The pharmaceutical CRO market in China has witnessed stable growth for seven consecutive years since 2015. According to Frost & Sullivan, the growing trend of the Chinese pharmaceutical CRO market is projected to continue, with the forecasted market value to surpass USD 22 billion in 2024.
CRO's full name is Contract Research Organization, referring to a company that provides support to the pharmaceutical, biotechnical and medical device industries in the form of research services outsourced on a contract basis. It can be divided into two categories, the pharmaceutical CRO and the CRO for medical devices. This article focuses on the pharmaceutical CRO industry.
The pharmaceutical CRO covers all phases of new drug discovery and development, and it can be divided into drug discovery CRO, preclinical CRO and clinical CRO.
Drug discovery is the source of new drug innovation, and it plays a significant role in the research and development of new drugs. The drug discovery CRO involves four crucial components: target identification, modeling, lead drug discovery and lead drug optimization. According to Frost &Sullivan, the forecasting market value of drug discovery CRO in 2024 will be USD 4.3 billion, representing 19.5 % of the total pharmaceutical CRO market value. Chinese companies providing drug discovery CRO services include Wuxi AppTec (Chinese: 药明康德), Pharmaron (Chinese: 康龙化成), Viva Biotech (Chinese: 维亚生物) and HitGen (Chinese: 成都先导).
The preclinical CRO's major services include synthesis and industrial development of lead compounds and active pharmaceutical intermediates, and safety evaluation research. According to Frost & Sullivan, the market value of preclinical CRO in 2024 is expected to be USD 4.1 billion, representing 18.6% of the total pharmaceutical CRO market value. Chinese companies that provide preclinical CRO services are Joinn (Chinese: 昭衍新药), CrownBio (Chinese: 中美冠科), Medicilon (Chinese: 美迪西), Innostar (Chinese: 益诺思) and Chemexpress (Chinese: 皓元医药).
The clinical CRO provides Phase I-III clinical and technical services, clinical data management and statistical analysis, and new drug registration. According to Frost & Sullivan, the market value of clinical CRO in 2024 will be USD 13.7 billion, representing 61.9% of the total pharmaceutical CRO market value. Chinese companies providing clinical CRO services include Tigermed (Chinese: 泰格医药), Boji Medical Technology (Chinese: 博济医药), dMed-Clinipace (Chinese: 缔脉) and Yaoyanshe (Chinese: 药研社).
The significance of CRO in facilitating new drug discovery and development
China is a preferred drug manufacturing hub as global drug R&D demand continues to rise. In 2021, 84 novel active substances were launched globally, doubling the number five years ago. This brings the total number of launches over the past 20 years to 883. The total number of products in active development in human trials globally exceeds 6,000, up 68% over the level in 2016. Moreover, 5,500 new planned clinical trial starts were reported in 2021, up 14% over 2020 and 19% higher than in 2019. During the phase of R&D for new drugs, especially the phase of new drug discovery, pharmaceutical companies need a considerable number of scientists. Considering the high human cost, international pharmaceutical companies prefer to transfer a part of their R&D work to emerging countries, especially southeast Asian countries like China and India.
Over the past several years, the Chinese government has been continuing to encourage the development of new drugs and the pharmaceutical industry. It has introduced a series of policies and reforms to support the innovation and manufacture of new drugs. For example, National Medical Products Administration (NMPA) released the Circular on Adjusting the Approval Process for Drug Clinical Trial Evaluation in 2018, which positively contributed to shortening the clinical development time of innovative drugs. What's more, NMPA has refined the requirements and responsibilities of all parties to the drug clinical trial by issuing the Quality Management Practices for Drug Clinical Trials in 2020.
Even though the regulatory environment is getting better for new drug R&D, costs and time are other limiting factors for the development of new drug R&D. Moreover, it has a low success rate. Traditional pharmaceutical companies spend, on average, 10 years developing the R&D pipeline. The longer an R&D cycle is, the shorter the patent protection period is. With the appearance of CRO companies, pharmaceutical companies can transfer the R&D work to them. It's a win-win choice for both parties.
Analysis of the pharmaceutical CRO in China using Michael Porter's Five Forces Model
Porter's Five Forces Model is used to analyze a competitive environment. It consists of five components: the number and power of a company's rivals, potential new market entrants, suppliers, customers and substitute products. EqualOcean will use this model to analyze the pharmaceutical CRO market in China.
The pharmaceutical CRO covers the whole process of new drug discovery, research and development, and provides integrated, full-cycle services, so there is no apparent upstream affiliation, and the influence of suppliers is limited. Major customers of the pharmaceutical CRO are pharmaceutical companies, medical institutions and health facilities. As the country spends more on pharmaceutical R&D, the pharmaceutical CRO industry has better bargaining power for downstream customers.
Chinese companies can benefit from its cost advantage in the international pharmaceutical CRO market. "In China, the cost for preclinical and clinical trials is only 40% of that in European countries and the United States. However, India is also good at making generic drugs, at a lower cost than China in some cases. Thus, some international drug makers also choose to cooperate with Indian pharmaceutical CRO companies." Yang Mohan, Chief Medical Investment Officer of Partners Financial Holdings Limited, told EqualOcean. As the research and development of innovative drugs become a popular trend in the international healthcare sector, Chinese companies should spend more time and invest more money in the R&D of innovative drugs to have more competitiveness overseas.
