China's drug contractors on a fast-growth track

* Clinical CROs in China to grow 18 pct annually

* Late-stage CRO revenue to reach $240 mln by 2012

* Lower costs, skilled workforce draw business

By I-Ching Ng

NEW YORK, Sept 3 (Reuters) - Companies that conduct research for drugmakers are poised for torrid growth in China as their multinational clients look to sell more medicines in the world's most populous country and cut development costs.

Such contract research organizations, or CROs, charge large drugmakers for conducting all stages of research -- from discovery of compounds that might be used as drugs, to animal studies and expensive clinical trials involving hundreds or thousands of patients with various ailments.

Most of the world's largest drugmakers, including Pfizer Inc (PFE.N), Merck & Co (MRK.N) and Novartis AG (NOVN.VX), have turned to local Chinese drug contractors with niche specialties and a cheaper pool of scientists to deliver less costly drug trials, and to gain access to China's large pool of patients.

Total revenue of China's CROs is unclear since the local drug contractors are dominated by scores of private businesses and only one publicly traded company, WuXi PharmaTech (WX.N).

But CROs in China that specialize in late stages of research, including clinical trials, are on a fast-growth track, said Ranjith Gopinathan, senior research analyst at consulting firm Frost & Sullivan. They capture annual revenue of about $145 million, or less than 2 percent of the global CRO market. They are expected to expand at 18 percent annually, reaching $240 million by 2012, Gopinathan said.

Hence, multinational CROs, including U.S.-based Covance Inc (CVD.N) and Charles River Laboratories International Inc (CRL.N), are aiming to be far bigger players in the country.

"The big drivers are the big, untapped and rapidly growing markets," William Blair & Co analyst John Kreger said. "That's what the pharma industry desperately needs right now."

While the business in China thrives, Kreger said he expects growth of the global CRO market to dip into single-digit range in coming years because Western drugmakers are cutting back on how much they are willing to pay contract research companies.

China, India and other emerging markets are expected to help offset tepid CRO growth in other parts of the world.

China's CROs largely came into being after the country joined the World Trade Organization in 2001 and developed a drug regulatory system under China's State Drug Administration.

The increasingly competitive sector has at least 138 CROs, according to Shanghai-based consultant firm Modular R & D.

"(The) CRO industry in China as a whole is still young and fragmented, but they anticipate a quick ramp up toward standardization and global competitiveness," said Mandy Chui, global leader for emerging markets at IMS Health RX.N, a U.S.-based consultancy that tracks market data on the pharmaceutical and healthcare industries.

BEYOND CHEMISTRY TO TOXICOLOGY

Over the years, Chinese CROs have focused on relatively inexpensive areas such as biology and chemistry -- including screenings of chemicals to identify combinations with potential as medicines. They have also worked on manufacturing active pharmaceutical ingredients for generic drugs.

Experts said an increasing number of CROs in China, local and foreign-based, are moving into more lucrative stages of the drug development chain. They include preclinical studies, such as toxicology and other animal research, as well as human studies.

James Foster, chief executive of Charles River, estimates toxicology demand will surge "significantly" in 2010. "We would anticipate all the businesses we do in the U.S. and Europe we will eventually do in China," Foster said in an interview. His company built a new preclinical facility in Shanghai in January and is planning to build a second site in China.

China's annual market for toxicology -- studies that typically use animals and are designed to root out serious side effects of drugs early in the game -- is worth about $20 million. But it may jump to $200 million in five to seven years, said Joe Herring, chief executive of Covance. Covance's CRO business in China should be profitable this year, with revenue doubling in 2010, he said.

With an abundant supply of primates, and less animal-rights advocacy, China has become a favorable destination for animal testing, said Frank Zhang, chief executive of GenScript, a biology CRO with operations in the United States and China.

To sell existing drugs to China, multinational drugmakers are required to conduct additional testing to obtain local approvals. Ronny Krishana, senior director of strategy and business development at Pfizer, said his company plans to collaborate with more than 500 hospitals and 2,000 doctors on at least 135 local clinical trial programs in 2010.

"Our investment in local clinical trials in China has increased dramatically in recent years," Krishana said.

Despite the growth potential, Frost & Sullivan's Gopinathan warned that concern over intellectual property, a limited number of qualified research sites and long approval processes for clinical trials would hold back China's CRO market.

Still, the CROs are moving drug development in China into a more sophisticated and possibly more lucrative stage.

"China's drug development industry can help the country build a new brand that is known for innovation and quality, so that 'made in China' will no longer be synonymous with manufacturing cheap products," said Charles Huang, an executive with Sundia MediTec Company, a Shanghai-based CRO. (Editing by Steve Orlofsky)