Pharmacy of the world: China’s quest to be the No. 1 drugmaker How policy, people and cash are driving growth -- and sparking a backlash
December 23, 2021
In the late 1990s, Samantha Du was a researcher for the U.S. pharmaceuticals giant Pfizer when she received a tough assignment: getting drug approvals in China, her home country. She soon saw the difference between the stateside market geared toward branded products and its Chinese counterpart centered on generic and traditional medicines.
"[China would] need local companies, just like the global pharmaceutical and biotech companies in Europe and the U.S."
Samantha Du, founder of Zai Lab
“It took seven years longer for new drugs to get approval in China than the U.S. or Europe," she said, recalling the dawning sense of responsibility she felt to do something about it. She realized China would “need local companies, just like the global pharmaceutical and biotech companies in Europe and the U.S."
China has changed much from the country Du experienced two decades ago, and she has played a role in its transformation. Her story is symbolic of how policy, people and plenty of money have driven China's great pharma expansion.
In 2014, Du founded Zai Lab. The company has grown rapidly thanks to its advanced therapeutics for cancer and immunological diseases, listing on both the Nasdaq and Hong Kong stock exchanges and drawing attention from global investors.
Du’s endeavor dovetailed with the Xi Jinping administration’s push to advance China’s pharmaceuticals industry. Now a country long known for producing generics and raw materials for precursors, called active pharmaceutical ingredients (APIs), has also begun to discover new drugs. In particular, it has seen strong growth in biological pharmaceuticals, or biologics, which are considered more difficult to produce than ordinary drugs.
China’s pharmaceuticals market is already the second biggest in the world after the U.S., thanks in large part to domestic demand from hospitals. Now, it wants to take the final step and surpass the U.S. However, its methods -- from suspicions of intellectual property theft to questions over quality -- have prompted significant criticism.
In part one of this series, Nikkei Asia explored how China became the top global supplier of COVID-19 vaccines. Here, we look at how the jab gambit is part of a much broader effort by Beijing to dominate the international drugs market.
China’s mRNA vaccines
During the COVID-19 pandemic, China has so far supplied “conventional” vaccines, in which the inactivated virus causes an immune response. Conversely, the vaccines made by Western giants Pfizer and Moderna are a new type of inoculation, called messenger RNA, that trains the immune system to fight the virus.
The narrative of this East-West technological divide may be about to change. Hangwen Li, CEO of Stemirna Therapeutics -- founded in 2016 to focus on RNA products -- predicted two years ago that within five years the market for mRNA technology would “explode.” That statement proved prophetic. And contrary to popular perception, China is very much in the mRNA game too, underscoring its rise as a pharmaceutical powerhouse.
China bets on all kinds of vaccines for COVID-19
- Phase 1
- Phase 1/2
- Phase 2
- Phase 2/3
- Phase 3
- Phase 4
Source: Vaccine Centre at the London School of Hygiene & Tropical Medicine
An mRNA COVID-19 jab being developed by Stemirna, for example, has shown effectiveness against some variants including delta, according to the company.
Or consider Fosun Pharma, one of the biggest drugmakers in China. In March 2020 it partnered with BioNTech, the German company that co-developed an mRNA jab with Pfizer, to advance the development and commercialization of the vaccine in China.
Everest Medicines, a Chinese biopharmaceutical company, this past September also obtained the rights to supply mRNA vaccines developed by Providence Therapeutics, a Canadian biotech company, in Greater China and some Southeast Asian countries. Both Everest and Fosun have announced that they are also developing new vaccines for the omicron variant.
All told, there were 20 COVID-19 vaccines from Chinese entities under clinical trial as of November 2021, according to the Vaccine Centre at the London School of Hygiene & Tropical Medicine. They range from those that use old-school technology to the newest RNA innovations. Chinese companies Sinopharm and CanSino, which have marketed non-mRNA jabs globally, have now set their sights on developing mRNA vaccines as well.
