Outsourcing: China Takes Center Stage

Increasingly, China is positioning itself as a research leader, bolstered by the Chinese government's significant investment in education and in the development of high-tech business regions. A highly-educated workforce of scientists and engineers adept at managing key research and development (R&D) tasks, right through to regulatory submission, is just one of the draw cards.

Almost all of the major pharmaceutical companies have, to some extent, outsourced activities to China in recent years. According to Jim Zhang, managing director of JZMed, a market research company focusing on the Chinese pharmaceutical market, medium-size pharma companies and even small biotechs are following big pharma's move. Moreover, China's booming biotech industry-with about 250 companies involved in various areas of biotech research-is making both the Chinese market and Chinese companies attractive to overseas companies eager to establish partnerships for codeveloping or marketing products in China.¹

In the R&D arena, the largest sector of pharma outsourcing to China is currently that of drug discovery, including lab-based chemistry and biology work, Zhang adds. Stephen Hasler, CEO of consultancy Originex Ltd., concurs, noting that many pharma companies are connecting with companies in China to have those Chinese companies synthesize compounds for them for testing. "This just goes to show the level of scientific expertise available in China," Hasler says.² Clinical trial outsourcing, too, has grown in popularity, and today the vast majority of major pharma companies, as well as many medium-size and smaller companies, are including sites in China in their large-scale trials.

The use of other, specialized services, such as regulatory outsourcing, has started gathering momentum in the past two or three years. A CSC survey of regulatory affairs leaders at top-tier pharma companies shows that China is the most used offshore location, with nearly 30% of surveyed companies selecting China-followed by India, at just under 25%.³ Nevertheless, while pharma companies have been outsourcing various functions to China for some time, extensive investment in the country by those same companies is relatively new. Paul Chung, Director of the Regulatory Solutions Group Practice at CSC's Life Sciences Division, points out that it was only about three years ago that pharmaceutical companies began announcing their intentions to invest billions of dollars in R&D within China, and more recently, they have begun fulfilling those goals.⁴ "That expansion has both fueled the need and provided the resources for service providers to expand their Chinese operations in support of these predominantly US and European companies," Chung says.

Regional attraction

One of the huge attractions to China is the opportunity to tap into the burgeoning Chinese pharmaceutical market and have products ready for submission locally. This is an issue of special relevance to the industry as profits in established markets level off. The new opportunities have led several major pharmaceutical companies to open offices in China, and many others are forming strong bonds with outsourcing partners across the R&D continuum. Undoubtedly, companies want to be well positioned for marketing to a population with increasing means to buy pharmaceuticals, thanks to a growing middle class and ever greater numbers of people with medical coverage.

In February 2011, in a move that will see 90% coverage of medical treatments for 440 million individuals, the State Council of China announced plans to expand medical insurance coverage in urban areas.5 By 2020, China expects to have in place a reform program that makes healthcare in China affordable and modern for its entire population of more than 1.3 billion people.

The impact of this can be felt in the areas of clinical trials and product submissions. Zhang notes, for example, that while the market size of the clinical trials sector was once quite small, the outsourcing of clinical trials has recently gained popularity, with the Chinese drug market attracting all drug companies to try to market their products there. "The current market value of clinical trial outsourcing in China is estimated to be around $400 million," he says. "It has been growing at around 50% a year over the past two years (2009 and 2010). It is expected that in 2011 the combined service revenue of all phases of clinical trial outsourcing in China will grow about 55% to 60%, reaching $620 million to $640 million."

China's proximity to other emerging markets in Asia offers companies the added potential to expand their product reaches. For example, companies could handle their submissions to Asian countries such as Japan, Malaysia, and South Korea, with China being the central submission hub for the region, Chung says.

Talent pool

At the microlevel, China's appeal as a place to outsource more-complex regulatory functions lies in the increased availability of a highly-skilled and highly-localized workforce, thanks to the development of industrial areas or economic zones. For example, the economic zone of Tianjin was established to attract high-tech, low-polluting industries and supports a significant number of universities and colleges. That gives companies access to a vast pool of talent to tap into and enables companies to establish large departments for managing major outsourcing projects. "China has a large number of college graduates, which provides companies with a large and appropriately qualified workforce," Hasler says.

Hasler adds that companies that outsource to China experience low staff turnover rates, along with commitments to quality, performance, and service. Chung says China is one of the few countries that has the breadth and depth of talent to staff a large operation with high-quality professionals.

Workforce competence is important not only in terms of employees' current capabilities but also in terms of whether employees can be trained to take on other and more-complex tasks in the future. "What I've seen in working with China is that because of the high number of graduates, and because those graduates are trainable, and because there's a big workforce out there, China's ability to ramp up resources rapidly is quite impressive," Hasler says.

