The number and size of contract manufacturing organizations (CMOs) in China are expanding for three key reasons. The main reason is that there are more biosimilars and innovative drugs entering the clinical pipeline, and reaching commercial scale. Also, because most early-stage biologics developers in China lack manufacturing facilities, the need for contract manufacturing services is growing. The second reason is the shift in regulatory policy allowing contract manufacturing in the first place (see below about the Marketing Authorization Holder (MAH) system reforms). The third is economic—China is demonstrating clear investment interest in participating in global markets for both innovative biologics and biosimilars produced at GMP quality levels. These factors are creating a strong market environment for CMO services.

As part of this market environment, we are also seeing China’s biomanufacturing facilities actively expanding their facilities. In fact, total capacity in China has grown by over 10%, based on our analysis of facilities under active construction. BioPlan’s Top 60 Biopharmaceutical Manufacturers in China¹ directory shows continued capacity expansions and upgrades at a majority of bio-manufacturer facilities through 2017. This is contributing to an increasingly robust China-bio ecosystem.

CMOs in China before 2016
Before 2016, pharmaceutical contract manufacturing for domestic drugs essentially did not exist in China due to a regulatory framework that demanded drug-developers be in charge of the manufacturing of the drug products they developed, i.e., no third-party/CMO manufacturing for either clinical trials or commercial production in China. Meanwhile, manufacturing for certain developing overseas markets remained largely unregulated, and this is where most Chinese CMOs generated most of their export revenue (pre-2016).

However, as a result of these efforts, some contract manufacturers have been growing; at the time, most were focused on small molecule therapeutics, especially active pharmaceutical ingredient (API) and intermediate products. A few players also established FDA-certified contract manufacturing of finished-dosage chemical drugs, for example, Hangzhou Minsheng Pharma. CMOs for biological therapeutics, especially for mammalian cell systems, require a much more sophisticated production capability, and few domestic companies had the process development, technical, or quality systems capabilities. A few very well-known contract research organizations (CROs) with scientist backgrounds, such as WuXi AppTec and Chempartner, developed divisions devoted to contract bio-manufacturing for their overseas clients. Yet more often than not, these facilities were lab-scale or pilot-scale producing biologicals for preclinical or clinical trial use. The Beijing-based Autekbio, founded in 2011, was the first, and one of the few CMOs fully devoted to contract manufacturing of biologicals.

Opportunities for China-based biological CMOs
Though China’s contract biomanufacturing is a relatively very young business, and it remains constrained by regulatory hurdles, recent years have seen a wave of opportunities. With the gradual maturing of bioprocessing, multi-national pharma companies have been faced with the question as to whether bioprocessing should remain a core competence for big pharmaceutical companies.

The fast growth of global biopharma markets has also resulted in increased R&D investment in biologics and a higher demand for a variety of outsourcing options, including biologic product manufacturing. In China, as elsewhere, development of a new biotherapeutic is a very capital intensive and establishment of GMP grade manufacturing facilities requires tremendous time, capital and technology. Though multinational pharmaceutical companies usually have their own GMP manufacturing facilities elsewhere, they still focus on ways to reduce costs. 

One strategy is outsourcing manufacturing of relatively old biopharmaceutics such as insulin, interferon, interleukin, or growth hormones, to a CMO and utilize their own facilities for newer and more valuable biological pipeline. In some cases, collaboration with a manufacturing partner in another country, such as China, can bring cost advantages and preferential treatment in drug evaluation and approval processes.

At smaller scales, contract manufacturing is almost indispensable for small to medium sized biotechs, which are usually cash-strapped and do not have the financial resources to complete their own GMP grade manufacturing facilities. With support from venture capitalists, the financial resources are available to purchase services from external vendors.
This process is clearly developing in China as CMOs are now beginning to service smaller biotechs so they can concentrate on their R&D efforts. As a result, outsourcing in China at clinical scale has grown. According to BioPlan’s research on China biopharmaceuticals2 the global biopharmaceutical outsourcing service market will grow faster than in Western markets, at nearly 20% over the next three or four years. CMO services in China are likely to continue to expand, as clinical scale biologics in the pipeline produced for smaller companies by CMOs come to represent an increasing proportion of the biopharmaceuticals on the Chinese market in coming years. 