Some companies in China are working on their own mRNA vaccines without foreign partners.
Suzhou Abogen, a two-year old Chinese startup, has teamed up with Walvax, one of China's largest vaccine companies, and the Institute of Military Medicine under the Academy of Military Sciences. They have developed the first mRNA vaccine approved for clinical trials in China, known as ARCoV. Trials of ARCoV have also been approved or conducted in Mexico, Indonesia and Nepal. According to a paper published in Cell, an American science journal, ARCoV requires less stringent cold storage than the Moderna and Pfizer shots.
Source: Reuters
Reaching for the top
Number of first-in-class (FIC) drugs developed by Chinese companies
Source: Boston Consulting Group
It has become increasingly clear that all existing coronavirus jabs, including mRNA shots, become less effective over time. That opens big opportunities for new rivals, including those from China, to join the vaccine race.
That Chinese players are in a position to compete is a testament to how far they have come.
The nation’s decades of making generics and APIs have served it well. "China is the main producer of APIs globally, possesses immense bio-manufacturing capacity, and tends to excel in scaling up operations generally," said Dr. Abigail Coplin, Assistant Professor of Sociology and Science, Technology, and Society at Vassar College.
That capacity helped make China the single biggest exporter of COVID-19 shots, heralding a major shift in the structure of the global pharmaceutical supply.
Biotech companies drive China’s drug development
- Multinational pharmaceutical companies in China
- China pharma companies
- China biotechs
Source: GBI, McKinsey
“To be honest, it would be very difficult to imagine that Chinese drugs could be sold to overseas markets five years ago”
Michelle Yu, investment director at Value Partners,
“To be honest, it would be very difficult to imagine that Chinese drugs could be sold to overseas markets five years ago,” said Michelle Yu, investment director at Value Partners, a Hong Kong-based asset management company. The reason, she said, was that most drugs developed in China were just “me too” products for the domestic market.
Many emerging pharmaceutical companies are already showing global ambitions. BeiGene, whose Brukinsa cancer treatment won approval from the U.S. Food and Drug Administration in 2019 -- a first for a Chinese company -- has a couple of offices and sites outside of China. Its manufacturing sites in China are designed to follow the standards issued not only by China but also the U.S. and European regulators, according to the company.
WuXi Biologics, a China-based pharmaceutical research group, has manufacturing bases in Ireland, Germany and the U.S.
Shanghai Junshi Biosciences licensed out its Toripalimab cancer antibody treatment, including two option programs, to U.S.-based Coherus, receiving an aggregate of $1.11 billion in an upfront payment, exercise fees and milestone payments. Junshi also won approvals of its COVID-19 antibody treatment from over 15 countries and regions, including the U.S. “We sacrificed other important projects like PD-1 treatments for a couple of months to advance the COVID-19 neutralizing antibody therapy to the clinical stage early last year,” Ning Li, chief executive officer at Junshi, told Nikkei Asia.
When it comes to mRNA COVID vaccines, some Chinese companies claim that the raw materials they are using are also mostly domestic.
“Chinese pharmaceutical companies can be on par with the mega pharmas in the future,” said Koji Kawashima, assistant general manager of the health care and medical business at Marubeni, a Japanese trading house that has a joint venture with Fosun Pharma in Shanghai called Fobeni.
A Communist Party priority
"China's strategy in the biopharmaceutical sector is based on a long-term perspective, just like its policy clearly states"
Toshiyuki Murai, a product specialist at Sumitomo Mitsui DS Asset Management
Beyond economic considerations, drugs -- especially biologic drugs -- have become a priority of the Chinese government because of demographic changes. The country is aging rapidly, partly due to its previous longstanding “one child” policy, and the Communist Party is seeking innovative ways to manage the growing medical burden.
Many of its pharmaceutical ventures are focusing on chronic diseases and cancers, and biologics can target such illnesses.
