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Evolving landscape of pharmaceutical outsourcing in China
22 October 2012 • Author(s): Xiaorong He, Senior Research Fellow, Boehringer-Ingelheim
China’s economic growth has shocked and awed the world, with its GDP growing at an average rate of 10 per cent for 30 years1. The astonishing economic growth has also spurred rapid growth of pharmaceutical outsourcing business in China. In the past, China had been the major source of raw materials, basic intermediates and commodity bulk drugs for the pharmaceutical industry. Starting five to 10 years ago, China gradually moved up the value chain, providing a wide spectrum of services encompassing drug discovery support, preclinical development, clinical trial and contract manufacturing services to western Pharmaceutical and biotech companies.
PricewaterhouseCoopers ranked China as the most desirable pharmaceutical outsourcing location in Asia when considering the overall scores of cost factors, a range of risks associated with the territory environment and the extent of the market opportunity2. This article analyses key opportunities and risks in pharmaceutical outsourcing to China in the context of changing economic, political and social conditions. Hopefully, this will provide a useful framework to understand how the pharmaceutical outsourcing landscape has been and will be evolving in China.
Economic considerations: blessing and curse of rapid economic growth
The rise of China is a truly amazing story in the 20th century. In 1977, China was at the brink of economic destruction after the 10 year upheaval of Cultural Revolution. Chinese leadership decided to rescue the country by implementing ‘Opening and Reforming Policy’ that initiated economic transformation in late 1978. For the past 30 years, China’s GDP has grown at an astonishing rate of 10 per cent per year. In 2010, China’s GDP was valued at USD 5.87 trillion, surpassing Japan’s USD 5.47 trillion to become the world’s second largest economy after the US3. The economic boom has lifted more than 900 million Chinese out of poverty (defined as the number of people living on less than USD 1.25/day4). It has also created a burgeoning middle class with significant purchasing power that drives the growth of the Chinese pharmaceutical market. According to a 2006 report issued by McKinsey5, China’s upper middle class (defined by having an annual income of USD 15,000 or above) will increase from 9.6 per cent in 2005 to 23.6 per cent in 2015. Given the population of 1.3 billion people, 23.6 per cent equates to a staggering 300 million people, which is roughly the size of United States. With the rising number of affluent Chinese, rapid urbanisation and aging population, diseases such as diabetes, cancer and cardiovascular diseases are on the rise, offering a major growth driver for global pharmaceutical companies. China is expected to be world’s third-largest prescription drug market in 2011, according to a report released by pharmaceutical market research firm IMS Health6. In a frantic effort to capitalise on the promise of this emerging market, big pharma has spent billions of dollars expanding their R&D and manufacturing capabilities in China, forming strategic alliance with local companies and outsourcing what used to be considered ‘core activities’ to Chinese CROs and CMOs. Companies such as Eli Lilly are transforming their business models from a fully integrated pharmaceutical company (FIPCO) into a fully integrated pharmaceutical network (FIPNET), which allows the company to effectively utilise resources outside its internal capacity to enhance productivity and reduce risk. For example, Lilly outsources early stage development work to its ChemExplorer and PharmaExplorer partnership in China. It has also formed a risk and reward sharing partnership with China’s Hutchison MediPharma, focusing on drug discovery in oncology and inflammation therapeutic areas.