Issue Date: November 26, 2007
Shopping The World
EARLIER THIS MONTH, Sharon E. Tetlow, a senior vice president and the chief financial officer of the San Francisco-based biotech firm Cell Genesys, went to Shanghai for the first time. Cell Genesys already conducts research programs with contractors based in Europe and recently started working closely with a research partner in China.
During her stay in China, Tetlow took part in a panel discussion at the UBS China Life Sciences conference in Shanghai. She told attendees that Cell Genesys looks for "technological strengths" in its partners and is particularly interested in companies that understand viruses and monoclonal antibodies. She did not reveal which service provider her firm is now using in China, but she said that it has "particular technological capabilities."
Cell Genesys' venture into China illustrates the extent to which that country is advancing from a provider of low-cost commodity-chemistry services to being a viable option for more advanced contracting partnerships with drug companies. This advance is making it even harder for contract research organizations (CROs) in countries ranging from Russia to Canada to the U.S. to keep in front of the Asian steamroller. But for pharmaceutical industry consumers of such services, the simultaneous push by all players to increase the sophistication of their research offerings is creating a wealth of welcome options.
As recently as two years ago, the trend in the contract research industry was clear. CROs based in China and India were prospering while many in Europe or the U.S., unable to compete with lower costs in Asia, were retrenching. While Chinese and Indian CROs were expanding their labor force and range of capabilities, Western ones were contending with payroll reductions.
WuXi PharmaTech, a Shanghai-based CRO, is emblematic of this rise. Founded just seven years ago, the company has expanded rapidly and today employs a scientific staff it puts at 2,100. In the face of such a juggernaut, it seemed just a matter of time before outsourced chemical work was mostly performed in Asia.
In fact, the story is more complex. Several contractors based in Europe and North America are thriving, whereas others based in China or India have had to upgrade services to meet customer needs. Geographical location has emerged as only one of many factors determining the success of companies doing chemistry research work on behalf of others. As the case of Cell Genesys illustrates, customers are often shopping the world for technological capabilities, not just cheap services.
"No country has a monopoly on good chemists," says Richard D. Connell, head of chemistry outsourcing at Pfizer Global Research & Development. "From a talent perspective, all countries produce really smart, hard-working chemists."
Chinese and Indian firms got their feet in the contract-research door in the mid-1990s by performing relatively simple tasks, such as high-throughput screening, that did not involve the sharing of much sensitive intellectual property (IP). This coincided with big pharmaceutical companies' belief that large-scale screening of compound libraries was a magic tool for generating great drug candidates.
The rush for generic libraries is over. And firms in China and India can no longer solely rely on their cost advantage, because salaries have been rising rapidly in both countries. Meanwhile, buyers are increasingly interested in working with contractors that offer specific technologies or, more important, an integrated range of services in biology and chemistry.
It is therefore not surprising that Chinese and Indian CROs are increasingly moving to provide integrated services. John V. Oyler, chief executive officer of Beijing-based contract research firm BioDuro, tells C&EN that it's efficient for customers to work with an external partner that can provide chemistry as well as biology services at the same location.
If biology and chemistry are colocated, researchers can get efficacy results within 48 hours. But if a U.S. or Europe-based biology lab tests compounds synthesized somewhere in China, researchers may need to wait as long as two weeks for their results as the compounds are shipped, clear customs, and enter the work queue in the biology lab, Oyler explains. BioDuro offers an integrated range of chemistry and biology services out of Beijing, he adds, because that's what customers demand.
WHETHER FOR integrated chemistry/biology services or for pharmaceutical chemical manufacturing under current Good Manufacturing Practices (cGMP), competitive options for contract research are available around the world.
CROs set up their operations where they find the scientists they need. Founded by American entrepreneurs, BioDuro, for example, opted to locate in Beijing because of the relative ease of hiring researchers there who are experienced in toxicology studies. "It doesn't matter where a company is based, whether it be Beijing, Chengdu, Tianjin, or elsewhere," Oyler says. "What matters is who works there."
