Nothing says a country has arrived quite like a thriving biotechnology industry. Whether it be a lifesaving drug or therapy, national pride gets a boost from the scientific excellence and sophisticated entrepreneurship it takes to deliver innovative biotechnology to patients. Biotech is also a high-risk, costly endeavor riddled with obstacles and setbacks. Many governments have tried to jumpstart their biotech industry only to fail. But China, starting from a low bar, with a market dominated by generic chemical drugs and a few follow-on biologics, looks set to reliably deliver meaningful innovation to patients within the next 10 years.
The government has certainly worked hard to support it. Biotechnology has been called out as a key industry in the 12th and 13th Five-Year Plans. It is estimated that the government spent US$6 billion in R&D pharma investments between 2010 and 2015. Although less than what the U.S. invests, the R&D dollar stretches farther in China’s lower cost environment. Today, China excels in basic research – where it tops rankings for the number of published papers in peer reviewed journals and quantity of patents – but remains weak in translational medicine: the tough task of getting exciting lab discoveries to work in the complex system of the body.
This is because R&D is only the seed; it takes a flourishing ecosystem for a biotech industry to function. It requires science-savvy venture capitalists to finance the start-ups; biotech CEOs and employees that combine entrepreneurship with scientific vision; qualified hospital investigators that follow clinical trial protocols to deliver clean data; transparent, predictable regulations that adhere to global standards for approving safe, effective drugs and therapies; an IP culture that protects patents and trade secrets and robust financial markets that provide investors with a profitable exit. And this is only a partial list; it also takes big pharma, contract research organizations (CROs) patient groups, an army of doctorates and much more.
China has been fortunate to have a flood of experienced ‘returnees’ (often called ‘sea turtles’) to accelerate the development of its biotech ecosystem. These China-born scientists, educated in North America or Europe with valuable industry experience, are filling positions across the life science industry. Now that China is the world’s second largest pharma market, after the U.S., China has become an opportunity too good to pass up.
Many are lured by the generous offers made by the 100-plus biotech parks that dot the country. Incentives include free office space, generous financing for labs and manufacturing facilities, tax breaks and the promise of an amenable living environment for the high-tech workers they hope will settle in the park. Backed by municipal governments, hi-tech parks often prefer to invest in tangible assets. Innovent, a successful biotech based in Suzhou BioBay, is a classic example; it received financing for a US$120 million biologics manufacturing facility from the local government.
The more remote or less established a high-tech park is, the more generous the enticements might be but the harder it is to attract top talent. The older parks, where one can find big pharma and mature biotechs, are Shanghai Zhangjiang Hi-Tech Park, Suzhou BioBay and, in the area of genomic editing, Shenzhen.
In these parks, there is a higher concentration of top employees, but competition is fierce, and talent retention can be tough.
But until recently, the regulatory system had not caught up with the government’s push to spur innovation. New drug applications were delayed for two years or more before they would be greenlighted for testing in humans, an administrative step that usually takes 30-days in the U.S. That all changed in August 2015 when the State Council issued Circular 44, giving the China Food and Drug Administration (CFDA) the mandate to make dramatic reforms. The CFDA has made substantial progress; clearing the backlog, hiring more reviewers and speeding up review times. The changes have been hard on China’s 3,000 pharma companies that focus on making generics. The CFDA recently kicked out 1200 drug applications for fraudulent data, most of them for generic drugs. While this unusual government disclosure highlights the seriousness of problems with clinical trial management, the regulators are now freed up to focus on higher quality applications.
In important ways China’s pharma sector is adopting world standards – mandating good manufacturing practice (GMP) and good clinical practice (GCP), requiring bioequivalency for generics and biosimilars, and allowing contract manufacturing by instituting a market authorization holder (MAH) system. China’s objectives are “to ensure the country has a viable domestic manufacturing capacity to produce basic medicines and to create a new export industry that represents higher technology products,” explains Benjamin Shobert, managing director at Rubicon Strategy Group.
The policy changes have been warmly received by leaders in the biotech industry, although there remains concerns about the government’s ability to transparently communicate and predictably execute the changes. “The white lines of the landing strip have been set, now we just hope they don’t move again,” said David Deere, chief commercial officer of PaizaBio, a contract manufacturer looking to invest in China in response to the reforms.
For the MNC pharmaceutical companies, the regulatory reforms are forcing them to reconfigure their China strategy. For the past decade, MNCs sales in China have relied on imported, off-patent drugs that enjoyed a price premium. China was an afterthought when developing global clinical trials for first-in-class drugs. The government reforms now offer a viable regulatory path for new drugs, but they must be developed and manufactured in China. The imported drug path still exists but will be much slower, eating into valuable patent time while preferential pricing for imported drugs is being phased out. MNCs are looking at how they can partner locally, are beefing up their global R&D centers in China and figuring out how to manufacture and develop new drugs in China, for China.
