Much has been said and written on the impact of China as a pharmaceutical production hub and how the West has become increasingly dependent on this country for many of its requirements for active pharmaceutical ingredients (APIs), related intermediates, and even some formulated drug products.

On the contrary, the role played by China in the development of new drugs and more generally in pharmaceutical R&D appears to have somewhat fallen below the radar screen of Western observers, rarely making the headlines. Consequently, while almost everyone in the West knows that China is second in terms of pharmaceutical sales only to the U.S., most continue to associate this country with generic pharmaceuticals, traditional Chinese medicine, and as a cheap source of drug substances. Few are identifying China as a hot bed of pharmaceutical start-ups, source of innovation, and as a significant developer of new molecular entities (NMEs).

Such a perception is misleading, and derived largely from the limited awareness of the developments having occurred over the last few years in the country and how rapidly the Chinese pharmaceutical ecosystem has adapted and evolved. If not corrected, it may prevent Western companies, including contract development and manufacturing organizations (CDMOs), from taking advantage and grabbing the opportunities that the transformation of the Chinese pharmaceutical industry is potentially creating.

One of the catalysts behind the transformation of the Chinese pharmaceutical industry is found in the various initiatives associated with the implementation of the 14th Five Year Plan, adopted in March 2021, also the year celebrating the 50th anniversary of the foundation of the Chinese Communist Party (CCP). This plan covers the period 2021 to 2025 and its objective is to make China a strong, modern, and culturally advanced society. It represents the natural continuation of various other initiatives including, “Made in China 2025,” which aims to reduce the country’s dependence on foreign technology and promote Chinese manufacturers on the global scene. The goal is to reposition the country’s image as that of a low-end manufacturer into a high-end producer targeting specifically selected industrial sectors, including biopharmaceuticals. 

While building on the successes of the previous fifty years that have allowed China to transform into a “moderately prosperous society” where the overriding priority has been to achieve rapid GDP growth, the 14th Plan recognizes that the country has entered a new phase of its development and that both the external environment and domestic context have changed. As a result, the emphasis of China’s development model has shifted from its previous focus on high GDP growth irrespective of quality standards, towards industrial strategies focused on innovation, coordination, and environmental protection.

This means that all industrial sectors in China will have to adapt how they operate to ensure that the “quality” objectives set in the plan are effectively met—the pharmaceutical industry being no exception.

China’s transformation

Until recently the Chinese pharmaceutical industry has been characterized by an extremely fragmented supply structure with more than five thousand manufacturers focusing almost exclusively on generics. Investments devoted to the development of NMEs, if any, were marginal, mirroring the puny size and R&D resources of most Chinese companies. The complexity and length of the approval process imposed by regulatory authorities of new products have acted as a further deterrent of innovation.

This structure and focus has served the country well in its first development phases, succeeding in establishing a domestic industry able to supply the basic needs of the population while securing a source of foreign currencies through exports. However, over the years its limitations and inadequacy for meeting the evolving priorities and ambitions of the country have become increasingly evident, its very sustainability being threatened.

Recognizing this situation, the Chinese authorities have developed a plan for reshaping the domestic pharmaceutical industry. The ambition is to bring it on par with its Western counterparts by favoring the emergence of a few national champion companies able to significantly contribute to the country’s renewed focus on quality and ensuring that China becomes an innovation leader in pharmaceuticals on the world scene. This is underpinned by the target of having the industry reach by 2025 R&D outlays corresponding to 10% of sales.

To ensure the effective and swift transformation of the Chinese pharmaceutical industry the authorities have taken several measures combining carrot and stick types of policies where the creation incentives and a favorable climate is complemented by more or less explicit coercive measures.

One of the priorities of the authorities has been to favor the development of domestic pharmaceutical demand. To this end they have enacted policies facilitating broader access for the general population to modern healthcare in general and more particularly pharmaceuticals. Within this frame a key step has been to ensure expanded health care coverage—today more than 90% of the Chinese population is insured, making medical and pharmaceutical treatments affordable. Parallel to this, health care budgets have consistently outpaced GDP growth (see Figure 1). This trend is expected to continue unabated over the foreseeable future driven by the graying of the population and the increasing priority given by the Chinese government to “quality” of life considerations, particularly as GDP growth is gradually slowing reflecting the country’s transition from a model of “high development speed to high quality.”


In a context of expected slowdown of GDP growth combined with a continuing increase of health care budgets, the issue of financial sustainability is of paramount importance. This has prompted the Chinese authorities to become more selective in the reimbursement of pharmaceuticals. On one side is the faster inclusion in the National Reimbursement Drug list of innovative pharmaceuticals and on the other side the enactment of cost containment measures, including purchasing systems referred to as volume-based purchasing (VBP) for products whose patent has elapsed. VBP are based on tenders where “the winner takes-it-all,” allowing to obtain substantial price concessions freeing budgets and resources to be allocated, for example, to the reimbursement of new innovative therapies.

Parallel to this the Chinese authorities have adapted the regulatory framework to encourage innovation. Examples of such steps include the streamlining of approval procedures for new products, the creation of a fast-track system allowing the priority reviews of innovative products, and the enactment of more expeditious authorization processes for clinical trials. Another step has been the phase out of regulations linking the marketing license to the production license. These regulations were de-facto obliging the developer/marketer to have their own manufacturing assets for products. If maintained this requirement would have represented a major stumbling block preventing the emergence in the country of pharma start-ups and other sets of pharmaceutical developers—the breed responsible in the West of most innovation as reflected by the increasing share of NMEs originating from these types of players approved by the U.S. FDA over the last twenty years.