Chemizon, a firm that opened its doors less than two years ago, initially opted to site most of its operation in Seongnam, South Korea, because of the ease of hiring experienced medicinal chemists there at salaries below those paid in the U.S. It has since opened a facility in Beijing. The company is headed by Anthony Piscopio, who previously founded Array BioPharma in Boulder, Colo. Chemizon aims to provide a full range of pharmaceutical research services, from target identification to the filing of Investigational New Drug Applications.
By picking South Korea, Chemizon bucked an industry trend of setting up almost all new labs in either India or China. The availability of human resources was not the only factor in South Korea's favor, says Ramesh Subramanian, Chemizon's U.S.-based head of business development. Another factor favoring Korea was the country's strict regime of IP protection. South Korea, Subramanian adds, is also one of the few countries in Asia where it's possible to manufacture radiolabeled compounds for export. It's not possible to do this in India, Subramanian notes, because the country did not sign the Nuclear Non-proliferation Treaty. Radiolabeled compounds enable researchers to monitor how drug candidates travel through a living organism such as the human body.
NEXT YEAR, Chemizon plans to complete the construction of a biology lab in South Korea. Until then, its operations in South Korea will be fully devoted to servicing Japan's Takeda Pharmaceutical, with which Chemizon signed a long-term cooperation agreement last month. The accord specifies that Takeda will work only with the company's South Korean labs.
Chemizon has also been expanding in Beijing, where scientific human resources are too abundant to pass up. The company currently employs 45 scientists in South Korea and 75 in Beijing. By the middle of 2008, it expects to employ between 150 and 175 people, the bulk of them in China. At present, Subramanian says, about a third of Chemizon's employees are Ph.D. holders, a ratio that it hopes to maintain.
But Chemizon is not the only contract chemistry company ably competing against Chinese and Indian rivals. Farther east, Russian and Ukrainian CROs are also tackling the challenge.
Indeed, when chemistry executives in these former Soviet states are asked whether they've had to downsize in response to Chinese and Indian competition, most of their answers echo that of Nikolay Savchuk, CEO of ChemDiv, which employs 500 researchers and other personnel in Moscow and San Diego, Calif.
"Cut back? We've actually had to expand," Savchuk says.
To stay competitive, Russian and Ukrainian CROs have extended the breadth of chemistry services they offer to include more steps along the drug discovery pipeline-everything from custom synthesis to biological screening. These services range far beyond making diverse chemical libraries and providing synthetic organic chemistry know-how, skills on which many of the CROs were initially based.
MOST OF THE MAJOR CROs in Russia and Ukraine emerged as the Soviet bloc dissolved in the early 1990s. After the breakup, scientific funding plunged, and "many highly experienced and highly educated chemists essentially found themselves out of work or on limited welfarelike support," explains Eugene Vaisberg, CEO and lead founder of ChemBridge, which is headquartered in San Diego but has the bulk of its operations in Moscow.
Funding for academic research in Russia and Ukraine remains limited, Vaisberg says, leaving a pool of highly trained chemists in search of more lucrative employment. ChemBridge employs 300 people, 150 of whom are chemists; 90% of them have Ph.D.s or master's degrees, he adds.
The Soviet collapse coincided with big pharma's embrace of high-throughput screening of generic chemical libraries. "They believed high-throughput screening would be the solution for all their problems, and all they had to do is find as many compounds as possible and to screen them all," says Vasily Pinchuk, vice president of marketing for Kiev-based Life Chemicals, which employs a staff of more than 100, 50 of whom are chemists.
Brokers rushed into the newly opening former Soviet states to purchase and resell in-house chemical libraries that contained unusual nuggets long locked up behind the iron curtain. Entrepreneurial academics took note, went into business, and cut out the middleman.
