2012 Scrip 100: Asia grows drug discovery footprint

The dramatic rise of clinical trial outsourcing over the past decade has been widely heralded. Although less frequently discussed, it is no less significant that pharma companies are increasingly farming out a wide variety of drug discovery processes to third-party providers. George Green looks at the market for outsourcing, with a special eye on China.

Outsourcing drug discovery processes such as medicinal chemistry, ADMET (absorption, distribution, metabolism, excretion and toxicology) testing, and high-throughput screening is nothing new. Large pharmaceutical companies have been using a variety of types of contract drug discovery providers since the mid to late 1990s. However, in the past four years the industry has dramatically accelerated the practice, and several large multi-year deals have flung the issue of outsourcing drug discovery back into the newspapers. Scrip Business Insights forecasts the market to grow at a CAGR of 16% from $10.1bn in 2011 to $18.5bn in 2015.

Several recent deals illustrate how big pharma companies are engaging more often and more strategically with drug discovery outsourcing providers. Lilly, which is one of the most active outsourcers in the industry, signed a 10-year $1.6bn deal with Covance in 2008. Under the deal, Covance is providing non-GLP toxicology, in vivo pharmacology, a quality-control laboratory and imaging services. Covance acquired the 450 acre Greenfield Indiana site, taking on 260 Lilly employees. In late 2010, Covance completed a 40,000 sq ft laboratory capacity expansion on the site, which will support its work with Lilly.

Covance was also the partner in a landmark deal with Sanofi in 2010. Under the $2.2bn partnership deal, Covance will acquire two sites in Porcheville, France, and Alnwick, UK, and will perform discovery support, toxicology, chemistry, Phase I to IV, central lab and market access services. Central lab and Phase III services will form around 75% of the service part of the deal.

However, partnerships have not been limited to Europe and North America. Pfizer’s extensive use of Chinese leading provider WuXi AppTec has been well publicised. In 2008, the two companies signed a three-year agreement under which WuXi will perform ADME testing. As leading drug discovery providers continue to build trust and develop their capabilities, other major pharma companies will establish similar partnerships.

R&D activity continues to move east

This year the pharma world has witnessed dramatic cutbacks, with companies such as Pfizer, Merck, AstraZeneca and Novartis all cutting jobs in internal R&D roles. While they reduce internal capacity in Europe and North America, large pharma companies are seeking to conduct a greater proportion of R&D in emerging markets, partly in search of cost efficiency. While clinical trial activity is continuing to increase in countries such as South Korea and China, drug discovery activity is also gaining pace. As an example, Chinese drug discovery and manufacturing supplier WuXi AppTec’s revenues have been growing around 20% annually since 2004.

Many big pharma companies are investing heavily in R&D facilities across the Asia Pacific region. Low costs and a large strong talent pool, combined with government incentives, have highlighted the attractiveness of several countries across the region. China is still commanding the greatest attention (see table 1), and although big pharma has been investing in the country for some years, these centres continue to stimulate domestic drug discovery outsourcing providers by creating contracts directly and through training they provide to domestic employees.

Table1: R&D activities of large pharmaceutical companies in China

Source: Scrip Business Insights

Company	Activities	Location	Employees
GlaxoSmithKline	Pursuing R&D in neuroinflammatory and neurodegenerative disease. A humanised monoclonal antibody for multiple sclerosis developed at its China R&D centre has started Phase I trials.	Shanghai	280
Novartis	Established the Novartis Institute for BioMedical Research in Shanghai. Plans to invest $1bn to expand work in biomarkers, proteomics, genomics, and in vivo pharmacology.	Shanghai	160
AstraZeneca	Set up an innovation centre with an investment of $100m. The R&D activities are focusing on uncovering the ethnic differences in diseases to work toward personalised medicine.	Shanghai	200
Pfizer	Partnering with Chinese CROs and innovative companies to develop new oncology therapeutics.	n/a	n/a
Sanofi	Following a hybrid model with a combination of local presence (for clinical trials) and partnership with academic institutes for drug discovery.	Shanghai	100
Bayer HealthCare	Set up an R&D centre with special attention to drugs for diabetes, hypertension, and liver and gastric cancers – diseases that have high prevalence in China.	Beijing	140

Leading providers

The much-vaunted shift to strategic outsourcing, discussed intensively in the context of clinical trial partners, is also occurring in drug discovery. By increasing the volume of work, sponsors are able to negotiate lower prices. In longer engagements proportionally less resource is spent on building relationships and training staff. In addition, using fewer providers cuts the costs of contracting, management and oversight. Longer relationships mean that providers have a chance to respond to feedback and adapt to sponsor requirements over time. As trust develops, sponsors will outsource increasingly sensitive projects, and the ability to do this extends their flexibility.

The landscape of service providers is evolving. Whereas previously the market consisted of a large number of geographically focused niche providers, now multinational CROs are increasingly expanding into the area.

As shown in the table, several of the leading companies providing drug discovery services are major US-based CROs. By covering the full range of the value chain, such companies aim to engage clients at the earliest possible stage, seeking to cross-sell later-stage services as the project develops. Galapagos and Evotek are the only European players. Contrasting the CRO market, there are few large multinational players. Instead the market is highly fragmented, with a very large number of geographically focused niche providers, which typically operate at lower price points. As big pharma seeks to reduce the costs of oversight, and contracting, they will increasingly channel business to the larger providers, which will in turn lead to more M&A activity within the niche provider space.

Large CROs are entering the Asian drug discovery market through acquisition. For example, in 2009 PPD acquired Chinese drug discovery outsourcing provider BioDuro for around $77 million. Charles River Laboratories attempted to acquire WuXi AppTec, although the deal collapsed following shareholder action. Further acquisitions by CROs, which may be linked to divestments of sites by pharma companies, are likely.

Table 2: Revenues of leading public drug discovery outsourcing companies

Source: Scrip Business Insights

Company	2010 revenue ($m)	2009 revenue ($m)	Notes	Total employees
Covance	840	792	Early development segment	>10000
CRL	466	510	Preclinical services segment	7500
PPD	313	275	Laboratory services segment, including BioDuro	>10000
WuXi AppTec	300	243	Revenue excluding manufacturing	4500
Galapagos	181	147	Total revenue	800
Caliper Life Sciences	124	130	Total revenue	469
Albany Molecular Research	83	86	Drug discovery and small scale manufacturing	1421
Evotec	73	59	Total revenue	550

The future of drug discovery outsourcing

Pharma companies are becoming less conservative towards less routine drug discovery processes such as hit-to-lead and lead optimisation, and in vivo efficacy testing. CROs are beginning to offer an increasing range of in vivo efficacy models. Of the major service providers, Covance has among the most comprehensive offering in this area. Emerging market companies are also entering this space; for example WuXi AppTec has models in pain, inflammation, diabetes, obesity, cardiovascular disease and the central nervous system. Specialists such as Taconic also offer a wide range of models. Niche companies which have proven their ability to provide higher value services are likely to become acquisition targets for larger CROs, including Chinese and Indian players.

According to EvaluatePharma, global pharmaceutical R&D spending will climb steadily from $130bn in 2011 to $146bn in 2016. Preclinical R&D will represent around 25% of this. Outsourcing penetration in drug discovery will increase as pharma companies continue to trim fixed costs and develop their relationships with service providers. This will present opportunities for outsourcing partners, especially in Asia Pacific cities with emerging biotech hubs such as Seoul, Shanghai, Beijing and Taipei where growth in both R&D spending and pharmaceutical markets is greatest.