【By Guo Wang, Observer News】"The Chinese pharmaceutical industry is at a critical juncture to go global." The British magazine The Economist published an article on November 23, pointing out that Chinese pharmaceutical companies have rapidly risen in new drug R&D, the number of clinical trials and international cooperation. With fast iteration, low cost, rich clinical resources, and a transition from "follow-up innovation" to "first-in-class innovation", they have established a leading advantage. Although the United States hopes to reduce its reliance on China's supply chain, in fact, American manufacturers and patients may end up relying more on China.

The report states that after the United States, China is the world's second-largest innovator in new drugs. Its companies conducted about one-third of global clinical trials last year, compared to just 5% a decade ago. China is also developing rapidly in key research areas such as cancer. Investors have noticed that the stock prices of Chinese biotech companies have risen by 110% this year, three times more than their U.S. counterparts.

For most of the past centuries, new drug discovery has been dominated by Western companies, usually referred to as "big pharma". The situation has changed now. These companies are facing the steepest "patent cliff" in history: drugs expected to generate over $300 billion in revenue in the next six years will lose patent protection before 2030. To fill the gap, large U.S. and European pharmaceutical companies are searching globally for potential drug molecules, and an increasing number of discoveries come from China.

However, this timing is quite awkward.

After all, the U.S. wants to reduce its reliance on China's supply chain, and the U.S. government is worried about China's "chokehold" on active pharmaceutical ingredients. Moreover, there have been rumors of the White House tightening its grip on China's pharmaceutical industry, although no action has been taken yet.

The New York Times cited a newly released survey on October 10, once again revealing the depth of the U.S. dependence on China in the early stages of the pharmaceutical process: nearly 700 U.S. generic drugs rely entirely on Chinese supply for at least one chemical ingredient.

But on the other hand, in the development of next-generation drugs, U.S. pharmaceutical companies and U.S. patients may become increasingly dependent on China's innovations, rather than reducing their reliance.

More evidence is emerging.

The article wrote that in May this year, Pfizer, the largest U.S. pharmaceutical company, reached an agreement with the Chinese biotech company Sanbio Biopharma. If the latter's experimental anti-cancer drug is approved, Pfizer will pay 1.25 billion dollars to obtain the rights to produce and sell the drug outside China.

The following month, GlaxoSmithKline from the UK reached a 500 million dollar partnership with Hengrui to gain rights to a lung disease treatment drug, as well as the option to purchase another 11 drugs, which could be worth up to 12 billion dollars in total.

Chinese Pharmaceutical Production Line IC Photo

Such transactions are no longer exceptions. In the first half of this year, nearly one-third of global licensing agreements signed by big pharma were with Chinese companies, four times the rate in 2021.

Until recently, the Chinese pharmaceutical industry was known for producing generic drugs, supplying drug components, and conducting clinical trials for Western companies. Over the past decade, the industry has undergone self-renewal: the approval process has been simplified, drugs for major diseases have received priority review, and regulatory standards have gradually aligned with international standards.

Between 2015 and 2018, the number of staff at the China National Medical Products Administration increased fourfold, and it took only two years to clear 20,000 backlogged new drug applications. The approval time for human clinical trials was reduced from 501 days to 87 days, and the output of new drugs surged: in 2015, China approved only 11 treatment options, mostly imported from the West; by 2024, this number had increased to 93, with 42% being locally developed.

These reforms have also been accompanied by efforts to attract overseas talents returning to China. Many returned students brought experience in starting biotech companies, dealing with investors and regulatory agencies. Simplified financing processes and convenient regulations for listing on the Hong Kong Stock Exchange further stimulated their entrepreneurial enthusiasm.

Early signs of success have already emerged.

In November 2019, BeiGene, a Chinese biotech company, became the first Chinese domestic company to receive FDA approval for a cancer drug. More approvals followed. The industry's true moment of glory came in September last year: a small Chinese biotech company, Kangfang Bio, developed a lung cancer drug that surpassed Merck's blockbuster Keytruda in clinical trials.

What has driven the rapid rise of Chinese pharmaceutical companies?

The author believes the primary reason is their speed of innovation. By developing "fast followers" (drugs that improve upon the safety or administration methods of existing drugs), they move towards "first-in-class" drugs. Research shows that "fast followers" and "first-in-class" drugs now account for more than 40% of the industry's R&D pipeline. Wang Xingli, vice president of Fosun Pharma, said that developing "fast follower" drugs gave the industry the "courage to challenge first-in-class" drugs.

The second reason is the speed, scale, and cost advantages of the R&D process. Chinese companies take about half the time of the global average to move from drug discovery to the start of human trials. Human trials themselves - typically the slowest part of new drug development - progress faster. A large patient population makes it easier to recruit patients, and a vast network of trial centers accelerates the development process.

Cancer remains a core area of focus for Chinese companies, but they are also expanding into new areas such as weight loss drugs. The active ingredient in Novo Nordisk's popular weight loss drugs Wegovy and Ozempic, semaglutide, will have its patent expire in China next year, sparking a surge in generic drug development.

But Chinese companies are not limited to copying: According to Bloomberg Industry Group, there are currently 160 new weight loss drugs under development worldwide, and about one-third come from China.

The article also mentioned that despite being the second-largest pharmaceutical market after the United States, China faces high profitability challenges.

Data from consulting firm McKinsey show that in 2023, sales of prescription drugs in China were approximately $125 billion, just one-sixth of that in the United States. Most of the sales still come from generic drugs, with new drugs accounting for only one-fifth (expected to rise to one-third by 2028). Even so, the Chinese market remains highly price-sensitive: national medical insurance covers most drug purchases, forcing companies to participate in bidding by consolidating hospital demand. To enter the medical insurance directory, pharmaceutical companies often need to reduce prices by over 50% to reach a broader patient base, otherwise they can only target a much smaller self-pay market.

This also explains why the U.S. and other overseas markets have become so important.

The most common way for Chinese companies to enter overseas markets is to sign licensing agreements with Western companies. Now, some Chinese companies hope to gain a larger share: a growing trend is the "NewCo" model - biotech companies establish legally independent companies in the U.S. (usually supported by foreign investors), and transfer potential assets to these companies. For Western investors, the valuation of Chinese pharmaceutical companies is highly attractive: the market value of listed Chinese biotech companies is less than 15% of their U.S. counterparts, and upfront payments for licenses are usually two-thirds lower than global comparable deals, with total transaction sizes about half the global average.

The article believes that more competition usually means more affordable therapies will emerge. For patients who have long been unable to access cutting-edge drugs, the rise of China helps bridge this gap, which is particularly important for patients in developing countries.

For Chinese pharmaceutical companies, the real test is not only to develop effective new therapies, but also to break through the entry barriers and related regulatory obstacles in overseas markets.

Wang Xingli said that most Western pharmaceutical giants took a century to reach their current scale, compared to which the Chinese pharmaceutical industry is still "in a very early stage".

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