There is widespread recognition that navigating the China pharma market requires a strong local partner. This has been a boon for China’s emerging crop of start-up biotechs that have been snapping up deals with big pharma and biotechs from the U.S., Europe, South Korea and Japan. According to data compiled by ChinaBio LLC, a Shanghai-based consultancy that acts as a bridge between Western firms and China, publicly announced cross-border pharma deals last year totaled US$3.5 billion with biologics accounting for over 70%. The hot therapeutic indications follow China’s significant unmet medical needs with oncology topping the list, followed by immunology, neurology and diabetes.
Many deals involve Chinese companies searching for Western technology, while Western firms seek to leverage local expertise to navigate the development pathway smoothly. Lee’s Pharma, Sciclone, CanSino and CANBridge are among the dozen or so companies that signed in-licensing deals last year. Newly founded Zai Labs is particularly on fire, having signed deals with GlaxoSmithKline, Tesaro, Hanmi, UCB and Sanofi since its inception in 2014. While most deals are for early stage assets, 3SBio, a commercially successful biologics maker, nabbed two marketed diabetes drugs from AstraZeneca in October. China’s traditional pharma companies, recognizing that the business case for generics will not last forever, have also been heading west, looking to buy novel drug candidates with market potential in China. Chinese biotechs have a reputation for paying low upfront payments, relying on milestones to sweeten the deal, but this remains hard to assess since few Chinese biotechs disclose financial terms.
Western firms looking for more control in China have set up longer-term partnerships and joint ventures. WuXi AppTec, a platform service company that has moved up the pharma value chain, has set up joint ventures with Juno, a leading U.S.-based immunotherapy company with CAR-T technology, and Medimmune, the biologics arm of AstraZeneca. Eli Lilly has been very active partnering with Chinese companies, setting up a ten-year, US$1 billion deal with Innovent as well a collaboration with WuXi AppTec.
Increasingly, Chinese biotechs are making money by licensing out global rights to their assets, demonstrating China’s strength in drug discovery. In a deal that was viewed as a significant industry milestone, Jiangsu Hengrui Medicine Co. out-licensed a preclinical immunotherapy drug, PD-1 antibody, to U.S.-based Incyte Corp. for US$795 million in 2015. Hengrui is also leading a wave of Chinese biotechs that are initiating clinical trials in the U.S. They are looking to get a piece of the much larger U.S. market but also to take advantage of the more predictable regulatory system in the U.S. that allows them to collect clinical trial more quickly than in China.
Last year there were two notable Nasdaq IPOs for China-based biotechs – Beigene and Chi-Med – and both companies were led by foreign-born CEOs who were able to get U.S. investors interested in the China biotech story. Beigene raised US$756 million in January 2016 with Chi-Med going public a few months later, raising $650 million. Both are clinical stage companies with rich oncology pipelines that leveraged out-licensing deals with big pharma to help finance the development of their assets. But China remains a tough place for clinical stage biotechs to raise capital on the stock market. The rules ban pre-revenue companies from listing, and the Third Board in Beijing offers little liquidity.
But not being able to exit on the public market has not stopped an explosion of venture capital fundraising for life sciences. In 2015, over US$10 billion was raised followed by $7 billion more in the first three-quarters of 2016; a 19-fold increase over 2014 for investments in drugs, devices and services, according to ChinaBio data. VCs now have to get busy investing this capital – not surprisingly, most biotech CEOs say that fundraising is not a problem. Beigene, Zai Labs, Innovent and CStone have all raised rounds in excess of US$100 million. Many VCs are investing outside of China and are willing to finance western biotechs if they can see a China connection to the technology.
The biotech industry in China has been growing by leaps and bounds, but before one can say it has truly arrived, a few barriers still have to be overcome. The question of reimbursement remains: who will pay for innovation? While the size of the China market promises substantial sales by volume, how the government will price and compensate biotechs for novel drugs is a crucial issue. Moreover, China’s biotech industry has to brace itself for surviving the high-profile clinical trial failures that are sure to happen, as they do in any biotech industry anywhere. And in the 13th Five-Year Plan, the government will start looking for a return on its investment. But, in the end, much will be forgiven and forgotten if and when China delivers its first blockbuster drug to the world.
A resident of China since 1998, Shannon Ellis has worked for a Chinese NGO, the Canadian and British embassies in Beijing, and Nike. For the past three years, she has been reporting on China’s biotech industry for BioWorld. She also writes white papers for IMA Asia, an executive roundtable for MNCs.