Considerations in Pharmaceutical Outsourcing in China

Working with contract research organizations (CROs) is an important element of a pharmaceutical company’s outsourcing strategy, particularly if the CRO is located offshore. Laurie Chipperfield, director of technology and strategic sourcing, Worldwide Research and Development (WRD) at Pfizer (Groton, CT), shared her insight on factors to consider when working with CROs in China. Chipperfield spoke at the DCAT–ISM Sourcing Summit: Forward Thinking Sourcing, an educational program presented by the Drug, Chemical, and Associated Technologies Association (DCAT), along with its partner, the Pharma Forum and Chemical Group of the Institute of Supply Management (ISM). The program was held Nov. 3–4, 2010, in New Brunswick, New Jersey.

Chipperfield outlined the key elements of Pfizer’s strategic priorities as it relates to the company’s research and development (R&D) activities in China. Its major goal is to accelerate global portfolio delivery in key disease areas by increasing clinical trial activities and capabilities and by establishing a network of CRO partners to support research projects. The company also is seeking to build its knowledge and insight in disease mechanisms relevant to Asian patients. Lastly, the company wants to pursue innovative approaches to redefine its R&D business model.

In looking at China, these goals are occurring amidst changing macroeconomic and demographic conditions driving the healthcare market in the country. These conditions are increased urbanization, a growing aged population, an increase in Western lifestyle diseases, and an establishment of a basic healthcare system to increase coverage for urban and rural residents.  As these conditions evolve, the market for CROs in China, still fairly new, continues to unfold. CROs emerged in China in the mid-1990s, and as of 2008, there were some 400 CROs in China, according to a 2009 report by the research firm Decision Resources (Waltham, MA). The major Chinese CROs are located primarily in Shanghai and Beijing, particularly in two large biotechnology parks: Shanghai Zhangjiang Biopharmaceutical Park and Beijing Zhonguancun Life Science Park. The Chinese CRO market is expected to continue to grow at a compound annual growth rate of 33%.

Chipperfield said that many considerations in working with a CRO in China are common to any effective outsourcing relationship, but additional factors specific to the business environment in China also have to be taken into account. For example, contract language specific to China may be used, but it is important to take more proactive measures in consideration of intellectual property (IP) protection. These measures involve confirming work practices at a potential CRO or supplier to ensure IP protection. For example, it is important for a sponsor company to understand how people and work are segregated, the level of employee retention, and information-handling practices. It also is important to pick a supplier with whom a strong and stable relationship can be developed. Understanding the ownership structure, the employee turnover rate, and detailing in-house drug-discovery programs of the CROs that may present potential conflicts of interest are important factors to consider when selecting a CRO. She also suggested that for key partners, it is important to speak with industry experts such as venture-capital principals to gain an understanding of the CRO under consideration. For the sponsor company, it is wise to determine and prioritize what type of work would be appropriate to be performed in China. 

Chipperfield further outlined crucial steps to take when selecting a supply partner, which are relevant for good supplier development practices, with some regional customization for China. These steps include:

• Be clear on the intent of the supplier relationship––certain partners will be more strategic than others

• Visit and audit facilities

• Keep in mind the cultural expectations for business relationships in China

• Establish and use in-country offices for facilitation of large collaborations and supplier evaluation

• Regard past project experience with the CRO or supplier as the best predictor of future success in the outsourced relationship, which can involve skills in areas such as the selection of trial projects, cycling through project complexities, and understanding the supply chain

• Expect that a partner’s initial service and experience level will be different than the in-house capabilities of the sponsor company

• Understand the supplier and the location of which the service will be performed

• Evaluate the business team’s ability to convey a contract manufacturing and research mindset. 

As sponsor companies consider these issues when outsourcing to China, Chipperfield shared some trends that may affect the environment for working with CROs in China. “Chinese CROs are moving upstream in the R&D value chain and are increasingly offering services in chemistry, biology, assay development, and even target identification,” she said. “Some integrated CROs can offer round-the-clock scientific services with Web-based direct access to data for clients.” Alliances among CROs also are increasing as a means to broaden service offerings, and Western CROs are expanding to China. Also, it is likely that there will be increased merger and acquisition activity in the highly fragmented CRO market in China. Moreover, some CROs are developing and bringing their own new drugs to market, a factor that sponsor companies should consider in CRO selection for possible conflict of interest. She adds that geographical proximity is extremely important for projects that require the exchange of goods between the customer and the supplier. “Companies may be disappointed if they focus too much on FTE [full-time equivalent] costs and overlook the total transaction and opportunity cost of outsourcing.”

Industry estimates suggest that the global CRO market is expected to reach $24 billion by 2012, and the majority of this growth is expected to come from India and China. The sector will also grow in terms of depth of offerings by suppliers such as increasing offerings in formulation development and good manufacturing practice capabilities. Also, within China, specifically, cost differentials between inland-based CROs and coastal-based CROs have to be considered. Escalating costs in the more well-established coastal areas of the CROs is creating a potential advantage for inland-based CROs, who may be able to compete more effectively on costs, including labor, perhaps by as much as 20–30%.