Outsourcing in China: Big Pharma wants partners, not just contractors

SAN FRANCISCO--As Big Pharma looks to tap the burgeoning drug market in China, companies are realizing they can't bulldoze in with U.S.-approved drugs and expect a red carpet. Instead, companies such as Vertex ($VTX) and AstraZeneca's ($AZN) MedImmune are looking to partner up with local service providers to speed their way to capitalization.

During a China-focused forum at last week's J.P. Morgan Healthcare Conference, Merck ($MRK) Executive Vice President Cuong Viet Do said China will be the world's largest pharma market by 2020, and big-time drugmakers--including his own--are often deluded into thinking they cash in on their own, working with CROs in a traditional outsourcing model. But China is far more complicated than any other market in the world, he said, and Big Pharma is learning the hard way that it's better off partnering with in-country experts.

"Having a slice of a large pie is often much better than having 100% of a very small pie," Do said.

For Vertex, China was long a source of cheap labor and arbitrage-friendly manufacturing, R&D Vice President Peter Mueller said at the forum. Now, the company has recognized the value of Chinese ingenuity, through both local companies and universities, he said. With a partner, it's infinitely easier to make inroads into the often byzantine Chinese regulatory environment, Mueller said, and Vertex has reached out to Chinese CROs and researchers for its recent orphan drug programs.

MedImmune came to the same conclusion when it chose to launch a joint venture with Chinese CRO WuXi PharmaTech ($WX), said Bahija Jallal, the company's executive VP for R&D. Under the deal, the two will work to develop biologics specifically for the Chinese market, and Jallal said MedImmune's R&D team would face an uphill battle without WuXi's expertise in dealing with the SFDA and commercialization in China's highly diverse regions.

"You're not going to learn much about China sitting in some board room and making plans," Jallal said.

WuXi, which sponsored the forum, believes the future of Chinese R&D goes beyond in-China-for-China development, COO Edward Hu said. The incoming government has placed an emphasis on creating a knowledge-based economy that encourages innovation, and WuXi predicts reforms that will help China become a breeding ground for therapies for the world market, Hu said.

That could mean a huge opportunity for Chinese CROs. If MedImmune's JV is a success, more and more Big Pharma outfits could seek out partnerships with their service providers, exchanging a larger share of profits for indispensable know-how in a foreign market. And, as Jallal said to echo Do, a smaller share of a blockbuster beats out a lion's portion of a costly failure.

"You don't get the whole pie when you partner, but we don't need the whole pie," she said.

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