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In Sluggish World Economy, Array Companies Encouraged by China's Fast Growing Clinical Market

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"Explosive" and "enormous" are the words Simon Sheng uses to describe the market for microarray technology in China. As general manager for Affymetrix's office in the country, Sheng said he has hired eight sales and marketing personnel this year and hopes to add more soon.

"The market is growing and the potential is enormous," Sheng told BioArray News in an interview during a recent workshop in Hangzhou, a city just west of Shanghai. "Everybody agrees that the China market is exploding, not only on the research side but on the clinical side."

On the research side, Sheng said, there is "no shortage" of government funding for scientists, unlike the situation in the US and in some EU countries. "Although in the past few quarters we have seen that the economy is slowing down a little, it is stable, so the overall funding environment for researchers in China is good," he said.

In terms of the clinical market, Sheng said that it is "absolutely growing fast," for Affy, which he attributes in part to the company's shift in focus to the clinical market. Indeed, Affy now sees its CytoScan HD array for constitutional and cancer cytogenetic clinical research as a flagship product that will soon generate about a tenth of its revenues. Sheng noted that the market in China is also growing rapidly for molecular diagnostic firms such as Roche and Qiagen.

At the same time, Sheng said that Chinese customers are looking to adopt new technologies.

"I think all the users have realized that molecular diagnostics is the future," said Sheng. "The very mature technologies like immunoassays, clinical chemistries, and chemiluminescence have already been built up to scale, but molecular diagnostics is new and attractive to end users, and they want to build up their capabilities and catch up very quickly."

And the availability of large sample cohorts has also led to demand for chips from pharmaceutical clients.

"Every big pharma has [an] R&D center here and ... is scaling up activity here in China," said Sheng. "You can see the contract research organizations are booming as well."

These trends have not been lost on Affy's competitors. Jun Hou, a member of Agilent Technologies' management team in China, said that the firm's roster of clinical clients is also expanding.

"To date, most business has been with academic customers, but in recent years demand has increased dramatically from the clinical community, including customers of independent labs," which are similar to CLIA-compliant labs in US, Hou told BioArray News during a visit to Agilent's China headquarters in Beijing earlier this month.

According to Hou, Agilent also has seen demand pick up for its menu of chromosomal microarrays. "Cytogenetic arrays are being used mostly for constitutional disorders, and also for prenatal clinical research," Hou said. "This market has developed mostly in the past two years, as array CGH for cytogenetics is relatively new for Chinese customers and they take reference from developed countries."

The adoption of chromosomal arrays in China is being driven in part by the characteristics of the market. As Sheng noted, the country has maintained a one-child-per-family policy since 1979, which has in turn created an interest in genetic testing. And in terms of technologies, Sheng said that geneticists in the country have "no doubt that gene chips will be the way things are going to go."

"That's the trend, and you can feel that from all the end users," said Sheng. "The interest level is very high."

Officially, chromosomal arrays in China are being used solely as research tools. In order for the chips to be used openly in a clinical context, Sheng said that companies will have to have their platforms cleared by the China Food and Drug Administration, or SFDA. As Affy had its GeneChipScanner 3000Dx, the instrument on which its CytoScan assay is processed, cleared by the SFDA earlier this year, Sheng portrayed his firm as being a "couple steps ahead" of its competitors in reaching that goal.

"Now we have this absolutely big advantage, and we are going to use that," said Sheng.

Still, in order for an assay to be cleared for clinical use in China, it must have already been cleared in the company's country of origin. Affy currently aims to submit CytoScan to the US Food and Drug Administration for clearance next year. Should it gain clearance for the assay in the US, it could then submit the test to the SFDA, Sheng said.

Agilent's Hou declined to comment on the firm's regulatory strategy, but said that Agilent's arrays are being used in a research setting in cytogenetics. Still, like Sheng, he said that the market continues to grow.

"Agilent has seen fast growth of cytogenetic revenue from both instruments and CGH arrays and does expect continued growth in coming years in the cytogenetic market for scanners and arrays," said Hou.

NGS and Arrays

While Agilent is benefitting from the increased demand for chromosomal microarrays in China, the company's most popular genomics research products are actually its SureSelect and HaloPlex lines of target enrichment kits, driven by "rapid growth" in next-generation sequencing and exome sequencing, according to Hou.

"[In] recent years, there has been a move toward smaller sized capture with the release of desktop sequencers," said Hou, adding that the primary customers who use these tools are academic and service providers, though he noted that the Chinese clinical community is increasingly embracing smaller desktop sequencers, and designing disease-focused custom capture panels.

While some have portrayed sequencing as a threat to array technologies, Hou said that is not the case in China, at least in terms of Agilent's genomics business. He claimed that sequencing adoption is complementing array use, rather that cannibalizing it.

"In terms of apple-to-apple comparisons, in terms of revenue, we have seen revenue growth for microarrays for both CGH and microRNA against previous years," said Hou. "Logically, if there was no NGS, it might have grown faster," he said. "But I think they are complementary."

'Unique Complications'

While major array vendors seem to view the Chinese market positively, both Affy's Sheng and Agilent's Hou cautioned that there are a number of characteristics that are worth noting when doing business in China.

"One thing I want to emphasize is localization," said Sheng. "Whether we are talking about localized chip design, localized business model, localized pricing strategy, localized channel strategies, basically that is the experience I have had in my past careers — if you want success in China, you are going to do things locally," he said. "You can't just copy your US or European business model and products over here in China – it's not going to work."

He said that it takes time for foreign companies to enter the market, no matter how enticing the prospects.

"I think it takes effort, to be frank," he said. "A company needs time to understand the China market, it is not easy for a multinational company to just step into this market. They need to learn and also they need to try to understand why localization is so important."

One of the reasons that localization is important, according to Sheng, is that China has some "unique complications in term of the import and export of goods as well as the import and export of money." As Agilent's Hou described, all array-related products must be obtained through the country's Foreign Trade Organization.

"Only the FTO is authorized to do foreign trade transactions," Hou said. "The customer signs a contract with the FTO, the FTO signs contracts with the manufacturer, and this is how Agilent products are imported into China," he said.

"We do have some local practices that are sometimes hard to explain, that is why the company made sure it has local Chinese in charge of the China market," said Sheng.

Revenue Mix

One particular issue that faces the China offices of array companies is the mix between instrument and reagent sales. According to Sheng, while the mix of hardware-to-reagent revenue in the US is usually about three to seven, and most of the revenue comes from reagents and consumables, the situation in China is vice versa.

"Across the industry, you can visit anyone, that is what you can see," said Sheng. He said that the dominance of instrument sales over reagents is the result of government regulations on how researchers can use their funding. While local sales forces understand this, Sheng said it often confounds companies back at home.

"Most companies when they enter the China market don't understand this," Sheng said of the instrument-reagent mix. "They challenge the China team, 'Why do you have such high hardware revenues but not much consumable revenues?' They don't understand what is happening here."

Agilent's Hou agreed. "I think it is much easier for Chinese customers to buy new platforms and adopt new technologies, but it is harder for them to use the platforms in the long run," Hou said. "It can be seen from the revenue of the reagents versus the instruments." Researchers get money to buy instruments from government funds, but then cannot obtain the funding to carry out additional studies.

"I think it is very common in China that there are so many instruments sitting there not being utilized," said Hou. "You often have to pay the reagent costs on your own. The government does not allocate money for reagents."

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