Asian Research Boom Continues

Managers of chemistry-based contract research companies in developed countries are wont to belittle their Asian competitors. They claim that Asian firms have limited research capabilities, are unable to protect intellectual property, and charge prices that are unsustainably low.

There is some truth to the allegations. Managers of some prominent Chinese and Indian contract research organizations (CROs) are among the first to say that their capabilities lag behind those of U.S. competitors. Nonetheless, some U.S.-based chemistry CROs are struggling to maintain sales, while those based in Asia are hustling to recruit scientists and build more lab space to fulfill growing business commitments.

Two years ago, I was boasting a little when I was forecasting that we would have 500 scientists now, says Ge Li, president of Shanghai-based WuXi PharmaTech. The firm's total workforce is 900. When Li spoke to C&EN in 2003, PharmaTech employed 162 scientists out of 225 employees. Formed in 2001, PharmaTech is China's largest CRO.

Goutam Das, president of Syngene, India's oldest chemistry CRO, estimates that the contract research market in India is growing at 20–30% annually and that this growth rate will continue for at least four to five years. The industry in India already employs about 2,000 scientists, he says, 425 of whom are at Syngene. Based in Bangalore, Syngene is a 12-year-old subsidiary of the Indian biotechnology company Biocon.

In the U.S., CROs are experimenting with risk-sharing and other ways to bill their customers; meanwhile, those in Asia are overwhelmingly working on the basis of full-time equivalents (FTEs). Under an FTE contract, the client pays the CRO an agreed-upon sum based on the number of researchers it employs. Under an FTE agreement, the CRO pledges it will not be paid royalties later on, even in cases where the customer successfully launches a new drug based on chemistry from the contractor.

Das expects that Indian companies will continue to derive most of their sales from FTE agreements. But he foresees that, more and more, big clients will demand direct control over their subcontractor's operations. He explains that if a big pharmaceutical company employs, say, 100 scientists at a single CRO in India, it may in the future demand to station its own managers at the firm to closely supervise the work that is done.

Y. Koteswar Rao, executive vice president at Chembiotek, a Calcutta-based CRO that is part of the Chatterjee business conglomerate, boasts that his firm was the first Indian CRO to entertain such a request. A customer posted one of its managers at Chembiotek for two years.

As is becoming common in the U.S., some Asian CROs are setting up risk-sharing agreements with their customers, but it's more the exception than the rule. Rao says Chembiotek derives about a third of its business from such agreements, under which the CRO receives less money than under a straight FTE contract but qualifies to earn royalties if its contribution helps the customer launch a new product.

Why would a drug company agree to share the huge profit derived from a new drug with an Indian firm that seems to provide little more than an inexpensive research labor force? CSN Murthy, chief operating officer of Bangalore-based Aurigene, says his firm has foregone FTE work and now exclusively signs up clients on a risk-sharing basis. By next year, he expects Aurigene to be working on 12 projects, including ones with the Danish diabetes drugmaker Novo Nordisk and the Danish biopharmaceutical firm Rheoscience.

Murthy says customers agree to work with Aurigene because, as an outsider, it introduces a different thought process into the discovery process. Moreover, owing to India's vast scientific workforce, Aurigene is able to rapidly hire additional scientists as needed. Murthy expects the company to employ 180 scientists next year, up from 105 now. He further boasts that, in addition to performing complex chemistry in well-equipped labs, Aurigene has biological capabilities, including its own animal lab.

The company is a subsidiary of Dr. Reddy's, a Hyderabad-based drug company that aspires to launch its own drugs on the international market. Murthy says Aurigene's customers accept that intellectual property does not leak from Aurigene to Dr. Reddy's. We're a subsidiary of Dr. Reddy's, but we run independent of them, he says.

Managers of Chinese and Indian CROs vary in their assessment of their own capabilities. Some claim to offer services nearly as sophisticated as can be found in the West. Others acknowledge that their capabilities are inferior, but say they are steadily improving.

According to Michael Hui, managing director of Shanghai ChemPartner, whereas in a U.S. CRO about half of the scientific staff hold a Ph.D., it is probably about 20% at his firm.

But through experience, he says, his staff can tackle progressively more complex projects. Our new staff starts with some low-end work, like library synthesis or producing reference compounds, he says. Then top performers are selected to work on more complex projects. Over time, we can charge a higher FTE rate because we are able to allocate a larger number of high-end people to the job, because their skill set, their output, their productivity is 8090% of the equivalent in the U.S., Hui claims.

Formed in 2003 in Shanghai's Zhangjiang technology park, ChemPartner and its sister company ChemExplorer employ a total of 320 scientists. Whereas ChemExplorer's 180 scientists exclusively handle Eli Lilly projects, ChemPartner serves a variety of customers.

The main reason so much business is going to Asian CROs clearly is the low rates they charge. Whereas the FTE rate in the U.S. is in the neighborhood of $200,000 annually, companies based in India and China typically charge customers $50,000 to $60,000. Some U.S. competitors claim that Asian prices are unsustainably low, considering that instrumentation and lab chemicals are all imported from the same suppliers used in the U.S. Moreover, demand for scientists in India and China has become such that Asian CROs have to cope with severe salary inflation.

K. Ranga Raju, CEO of India's Hyderabad-based Sai Life Sciences, states that for quality work, it starts at $60,000 per year. He predicts that the rate will rise to nearly $80,000 within a year or so. Syngene's Das estimates that Indian FTE rates are rising only about 5% annually. Both Syngene and Sai actively recruit their top scientists and managers in the U.S., where there is a large pool of experienced Indian scientists who studied at U.S. universities or work in U.S. drug firms. In Shanghai, both PharmaTech's Li and ChemPartner's Hui argue that, although their scientists' salaries are surging, their productivity is increasing even faster.

FTE rates cannot rise excessively, Das says, because there is too much competition in India. He estimates that India is home to 2025 CROs. But, he insists, not everybody offers the same quality of service, infrastructure, or analytical capability.

Ranga Raju says Sai is trying to differentiate itself by its capabilities and the caliber of its staff. He recently hired the head of AstraZeneca's Bangalore research lab, Milind Shanvi, to head Sai's R&D operations. The firm now employs about 150 people and expects to have a staff of 500 within two years.

PharmaTech's Li says not every Asian CRO is as systematic as his firm is in the way it conducts research. We can just make compounds, but we also train our people to deliver on time, he says. A lot of companies can just make a compound, but I don't think many companies out there know how to provide quality service. Li notes that PharmaTech has procedures and dedicated staff to systematically protect customers' intellectual property.

Li is not quite sure whether his main competition is from India, the U.S., or other Chinese firms. In terms of the quality of our science, we're competing against companies in the U.S. or Europe, he claims, but in terms of our prices, we're competing against India.

U.S.-based chemistry CROs are certainly feeling the competitive pressure created by a company like PharmaTech. However, for all the spectacular growth they are enjoying, CROs from India and China still play little more than a minor role in the drug discovery process.

Das, who with his 12 years in the business has more perspective than most about the contract research industry, estimates that Western and Japanese pharmaceutical companies spend a total of $20 billion annually to discover new drugs. No more than $5 billion of this goes to chemistry and other CROs, he believes. And companies based in developing countries like China and India handle about one-quarter of the CRO market.

In this context, any fear that pharmaceutical research will leave Western countries for India and China is overdone. The main reason, Das says, is that Western CROs can do high-end work for their customers. Most Western contract research companies are doing lots of value addition, in terms of optimization of leads, for example, to demand a premium for their service, he says. I am not sure if India or China is there yet.

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