Where to begin

The areas of a business that are suitable for regulatory outsourcing to China have to be considered by vendors and their clients. Regulatory outsourcing experience, for example, has taught Chung and other CSC leaders that global regulatory operations tasks are the most adaptable to the Chinese market. Those tasks include document handling and the performance of routine tasks, such as updating product information for registered products.

Operational and repetitive tasks such as document-level publishing and routine submission maintenance processes also are appropriate for Chinese outsourcing, as are the large-scale submissions generally required with new product registrations. That's because those activities require large numbers of people to manage large capacities in short time frames.

"The biggest area of satisfaction is regulatory operations and submission report publishing," Hasler says. "Partly, that's because experience has shown that service providers in China have the capability of publishing in all formats, whether it's publishing on paper or in any of the electronic formats around. On top of that, submissions for most countries in the world have been generated in China now."

According to Vicki Phelan, Pharma and Life Sciences Leader of KPMG's Shared Services and Outsourcing Advisory Group, there is also the potential for greater outsourcing of the authoring of submission content for registered products; however, she predicts, language skills will preclude authoring of new product submissions.⁶

Growth in the Asian region and gradual movement in Asia toward both the standards set forth by the International Conference on Harmonization and electronic submission formats are also propelling growth in regulatory outsourcing in the region. Stan Lepeak, Research Director, Shared Services and Outsourcing Advisory at KPMG, notes that although China excels in such areas as R&D and aspects of regulatory outsourcing, the same may not necessarily be true in areas that require greater creativity, business knowledge of the West, or management skills. "We generally don't see firms going to China to do information technology, infrastructure, or application development outsourcing," Lepeak says. "And certainly, there is little finance, accounting, human resources, procurement, or call center work. Most of the work is being done in R&D, and there's some regulatory work; and that's as much to develop drugs to sell locally as it is for markets in the United States and Europe."⁷

Risk assessment

Though there are significant advantages to using the Chinese market as an outsourcing destination, choosing to outsource work to vendor partners in China is not without risk. Whatever the project-but particularly with projects involving high-end, mission-critical functions such as clinical research or submission management-it's vital to ensure a company will be in good hands.

The cost advantages afforded by the Chinese market open the floodgates to all kinds of vendors, some of which are solely China-based practices with limited global experience, experts in the market warn. This means international companies need to perform their due diligence early in the vendor search in order to weed out providers that lack solid histories of performance or that don't have expertise beyond China or the Asian region, particularly when it comes to functions that have global ramifications. "Regulatory operations are critical for product marketing, and a vendor that cuts corners and doesn't have a proven track record could pose a significant risk to a pharma company's ongoing business activities," Chung says.

When selecting partners, companies should pay attention to governance issues, security management, and informational management processes, among other matters, and should ensure any partner they select has qualified staff to manage the business. Intellectual property issues continue to be an area of concern, Phelan says. "Additionally, the internal controls and auditing functions in China may not be as stringent as would typically be required, so there is a need to make sure they're in place," she says.

One other drawback, particularly for US-only-based companies, can be the time zone, though as Hasler says, there are ways of working around this. Hasler also notes that security, compliance, and connectivity should all be top of mind for companies seeking to outsource to China. "Questions companies will be asking include: Does the Chinese operation have validated systems in place that would pass inspection by major regulators?" he says.

While for companies intellectual property concerns tend to be top of mind, for many regulatory experts it's business continuity and disaster recovery that are the question marks when outsourcing to countries such as China is under consideration. These concerns have come to the fore in the wake of the devastating earthquake and tsunami in Japan, since China is also an earthquake region. Companies want to know that if a disaster occurs where the factory or outsource supplier is, or where the vendor's servers are, that contingency plans are in place to manage potentially critical outages.

A matter of culture

There are other, more-tangential issues to consider as well, such as cultural fit, since poor communication between vendor and sponsor will not only create frustration but also can slow a project's progress. One regulatory leader at a large pharma company with Chinese operations says that the way a relationship is built in China is much more important than companies in the West are accustomed to. "It's important to gain trust and build relationships with clients," he says. "Ordinarily, in the West a company might send out a bid, get some numbers back, and make the selection from that. In China, though, there must be an equal focus on relationship building."

Therefore, having a partner with a local presence-one that understands the culture, that can carry out negotiations, and that can oversee work when necessary-is important. Becoming immersed in the Chinese culture is part of doing business there. Phelan says a company's business success and ability to generate cost savings do hinge to some extent on building good relationships with business and government leaders. "This isn't about taking bribes," she points out. "It can be equated more to lobbying to ensure you get properly introduced to the Chinese market, become a part of that market, and are accepted as an insider rather than an outsider."

