China’s Little Pharma Firms are Kicking Ass. Could They Catch the US?
China's pharma R&D pipeline is almost as stacked as the US, potentially shrinking US pharma domination.
Why this matters: We are heading for a clash. The US does not accept reliance on the PRC biotech ecosystem. So far, the focus has been on traditional PRC strengths of manufacturing and contract research. This will switch to broader drug development as China moves up the pharma value chain. If taken to extremes, it may prevent life saving drugs developed in China from reaching the US and the broader West.
Article: China’s Little Pharma Firms are Kicking Ass. Could They Catch the US?
From a critical tech standpoint, pharmaceuticals are unusual. They are simultaneously a slow-moving mature industry and sci-fi cutting edge tech.
Small molecule (i.e. chemical) drugs are being produced as they have for decades. Yet, the biotech revolution - underpinned by gene editing, increased biological understanding, lab automation/industrialisation, plus AI - have created a surge of new products that will revolutionise healthcare.
As little as five years ago, China had no best-in-class or first-in-class novel or innovative drugs sold globally. The country was (and remains) a leader in active pharmaceutical ingredient manufacturing, generic drug manufacturing, contract manufacturing and contract research.
Change is coming. In 2022 and 2023, five PRC-developed innovative drugs were approved by the US FDA. The proportion of Chinese-developed drug approvals in the US remains few - only 3 were approved in 2023 out of a total of 55 FDA novel drug approvals, but not long ago it was zero.
Chinese pharma needs the US: America is the market that matters
The US has about 4% of the global population and accounts for 44% of global pharma spending in 2023 ($711 billion out of ~1600 billion global spend - I had to eyeball the final figure as it was from a graph [pg 20]).
And the US share of global pharma spending is not decreasing. IQVIA’s prediction for 2028 is that the US pharma spending will be $1.01 trillion out of $2.3 trillion global spend (44%). The US is THE global market that matters and it will remain so.
China accounts for the second most global spending by a country, at around 7% ($163 billion out of ~1600 billion global spend), despite China having 4x the people and an older population. Thus, the pharma price per unit in China is low, driven down by centralised procurement and steep discounts on China’s national reimbursement list, making profits hard to come by.
So, Chinese firms' pathway to profit is paved in the US. Almost every Chinese firm with an innovative drug, even those that have first been approved in China, is considering getting approval and sales in the US.
China’s stacked clinical trial and R&D pipeline
The Chinese pharma pipeline is absolutely stacked with high potential candidates. China-headquartered firms have substantially closed the clinical trial gap with US-headquartered firms in the last decade. It is a truly remarkable achievement.
Source: Crudely adapted (using PlotDigitizer) from Page 16 of IQVIA “Global Trends in R&D 2024: Activity, productivity, and enablers.” A pretty version of the graph appeared in The Wire China.
China is particularly strong in next-generation biopharma, the medicines that will have the biggest breakthroughs over the next decade. As with other technologies, China tends to take the lead in technologies where legacy entrenchment is weak (mineral refining, solar cells, wind turbines, EVs, 5G etc).
According to China-based analytics firm Pharmacube (published in Nature), 62% of clinical trials for China’s first-in-class drugs (518 out of 836) are in next-gen pharma. This means Chinese firms will be at the global cutting edge in many areas of treatment.
The data from Pharmacube includes trials occurring all over the world (the drug developer must be Chinese headquartered). Companies do this to ensure access to multiple markets, a greater diversity of patients, or to speed up trials.
The most innovative drug companies in China are small and agile. Pharmacube published a list (paywalled) of the approximately 80 China-headquartered firms (including Hong Kong) which are simultaneously undergoing stage 3 clinical trials and also in the process of a new drug application. There were few big companies on the list.
Of course, it would be equally possible to find positive points in the US biopharma sector which is a behemoth. And the US is keenly aware of this competition. It will deploy significant resources in an attempt to maintain its lead, which it did not do for other sectors that China now dominates.
But the available evidence suggests Chinese firms will raise a huge challenge.
One extra data point is the ASPI Critical Tech Tracker which maps highly cited papers in key technology areas. ASPI tracks seven technology areas in the biological and medical sciences. China has overtaken the US in four.
High paper citations are a useful data point - they show where leading research occurs. But there are limits. Paper citations do not tell us the commercial or strategic value of individual papers (a handful will be orders of magnitude more important than the rest). And large countries with big research pools have advantages in paper citations because researchers have larger networks.
What are the geopolitical implications?
The US is trying to reduce reliance on Chinese biotech. The BIOSECURE Act is the first attempt at this. The bill prohibits entities that receive federal funds - such as hospitals and research entities - to “procure, obtain, or use any biotechnology equipment or services produced or provided by a biotechnology company of concern.”
The Act is vague enough that any Chinese company could become a company of concern. It is more important to understand what the US is trying to achieve.
The biggest concern is that US biotech innovation and the broader healthcare system is highly reliant on Chinese contract research, contract manufacturing and supply chains. So they want to make sure that innovation can continue regardless of China.
The five firms specifically named in the Act as companies of concern - BGI, MGI, Complete Genomics, WuXi AppTec, and WuXi Biologics - are big providers of contract research, genomic sequencing and DNA synthesis. They do not develop first-in-class drugs.
If China becomes a world leader in drug development and starts to beat out US firms on competitor drugs, then the US position might change. Some Chinese drug developers could be designated as companies of concern or have implicit/explicit restrictions placed on them to avoid becoming a company of concern. This has implications for the rest of the world because many Chinese drugs will be financially unsustainable without the US market.
Two dynamics will probably play out here. On the one hand, the US government will be reluctant to stop supply of life-saving drugs to sick Americans. But, they will also be concerned about China turning off the supply during periods of conflict, harming vulnerable people.
On top of this, US pharma firms will support US restriction on Chinese firms once they become peer competitors. US pharma has so far mostly lobbied against restrictions such as BIOSECURE because they want access to Chinese manufacturing and research. But this will change once they see a market threat.
Chinese drug developers, and their US partners, are already trying to “de-China” to avoid the wrath of BIOSECURE and other future legislation/designations.
They do this in the following ways:
They out-licence their drug to a big global firm to sell in the US. The Chinese firms collect royalty checks and leave marketing, distribution, approvals to the experienced player. This is not the end ambition of Chinese firms and so will only be a stopgap measure for some companies.
The companies get acquired by a big global firm. AstraZeneca acquired Gracell Biotechnologies, a China-based company that develops cell therapies, for $1.2 billion last December. This is a way for PRC firms to get a payday without broader political concerns.
Chinese companies set up a subsidiary, separate venture or joint venture in the US that operates mostly separately from their operation in China. This has been rare. But has become more common with clinical trial candidates in the last few years.
Chinese firms do not want to be a developer of drugs for the big US multinationals forever. They want to become large global companies in their own right. So the licensing-out or being acquired are not likely to be ongoing preferred options.