China’s challenge in the drug services fieldGeopolitical tension threatens to curb what has been a fast-growing business
December 13, 2022
WuXi AppTec has had a great year so far. The Shanghai-based company, perhaps the world’s largest contract research and manufacturing firm serving the drug industry, recently reported a 72% increase in sales for the first three quarters of 2022, to just over $4 billion. Sales in its largest business, WuXi Chemistry, more than doubled.
The performance at Asymchem and Porton Pharma Solutions, two other publicly traded drug services providers in China, has been similarly robust this year. And WuXi’s third-quarter earnings report predicts that the firm “will maintain strong growth regardless of the environment.”
That environment is changing, and tension between China and the West is casting a shadow on Chinese companies like WuXi. In September, Asymchem’s planned acquisition of Snapdragon Chemistry, a Massachusetts-based specialist in flow chemistry, fell through after a review by the Committee on Foreign Investment in the United States, an arm of the US Treasury Department that scrutinizes investments by foreign companies for their national security implications.
The trend extends beyond the drug services supply chain: in the electronics industry, the Biden administration recently rolled out restrictions on the sale of advanced semiconductors and semiconductor-making equipment to Chinese companies.
“We definitely want to do more in the US and in Europe. – Yaohui Ji, general manager, contract development and manufacturing, Porton Pharma Solutions.”
At the CPhI Worldwide trade show, held in November in Frankfurt, Germany, executives with drug services companies from across the globe tried to parse the implications of the changed geopolitical environment. And leaders from European firms questioned whether China’s drug services industry can continue growing at its breakneck pace in this new environment.
They contend that drug industry customers, seeing the strained relations between major nations, have become wary of overreliance on Chinese firms for chemical intermediates and active pharmaceutical ingredients (APIs)—particularly ingredients for the patented medicines that bring in most of the industry’s profits. Moreover, Russia’s invasion of Ukraine has unsettled decision makers, who wonder what would happen to supply chains if China took similar action against Taiwan. For their part, executives at Chinese firms said they are aware of the concerns and are taking steps to address them.
Firms like WuXi started emerging roughly 2 decades ago, when big drugmakers eager to cut costs began outsourcing drug discovery tasks and chemical synthesis work to companies in China. WuXi was founded in 2000 and today has 45,000 employees, 95% of whom are in Asia. As drug services companies in China grew, those in the West stagnated or shrunk.
The drug industry’s rethinking of its China-centric outsourcing strategy is recent, Kevin Cook, CEO of the UK-based services firm Sterling Pharma Solutions, explained. “I think the drift back from the East to the West started before COVID, and COVID only emphasized and accelerated things,” Cook said. “Layer on top of that the tension because of the war in Ukraine.”
Cook said Sterling is ready for the westward shift, a phenomena often called reshoring. Its main facility, in Dudley, England, is a former Sterling Drug site built in 1969. Since 2016, when the company was formed, it has acquired two sites in the US, one in Wales, and one in Ireland.
Today, 70% of Sterling’s sales are to companies based in the US, according to Cook. Smaller biotech customers, in particular, appreciate geographic closeness. “It’s interesting how ‘made in the US’ is really important,” he said. “And if it can’t be made in the US, then ‘made as close as possible to the US’ is important.”
Although a shift back to Western shores is happening—Sterling says it is receiving a record number of proposal requests for synthesis projects—Cook said he can’t put a number on it, and he cautioned against overinflating the significance of the trend. “I think it’s more rebalancing the global supply chain rather than a hard move from the East to the West,” he said.
Similarly, Stefan Randl, vice president of the drug substance business at Germany’s Evonik Industries, said China is entrenched in pharmaceutical chemical manufacturing, whether for APIs or the raw materials needed to make those APIs. “At the moment, every supply chain depends on China,” he said.
In an effort to reduce that dependence, Evonik has been evaluating its raw material network to make sure it has a diverse group of suppliers. Randl said the initiative is intended both to improve supply chain security and to satisfy customers’ concerns. “Pharma companies are approaching us and asking us to be completely independent of China, including raw materials,” he said.
Executives from Chinese drug services firms said they hear the concerns of customers and are making changes—including the establishment of research and production facilities outside their home base in China.
James Gage, Asymchem’s chief science officer, said that the company is having its best year ever and that customer worries about dependence on China are mostly hypothetical at this point. “We have a lot of momentum behind us and a lot of goodwill from our customers,” Gage said. “But I would be lying if I said there aren’t questions about what our plans are to diversify.”
Buying Snapdragon was going to be one step in Asymchem’s diversification process, and Gage said the firm was disappointed in the Treasury committee’s decision. Cambrex, a US-based pharmaceutical services firm, announced Nov. 21 that it will acquire Snapdragon.
Even before the deal was scuttled, Asymchem was working to establish an R&D center in Woburn, Massachusetts, where Gage and Steven Hu, Asymchem’s chief technology officer and chief business officer, are based. Hu said that it will open in the first quarter of 2023 with about 20 employees—mostly chemists and other scientists—and that the firm hopes to have 100 employees in Woburn by the end of 2023.
The R&D center will mostly conduct process research for drug intermediates and APIs that will be made at Asymchem’s facilities in China. But the company also wants to establish manufacturing outside the country. “Asymchem continues to look for additional opportunities to expand our presence both in North America and in Europe,” Gage said. “We are actively looking.”