The case for China

In recent years, several leading pharmaceutical companies have been progressively moving aspects of their regulatory submissions to offshore outsourcing partners, and metrics from two companies have demonstrated significant benefits from those initiatives. The companies, referred to as company A and company B, are assessing future outsourcing opportunities.

Top 10 pharma company A began its regulatory outsourcing program in 2010. To start with, members of its regulatory team went to the vendor's offices in China to conduct in-person training. This enabled the teams both to collaborate on processes and procedures and to build a foundational rapport that will be instrumental in quickly managing issues that might arise.

The process has been methodical. To start with, each submission is weighed according to complexity to schedule maximum time for more-detailed submissions. In addition to publishing the submission, the vendor conducts internal quality control assessments before releasing the submission to the client.

Production has improved month to month. For example, the regulatory group was in production 51% of the time in March and nearly 70% of the time in April. There have been problems, chiefly with downtime due to IT problems. However, the company says the problems can be traced back either to its own systems not being available or to access limits as a result of security restrictions.

The quality of work has stood out, with data from April showing that European Union and international regulatory work was 97% right first time and on time 100% of the time, and that US regulatory was 99% right first time and on time 100% of the time.

Company A is currently outsourcing around 8% to 9% of its regulatory submissions to its Chinese partner, and very little of that needs to be reworked. Notably, the company says its goal was to create a capability that made it impossible to tell whether a submission had been published in-house or by the Chinese partner, and it has been able to achieve this.

At large biopharma company B, the outsourcing relationship with its Chinese partner began in 2008. Again, as with company A, at the start of the relationship, personnel from the head office traveled to China to train around 25 to 30 staff. Outsourcing work began with simple documents, such as protocols, and gradually evolved into more-complex work, such as integrated summaries of safety and efficacy as well as chemistry, manufacturing, and controls submissions. The initial plan was to have 75% of documents, or roughly 3,000 to 4,000 documents, processed by the vendor in China. By 2009, company B was sending 7,500 documents, or around 4 million pages, to its Chinese partner. There was a 4% error rate, and 24-hour turnaround was achieved about 95% of the time. By 2010, document outsourcing had jumped to 10,000, or more than 6 million pages; the error rate was down to 2%, and the on-time rate was 99%.

The vendor has proved itself to be a full partner by pulling together during crunch times and working with company B to deliver submissions both accurately and quickly. The level of success has been such that company B has decided that rather than replace its document-publishing system, it will have its vendor use its platform and business processes to publish submissions. Thus the company will outsource 100% of its documents to its partner, with a small handful of internal staff conducting maintenance and prioritizing the work. The company also plans to continue conducting random checks on the work to ensure its processes and standard operating procedures are being adhered to.

Just like company A, company B says its customers can't tell the difference between what has been published via the vendor's platform and via the company's solution. In fact, the skills and capabilities developed by the Chinese vendor are such that the company is having a team from China travel to the United States to train its US team on the new publishing platform.

For relationships between outsourcing partners to flourish, particularly when across geographies, it is imperative that governance be established and regularly reviewed and that there be adherence to standards and protocols. Equally, companies that have enjoyed successful outsourcing relationships say personal interaction between the company and the vendor is vital to making the partnership work. As company B says, it has treated the staff at its Chinese partner like an extension of its own internal staff, and the Chinese vendor has reciprocated by being truly conscientious.

Conclusion

As regulatory outsourcing to China gathers momentum-with more and more companies selecting partners in the country and establishing offices there-any existing concerns and discrepancies will lessen. Nonetheless, as in any partnership or outsourcing relationship, companies must do their due diligence and learn how to conduct themselves and do business in the Chinese market.

The achievement of success in regulatory outsourcing is not related just to country but is the responsibility of the companies involved. A company needs to be aware of its vendors' knowledge and capabilities with regard to how they manage their outsource operations and the systems and culture they put in place, Hasler says. "The issue of country matters in ensuring it has a culture that is service focused," he says. "And China, much like the rest of Southeast Asia, has that service focus and desire to deliver."

Adam Sherlock is Director, Regulatory Solutions Group at CSC Life Sciences, Royal Pavilion, Wellesley Road, Aldershot, Hampshire UK, e-mail: asherlock2@csc.com.

References

1. Jim Zhang, correspondence with Adam Sherlock (2011).

2. Stephen Hasler, interview with Adam Sherlock (2011).

3. Steve Hasler ed., "Outsourcing in Regulatory Affairs," CSC (2011).

4. Paul Chung, interview with Adam Sherlock (2011).

5. Sui-Lee Wee and Huang Yan, "China to Expand Health Coverage to Urban Population" Reuters (2011), http://reut.rs/hCyBjl.

6. Vicki Phelan, interview with Adam Sherlock (2010/2011).

7. Stan Lepeak, interview with Adam Sherlock (2010/2011).