This new wave of outsourcing may benefit CMOs in multiple Asian countries, including Singapore, South Korea, India and China. Many see growth opportunities in this sector. For example, Samsung Biologics, founded in 2011, with its massive mammalian cell capacity (360,000L), surpasses most established service providers. Singapore is also a hot spot favored by many global companies considering outsourcing of bioprocessing. Some industry insiders in China strongly believe that China can be as good a destination for this wave of outsourcing. Among them is Li Zhiliang, chief executive officer, Autekbio, who projects that outsourcing of bioprocessing will become a global standard, and ‘made-in-China’ biopharmaceuticals will be as commonplace as ‘made-in-China’ iPhones.

Domestic Chinese biopharma creating demand for services
Development of biological pipelines by domestic Chinese companies represents a significant portion of the R&D by small biopharmaceutical companies. The private and public funding for these companies is also driving the need for domestic CMOs. China, especially in the Yangtz Delta Region, is now home to hundreds of start-up bio companies trying to develop pipelines in biologics.

According to Bioplan’s recent research for its Top 60 Biopharmaceutical Facilities in China Directory, there are well over 60 biopharma companies in China, both new and old, that have started mAb development projects. Luo Jiali, chief executive officer of Boehringer Ingelheim’s contract manufacturing facility for biologics in China, said that since the successful launch of Langmu in 2013, Chinese developers have submitted IND applications for 109 Class I biological therapeutics, including 61 therapeutic mAb, 9 ADC, 4 bi-specific antibody and 1 PD-L1-Fc, as well as 26 recombinant proteins, 13 fusion proteins and a number of gene therapy products, therapeutic vaccines and oncolytic viruses.2 It may well be that the many relatively new biotech companies in China will need the support from external manufacturing partners, and this may create the critical mass needed to establish GMP grade contract bioprocessing facilities. 

Regulatory reforms in China to capture outsourcing opportunities
With both global and domestic demand on the rise, Chinese regulatory authorities made the move to permit contract bio-manufacturing in China in 2016. That year, China started the pilot Market Authorization Holder (MAH) program, under which holders of a CFDA biologics approval number now have the option to either manufacture the drugs or use a CMO. The MAH breakthrough is a pilot running in 10 provinces and municipalities, and then in 2018, it is expected to be applied to the whole country. It is widely expected that the regulatory hurdles for contract manufacturing of drugs in China will shortly be removed.

The MAH reform is already boosting China’s contract manufacturing industry. According to statistics from Liberation Daily, through May 2017 there were a total of 381 applications of MAH and Shanghai alone saw 16 applicants of MAH for 24 drug projects with 18 CMO partners. This is likely good news for Boehringer Ingelheim, the first multinational biologics CMO in China, and the company that has been in the middle of the lobbying efforts for MAH reform. The company announced that even before it officially started operation in 2017, demand for services have been booked into 2019. Biotech companies, including NASDAQ-listed BeiGene and newly founded Zai-Lab, have signed agreements with Boehringer Ingelheim under which it will provide process optimization and manufacturing services in its Shanghai facility for their new monoclonal antibodies. 

Quite a few domestic pharma companies, including North China Pharma and Tasly Pharma, also stated that they have idle capacity available for contract manufacturing.³ Autek’s Mr. Li said that at its current stage China has over 50% idle capacity in bio-manufacturing compared to 30% in the U.S. EU. He expects the implementation of MAH is going to significantly decrease idle capacity, leading to a cost reduction and increased productivity. 

Drug makers’ concern about capacity
There is no doubt that MAH reform is good news for China’s CMO industry. But even still, a majority of domestic mid-scale and larger biopharma developers may not be planning to outsource manufacturing. BioPlan’s analyses of China’s biopharma facilities show that over 90% of mid-scale and larger biopharmas are planning to build or expand their own facilities. For example, BeiGene, the company using Boehringer’s CMO services in Beijing, is also building a bio-manufacturing facility in Guangzhou. Major concerns about using CMOs are no different from those in the West, including quality issues, loss of control, need for reliability, lack of commercial insurance to cover risk sharing, as well lack of experience in manufacturing partnership management and auditing. 

