Industry Insights | Innovative drug R&D activities are becoming increasingly active, with the pharmaceutical R&D outsourcing service market growing rapidly

• Analysis of Value Chain/Industrial Chain in the Pharmaceutical Industry

The pharmaceutical industry is an important component of the national economy. In the pharmaceutical industry, raw material producers and drug manufacturers are located upstream of the industrial chain, providing production services. Commercial companies provide services for the distribution and circulation of drugs in the pharmaceutical industry. The downstream of the industry is the sales terminal, including hospitals, pharmacies, and patients.

Source: Compiled by Frost & Sullivan

• China's pharmaceutical market size (split by chemical drugs and biopharmaceuticals)

The overall pharmaceutical market in China can be divided into biopharmaceuticals, chemical drugs, and traditional Chinese medicine based on the type of drug. From 2016 to 2019, the scale of China's pharmaceutical market continued to grow. Although it declined in 2020 due to the impact of the pandemic, with the continuous launch of innovative drugs and the increase in national healthcare spending, it is expected that the pharmaceutical market will maintain rapid growth from 2021 to 2025, with a compound annual growth rate of 9.6% from 2020 to 2025.

Biopharmaceuticals currently account for a small proportion of the Chinese pharmaceutical market, but their growth rate is several times that of the chemical and traditional Chinese medicine sectors during the same period. Calculated by revenue, the compound annual growth rate from 2016 to 2020 reached 17.1%. The biopharmaceutical market is expected to reach 811.6 billion yuan by 2025, with a compound annual growth rate from 2020 to 2025 estimated at 18.6%.

Source: Compiled by Frost & Sullivan

• R&D investment scale and forecast of Chinese pharmaceutical industry (divided into drug discovery, preclinical and clinical stages)

Expenses related to clinical phase research are the largest component of China's pharmaceutical R&D expenditure. Expenditures related to clinical phase research increased from 788 billion yuan in 2016 to 1703 billion yuan in 2020, and it is expected to increase to 3423 billion yuan by 2025, with a compound annual growth rate of 15% from 2020 to 2025. Driven by increasingly active innovative drug R&D activities, the growth rate of expenditures related to drug discovery research is expected to accelerate. It is estimated that the compound annual growth rate of expenditures related to drug discovery research in China will remain at 15.8% from 2020 to 2025.

Driven by increasingly active innovative drug research and development activities, the growth rate of expenditures related to drug discovery research is expected to accelerate. In the near future, it is projected that the compound annual growth rate of expenditures related to drug discovery research will remain at 7.8%.

Source: Compiled by Frost & Sullivan

CRO (Contract Research Organization) provides development solutions covering drug discovery, preclinical, and clinical stages, offering services such as DMPK, safety toxicology, bioanalysis, clinical trial monitoring, SMO, data management, and statistical analysis.

• Market scale of China's CRO services

From 2016 to 2020, China's CRO market grew from 22 billion yuan to 522 billion yuan, with a compound annual growth rate of 24.1%. The market will continue to grow rapidly in the future, expected to approach 158.3 billion yuan by 2025, with a compound annual growth rate of 24.9% after 2020.

Source: Compiled by Frost & Sullivan

• A larger patient base and disease spectrum

In developed countries with limited patient numbers, recruiting suitable subjects for clinical trials remains a challenging issue. China has the world's largest population base, which provides CROs with a vast amount of patient resources, shortens the time required to recruit patients, and reduces costs. In addition, China's comprehensive disease spectrum offers CROs the opportunity to conduct clinical trials for different indications.

• Sufficient talent reserve

Due to the highly repetitive and specialized nature of the work involved, human resources can be a key factor in drug development. China's education system has seen hundreds of talents entering the CRO field each year, sufficient to meet the labor-intensive needs, forming a strong team for new drug research and management. In addition, a considerable number of overseas talents return to China every year, integrating the most cutting-edge technologies into China's CRO industry.

• The experimental cost is relatively low

The CRO industry is labor-intensive, with the average annual income per person in China being about half that of the US, giving it a significant cost advantage. In addition, compared to the general compensation amounts in the US, China's compensation is relatively lower, ranging from a few hundred dollars to over a thousand dollars.

The clinical CRO market mainly includes (i) clinical trial operations, (ii) data management and statistical analysis, (iii) site management, and patient recruitment services.

Source: Compiled by Frost & Sullivan

Compared with the global and US clinical CRO markets, the growth of clinical trial markets in China over the past and next five years has been significant. From 2016 to 2020, the total market size increased from 115 billion RMB to 263 billion RMB, with a compound annual growth rate of 22.9% during the same period. In the future, the market size is expected to reach 835 billion RMB by 2025, with a compound annual growth rate from 2020 to 2025 of 26.0%.

Source: Compiled by Frost & Sullivan

• Professional and experienced talents

Clinical CROs are labor-intensive industries, and whether there is a reserve of professionals with rich experience is particularly crucial for the steady development of enterprises. In the past, the orders received in China were mainly for generic drugs and Me-too drugs. With the wave of encouragement for new drug research and development, more and more Me-better, even Best-in-Class or First-in-Class drugs have emerged. Some aspects, such as the quality of clinical trial protocol design, are directly related to the success or failure of trials, which require very professional and experienced personnel.