In 2020, China's CRO market grew to CNY 52.2billion (USD 7.7billion), an increase of 9.43% year on year. By estimation, the Chinese CRO market size will leap to CNY 150 billion (USD 22.2 billion) by 2025. In 2020, the Chinese top 3 CRO companies (Wuxi AppTec, Pharmaron and Tigermed) represented 35.9% of the total CRO market size.
Although the pharmaceutical CRO is a high-profit sector, it has a high barrier to entry, such as talents, funding and techniques. Besides, top pharmaceutical CRO companies occupy a big part of the market size and it's easier for these companies to get domestic and international operations. Yang Mohan told EqualOcean that now companies that want to enter the industry need to well establish their differentiation. This is the most important thing to stand firmly in this industry. They can choose a more specific niche to show their differentiation in services or products.
As the pharmaceutical CRO provides R&D services for pharmaceutical companies and medical research institutions, it faces no risk concerning the threat of substitute products. Because the pharmaceutical industry involves the accumulation of many technical experience, and R&D services industry need talents with a large stock of biological and chemical knowledge, so the services provided by pharmaceutical CROs can't be replaced easily.
Future trends of pharmaceutical CROs in China
EqualOcean believes that pharmaceutical CRO companies will have two important trends in the future. One trend is that more and more Chinese companies will have go-global strategies. Some pharmaceutical CRO enterprises will take on more overseas business and help more local pharmaceutical companies go global. The other trend is that the digital CRO services model will be a choice for traditional Chinese CRO companies to make a business transformation.
Trend one: More and more Chinese companies will have go-global strategies
The drug development process is a very long and complex process that usually takes 10-15 years and costs several USD dollars and a dozen years. This huge amount is an enormous burden for small-size companies and start-ups. What's more, at the regulatory level, if every new drug development company constructs a platform for its novel drugs, it would be a waste of time and money. As for pharmaceutical CRO companies, they can concentrate on human, material and financial resources and create a professional platform that provides R&D services for different pharmaceutical companies.
Chinese CRO firms have many advantages or competitiveness compared to international CRO enterprises, such as high-quality talents and lower costs. Therefore, some global pharmaceutical companies transfer a part of their R&D work to Chinese CRO companies. At the same time, more and more Chinese pharmaceutical CRO companies have made go-global strategies and are trying to take on more overseas business to compete with international companies.
So what are the typical characteristics of these companies with ambitions for the overseas market? Yang Mohan told EqualOcean, "Chinese CRO companies with go-global strategies have two typical features. One is that the founders of these companies have a profound overseas academic or industry background. The other is that these companies have experience with active pharmaceutical ingredients and have established some connections with overseas customers."
EqualOcean believes that the top three Chinese CRO companies with go-global strategies are Pharmaron, WuXi Biologics (Chinese: 药明生物) and Wuxi AppTec. In 2021, the overseas revenue of these companies accounted for 83%, 75.6% and 75% of their total revenue separately. Besides, some medium-size companies also have made overseas strategies. For example, dMed-Clinipace, is a clinical CRO firm dedicated to helping Chinese pharmaceutical companies go global.
Trend two: appearance of digital CRO services providers
Top Chinese CRO companies have create a full life cycle and integrated CRO+CDMO services platform to strengthen their core competitiveness. But this model is not suitable for small-size companies. As the digitalization becomes a reality and some healthcare companies have combined their business with high-end technology, digital healthcare is not a dream. As an emerging trend, the digital CRO has captured the attention of investment institutions in the past three years. According to Vbdata and public resources, there were 15 financing rounds about the digital CRO in 2021.
Yaoyanshe is an innovative clinical CRO technical platform dedicated to making pharmaceutical research and development more efficient. "The CRO industry has reached a consensus that the digitization of CRO services will be a new trend in the future, especially during the Pandemic. During the crisis, people couldn't work on site, and some clinical trials have been put off, which makes 'digitalization' even more crucial. After two years of work on the market education and practice, the cost-effectiveness of the digital CRO service provided by Yaoyanshe has been widely acknowledged." Yaoyanshe (Chinese: 药研社) told EqualOcean, "Digital CROs have a high barrier to entry. In this industry, some CRO companies that can't develop digital systems would purchase more mature systems externally to apply to their clinical trial programs. In terms of the future challenges, I think digital CROs will meet four main aspects: 1) regulations and policies in the collection and accreditation of clinical trial data are not sound, 2) patients and researchers are not familiar with the use of tools, 3) the industry lacks digital standards, and 4) the quality of digital tools is uneven."
Overall, we believe CRO is a promising industry though facing risks and challenges. In the long term future and with the wide spread of digitalization, digital CRO will catch more attention from investors and pharmaceutical companies. EqualOcean will continue to follow the latest news about this industry and we look forward to its development in the future.