The Chinese CRO market is predicted to reach $100 billion in 2020

The Chinese CRO market is predicted to reach $100 billion in 2020

In July 2017, the Chinese CRO giant, WuXi AppTec, has disclosed its attempt for an IPO. In a report, it is slated to raise around $800 million, and if it is successful, WuXi AppTec is set to break the largest fundraising record of the Chinese biomedical industry in the past six years.

Wuxi AppTec, the Chinese CRO giant, is positioned as a small molecule chemical platform and provides professional drug development outsourcing services to pharmaceutical companies and research institutes. Riding on the trend of China officially joining the ICH, as well as the implementation of drug listing license system, the majority of the CRO companies have benefited significantly. And WuXi AppTec is one of them. It has been stepping up the efforts to be listed on the main board, a sign of strong interests from the capital market in this sector.

This is just one of a series of events happened in the Chinese CRO field this year. In June, Quantum Hi-tech has announced its acquisition of ChemPartner, one of the largest and most experienced Chemistry service outsourcing company in China, with $340 million; prior to that, Xinjiang Bai Hua Cun, a state-owned comprehensive company, has bagged Huawei Medical with a $270 million investment, marking its entry in new drug research and development.

In this article, I have discussed the development of the CRO industry in the past few years and specifically focused on the performances of major Chinese and overseas companies.

Multi-factor promotes the development of the CRO industry

In the past half-century, largely thanks to the increased depth of understanding and the accumulation of knowledge in the life science field, the pharmaceutical industry began to subdivide, leading to the high specialization in skills. This has driven the separation between research and development, fueled the initiation and progression of the outsourcing service.

On another note, new drug development itself is a long, costly, and high-risk process. A slew of small to mid-size biopharmas do not have the resource to independently develop new medications, or their capabilities are relatively weak. The CRO industry becomes their star, as it provides an economic venue for them to independently research and develop new drugs. Worth noting is that CRO providers are equally important for large pharmaceutical companies, as they serve to reduce the cost and alleviate the risk, enabling them to study multiple medicines at one time.

At present, CRO companies primarily provide services in preclinical research, clinical research, technology transfer, consulting, etc., ranging from new drug development all the way to registration and post-market research. Gradually, they have become an indispensable link of the pharmaceutical industry.

The top ten CRO companies in the world account for about half of the market

CRO is originated in the United States. During the 70s of last century, America started its medical payment reform, switching from “charge for service” to ”pay for project” model, greatly reduced the drug consumption. In an attempt to cope with this impact, an increasing number of pharma companies stepped up their investments and committed to devoting more resources to new drug research and development. The CRO business was born in the midst of it.

When the time came to the mid-1980s to 1990s, a slew of CRO companies popped up and began to grow aggressively in the US, including several CRO giants nowadays, such as Parexel, PPD, Icon, Covance, etc.; the American market has experienced a rapid growth. After 2000, these leading US CROs shifted their emphasis and moved onto expanding their global territories and seeking for new merger and acquisition opportunities.

In a report published by the CFDA, the global market sale of the pharmaceutical services has climbed as the years went on, from $28.831 billion in 2010 peaked to $45.18 billion in 2016, amounting to an average annual growth rate of 7.93%. The CRO industry, as one of its largest sector, has grown even more quickly, raised from $21.3 billion in 2011 to $29.3 billion in 2015, reaching an average annual growth rate of 8.25%.

World famous major CRO companies

The global CRO market is highly concentrated. According to the data from IMAP Global, an M&A service company, the top ten CRO companies account for more than 45% of the market share. And this figure is expected to climb in the next few years, as big players continue their merger and acquisition trend, in an effort to improve their global dominance and control. Currently, the majority of the leading companies are the US listed, including Quintiles, Covance, Parexel, etc.

  • Quintiles IMS

Quintiles, founded in 1982 by Dennis Gillings in North Carolina, USA, is currently the largest CRO company in the world. At first, it only served the American market; but in 1987, Quintiles started its journey of internationalization and opened its first European office. 6 years later in 1993, it further expanded its global footstep into Asia.

In 1994, in exchange of market capitals to boost its M&A activity, Quintiles was listed on Nasdaq and developed rapidly. In 2000, in an attempt to further grow its business, Quintiles set up PharmaBio department to provide funds, technology, sales team, and other services to large pharmas, with the goal of sharing sale commissions after the drug has successfully entered the market.

During this period of time, the collaboration between Quintiles and Eli Lilly is the most classic example. After Lilly submitted an antidepressant drug to the FDA for reviewing, Quintiles signed a cooperation agreement to invest $700 million and provide hundreds of sales teams to support its commercialization in the US market. The antidepressant achieved a huge success; Quintiles was rewarded handsomely. However, this is just part of the equation. Lack of possibility for large-scale replication and income instability are both prominent downsides associated with this model. Quintiles investors are not a fan of it, and the stock suffered. In 2003, Quintiles left the capital market.

In 2013, Quintiles restructured its company, kept its traditional clinical trial services and drug listing business and divested PharmaBio. After bagged $947 million in funding, Quintiles reentered Nasdaq, and the stock price soared right after its listing.

In May 2016, Quintiles further grow its services and completed a merger with IMS Health, the world’s leading pharmaceutical and health industry strategic consulting service provider. The combined company changed its name to Quintiles IMS Holdings and provide comprehensive business services to pharmaceutical companies; this further consolidated and enhanced Quintiles’ leadership position in the industry.