In addition, in the field of specialized disease clinical trials, such as ophthalmic diseases, there are also high technical requirements for talent. Ophthalmic trials involve complex areas and a variety of instruments, requiring technicians to have professional ophthalmic clinical knowledge, as well as skilled medication administration skills and instrument operation skills.

• Project management capability

Clinical development is a vast and complex endeavor that requires the participation of multiple parties including sponsors, CROs, research institutions, cold chain transportation companies, reagent and consumables suppliers, etc. Only by possessing efficient project management capabilities can one coordinate the relationships among these parties and promote the smooth progress of clinical trials. In addition, China's accession to ICH has brought more opportunities for cross-border cooperation. Leading clinical CRO companies with the ability to manage complex and large-scale clinical trials will receive more benefits, while small companies lacking project management capabilities will be at a disadvantage in competition.

• High-quality and efficient performance records, along with a good reputation

Due to the strong homogeneity of clinical CRO services, leading clinical CRO institutions have established a good reputation by maintaining high-quality data records and delivering on time, which helps to attract more and more clients to collaborate with them. This high-quality and efficient service capability is based on the establishment of a high-standard quality control system and systematic training for employees. The quality control systems and training systems of smaller companies are not yet mature, which may reduce the stability of their services.

• Internationalization service capabilities

As pharmaceutical research and development gradually globalize, the ability to manage international multi-center clinical trials and be proficient in different regulatory requirements of various countries becomes increasingly important for clinical CRO institutions. This requires substantial upfront investment in related infrastructure, the establishment of a global comprehensive standard operating procedure and quality control system, as well as the development of a competitive international team. Cultivating this global business capability requires a significant amount of capital and several years, which small companies find difficult to achieve in a short time, giving leading CRO companies an obvious advantage.

• The penetration rate of outsourcing services has increased.

Due to the higher demand for R&D profitability, growing clinical trials and regulatory affairs, as well as the need for simultaneous registration applications in many countries, the penetration rate of outsourcing services is expected to be even higher.

• The adoption of advanced technologies has increased

Clinical CROs are adopting more advanced technologies. This involves innovation in experimental methods in the medical field, such as an increasing number of research and development activities in gene and cell therapies, as well as the application of multidisciplinary technologies to other fields. This includes innovative mathematical and computational models, artificial intelligence, data analysis, which will increasingly be used to support clinical development projects.

• Global expansion

With the development of globalization, pharmaceutical companies are not only focusing on the domestic market but also turning their attention to overseas markets, especially China and the United States. In addition, the increase in international multi-center drug clinical trials has promoted the process of unifying clinical trial standards. Therefore, in order to provide overseas clinical trial services to clients, CROs will mainly expand their branches overseas through mergers and acquisitions.

• Industry integration of comprehensive services

Clinical CROs discover more market opportunities by providing comprehensive and diversified services, enhancing customer loyalty, and offering more targeted solutions for complex problems requiring multidisciplinary knowledge, thereby improving profitability. As leading and mature companies continue to expand and consolidate their reliance, the clinical CRO market will become increasingly consolidated, while smaller companies or startups may face potential challenges in their further growth process.

• Digitalization level has improved

The digitalization level of clinical CROs will continue to improve, and it is expected to enhance work efficiency in multiple aspects. By adopting cloud-based workstations, staff can access projects at clinical sites or remotely online. By introducing an online patient recruitment system, the patient pool has been expanded, reducing the time required to find suitable patients for clinical trials.

• Capitalization of massive data resources

Clinical CROs can obtain various data generated and collected from clinical development projects. Within the scope permitted by regulatory authorities and relevant legislation, these data will be analyzed more frequently to better inform future R&D decisions. For example, analyzing the patient recruitment criteria of past successful clinical trials may provide guidance on how to select patients for subsequent trials based on the same indication.

• More stringent regulatory system

In 2015, China initiated a reform of the drug review and approval system. In 2017, China's pharmaceutical regulatory authorities joined the International Council for Harmonization (ICH) and were elected as a member of the ICH Management Committee in 2018, accelerating the alignment of China's drug registration management system with international standards. Joining the ICH means that China's pharmaceutical regulatory authorities, pharmaceutical industry, and research institutions will gradually transform and implement the highest international technical standards and guidelines, and actively participate in rule-making. This will promote the early entry of innovative drugs into the Chinese market, meet clinical medication needs, and enhance the innovation capabilities and international competitiveness of the domestic pharmaceutical industry. Therefore, there is an increasing demand for clinical contract research organizations whose service quality meets international standards.

• Demand for diversified and comprehensive services

The clinical development process in China is becoming increasingly complex, involving diversified interdisciplinary work. This has led to a continuous increase in demand for services provided by clinical contract research organizations, including clinical trial operations, data management and statistical analysis, site management of clinical trials and patient recruitment, as well as other related services throughout the entire clinical development process (including medical imaging).