"China's strategy in the biopharmaceutical sector is based on a long-term perspective, just like its policy clearly states," said Toshiyuki Murai, a product specialist at Sumitomo Mitsui DS Asset Management. Biopharmaceuticals are one of the key industries named in the government’s “Made in China 2025” strategy.
Since 2015, the government has made numerous changes to pharmaceutical-related policies, many designed to encourage innovation at domestic companies.
First, Chinese authorities have sought to harmonize their standards with those of their global counterparts. China in 2017 joined the International Council for Harmonization, which sets international rules for the manufacture of pharmaceuticals, like specifying the number of patients in clinical trials.
China has also overhauled its drug trial and approval process. Six years ago, it took about a year to get a green light to conduct a clinical trial of Junshi’s antibody treatment; its antibody for COVID-19, developed in 2020, took only two weeks. The regulating body has accelerated the process by taking on more staff and enabled priority reviews for rare diseases.
At the same time, generic drugs are becoming less profitable due to the government's centralized purchasing policy. Drug prices were halved on average when the new system was piloted in 2018, in response to growing national health insurance costs.
This has forced many generic manufacturers to redirect their resources to the development of advanced products such as biologics. “The Chinese government was quite wise, since it successfully depresses the margin of generic drugs while raising the bar for R&D” so that Chinese pharmaceuticals can compete globally, said Yu from Value Partners.
The expanding National Reimbursement Drug List -- the dominant public reimbursement mechanism in China -- reflects growing support for new drugs. The authorities began updating the list annually in 2017. In 2021, 74 drugs made it, the second highest number after 119 in 2020. More importantly, 62% of the additions were new products launched since 2020, underscoring China’s willingness to adopt innovative therapies at a faster pace. This has helped improve affordability and access to new drugs, shorten the time gap between launch and reimbursement, and “played an important role in encouraging innovations,” according to Bruce Liu, a partner at leading strategy consultancy Simon Kucher & Partners.
China’s government has promoted biopharmaceuticals as a key industry since 2015
2015
- “Made in China 2025” specifies biopharmaceuticals as a key sector for development
- State Council issues Opinions on Reforming Review and Approval Process for Drugs and Medical Devices, aiming to improve the approval system
2016
- Priority Review allows innovative drugs for rare diseases and urgently needed treatments to be assessed faster
- “Healthy China 2030” states long-term vision for health care, encouraging innovation
2017
- Regular updates start for the National Reimbursement Drug List (NRDL); additions include innovative drugs
- China joins International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use (ICH), which sets international standards for medicines
2018
- 60-day review rule gives regulator two months to assess clinical trial applications; if 60 days pass without a rejection or request for more information, application is considered approved
- In its Volume Based Program, the government opens bids for central procurement of drugs, mainly generics
2019
- Introduction of Marketing Authorization Holder (MAH) system at national level lets R&D institutions, researchers and enterprises apply for drug market licenses. These were previously only available to enterprises with production licenses.
2020
- New Drug Regulation Registration clarifies evaluation channels
- Latest version of Patent Law features a patent linkage system
The People’s Liberation Army has also played an important role in the push for drug innovation.
The army has been hiring scientists in recent years to participate in national biologics projects. Chen Wei, a well-known military scientist who has worked on immunizations against Ebola and SARS, was involved in the development of the CanSino vaccine against the coronavirus.
The science team at the Beijing Institute of Biotechnology, part of the Academy of Military Medical Sciences, helped in the conceptual stage of the vaccines, said Pierre Armand Morgon, senior vice president of international business operation at CanSino.
Source: CanSino
CanSino’s team has completed a Phase 2 study on the first inhalable vaccine for COVID-19. Local reports suggested it is as easy to take as “drinking a bubble tea.” CanSino is planning to submit the vaccine for approval globally.
Adam Ni, an editor of China Neican, a newsletter on Chinese current affairs, said this kind of civil-military fusion was characteristic of Beijing’s industrial policy. He added that “the PLA has been tasked by the Chinese state to develop these vaccines as we know in collaboration with a number of other partners."