Many of these academics established businesses on their home turf. Others moved to the U.S. to get things going there before opening facilities back home. Now, CROs in the former Soviet Union operate primarily in Moscow and Kiev, although there's a sprinkling in other cities, such as Irix Pharmaceuticals' joint venture in St. Petersburg.
When the companies began, "people were buying everything we had on the shelf. Unfortunately, these times are over now," Pinchuk says.
"That was the golden age," adds Aleksandr N. Kostyuk, marketing director for Kiev-based Enamine, which employs a research staff of 300, 61 of whom have chemistry Ph.D.s. "Since then, demand for just any screening compounds has dropped considerably."
With the new century came pharma's reality check about high-throughput screening of unfocused chemistry libraries. A shift in demand toward more targeted and complex libraries forced the CROs to reevaluate the business model of selling stock libraries. The ascent of China and India added to the pressure.
TO STAY ABREAST of this competition, Ukrainian and Russian CROs began offering services that required more sophisticated synthetic and medicinal chemistry know-how. "Russia will not be able to beat China or India by number of scientists," says ChemBridge's Vaisberg. The better strategy, he says, is to try besting them with more chemically complex outsourcing services.
More than 100 companies worldwide can provide simple scaffolds, molecular building blocks, or custom resynthesis services, Vaisberg points out. "An average chemist can do this work, but novel custom library design and synthesis capability takes many years of expertise to develop," he notes.
Many CROs in the former Soviet bloc are already providing services that include preparing custom libraries, advancing screening hits into families of leads, and designing libraries that target important biomolecules, such as kinases and ion channels. Many also offer, or are planning to offer, in vitro biological screening of the chemical libraries they build.
To provide clients more services along the drug-discovery pipeline, ChemDiv has taken an additional step by setting up rodent and primate facilities for central nervous system and oncology drug toxicology testing. "We haven't done all the steps to make a drug for a partner yet because we haven't had all the parts in place," Savchuk says. But that's a goal. "So we are now investing in formulation and safety.
"I would say that in three years we could take many of the lead programs we are now working on with customers toward registration," Savchuk says. "In the midterm outlook, we'd like to do Phase II clinical testing."
ChemBridge takes a different perspective. The company has expanded as far as in vitro cell screening but has decided to stay close to its core chemistry competencies. "We want to focus on what we are best at and collaborate with people who are best at other pieces of the puzzle of drug discovery," Vaisberg says.
Some Indian and Chinese companies such as WuXi PharmaTech are now offering a similar spread of medicinal chemistry services, but most of them are younger than the Russian firms. Vaisberg points out that in 2001, months after WuXi was founded, ChemBridge was already working on or negotiating large contracts on advanced custom libraries with the likes of Pfizer and Merck & Co. "The most important differentiating factor between Russia and emerging Indian and Chinese companies is experience," Vaisberg says.
Furthermore, being based in the U.S. helps differentiate ChemBridge from Chinese and Indian competitors, Vaisberg says, because it permits efficient "U.S.-style" project management to be combined with the cost advantage of outsourcing. "Offshore chemistry is much more than chemists with rotovaps," he says. "It's project management, it's secured channels of communication, it's trust."
ANOTHER ADVANTAGE, Vaisberg points out, is that being in Russia or Ukraine allows overlap in the workday with European clients. There's also a cultural closeness, he notes. "Moscow and Kiev are in fact a part of Europe."
Russian and Ukrainian CROs report that European companies account for about 25-40% of clients. U.S. companies account for around 50-60% of clients, while Asian firms, primarily Japanese companies, make up about 10-15% of clients. Biotech companies make up the majority of clients, but big pharma provides a greater volume of business.
For clients such as Pfizer, which has been working with groups in Russia for at least six years, calm, steady growth distinguishes the CROs in that area. "Because the growth in Russia and the Ukraine appears reasonable and measured, there does not appear to be a big staff turnover issue that one sees in some companies in India and China," Pfizer's Connell says. "Stability of key staff can be a significant success factor in a multiyear collaboration.
