Drug Tester Bent On Speeding Up Clinical Studies

Back to Contents of Issue: April 2002

EPS finds No. 2 a lucrative place to be in drug-hungry Japan.

by Sumie Kawakami

NEWCOMERS TO JAPAN ARE often taken aback by the variety and amount of medication they receive from just one visit to a doctor. Show up with flu symptoms, and you're likely to receive a combination of antibiotics, stomach pills and antipyretics, for example. Japan is a drug-consuming giant -- second only to the US -- that produces and imports more than JPY6 trillion worth of drugs each year.

Nonetheless, the nation's big three pharmaceutical companies -- Takeda Chemical, Sankyo and Yamanouchi Pharmaceutical -- have total annual sales that equal about half of the sales of a single multinational like Pfizer.

International competition is squeezing the domestic giants these days. Calls at home for reform of Japan's medical system may also hinder growth. Japan's drug companies are searching for ways to grow and eyeing overseas markets, but before they can compete beyond these shores, they realize that they must focus more time and cash on research and development (R&D).

EPS, a drug-testing company, or contract research organization (CRO), has found its place in the middle of their dilemma. "Pharmaceutical firms normally spend JPY10 billion and take 10 years to develop one drug," says Tomohiko Ikeno, senior analyst at Ace Securities' investment research division. "CROs offer the solution to their problem; they increase the efficiency of clinical trials, which are very complex, detailed and time-consuming."

The market for CROs is new and growing. EPS chief executive officer Hao Yan explains: "No one really knew what a CRO was when I started the business 11 years ago, but pharmaceutical firms now consider the option of outsourcing clinical trials even in the early stage of development."

EPS now ranks No. 2 among about 30 CROs in Japan. In the fiscal year through September 2001, it reported annual sales of JPY4.3 billion, up 42 percent from the previous year. Among the top three CROs in Japan -- Cimic, EPS and Quintiles Transnational Japan, a subsidiary of a US-based company -- EPS was the first to go public when it listed last July.

The China-born Yan, who came to Japan in 1981, started his business as an IT company. As a graduate student majoring in bio-medical statistics at the University of Tokyo, Yan founded the company back in the early 1990s with two other students. Its main focus was on clinical data analysis and related software development. The business gradually grew to cover broader aspects of the industry until it transformed into a full service CRO. "We just followed the general trend and development of the industry over the past decade," says Yan. He says the transition was a natural one because of the huge amount of data analysis and management involved in drug testing.

The business climate surrounding CROs has changed drastically over the past decade or so. The International Conference on Harmonization of Technical Requirements (ICH) was established in April 1990 to achieve greater harmonization among the US, Europe and Japan on technical requirements for drugs. In order to meet global standards, the Japanese government in 1997 put stricter requirements on clinical trials. That meant more samples, data and analysis for Japanese drug makers to deal with. Deregulation that followed has led to the emergence of several independent CROs and has helped to change the way the big manufacturers test their drugs. Before they would work closely with a hospital, whose doctors would run the clinical trials. Now the CROs stand between the drug makers and the hospitals, easing the manufacturers' paperwork burden and saving them considerable time in dealing with the hospitals.

Even with the help of CROs, drug makers in Japan face intense international competition. Multinational firms have grown rapidly through mergers and acquisitions: The 2000 mergers of Pfizer and Warner Lambert as well as GlaxoWellcome and SmithKline Beecham created giants in the industry. Meanwhile, in Japan, drug makers made few moves to get bigger. In the year through March 2001, the top three Japanese pharmaceutical companies had total sales of JPY1.96 trillion, or just more than half of Pfizer's JPY3.9 trillion in sales during 2001.

Japanese firms have been increasing R&D expenditures to keep pace. "The more pharmaceutical firms spend on R&D, the bigger the CROs' piece of the pie becomes," Ikeno says.

"The need for outsourcing medical studies, both in the developmental stage and the post-marketing stage, is strong," Yan says.

The Japanese market for CROs is still small when compared with the JPY400 billion market in the US, where 40 percent of R&D is outsourced. But sales by Japanese CROs jumped 53 percent to JPY23 billion in fiscal 2000, according to the Japan CRO Association. The independent Yano Research Institute found that just 8.6 percent of Japan's total R&D expenditure was outsourced to CROs in 1988. But the institute says outsourcing is growing fast; by 2003 it predicts 25.3 percent of R&D will be outsourced, and by 2008 the figure will grow to 39.6 percent. "If the percentage increases to the US level, which I think it will within the next three to six years, we are looking at a JPY160 billion market," Ikeno says.

EPS is riding this tide. About 60 percent of the company's revenue comes from post-marketing surveys and research, called Phase IV in the industry. Phase IV studies are focused on such issues as side effects and problems related to taking different drugs at the same time, and they usually require longer-term projects and a large number of samples. They provide a stable source of income for CROs, while clinical trials for the pre-marketing stage may be canceled as soon as the drug in question is found to be ineffective or unsafe.

The company's clients include major Japanese firms and foreign firms operating in Japan. To avoid any signs of a conflict of interest, EPS uses a fingerprint authorization system to restrict access to data, says Takehiro Minami, the business development department group leader.

EPS sees its future extending far beyond the Japanese horizon. Yan stresses that 90 percent of revenue comes from Japan and this trend will not change, but he says he is eyeing China. "CROs are emerging in China in a very similar way to how it happened here. China will need CROs and clinical trials. That will be part of our revenue too," he says.

EPS has subsidiaries in Shanghai and Beijing. Its rival Cimic also has a base in China. Although EPS would not disclose details, some clinical trials are already in progress on the mainland. Yan is keen to form allies in China to develop software and do data management and analysis.

Yan says EPS could transfer some of its clinical trials from Japan to China if that becomes a legal option. Development of pharmaceutical products has been based on the assumption that a drug needs a clinical trial in the country where it will be sold. But the ICH has allowed Japanese drug makers to partially use clinical data from overseas when applying to register a new drug in Japan, and vice versa.

"If the situation changes in a way that some clinical data based on trials conducted in China can be used in Japan, our next step is to bring some trials to China where costs are lower," Yan says.

Analyst Ikeno says, "Drug makers use CROs in order to speed up the process of clinical studies so they can get their products registered as early as possible. In order to get work done, CROs need more people. Whether the company can balance the work with the cost is yet to be seen."

Yan is aware of the risk. "Pharmaceutical companies want to speed up the process, hoping to get things done even a day earlier," he says. "I believe every company thinks that way. Our problem is whether we can speed up the process as they hope. This is in fact our mission." @

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