Return of the “sea turtles”
A second factor behind China's rapid growth in the pharmaceutical industry is the return of researchers from jobs overseas. Within China the returnees are often referred to as “sea turtles,” evoking the idea of how the marine reptiles cross oceans but ultimately return to their birthplaces. Biologics companies including CanSino and Abogen were set up by sea turtles.
Three years ago, Reiji Morishima, a vice president at Fobeni, was surprised by the working culture in China when he first moved to Shanghai from Tokyo. He said it felt “pretty Western” when he found that employees were already highly specialized in Chinese pharmaceutical companies.
“Sea turtles” lead innovative biopharma in China
CEOs and founders with overseas experience
Samantha Du
Ning Li
Xuefeng Yu
Frank Jiang
Michael Yu
Xiaodong Wang
Jasmine Cui
Jingwu Zang
“Research scientists are the most precious assets”
Ning Li, Junshi’s chief executive officer
Junshi’s chief executive officer, Ning Li, worked at the U.S. FDA and French drugmaker Sanofi. He says this enabled his company to “have a faster way to move forward,” because he brought experience from both the commercial and regulatory sides of the industry. According to Li, most researchers at Junshi hail from multinational companies as well. “Research scientists are the most precious assets,” he said.
Morgon of CanSino said the “sea turtles” have helped the Chinese industry reach international standards of quality, compliance and good manufacturing. He met CanSino’s CEO and chairman, Xuefeng Yu, while working at Sanofi Pasteur 20 years ago.
Various incentives are in place to lure the sea turtles home. Jin Li, CEO of Sichuan-based Hitgen, joined the government’s Thousand Talents program, according to China Daily. The program offers funding and generous benefits for researchers and their families. Li had been working at AstraZeneca prior to Hitgen.
In some cases, Chinese pharmaceutical companies also offer shares to hire talent with overseas experience.
COVID-19 and the U.S.-China tensions have further benefited local pharmaceutical companies, according to John Wong, chairman for Greater China at Boston Consulting Group. “With the U.S. government so hostile to Chinese in universities in the U.S.,” he said, talented young researchers “may prefer to be in China.”
Money flows in
The third pillar supporting China's pharmaceutical industry is simple: cash. Investment from private equity and venture capital firms in China’s pharmaceutical sector hit a record $2 billion in 2021, according to market research company Pitchbook.
Funding from venture capital, private equity firms hit record in 2021
Deal value (In billions of dollars)
Deal count
Source: Pitchbook
China’s life sciences sector has also seen a flurry of acquisitions. According to Deloitte's research, there were 93 R&D-related M&A deals in the life science industry in 2020, worth a total of $14.1 billion. That is up from 76 deals valued at $13.5 billion in 2019.
Some big-name global investors have targeted Chinese ventures. Innovent Biologics, a drug discovery company founded in 2011, raised money mainly from international companies, including Singapore's Temasek and U.S.-based Capital Group Private Markets, before its IPO in 2018. Innovent Executive Director Ronald Hao Xi Ede suggested funding from well-known international funds led the company to a smooth IPO as well. Innovent is collaborating with U.S. pharmaceutical company Eli Lilly -- a partnership that started out with a funding round from Lilly Asia Ventures, according to Ede.
Source: Innovent Biologics
Abogen raised over $700 million for the development of its mRNA vaccine in August 2021. This fundraising round included Lilly Asia Ventures and Temasek Holdings and was reportedly a record for a pre-IPO Chinese biopharmaceutical company. It raised another $300 million from investors, including SoftBank Group’s Vision Fund, in November 2021.
China’s growing ranks of listed biopharma companies
- Hong Kong
- Shanghai
- Nasdaq
Source: Factset
Biologics startups have seen an influx of funding since Hong Kong allowed such listings in 2018, in an attempt to emulate the Nasdaq. Innovent’s Ede said management’s initial plan was to go public on the Nasdaq, but the rule change in Hong Kong persuaded the company to list there instead.
