Outsourcing Early Stage Drug Development To China The Great Debate

---

By Shawn Lawrence

Outsourcing pieces of Drug Discovery has become a common cost-cutting measure in the Biotechnology Industry. With the average number of clinical trials per new drug application more than doubling in the past 30 years and research and development costs rising, oursourcing just makes sense. China has recently been dubbed as a hot spot for oursourcing the early stages of the drug development. With lower costs, lower wages for skilled wourkers and of courseits large patient population, the amount of preclinical and clinical studies that are being conducted there is growing. Not surprisingly, all this activity has attracted the attention of many individuals from Canadian Biotech, with many Canadian companies looking towards taking advantage of these emerging opportunities to reduce costs in its own supply chains.

The Pro China Argument

Managing director, Life Sciences of BDC Venture Capital Denis Ho is among those on the Pro-China side. According to Ho, Canadian drug discovery and development through no fault of its own is lagging in terms of global competitiveness, suffering from a lack of available capital.

Additionally he feels drug development in North America is not efficient and very costly for Canadian companies that are essentially start-ups.

“We have fewer and fewer successful Canadian biotech companies reaching their targeted endpoints, because they just don’t have the money to finish what they started. These companies are forced into a vicious cycle where they become more vulnerable to takeovers, mergers and in many instances are pressured into settling into unfavourable partnerships.” Adds Ho, these companies do all the grunt work and even when they are successful, they don’t get to see the full gains of achieving that success.

Ho’s solution to this problem is to use China’s cost and talent advantages in preclinical development and clinical trials during the early stages of drug development, allowing Canadian sponsors to have the necessary cash needed to make it through the later clinical stages. To back his point, Ho argues that sponsors can enjoy savings on transport and quarantine costs by going to China, that the cost of a clinical trial in China is 10-20% of the cost of what it would take to do in the U.S. and that supplies, reagents and lab equipment are all less expensive overseas. Another potential positive he points to is that Canadian sponsors will have the ability to leverage their products to a larger Chinese market.

On the opposite end of the spectrum there are those who maintain that turning to China for our outsourcing needs is not a simple solution, that China’s infrastructure is still a work in progress. They have concerns that its industry standards vary from ours, in terms of the quality the service provided and of course the degree of intellectual property protection. Most of all, they warn that while offshoring to China may provide benefits to individual companies, in the end it could be detrimental to the Canadian biotech sector as a whole.

This month Biotechnology Focus discusses these concerns and others with Peter Pekos, President and CEO of Dalton Pharma services.

Q: Why do you feel that offshoring early research and development to China isn’t a solution?

A: Those that believe we should be turning to China for our outsourcing needs are missing a key point in the evolution of a nascent industry that the Americans have learned and understand; we need to fail to gain experience so that when we try again we have a better chance of success.

While we may have had few successes in relative terms and this depends on how we define success, we have had some. Cangene, Connaught, Biochem Pharma, QLT, our major generics Apotex, Novopharm and Genpharm all fall into the successful category. These companies have provided talent for other new companies and the industry as a whole has benefited. By moving the early work offshore we lose the opportunity to gain knowledge in our home country on how it is done, delaying the creation of a sustainable industry.

As far as saving money goes, the real big expenditures are in the later stages and the small amount of money saved in off shoring the early stage work is more than offset by the added risk of managing distant relationships and the potential loss of time due to communication delays and disruptions caused by management having to go on trips to keep things on track. There are some cases where moving work to the cheaper jurisdictions can save some money but a risk benefit analysis has to be carefully considered. I am not convinced that we have enough experience in successful off-shoring to get it right the first time. So learn how to do it here, or there, you still need to learn. Where is the net benefit to Canada and the emerging pharma company in the short and the mid-term? Factor in tax credits and other soft issues and I do not think you have a compelling reason to move development overseas.

Q: So you believe that outsourcing to China will affect the Canadian biotech industry negatively?

A: Moving work that could be done in Canada does result in a number of negatives.

The first of which is that experience is lost. Secondly, we lose the opportunity to employ people trained by our education system by moving the jobs elsewhere. This leads to a vicious circle of no jobs leading to no students, feeding the perception that we don’t have the talent to create an industry. We also allow immigrants with science training into Canada and if they cannot find work we set them up for failure to assimilate and this leads to a frustrated sub set of society with an under employment issue. We then no longer become a place to come for a better future further propagating the vicious circle because when we do not train the talent then lose the opportunity to bring in the talent we fuel the perception that the industry cannot supply the people to do the work.

Also, when a Canadian VC invests in a company and that money is spent here it has a leverage effect for the investors, the investing company and the service provider.

We have had some relationships with Canadian and American biotech companies where they have spent money here to develop infrastructure at Dalton Pharma Services.

This infrastructure was then available for other Canadian and international companies to use thereby multiplying the amount of gain to the local economy and industry. In general, jobs are gained or lost when money is spent in Canada or sent off shore. I have heard it said that for every job in a particular industry, a further seven jobs are created in allied suppliers.

