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Covance sees Asia as key market for CRO business

Covance CEO Deborah Keller

NEW YORK -- CROs, or Contract Research Organizations, are expanding as rising demand for new medicines spurs pharmaceutical companies to seek more cost-effective research and development. The organizations provide support to the pharmaceutical, biotechnology, and medical device industries in the form of research services outsourced on a contract basis. The Nikkei recently spoke with Deborah Keller, CEO of Covance, a leading U.S. CRO, about the industry's growing role and the importance of the Asian market.

Q: How important is your business in Japan?

A: Japan is the second largest pharmaceutical market in the world, next to the U.S. We have grown there significantly in the last several years. We are the only CRO that has the end-to-end capabilities within Japan. By that, I mean from late discovery all the way through the time when a patient gets reimbursed. We are seeing more of a demand in Japan for clinical trials. We have recently expanded into a new office in Tokyo. There are about 250 people working in our company in Japan.

Q: How about the Chinese market? Is there any difference in the CRO business between Japan and China?

A: China is also a growing market for us. I would say that China is more of an emerging market, and so you see it changing more rapidly. The Chinese pharmaceutical companies are very interested in getting their medicines approved in the West, whether it is in Europe or in the U.S., so that they can market their medicines in the West.

One difference is the regulatory environment. In Japan, the regulatory process is a little bit more routine and process-driven. In China, the regulatory environment has continued to evolve as the demand has evolved. For example, there was a lot of demand for clinical trials in China. So much of a demand that the Chinese Food and Drug Administration (CFDA) couldn't process all of the applications. So it was slowing global clinical trials. What started happening is, pharmaceutical companies would do the global clinical trials without China, and then do China separate. Because they couldn't let China impact the whole global registration for the medicine. As a result, CFDA started to add more resources.

Q: What kind of measures has CFDA taken to improve the approval process?

A: In August of 2015 they said if the medicine was new and novel, and would treat a disease within China, it would get a fast-track approval. There would be no waiting. If it was an application for a drug that was already on the market, what we call a "me-too," it would be a slow approval process. They were trying to delineate based on patient need and innovation. Because they have limited regulatory reviewers, they want to prioritize the medicines that will help Chinese people with diseases that are prevalent in China with new and innovating medicines.

Q: Why has the CRO industry been growing so rapidly in recent years?

A: Pharmaceutical companies will look at what they do and decide what they view as a core competency. If something is not a core competency, it is more cost-advantageous for them to outsource it to a CRO. Because, what we do is, we take their fixed costs and make them variable. Pharmaceutical companies move all of that labor cost to us. They can invest in all kinds of different technologies. But they may not consistently use them. Whereas with a CRO, we invest in all these technologies because we work with all of the major pharmaceutical and biotech companies. We utilize those much more fully, which is more cost-effective, so that you get a better return on investment.

Q: How has the role of CROs changed in the past 30 years?

A: Thirty years ago, it was purely overflow capacity. Pharmaceutical companies would come to you with something that was pretty easy, because they needed it done. So the CROs would be either busy or we wouldn't be busy. It didn't give us an even revenue stream.

In the late 1980s and into the '90s, there was a biotech surge in the U.S. and Western Europe. These companies were well funded, but they didn't have a lot of infrastructure like pharmaceutical companies. So they needed to use CROs. That was a good period of time. There was a lot of growth by the CROs. The revenue stream and earnings stream were a little more stable. That allowed us to invest in facilities and in training and development.

Then, when you get into the 2000s, what we started to see was that pharmaceutical companies decided that they had to improve their productivity within research and development. So they looked at how they can work more collaboratively with CROs to make some of their fixed cost variable. We started to see them focus on preferred providers instead of working with a variety of different CROs.

Q: What is the strength and uniqueness of your business?

A: Covance worked on 100% of the molecules for oncology that the FDA approved in the U.S. in 2015. In other words, we helped develop 100% of the new cancer medicines. The CRO industry continues to evolve in that biotech companies and emerging companies are very well funded, and they rely on the CRO industry much more so than pharmaceutical companies. And there's a recognition that we work on so many different molecules and that we are the market leader and create insightful actions that help them make better decisions, so that they can get their medicines approved.

Another uniqueness of our business is, we have the capability of something called "asset transfer." It means we took over facilities from Eli Lilly and Sanofi, and we ran those facilities as Covance facilities, and in turn we were given guaranteed revenue commitments. Those facilities were underutilized by the pharmaceutical companies. We worked on Eli Lilly studies with Eli Lilly people. This arrangement gave us not only the facilities but the scientific expertise and experience.

Q: What is the biggest challenge for you to be competitive as a CRO in Japan?

A: One of them is language. It is very important that we have somebody who is English speaking. The other thing is just making sure that we can find the right talent. We can find qualified people who are either doctors or scientists. But what the CRO industry does is, we are also a service. We have to work with a variety of different clients who all have different requirements and needs. It is different than pharmaceutical companies. And the quality standards or the expectations of the Japanese clients are higher than that of American clients. That is something that we have been able to accommodate.

Interviewed by Nikkei staff writer Momoe Ban

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