Despite China being one of the world's low-cost active pharmaceutical ingredient (API) manufacturing bases and emerging as a hotspot for contract research organizations, venture capitalists are yet to be won over by the closely related contract manufacturing organization (CMO) sector in China.

CMOs step in when pharmaceutical companies opt to outsource their manufacturing process in order to improve efficiency and productivity. Usually, this step can prove vital in slashing the costs of small to medium-sized companies, especially those that focus on biological or biotechnological R & D. However, investing in CMOs is associated with several risks, according to pharmaceutical industry experts at the ChinaBio® Investor Forum 2008, [held in Shanghai last week].

"We are still looking at CMO companies but we have yet to invest in one. There are some advantages, but we have come to realize that it is capital intensive and that biological CMOs are involved in very complicated processes," David Xu, managing director of Mingly China Growth Fund, said.

"CMO is becoming an exciting area that we are looking into. However, there is a tedious regulatory process involved and it still remains a highly regulated area," Huang Lu, director of Morningside Technologies, said.

Aside from cost and policy restraints, the sector offers slim pickings for venture capitalists looking to invest. "CMOs compared with CROs have a longer history, and there are hundreds of API companies. Some are so successful that they are able to IPO and therefore don't need an investor," Yi Shi, managing director of Lilly Asian Ventures, said.

"However, most of the others are small-scale or are family businesses and the limited scale makes them difficult to rely on," Yi said. "With biological APIs, there is a lot of know-how involved."

"China has ways to go before its CMOs become global. It is an incredibly expensive, incredibly long-term process, without taking biological CMOs into consideration. We have seen very few, if any, U.S. cGMP-compliant CMOs in China," Greg B. Scott, president and founder of ChinaBio® Accelerator, said.

"The Chinese pre-clinical API and biopharmaceutical CMO market is still in its infancy, though some companies are poised to provide such CMO services," said Tang Ming, COO of Sundia MediTech Co. Ltd., one of China's leading pharmaceutical and biotech R & D outsourcing companies. He also said a former Novartis (NYSE: NVS) employee will head Sundia's CMO business development operations.

While China's Drug Administration Law states that all Chinese pharmaceutical manufacturers must observe the country's Good Manufacturing Practice standards, current Good Manufacturing Practice certification by the U.S. Food and Drug Administration is likely out of reach for these companies.

Well-known players in the CMO sector include Sandoz and Goodwin Biotechnology Inc.