"On the other hand," Connell says, "the growth in India and China has led to an increase of suppliers that support the chemistry outsourcing market. Suppliers of specialty chemicals, biologics, and simple lab supplies and equipment appear to be rushing more resources into Asia to support growth in chemistry sourcing. This in turn creates an infrastructure and operating environment that enables a more efficient global supply chain between our organization and collaborators in India and China."
To keep the supply-chain machinery running smoothly across the sometimes sticky Russian border, and to ensure a ready source of lab supplies to the region, many companies employ custom brokers and international freight-forwarders to expedite the traffic of goods. "We invest heavily in in-house stock of commercial reagents," Vaisberg says. "We also supported creation of joint-venture companies with major catalog providers that hold stock in Moscow."
Enamine, a Ukrainian company, keeps an ample stock of building-block molecules at hand by making its own compounds. "It gives us revenue, but also our chemists have access to a huge pool of starting materials. For us, it's a big advantage," Kostyuk says. The company is currently expanding its building-block business.
On the other hand, some companies say they have responded to Chinese and Indian competition by reducing their business of making basic building blocks, scaffolds, or intermediates.
"We used to produce a lot of custom intermediates and scaffolds," Vaisberg says. "We realized that [those products] had become more commoditized, purely price driven. So we are downscaling intermediate production efforts in favor of more sophisticated custom library-related work or medicinal chemistry." When major pharma clients ask him to do more basic synthetic work, Vaisberg says he tells them, "You get a better deal going somewhere in India or China. Take advantage of our unique pockets of expertise and technology."
IN NORTH AMERICA, the rise of Indian and Chinese competition has had a similar effect on many CROs. Some firms that pioneered compound screening have exited the business; others have shifted their focus to complex chemistry and projects where time and IP protection are priorities.
The North American CRO community is fairly diverse. Most firms are small and specialized, operating at one location, but larger contracting firms exist. Albany Molecular Research Inc. (AMRI), for example, provides research services from the U.S., Hungary, Singapore, and India. Most companies do some small-scale pharmaceutical chemical manufacturing, and most have felt some level of competitive pressure from low-cost Asian competition in recent years.
Naeja Pharmaceutical Research & Development is a typical small specialist. The company was started in Edmonton, Alberta, by Ronald G. Micetich in 1987 as SynPhar, a joint venture with the Japanese drug company Taiho Pharmaceutical. The two collaborated on development of drugs such as tazobactam, an antibiotic, and mofezolac, a nonsteroidal anti-inflammatory, which were licensed to Wyeth and Mitsubishi Pharma, respectively.
By 1999, Micetich had taken full ownership of the company, changing its name and its direction. Venture capital financing for in-house drug discovery was drying up, according to Sameeh M. Salama, senior director of business development, just as the services market for the pharmaceutical chemistry performed at Naeja began to expand. Micetich pursued the CRO market.
"We had medicinal chemistry, pharma research, drug metabolism, and biology," Salama says. "Rather than continuing with a typical internal drug discovery program, in- and outlicensing, we decided to convert the business to contract research." The company had its own products at various stages of development, based on its expertise in antibacterials, antifungals, and anti-inflammatories. But efforts became increasingly focused on third-party contract services, Salama says. "And business took off."
ACCORDING TO SALAMA, Naeja does about 40% of its business in the U.S., 20% in Canada, and the rest in Europe and Asia. It avoids early-stage work such as high-throughput screening and library generation. "We basically do the next steps-hit validation, lead optimization, and advanced lead optimization," he says. "At the end of the process, we have identified candidate compounds that clients can take to preclinical development."
Naeja employs 90 chemists, most of whom have Ph.D.s. "This is really what you need in a discovery and lead optimization program," Salama says. The company also maintains a pharmacokinetics and drug metabolism group from its drug discovery days. It runs an animal facility and a microbiology lab for in vitro and in vivo research.
