on the original drugs, and belong to the me-too innovation, compared to the first-in class. According to insiders based on the development stage of Chinese pharmaceutical industry, me-too innovation is the main path for the independent innovation of the Chinese pharmaceutical industry currently and in the near future.

A clear trend at present is that the Chinese-produced me-too innovative drugs are achieving the import substitution of the original drugs, which will continue in the future. Take the icotinib of Betta Pharmaceuticals for instance, gefitinib of AstraZeneca was marketed in China in 2005, with the sales of about RMB 936 million in China last year, while the sales of the Chinese-produced me-too innovative drug: icotinib marketed in 2011 were about RMB 1.03 billion in 2017. The share of icotinib has surpassed gefitinib on the Chinese market upon the price advantage under same efficacy and localized marketing operation, and icotinib has achieved import substitution.

An essential condition for Chinese me-too or me-better innovative drugs to achieve import substitution or other commercial success is the efficacy of such drugs relative to original drugs. Such internal need forces Chinese pharmaceutical enterprises to constantly increase investment in new drug development, especially the fund investment in the clinical stages. With the increasing strictness and more scientific new normal of review from the Chinese drug administration, the series of subsequent new drug development links starting from the preclinical studies has raised newer and higher requirements for the content and quality of Chinese CRO services, which is also a new opportunity for business upgrading and innovation of Chinese CROs.

Business mode upgrading, deep involvement in innovation

Chinese CROs are cultivating market segments, building characteristics, and constructing own unique competitive edges in combination with own R&D strength and fields they are good at, when facing the competition pressure from international CRO giants.

JOINN Laboratories, a Chinese CRO listed on A-share in 2017, features "global certification", has the earliest commercial GLP laboratories in China, and is a professional preclinical safety evaluation institution of new drugs first in passing FDA’s GLP inspection in China and possessing both AAALAC certification and CFDA’s GLP certification qualification

Originally positioning itself as a platform company, WuXi AppTec has gradually possessed new small molecule drug platform, biopharmaceutical platform, gene therapy platform, cell therapy platform, medical device platform, and genomics and big health R&D platform, etc. during the development and growth. Besides the platform positioning, WuXi AppTec has expanded new business modes and deeply got involved in the new drug innovation process in a variety of ways.

International M&A

Through the "going abroad" international strategy, WuXi AppTec has established joint ventures with AstraZeneca, JUNO, and PRA, etc., invested in innovative biological drug R&D and cell therapy to improve CRO service ability, and acquired NextCODE and Crelux to develop genetic and biological technology.

Launching VC (venture capital) + IP (intellectual property) + CRO risk sharing business mode

Cooperation with the U.S. startup biotech company: The small company Callidus Biopharma only has 2.5 employees (two full-time scientists and one part-time financial person) at its beginning, however, Callidus efficiently completed the early-stage conversion R&D upon the potential target in the rare disease field and with the help of WuXi AppTec’s funds and R&D platform resources. Also, the U.S. virtual R&D company Novira received the investment from WuXi AppTec’s venture capital, and completed the R&D through WuXi AppTec’s technology platform; it was eventually acquired by J & J.

The above new drug development mode is called VIC mode: VC (venture capital) + IP (intellectual property) + CRO, through which, WuXi AppTec has obtained service fees and earnings growth by other methods like acquisition, and provided new opportunities for the innovation rise of small companies.

Finally

Chinese CROs represented by WuXi AppTec can be said to play the innovation supporting role in the early stage and during the current rise of Chinese innovative drugs. With the deep involvement in the new drug R&D process, those CROs will assume more detailed, deeper and more professional work in the innovative drug development in the future. The Chinese independent innovation dominated by me-too innovation in the future will be the engine to drive the Chinese CRO industry growth, and also an important opportunity for CROs to cast off low-end services and transform towards high-end service providers. In the benign interaction of the two, CROs will gradually become an important link that breeds the innovative drugs.

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