Biotech firms outsource to Asia

SAN FRANCISCO — The global financial crisis has hurt biotechnology, an industry in which it can take a billion dollars and 10 years to create a marketable medicine. But a survey of worldwide industry trends suggests that the funding shortage hitting North American and European market leaders could benefit emerging biotech clusters in Singapore, India and China.

The cost advantages of outsourcing to these countries have made them appealing destinations for clinical trials and manufacturing and research facilities.

“As Western companies navigate an environment where capital is scarce, they are under increasing pressure to lower cash burn and contain costs,” Ernst & Young biotech consultants write in their annual “Beyond Borders” report. “This should lead to an increase in outsourcing of clinical trials and manufacturing to Asia.”

The 130-page report dwells mainly on the North American and European biotech firms, which combined accounted for more than 94 percent of the industry's $89.6 billion in worldwide revenues last year. Ernst & Young treats the outsourcing phenomenon at the tail end of its study in a section titled “Seeds of Change,” showing how the Western biotech firms that dominate the industry are shifting some operations to Asia.

Singapore is the “destination of choice in the region for manufacturing operations and headquarters,” the report says. The city-state is already home to bio-manufacturing plants for Genentech, Novartis and GlaxoSmithKline among others. Ernst & Young says seven new manufacturing facilities are expected to open this year.

Singapore has also made itself a hub for research and development, the report says. Among other successes, the U.S. pharmaceutical giant Eli Lily opened a $150 million research facility in Singapore in October 2008, in the heart of the financial crisis. In January, Abbott Pharmaceuticals opened an R&D facility in Singapore, its first in Asia.

Outsourcing takes a somewhat different form in India, which is making itself a destination for clinical trials, among other initiatives, Ernst & Young says. Human testing is the most labor-intensive part of the medical discovery cycle, requiring doctors, nurses and other clinicians to find and monitor thousands of test subjects.

The report says the Indian government is supporting efforts to “boost clinical-research outsourcing” with measures that include better monitoring of the trials to increase safety and confidence and streamlining regulatory processes to cut development times and costs.

Merck is planning to initiate clinical trials of its cervical cancer vaccine Gardasil in India, the report says, describing a recent devaluation of the rupee as “good news for Western companies looking to outsource activities to India.”

India also hopes to become a center for the manufacturing of the generic versions of biotech remedies as they come off patent, targeting what Ernst &Young calls “the emergence of a market for biosimilars.” It is still early in that game. The competitive landscape for biosimilars will depend on rules that are only now starting to work their way through the U.S. Congress. But Indian biotech firms are already getting prepared.

China is also primed to benefit from biotech outsourcing in several ways. Ernst & Young says Chinese contract research organizations are trying to win clinical trials from Western biotech firms — mirroring the efforts of competing organizations in India.

Another fruitful area for China is pre-clinical research. This is laboratory work done by technicians and junior scientist who perform tasks such as screening compounds and biological molecules. China has a large supply of skilled workers who earn less than their Western counterparts, creating what Ernst & Young calls “significant cost advantages” by outsourcing this early-stage work.

China hopes to become a bio-manufacturing center but it has been hurt by product safety failures like the scandal over tainted infant formula.

In a similar case in the medical realm, Ernst & Young said Chinese manufacturers supplied contaminated batches of the blood thinner, heparin, to the U.S firm Baxter International, “which resulted numerous adverse reactions and deaths.” News reports said patients in 11 countries, from the United States to Europe to Japan, were affected. There was a congressional hearing in the United States and the U.S. Food and Drug Administration said it would open a branch in China to facilitate the inspection of factories producing U.S.-bound products.

Ernst & Young does not expect such setbacks to stop the outsourcing trend. Instead the consultants said the incident reminds “multinational corporations to manage the increased risk of a global supply chain.”

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