The company also has a small-scale synthesis operation, which took a hit from India and China. "About 10% of our revenue was from one-off synthesis," Salama says. "A good portion of that disappeared over the last few years. But in recent months, we have seen some of the more difficult syntheses come back." The custom synthesis group, consisting of 12 chemists, has seen an uptick in work on IP-sensitive multistep processes.
As for the rest of Naeja's services, "China and India have had no effect on business," Salama maintains. "This is not something you go to university and learn. It comes with years of experience. The fact that you can sit down with a client and go over a program and suggest changes based on sound medicinal chemistry—this is where India and China tend to lag behind."
Adesis, in Newcastle, Del., approaches the market with a similar focus on lead optimization. "We chose to go for the portion of the business spectrum where people will want to retain the project domestically rather than ship it overseas," says CEO Ving J. Lee. "Basically, these are projects where people need very quick turnaround because biologic proof of concept or proof of principle is needed, and time is of the essence."
The company has been impacted by Chinese and Indian competitors over the past five years, Lee acknowledges. "We felt pressure, but mitigated it by changing our customer base and our types of chemistry and services." Adesis shifted away from big-pharma customers that are more likely to send work overseas. "We have changed to a broader client base that includes biotech companies, virtual biotechs, and clients who are at the intermediate range between biotech and big pharma."
According to Lee, some of the outsourced chemistry research that has gone to China and India in recent years has returned to North America. "The pendulum is swinging back to domestic CROs," he claims. "As people become more and more sophisticated about what kind of projects to send overseas, they have to weigh cost, time benefit, and the IP advantage of doing it domestically."
ANOTHER North American specialist CRO, J-Star Research, focuses farther downstream. "We support the drug development process," says Andrew S. Thompson, CEO of the South Plainfield, N.J., firm. "The real sweet spot for J-Star is after the client has chosen a compound for development. We supply the intellectual input for changing from the discovery synthesis to the manufacturing synthesis."
Thompson, who started J-Star 11 years ago after working in process chemistry research at Merck, says his company offers a service that most drug developers would prefer to access locally. Still, the pressure from China and India is unquestionable.
"We are always busy," he says. "But there is this constant threat, this sword of Damocles. There are always 50 to 100 companies in China or India that claim they can do exactly what you do for one-fifth the cost."
Between 2002 and 2004, Thompson says, most of the potential clients he met with would "shrug their shoulders and ask, 'Why should I do business with you? I can get the same exact thing, quality, and time for less in China and India.' It was very frustrating when I knew that it just wasn't true."
Today, Thompson sees more of an equilibrium. "People know what they get in India and China. They know what to go there for and what to come to me for. People no longer say, 'We can get the same thing you have in India and China.' I rarely hear that anymore."
He acknowledges, however, that the experience allowed J-Star to focus on its strength in process development chemistry. The firm used to pursue business in areas such as intermediates and building blocks, but it has written off such work to low-cost providers overseas.
Not all North American CROs have backed off from manufacturing as a key service, however. Cambridge Major Laboratories, Germantown, Wis., has managed to maintain a significant pharmaceutical chemical production business tied to its contract research services, according to CEO and founder Michael W. Major. He also sees large pharmaceutical companies pulling some outsourcing out of Asia. "This is very interesting," Major says, "because they need IP protection and quick response. They generally need 500 g to 50 kg, depending on compound and stage of project."
Major claims that the pressure from China and India is felt most by large contract fine chemicals manufacturers such as Lonza and DSM. "For us, manufacturing is not exactly bad," he says. "India is generally a supplier of compounds on large scale. China is well-known for delivering intermediates." This leaves room for producers that can provide fast turnaround on materials for clinical trials up to Phase III. "As a project graduates to larger scale, the cost of material becomes significant. Then you go to China."
While Major says he is not interested in getting on the ground in Asia, he notes that having a presence in Europe is an important facet to developing business in "the Western world." To this end, earlier this month, the company announced the acquisition of the Dutch CRO ChemShop.