I also believe that by teaching the Chinese how to do innovative drug discovery and development that we will have helped create the biggest competitive threat to our current innovative pharma industry ever. In the generic marketplace, the generic companies worked to bring Indian suppliers up to FDA and EU standards for API’s. These same companies in India then learned to develop dosage forms cheaply. The generic companies enjoyed this short term cost benefit and because they controlled the market it was ok. Well the Indians have begun setting up sales offices in North America and Europe. I see the same thing happening in China with generics and also in the future with innovative pharmaceuticals.

A factor to consider is that competition in China is ferocious. They look to making their money through exports. I have been told that exporters from China receive a cash back payment from the government of 15%. If true, even if they sell at their cost, when they export out of China they make 15%, not a bad return if your overhead is covered by domestic sales.

Q: Intellectual property protection is very high on the list of worries for sponsors that are reluctant to outsource to China. What are some reasons behind this line of thinking?

A: I agree that intellectual property protection is a key disadvantage for a Western company doing early work in China. They have rules in China that need to be understood and factored into the type of work you put over there. One rule specifically that is worrisome for a company that is interested in patenting in China is the order of filing for patents. This could dramatically impact whether a product or a process is patentable in China. Also, the way they treat disclosures of confidential information needs to be clear. I am not sure how binding non-disclosure agreements are and what the process is, in case of a breach. What happens in China if there is a breach? What can you do to remedy? What is their judicial system like for offshore complainants? Will they be treated fairly and with the same respect for the truth that is integral to our system? When you work with a Western supplier you know the rules.

If you sign a non-disclosure agreement you have a clear understanding what the recourse will be if there is a breach.

We have all heard the stories of processes going out the back door and knock offs appearing on the market. Software, media, designs, trademarks are all vulnerable and there does not seem to be a high degree of urgency on the part of the government to control this, although some inroads are being made.

Q: What are some of the concerns about the quality of offshore work in China?

A: Inconsistency from batch to batch and from container to container is not uncommon. Culturally we seem to have some differences in what is considered acceptable in terms of meeting specifications and variability between batches. Also, a difference in values around what is seen to be a breach of promise or commitment is quite common. There seems to be a tendency to avoid confrontation even if this is caused by a service failure or lack of meeting a commitment. There is distrust in general in China with respect to people taking ideas and customers. On occasions that I have had to find out how something is made to be sure that there is no potential for contamination they feel that I might steal their ideas too so they do not openly share even if we have non-disclosure agreements in place. So if they do not trust or believe in a non-disclosure agreement to share with you, what does it mean when you share with them? Shared use equipment leads to big risk of cross contamination and since every one is reluctant to tell you what else they make in a reactor even if they knew and they often do not, the risk is virtually un-quantifiable. Segregation of processes and operations is not carefully considered.

There is a need for total rethinking on their part as to what is allowed. It is not that they are not interested in doing it right they need to be taught and since many of the ideas around segregation are new to them it is hard to know where to start the education process. Many manufacturing facilities that we have seen were open to the air and elements.

Q: China often touts its millions of technical graduates and hundreds of thousands of postgraduates as a key strength. In all five million university students graduate every year including a half million of the Masters/PhD variety. How does Canada stack up?

A: Clearly this is an area where we need to see some improvement here. We are not creating enough graduates to meet the needs of our industry and we are looking for immigrants to supply us with talent and labour. We need to focus on the right type of graduates; we need creative people in the age of abundance, Asia and automation to make sure that we are coming up with new ideas for the products that can sustain us.

Q: What about the cheaper costs associated with offshoring to China?

A: I have heard the numbers and what they don’t take into account is the soft cost of time and distraction. How do you value time away from a quality of life perspective? Another cost that seems to not be factored in is the environmental cost to the Chinese air and water quality from lax environmental controls. When will that be considered? Are we encouraging an environmental disaster by not holding vendors accountable for the environmental impact of their business activities and to the reduced life span of the Chinese people?

Who is responsible for this aspect? I was recently audited by a top 10 pharma company for compliance to safety and environmental standards. We were commended for ensuring that the safety of our employees and environment was not compromised. What if we all did the same for Chinese vendors that give us cheap chemicals? What would we find? Would we still want to do it if we knew that they were dumping waste in their rivers and on their land?

Q: Essentially is this whole idea of offshoring early stage clinical work to China more about short term gains for the Canadian biotech industry rather than achieving the industries long term goals?

A: I do think we are looking more at short-term gains and things will even out as time goes on as their economy catches up to ours. There are many questions that we still need answered. Do we really know how long the current style of government will apply to business in China? Could we see a movement to a more Democratic style of government? Will there be resistance to change from whoever controls things over there. Is there a nascent environmental movement developing that will impact how business is carried out?

I have more questions than answers. If we follow the pattern of movement of business activities to low cost jurisdictions where does it move to next? Will we see a stratification of supply in China itself where certain areas will be the low cost producers and others will do higher value activities?

I think if you factor it all in cold figures, there are savings. If we consider the whole picture it is not so clear to me that it costs so much less. As oil goes up and raw materials and finished goods get more expensive to ship, we have another element of cost that will have an impact on how we use China as an outsourcing partner.