The Science and Technology Innovation Board on the Shanghai Stock Exchange, or STAR board, has also become a popular choice for biopharmaceutical startups. Biopharmaceuticals account for more than one-fifth of STAR board companies as of December 2021. Nicolas Zhu, head of the life sciences and health care sector group at law firm CMS China, said that biotech startups have enjoyed flexible listing rules on the STAR board.
Many are loss-makers that spend heavily on R&D, though part of the appeal of Chinese players is that their research costs tend to be much lower than those of Western rivals.
Chinese companies spend less on R&D relative to sales
- China
- U.S.
Source: FactSet
Yu from Value Partners highlighted the attractiveness of China’s relatively cheap R&D. By some estimates, such costs are one-tenth those in the U.S. Labor costs in China are much lower, and according to Yu, a typical engineer only costs one-fifth the cost in the U.S. It is also much easier and cheaper to recruit patients for clinical trials, thanks in part to China’s huge population.
Compared with companies in the U.S., Chinese players generally spend less on R&D as a proportion of net sales. However, their R&D costs are rising as they conduct more global trials in an effort to win approval from overseas regulators.
The backlash
The rapid growth of China’s pharmaceutical sector has triggered accusations of technology theft from the U.S.
Source: AP
“If China wants to make innovation happen with global knowledge, it cannot stay like this.”
Ryo Hanamura, partner at Arthur D. Little Japan
Several Chinese scientists have been charged with stealing materials and research from American institutions and companies, including Cornell University and GlaxoSmithKline. The National Institutes of Health accused Chinese scientists of not disclosing their foreign ties, and 93% of the concerned cases in a 2020 NIH investigation involved Chinese funding. Some scientists have been fired from research institutes, such as the MD Anderson Cancer Center in Houston, for research theft.
During the COVID-19 pandemic, China-backed hackers were reportedly involved in spying on or stealing vaccine-related information in the U.S., Spain and India. In May 2020, the FBI and the U.S. Cybersecurity and Infrastructure Security Agency jointly warned organizations researching the coronavirus that they faced a threat of “likely targeting and network compromise” by China.
China’s intellectual property laws also help its companies draw on international rivals’ ideas. Robert Atkinson, the founder and president of the Information Technology and Innovation Foundation, a U.S. think tank, said the Chinese patent system is “designed to allow Chinese companies to access patent information” from multinationals. Many businesses are reluctant to retaliate for fear of compromising their presence in the massive Chinese market.
Chinese pharma companies face other criticisms as well. Some say their data does not meet international standards, that the industry is rife with bribery, and that quality problems persist.
Despite China’s clear advances in recent years, the country still has “a long way” to go to become a true global player, according to Tomoyuki Shibuguchi, chief researcher at Japan’s Office of Pharmaceutical Industry Research. His research shows only 15% of all products that originated from China have gone through global clinical trials in Europe, the U.S. and Japan. He pointed out that less innovative drugs -- which may be similar to existing innovative drugs with small modifications and cheaper prices -- still make up a large share of Chinese drug development.
Innovent’s Ede, too, said “the whole industry is still [in its] infancy.”
Jens Ewert, Deloitte’s China life sciences and health care leader, pointed out that innovative drugs developed by local companies tend “to be homogenous with only a small number of originated targets.” While the proportion of approved local innovative drugs is increasing, many new drugs for rare diseases are still imported into China.
At the same time, China ruthlessly protects its pharmaceutical industry, and foreign competitors are at the mercy of government regulators. While this has helped fuel the domestic sector’s brisk growth, it may hamper China’s efforts to achieve the top global status it covets.
Ryo Hanamura, partner at Arthur D. Little Japan, argued succinctly: “If China wants to make innovation happen with global knowledge, it cannot stay like this.”