According to a report, at present Quintiles has about 10% of the market share, with more than 50,000 employees. Its subsidiary companies and offices are widespread across the globe and located in more than 100 countries and regions. As of August 1st, 2017, Quintiles’ market value has reached a total $19.866 billion.

  • Covance

Covance was the subsidiary pharmaceutical services department under Corning Glass originally. In April 1996, Corning split its laboratory and pharmaceutical services, set up two new companies named Quest Diagnostics and Covance respectively. As an independent company, Covance was listed on the New York Stock Exchange.

In 2007, Covance opened its first central laboratory in Shanghai, marking its official entry into the Chinese market.

In 2008, Covance acquired a minority stake in Caprion Proteomics, a leading provider of proteomics analysis, to further strengthen its biomarker services to customers. In the same year, Covance bought in Lilly’s Greenfield campus in Indiana and executed a 10-year business agreement.

In the next few years, Covance has continued its acquisition wave, including Merck’s Gene Expression Laboratory in Seattle. According to the agreement, Merck will also sign a $145 million contract to buy Covance provided genetic analysis services. In the same year, Covance further stroke a deal with Swiss Pharma Contract, a Basel based clinical research company. And in the following year, Covance teamed up with Sanofi on a 10-year strategic R&D alliance agreement to buyout its centers in France and the UK.

In 2015, LabCorp, the United States IVD laboratory oligarch, acquired Covance and formed a world leading medical diagnostic company, providing integrated clinical laboratory services and point-to-point solutions for the R&D and the commercialization of medications and diagnostics.

Currently, Covance is ranked as the second largest CRO in the world, and it accounts for 6.24% of global market share in 2016.

  • InVentiv Health

InVentiv Health is the third largest CRO service company in the world, and as of 2016, its market share has reached 4.72% globally. In May 2017, it has announced its merger with INC Research, the tenth-ranked CRO company (2.26% market share in 2016), rising their combined market share potentially close to or exceed Covance and challenging its number two position in the CRO industry.

INC Research, founded in Delaware, USA on August 13, 2010, is a leading global CRO focused on the phage 1 to phage 4 clinical development services of the biologics and medical device industry. Its excellence in central nervous system diseases and cancer are favored widely across the spectrum of the industry.

“Undoubtedly, the merger of the world’s third-largest CRO and the leading CCO will create a good business synergy and bring fresh air into the industry.” Mentioned by the speaking person during the merger announcement. “After the merger, the combined company will serve customers from more than 110 countries and have more than 22,000 employees.” He continued.

The market share of leading CRO companies in the world

The global CRO market will undoubtedly be further consolidated after the merger between InVentiv Health and INC Research; the top ten providers will account for about 50% of the total share.

In the coming years, we can expect to observe three major trends in the field. Frist, new drug research, and development will continue gaining heat across the spectrum of the industry, and the R&D expense is expected to climb further. Riding on these trends, CRO industry will continue to grow. Second, the research cost and cycle pressure will increase; unavoidably pharma companies will rack up their effort to employ external CROs, in exchange for transferring fixed cost. Third, the integration of CRO services will intensify. CROs will eventually cover multiple links throughout the drug lifecycle — the drug discovery stage and preclinical research, new drug registration, post-marketing services, etc. And we have already begun to see this trend.

Chinese CRO industry has entered the M&A phase

Like the pharmaceutical industry, China’s CRO service has lagged behind at the starting line compared to its western peers. In 1996, MDS Pharma Service invested and established the first true sense Chinese CRO to provide clinical research services, marking the beginning of a new era. In 2000, WuXi AppTec, the biggest Chinese CRO nowadays, was founded and followed by the establishment of a slew of other CRO providers, including Shang Pharma, Guangzhou Boji Medical, Hangzhou Tigermed, etc. The Chinese CRO industry officially enters a rapid development period.

Several factors come into play.

First, the local pharmaceutical market is taking big steps to integrate with the international standards, becoming an active member of the global community; on the other side of the coin, oversea pharmas continue to show great interests in the Chinese market and are on the course of committing more resources and investments there. According to Qianzhan Research Institute, they have brought in more than $10 billion and established dozens of new research and development centers since 2000.

In the wake of the reduced drug approval time and the increased market demand, China is expected to continue gaining attention and attracting oversea pharmas to its market. While they are expanding their territories and capabilities in new drug R&D in China, the leading Chinese CROs will be in the forefront of the room and gradually become their priority suppliers and important strategic partners.

Second, China is undergoing a medical reform, where new government policies encourage innovations; its market is gradually shifting from me too drug to original medications. In the past years, Chinese pharmas’ need for drug mechanism research and toxicity studies are relatively insignificant; the preclinical CRO market is relatively small. However, things are changing. In the light of the Chinese government’s support of drug innovation and the convergence between China and the global medication standards, an increasing number of domestic pharma companies are slated to devote more resources and apply more capitals into innovative medication development, unavoidably promoting the growth of the CRO industry in China.

Third, the Chinese government is in the process to reform its medical payment system and curb health insurance fees, greatly fueled the enthusiasm of new drug R&D among local pharma companies. Riding on this steady upward trend, CRO industry becomes an indispensable link of the drug development process, as it makes up the lack of capabilities of local Chinese pharmas, giving them a line into drug innovations.

According to CFDA Southern Medicine Economic Research Institute, the Chinese CRO industry has raised from $2 billion in 2011 to $5.4 billion in 2015, amounting to an annual growth rate of 22.04%, higher than the global CRO market growth rate in the same period. It is expected that the total market value will reach $19.5 billion in 2020, maintaining an annual growth rate of 20.79% in the following years.

Major Chinese CRO companies

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