Although the company has a thriving production arm, Major says Cambridge Major's primary focus is contract research. "We are still a CRO," he says, "but the whole market is important to us. In order to be a player, you have to quickly deliver 5 g to 25 kg."
RESEARCH IS also the central activity at AMRI, long the North American leader in the CRO sector. CEO Thomas E. D'Ambra divides the company's activities into three main areas: drug discovery services; drug development and small-scale chemical production for early-stage active pharmaceutical ingredients, conducted under cGMP standards; and large-scale manufacturing.
D'Ambra agrees that a certain portion of research services will not be done overseas. "We don't see a lot of offshore competition for GMP-related services, where customers have identified an active compound they want to get into Phase I clinical trials as fast as possible," he says. Such projects require a high volume of complex chemistry, process development, and analytical work. "Our sense is that the customers want to be close to it."
But AMRI is expanding its operations around the world, according to D'Ambra, who speaks of a global division of labor. Last year, the company purchased ComGenex, a combinatorial chemistry firm in Budapest, Hungary, that develops compound libraries. D'Ambra notes that the Western firms like ArQule and Tripos that marketed these services exited under pressure from lower cost countries.
In Singapore, AMRI offers discovery chemistry and structure-activity relationship (SAR) medicinal chemistry, as well as some custom synthesis. Singapore is well-suited to these services—which are akin to AMRI's chemistry activities in North America—because of the country's respect for patents. "We try to duplicate what we have in the U.S.," D'Ambra says. "Scientists are trained to not only make compounds but also to be involved in SAR decisions on what to make based on access to the biology." AMRI is launching an in vitro biology group in Singapore to support compound testing there.
In India, AMRI is developing an infrastructure for custom synthesis, installing a new kilo lab that will ultimately be scaled up to offer production of compounds for Phase I clinical trials.
D'Ambra sees China as a newer and riskier player in the CRO market, primarily because of lingering uncertainties regarding IP. "Until recently, personal property didn't exist" in China, he says. "As much as our competitors in China talk about all the processes they put in place to protect intellectual property, we still get résumés from employees at some of these companies in which they actually will submit a research summary disclosing all the compounds they made for this and that customer. It's not that these applicants are doing anything unethical or underhanded. They don't know any better. It's a cultural thing."
With CROs and their technological capabilities now on a global menu, drug companies are taking advantage of the flexibility and cost advantage they offer.
Pfizer, the world's largest pharmaceutical company, is doing so, according to Connell's colleague, Stephen Street, executive director and head of discovery chemistry at Pfizer Global Research & Development. Street says India and China meet the criteria big pharmaceutical companies use to select contractors. "First of all, it is important to understand that both of these countries are growing markets for Pfizer and both have rapidly advancing scientific infrastructures," he says. "It is in the interest of us all that we work in these locations."
Street describes the use of contract research as a means of supplementing in-house chemistry. "While it is still very much the case that the majority of our chemistry is done internally, we leverage chemistry outsourcing at each stage of the R&D continuum," he says. "For this model to work, it is essential that we maintain a very positive balance between the skills and resources we have internally and those we have externally."
THE GLOBALIZATION of the contract research market is working to support the global operations of the larger drug companies. And that ship has sailed. "We have great partners in the U.S., Europe, India, and China," Street says. "In each location, we have preferred suppliers with whom we have developed excellent relationships."
It's no surprise that these relationships are helping contract research companies in India and China bring their chemistry skills and project management capabilities up to Western standards. CROs in the West are resigned to the fact that the Asian competition is not going away.
Nor is it generating much business for them. "Someday, there will be as many astute chemists there as there are here to do the kind of thing we do," says J-Star's Thompson. "But as far as free trade is concerned, I have no clients sending me work from India and China. I have hundreds of competitors, no clients. Free trade is creating a lot of competition for me."
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