In recent years WuXi, closely followed by ShangPharma, has added capabilities to expand beyond the basic chemistry work that supported early growth. For WuXi this meant investing in manufacturing and toxicology ahead of strong demand but it is now seeing increased interest in the new services.
“Commercial manufacturing became an important growth driver in 2011 while GLP (good laboratory practice)-toxicology is experiencing a fast ramp-up and is expected to turn profitable this year”, Liping Cai, equity analyst at William Blair wrote.
Large-scale manufacturing picked up after Vertex won approval for Incivek (telaprevir) but, as Tim Evans, senior analyst at Wells Fargo, wrote, there was “a fair degree of scepticism over the past several years regarding WuXi’s ability to ramp [toxicology]”.
Scepticism was underpinned by missteps taken by Western CROs (contract research organisations) when entering the Chinese toxicology market. MPI Research and Charles River Laboratories both exited sites in China after demand grew slower than expected.
Speaking last month James Foster, CEO of Charles River, said demand in China “was very fragmented and we didn’t have any large clients to do a significant amount of work”. Foster speculated everyone still in the market was making a loss. WuXi expects the business to become profitable this year.
Last year ShangPharma looked to benefit from Western CROs cutting back in China by acquiring the Shanghai toxicology site Charles River built. Speaking in November, Michael Xin Hui, founder and CEO of ShangPharma, said the site would accommodate rising demand for in-vivo pharmacology services.
ShangPharma expects capacity use to increase in the coming quarters but over this time the site will drag on profitability. The China-based CRO also invested in a facility to serve Eli Lilly, its largest client, but this site is already being used fully.
At the same time both the Chinese CROs must contend with currency appreciation and rising labour costs. To offset rising labour costs WuXi has opened a site in Wuhan, a second tier city, to offer the basic chemistry services that have faced the most severe pricing pressure.
Shifting to second and third-tier cities offers other benefits. Speaking at Partnerships in Clinical Trials last week, Stephen Porter, CeO of VDDI Pharmaceuticals, said he prefers working in second and third-tier cities as there is less poaching of staff and as such turnover is lower.
WuXi and ShangPharma are also trying to maintain profitability and deepen relationships with big clients by offering integrated services. Guidance for 2012 suggests both companies, but particularly WuXi, are having success with this strategy and this should differentiate them from other CROs.
“Low prices are not enough to offset low quality, costly travel to monitor the vendor, and oversight of contracts across multiple vendors. That suggests that WuXi is positioned for market share gains”, David Windley, equity analyst at Jefferies & Company, wrote.