Role of China - China's importance to the global pharmaceutical sourcing industry is no longer in question. Now the issue is how to materialize China's potential value via partnership development. In the past 10 years, the cost to commercialize a new drug has increased to about $1.5 billion.

The change has driven the pharmaceutical outsourcing investment to about $36 billion in 2011 and grown the CRO/CMO (contract research organization/contract manufacturing organization) market dramatically, particularly in China and India.

While China and India have achieved phenomenal growth in the past 10 years, their combined share in the world market is still less than 15 % and has significant upside potential, especially in the more sophisticated service sectors in the value chain, in the next five to 10 years.

China's CRO/CMO market reached about $1.8 billion, or 5 % of the global share, in 2011, mainly in the low-end segment of the value chain. China is expected to outpace the overall global growth, especially in the high-end services, in the next five to 10 years, and become a dominant player in the global outsourcing business, mainly because of the following factors:

• Fast growing new drug development in China

• Cheap labor and rich technical resources
• Continued improvement in service quality in China for more high-end service possibilities
• Incentives from the Chinese government, which include high and new technology enterprise
• (HNTE) incentive reducing corporate income tax to 15 % from the normal 25 % and a tax holiday of two years' full exemption followed by three years of 50 % reduction; corporate income tax super-deduction allowing an extra 50 % expense deduction for eligible R&D costs; and income tax exemption for the transfer of technology: 100 % exemption up to RMB 5 million, 50 % exemption for the portion exceeding RMB 5 million during a tax year.
• Role of overseas returnees
• Patient resource and animal resource

While China continues to improve its capability and capacity to serve the global market, it is imperative for sourcing companies to develop strong and strategic partnerships in China.

Value Proposition Of CROs/CMOs

By nature, outsourcing requires customized products and services to achieve custom solutions. Both the sourcing companies and suppliers work toward the same objective - cost savings and shorter development time - and benefit mutually through a strategic partnership development. While the CROs/CMOs in China emphasize improvements in the field, sourcing companies still need to take more customized approaches for their specific sourcing project needs.

This demand for custom solutions focuses the supplier's energy on developing better chemistry solutions at a competitive cost. As of now, China is in the transition from repetitive bench work under close supervision to a design-based service arena. It is generally anticipated that China will enter into IP-based, high premium service areas across the entire drug discovery and development process.

Challenges And Opportunities

Continuous growth in global outsourcing gives China the chance to increase its share in the high-end service segments in the market. Rising costs in China likely will force consolidation among CROs/CMOs in China, and result in fewer - but more diversified and better quality - vendors and suppliers. This change puts China in a better position to be a strategic place for sourcing partnership development from the sourcing company, which will allow it to take more global market share.

There are many challenges ahead for China, such as IP protection, quality, cost control and unhealthy competition environment. All of them are closely connected with the quality of the human resource in China at both management and floor levels.

It has taken China the last decade to stand out as a good competitor at the low-end value chain of global drug discovery and development. Going forward, China has to transform itself into a high-end player to continue to grow and benefit from global pharmaceutical development. The key for the transition relies on its human resource quality, which is a big concern now. It is doubtful that its management resource has enough experience and competence to develop and lead a world-class operation in China. Thus China often loses its low labor cost to its high developmental cost. If this situation doesn't improve soon, it will be detrimental for China to continue to compete and grow globally.

The Real Outsourcing Cost in China

Typically, the fixed costs in delivering custom solutions in China, such as labor, equipment, material, and tax, do not vary from vendor to vendor, and are only about 20 % to 25 % of the costs in the United States. However, China's variable costs, such as development, overhead and supply chain management, have great uncertainty, reflecting its incompetence in technical capability and leadership quality.

It is not uncommon to see CROs/CMOs in China fail in producing challenging chemistries and lose heavily because of variable costs. If a project delivery consists of 70 % fixed costs and 30 % variable costs in the U.S., it is commonly translated into 70 % variable costs and 30 % fixed costs in China. China can be costly by the international standard if its variable costs are not well managed. The ability to control and streamline variable costs is the biggest competitive edge for the CROs/CMOs in establishing a healthy and mutually beneficial sourcing partnership with global customers.

To keep China riding on the global sourcing trend not only requires the CROs/CMOs to continuously strive for improvement but also demands involvement and engagement from sourcing companies in a partnership. It is the shared "responsible care" from both sides.

Strategies/Tactics in Developing Manufacturing Partnership

To develop a manufacturing partnership, sourcing companies' strategies and tactics will have to include balancing long-term position and short-term cost savings, focusing on guidance and nurturing the right culture, adopting custom approaches to different vendors, and establishing their own top criteria in vendor selection. A true engagement between customers and suppliers is much more important than short-term savings.

In a successful sourcing process, about 80 % of the activities are proactive to prevent pitfalls, and ensure on-time and quality delivery. The remaining 20 % are rather reactive, or fire fighting, in case something goes wrong, meaning you don't have much control of them. Proactive activities include deciding which material will be sourced, defining strategic suppliers, and vendor pre-qualification and validation. You can control and leverage these proactive activities, and therefore should invest more time and money on them to maximize effectiveness.

Three areas should get the most investment when selecting a strategic supplier: its technical competency, its transparence and skills in communication, and overall awareness and confidence about suppliers.