Things in China are clearly in transition, and drug developers, who are responsible for drug safety/quality, must learn to monitor their contract manufacturing partners. Small biotechs with only a few dozen staff, will have challenges doing so. Some in China believe that commercial insurance may be necessary in case of drug quality issues, and at least one commercial insurance company has expressed interest. Industry insiders have also expressed concerns over how to clearly define the partner roles and responsibility under MAH mandates. This evolution of contract manufacturing in China has parallels in the U.S. and EU, but China has the benefit of regulatory and contractual models that have worked in other regions.

Global outsourcing destinations: China on the radar
In our 14th Annual Report and Survey of Biopharmaceutical Manufacturing,⁴ we asked global respondents to consider their five-year time horizon leading up to 2022, and to evaluate their facility’s current plans for future international capacity expansion (not domestic). We identified more than 25 countries as potential outsourcing destinations. Among all respondents, the U.S. continues to rank highest as a potential outsourcing destination, with 30.9% indicating that there was a “Likelihood” or “Strong likelihood” that they would offshore production to facilities there over the next five years. Following the U.S. were Ireland and India, but for the first time, China beat out Germany and Singapore for fourth place (see Figure 1 in the slider above). We note that among respondents, patent and IP issues also come into play and these have likely increased as government policies and concerns over hacking continue to make news.

Looking into the future
China’s CMO business is young and still in the developmental stage, but indications suggest that when legal restrictions are removed, demand will slowly increase as the segment gains experience and knowledge. Industry concentration in biopharma will be relatively high compared to small molecule pharmaceutical contract manufacturing, where there are a greater number of established companies.

In biopharma, clearly there are already dominant players. Wuxi Biologics, which has gone through a very successful IPO on the Hong Kong stock exchange, just started operation of a new facility, which is the largest mammalian cell culture manufacturing facility fully using disposable bioreactors in the world. The facility uses 14x 2,000L and two 1,000L disposable bioreactors for late-phase clinical and commercial manufacturing. It is also the largest biologics manufacturing facility of any kind in China.

JHL Biotech’s Wuhan facility, which started operations in 2016, has a current capacity of ~10,000L and is also expanding. 3S Guojian, which successfully launched the first made-in-China mAb therapeutics in China, also uses its idle capacity for contract manufacturing and has developed a good reputation in the industry.

New CMOs have started operations since 2016, but it is likely that China’s biopharma CMO segment will continue to be dominated by several larger players as they build solid reputations in the industry. And in biopharma, where product quality and safety is everything, that will create a high hurdle for new entrants. We also expect the quality standards for manufacturing to rise as CMOs, whose businesses depend on multiple products/services contracts with multiple drug developers, put great effort into ensuring impeccable manufacturing operations. In this industry, one failure can ruin a company’s reputation, whether in China or elsewhere.

This rising manufacturing standard is also likely to bring good news to vendors of new bioprocessing technologies, products and service. We have already witnessed the spread of single use technology in China’s biopharma industry and CMOs played a significant role. Some optimistic observers might even project that CMOs may transform China’s biopharma industry as outsourcing becomes a mainstream solution, enabling pharma companies to concentrate on development of innovative drugs. 

References

1. Top 60 Biopharmaceutical Facilities in China, BioPlan Associates, Inc., Rockville, MD USA, March2017; www.bioplanassociates.com updated Feb 2018
2. Advances in Biopharmaceuticals in China, 2nd Edition, To be released Summer 2018, BioPlan Associates, Inc. www.bioplanassociates.com
3. Pharma Economics, MAH, 2016-6-15
4. 14th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production, April 2017, BioPlan Associates, Inc., www.bioplanassociates.com

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Vicky Qing Xia is project director at BioPlan Associates. She has experience in consulting, business development, as well as alliance management in China’s biopharmaceutical industry. Her expertise includes developing research and analysis on multiple global market segments, and has managed a team of industry experts, and
projects. Contact: +1 301-921-5979; www.bioplanassociates.com.

Cai Yang is project manager at BioPlan Associates. He has business development experience in biotech and pharma segments and 10 years in market research and has worked with equipment manufacturers in pharmaceutical and medical device industries in Switzerland, Austria and Germany. He has also project managed studies involving new biopharmaceutical technology applications in China including analysis and strategy development.