Chinese contract research companies, which have traditionally relied on drugmakers overseas for revenue, are seeing surging demand from domestic clients focused on innovations and expansions.

Contract research organizations, or CROs, provide a wide array of services to clients ranging from drug discovery to clinical trials. One of the largest listed Chinese CROs WuXi Biologics (Cayman) Inc., for example, said it has 14 out of the 20 largest global pharmaceutical companies by revenue on its books, including Pfizer Inc., Eli Lilly and Co. and AstraZeneca PLC.

In recent years, however, some CROs have seen a spike in contributions from Chinese drugmakers and the China subsidiaries of foreign companies, leading to a greater proportion of revenue generated domestically.

Around 43.9% of WuXi Biologics' revenue, for instance, came from China in 2020, compared to 34.1% in 2017. Chinese companies also made up 40.6% of the company's client base in 2020, the largest of any region, according to the CRO's annual earnings report filed in March.

While the spike in 2020 could be partly driven by the pandemic, as China was among the first countries to bring the outbreak under control, experts believe the growth of domestic demand is set to continue.

"The revenue from China will outgrow overseas in the long term. Despite developed markets recovering gradually from COVID-19, China's research and development expenditure will grow faster," said Vicky Zhu, Hong Kong-based healthcare analyst with investment bank SPDB International Holdings Ltd. "[Also] the penetration rate of contract research is relatively lower in China, especially for clinical development of innovative drugs."

China's healthcare research and development service market is expected to grow by a CAGR of 21.4% in 2020-2024, compared to 10.7% for the global market, according to Zhu.

Surging demand from domestic market

While the majority of its income still came from overseas, Hong Kong-listed CRO Pharmaron Beijing Co. Ltd. also saw revenue from China increase to 13.6% in 2020 from 8.6% in 2017.

"We believe our years of experience offering one-stop drug development services to global clients will help us provide research services to domestic companies and the revenue from Chinese clients will hopefully increase," Pharmaron CFO Gilbert Li said.

Hangzhou Tigermed Consulting Co.Ltd., the largest clinical trial CRO in China, even saw a flip in its revenue composition — in 2020, 59.7% came from services delivered to the domestic market, compared to 37.3% in 2016.

"Since 2015, our revenue from the domestic market has been increasing significantly. We have seen many new biotech companies in China in the past years, which do not have the capacity to build up their own research and development team yet and need external resources to help with drug development," Tigermed CFO Gao Jun said in an interview with S&P Global Market Intelligence.

Gao said many of the products currently developed by Chinese drugmakers are "fast followers," which are usually modified versions of approved therapies that have recently demonstrated clinical or commercial success. Their manufacturers need to rely on third-party organizations to speed up the launch of these drugs in order to beat competitors to market.

In addition, Gao said the demand from overseas companies' subsidiaries in China has also increased since the nation joined the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use in 2017, which allows clinical data generated from trials in China to be accepted for drug approval applications in other countries on the council.

Localization strategies by global pharma, including conducting more trials in China and narrowing the gap between drug launches in China and the U.S. and Europe, also propelled the growth of Tigermed's domestic business.

"The clinical trial CRO market, in particular, is growing by a CAGR of more than 30% in China. We want to keep our leading position in the industry in China," the CFO added.

The 30 largest clients for Tigermed, mostly with fast-growing business in China, will be key for the CRO to keep its leading position in the domestic market, according to Gao.

"We hope to increase their loyalty by enhancing our understanding of their demand and pipeline. Their future products will become the cornerstone of our revenue generation. In the meantime, we will look for new clients and expand our services," he said.

Going global

Apart from young biotech companies that need help to jump-start their businesses, Gao said demand from Chinese drugmakers to expand abroad will also surge in the coming years.

"For drug discovery and manufacturing services, Chinese pharma companies will definitely choose Chinese CROs for their cost advantage. [However], at the current stage, most Chinese pharma and biotech companies choose global CROs for clinical studies," said SPDB's Zhu.

"As more [Chinese drugmakers] go for overseas markets, Chinese contract clinical trial service providers will have more chance to provide one-stop services for clinical trial applications both in China and overseas."

Tigermed's Gao is also expecting a surge in demand for overseas services from domestic entities.

"We aim to increase our multiregional clinical trial business by four to five times within three to five years, mostly driven by Chinese clients," the CFO said.

The U.S. and Europe will be the focus for these companies and Gao said Tigermed has already been ramping up its businesses in these markets. The CRO started to build its U.S. team in 2019, which now has the capacity to conduct some small-scale clinical trials.

"To accelerate our expansion overseas, we still need to find some sizable targets for acquisitions. We are cautiously looking for targets that can cover U.S. and Europe," Gao added. "So far there are some headwinds, such as restrictions on international travel and geopolitical tension between China and U.S. But we are still determined with our acquisition hunt."

The company acquired Romania Opera Contract Research Organization Srl, a Romanian contract research company, in 2018 to expand its business in Europe. Tigermed's role supporting Chinese companies to conduct trials for COVID-19 vaccines overseas, including in Europe, Latin America and Asia, also offers an opportunity to expand in these regions, Gao added.

Meanwhile, Pharmaron acquired Absorption Systems, LLC, a U.S.-based cell and gene research company, in November and a U.K. biomanufacturing facility from AbbVie Inc. in March, the same month that WuXi AppTec Co. Ltd. bought British gene therapy contract research organization Oxford Genetics Ltd.

"The global contract research and manufacturing markets are fragmented, so there will be plenty of targets for merger and acquisitions. [Chinese companies] with ample cash on hand and presence overseas will have an edge in overseas expansion, SPDB's Zhu said. "Generally, Chinese companies are more aggressive in expansion compared with their global competitors."