Like the Asymchem executives, Yaohui Ji, general manager of Porton’s contract development and manufacturing division, is eager to diversify his company geographically. Among Chinese firms, Porton was early to establish operations in the US, acquiring the New Jersey–based process research specialist J-Star Research in 2017.
“Now, with the pandemic and geopolitical tensions between the US and China, we see a much stronger need than before to really become a globalized company,” Ji said. Porton has 5,300 employees, only about 150 of whom are outside China. “We definitely want to do more in the US and in Europe,” he said.
Porton moved toward establishing a European presence in August, when it signed an agreement to build production facilities at a site in Mengeš, Slovenia, owned by the Swiss drug company Novartis. Porton expects to complete the project in 2 years and eventually have 300 employees in Slovenia.
“Pharma companies are approaching us and asking us to be completely independent of China, including raw materials. – Stefan Randl, vice president, drug substance business, Evonik Industries.”
In the next 3–5 years, Ji said, the company wants to dramatically expand its R&D staff at J-Star, establish API manufacturing in the US, and set up an R&D team at the Slovenia site. His goal is to have 1,000 employees outside China by 2027.
Porton’s drug industry customers like what they are seeing from the company, Ji said. In meetings at CPhI, he said, customers made clear that they don’t intend to pull projects from China wholesale but that they do want to “rebalance” their supply chains. “I think we are positioned pretty well to deal with some of the concerns,” he said.
Raybow PharmaScience, another Chinese drug services provider, has likewise diversified geographically. In 2019 it bought PharmAgra Labs, a custom chemical R&D firm based in Brevard, North Carolina. And it has plans for facilities in Europe, according to Peter Halkjaer-Knudsen, Raybow’s Denmark-based executive vice president.
But Halkjaer-Knudsen cautioned that no matter where a company produces an API, many of the raw materials it needs will still come from China. “So if we set up something in Europe, it will still be deeply dependent on efficient routes going back to China,” he said.
Making those routes secure will require changes. Companies that formerly championed just-in-time raw material delivery need to start keeping ample stockpiles on hand, Halkjaer-Knudsen said. And as important as having diverse suppliers internationally is having diverse suppliers within China.
Drug services companies beefing up their presence in the West will be challenged to staff their facilities, Halkjaer-Knudsen warned. Since acquiring the Brevard facility, Raybow has built a pilot plant and bought an adjacent building where it is expanding further. The site has about 30 employees today, up from 20 at the time of the deal, he said.
The firm’s goal is to have 100 employees in Brevard, but finding capable chemists is not easy. “There’s a war for talent in North Carolina,” Halkjaer-Knudsen said. The typical new employee in Brevard is a midcareer chemist attracted to the area as a good place to raise a family.
As drug companies reassess their reliance on China-based services companies, executives at Indian firms see an opening. Both Peter DeYoung, CEO of Mumbai-based Piramal Global Pharma, and Ramesh Subramanian, chief commercial officer at Hyderabad-based Aragen Life Sciences, said firms are shifting to a “China-plus-one” strategy, and they argue that India can be the plus-one.
China-plus-one thinking began during the international tensions of the Trump presidency and accelerated during the pandemic, Subramanian recalled. “The zero-COVID policy crystallized things,” he said, referring to supply chain disruptions caused by China’s strict approach to containing the virus.
Few companies in the West offer a full palette of biology and chemistry services for drug discovery. So when drug companies wanted to find suppliers of these services outside China, Subramanian said, they turned to India. That shift has brought a lot of work to Aragen, he added, noting that the firm’s workforce has increased to about 4,000 people from 2,500 just 2 ½ years ago.
After discovery, API development and manufacturing are the next steps in the drug creation process. For those services, facilities do exist in the US and Europe—and pharmaceutical companies are seeking them out, Subramanian said. But, constrained by limited capacity, Western producers can’t do it all. So they are asking Aragen and other Indian firms to conduct the initial steps of multistep syntheses, which allows them to concentrate on the final steps leading up to an API. “For us it’s great, as long as it’s challenging chemistry,” Subramanian said.
Piramal is seeing the same phenomena, DeYoung said, but because it has production facilities in the US and UK—amassed through a string of acquisitions since 2005—it can offer all the synthesis steps within its own network. “We’re geographically agnostic,” he said.
Given the heightened customer desire for supply diversification, many Western drug services companies are making new investments in production capacity. Evonik, for example, recently announced plans to build a facility in Lafayette, Indiana, that will make lipids used to deliver messenger RNA–based therapies. Randl noted that the $220 million project will be financed with $150 million from the US government’s Biomedical Advanced Research and Development Authority.
And earlier this year, Italy’s Flamma announced the acquisition of a plant in Lecco, Italy, from Teva Pharmaceutical Industries. “The goal is to be able to produce more APIs in Italy, which is in line with the European Pharmaceutical strategy that aims to have a more robust and resilient supply chain in the pharmaceutical sector, not totally dependent on Asia,” CEO Gian Paolo Negrisoli said in a press release announcing the deal.
At CPhI, Ken Drew, vice president of Flamma USA, said the large Teva facility has added 650 m3 of production capacity to the 250 m3 that Flamma already operates across two sites in Italy and one in Dalian, China. Noting the Dalian plant, he said the new facility will also be “an internal backup if things go south in China.”
That’s not something that Drew expects to happen. “Do I think China is going to do something in Taiwan? I don’t think so,” he said. “But nobody can say for sure that they won’t. Anybody with any foresight is going to investigate how they can secure their supply chain to avoid any sort of disruption.”