Combined with other factors, including access to capital markets, China’s entrepreneurial drive is provided by the influx of talent associated with Chinese individuals having studied and worked in the West returning to their home country attracted by its growth potential and dynamism. The development in various university campuses of centers of excellence in biomedical research increasingly eager to engage in partnerships with investors and industrial companies have also facilitated the emergence of a vibrant biopharmaceutical sector in China. This can be illustrated by the number of IPOs observed over the last years on the Hong Kong and STAR (Science & Technology) Shanghai Stock exchange (see Figure 2). Examples of emerging biopharmaceutical companies floated include Allist, BeiGene, CanSino Bio, C Stone Pharma, Huchmed (formerly Chi Med), Innovent Biologics, and Shanghai Junshi Biosciences. The combined capitalization of these firms reached in July 2021 a nadir at almost $380 billion.


At the same time traditional pharmaceutical companies have been forced to adapt to an evolving environment characterized by rapidly growing wages, competition for human talent combined with tighter operating requirements undermining traditional models based on access to cheap labor and often lax operating standards. This has started to unleash the consolidation and shake out of the supply structure—eventually prompting the emergence of a smaller set of players better equipped to compete.

The transformation of the Chinese pharmaceutical industry driven by these developments is becoming more and more apparent.

As an example, while not long ago the contribution of China to pharmaceutical innovation was marginal, the share of products in clinical development originating from Chinese companies has dramatically increased (see Figure 3). China is now estimated to account for about 15% of the almost 6,000 products currently at various stages of the clinical development pipeline—up from a puny 2% in 2007. China’s increasing share has come largely at the expense of Western Europe who has seen its share shrink from more than 30% to now little over 20%.¹


It is worth noting that, despite their relatively short history, emerging biopharmaceutical companies are estimated to account for 20% of products in clinical development originating from China.

Parallel to the increase in the number of development products originating from Chinese companies, the types of products developed in China are evolving as well. While before most of the R&D investments of Chinese pharmaceutical companies were devoted to me-too products, the focus is increasingly shifting towards the development of products with novel mechanisms of action addressing unmet therapeutic needs such as in cancer. An example of this type of products is fruquintinib, a potent selective oral inhibitor of vascular endothelial growth factor receptors (VGFR) 1, 2, 3 developed by HutchMed (formerly Chi-Med) for the treatment of refractory colorectal metastatic cancers. This product has been approved in China while its filing in the U.S. and the EU is being planned over the coming months—Takeda recently acquired the exclusive marketing rights outside China. Other examples include Dorzagliatin, also known as HMS5552, developed by Hua Medicine.

The glucokinase activator was approved in October 2022 in China for the treatment of diabetes 2 and marketed in the country under the Huatangning brand name.

Not surprisingly, over the years the share of new drugs originating from domestic companies has steadily increased. It now accounts for more of 50% of NMEs approved in China—up from the low single digit figures noted just a few years ago (see Figure 4).² A substantial percent of these NMEs is represented by selective anti-cancer products including both small molecules and biopharmaceuticals. Particularly pre-eminent are “ib” types of targeted kinase inhibitors. Examples of such molecules originating from Chinese companies and recently approved in the country include Allist’s furmonertinib, also known as alflutinib AST 2818; Beigene’s zanubrutinib; Betta Pharma’s ensartinib; Hansoh’s almonertib; Innocare’s orelabrutinib; as well as mAb checkpoint inhibitors like Beigene’s tislelizumab or Innovent’s sintilimab.


The renewed emphasis of the Chinese pharmaceutical scene on innovative R&D coupled with the flow of NMEs developed in the country is starting to change the image and role played by China in pharmaceuticals, previously associated almost exclusively with generics.

Driven by the quest to monetize their R&D efforts, an increasing number of Chinese pharmaceutical companies are seeking approval for their products in other countries or have entered in licensing agreements with Western pharma players eager to tap new innovation sources. Examples of these types of agreements include HutchMed having licensed to Takeda fruquintinib; Novartis’ deal with BeiGene for tislelizumab seeking to complement its own PD1 checkpoint inhibitor franchise; or Innovent licensing sintilimab (Tyvyt) to E. Lilly, whose intent is probably to establish a bridgehead in cancer immunotherapy in anticipation of patent expiries for BMS’ Optivio and Merck’s Keytruda.

To date, Brukinsa (zanubrutinib), the BTK (Bruton Kinase Inhibitor) developed by BeiGene, is the sole NME originating in China approved by the FDA for the treatment of some rare types of leukemia and lymphoma. Other products like HutchMed’s sulfatinib and Innovent’s sintilimab have been less successful. In both cases the FDA requested the extension of clinical studies to cover a more ethnically diverse set of patients. Some industry observers also suggest that the FDA action may have also been motivated by concerns about the reliability of the clinical studies assembled in China.³

Irrespective of these developments, over the coming years it can be expected that the impact of China as a source of NMEs on the international scene will only grow—transforming the country from a low-cost manufacturing hub into a source of innovative technologies and products.

Such a shift undoubtedly creates new challenges for the West, threatening its traditional dominance in the “high-tech” sector. However, it also creates new opportunities for Western pharma contract development and manufacturing organizations (CDMOs) supporting the increasingly large pool of emerging Chinese biopharmaceutical companies in the development and supply of products stemming from their R&D.

References
1. IQVIA Institute – Global use of medicines 2023 Report
2. Analysis of new drug registration and review in China 2021. Acta Pharma Sin. B April 12 (4), 2022 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9279709/#appsec1
3. FDA raises concerns about China developed drugs . Wall Street Journal February 9, 2022 https://www.wsj.com/articles/fda-raises-concerns-about-china-developed-drugs-11644408180

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Dr. Michele Jermini is the Managing Director of Exeris; michele.jermini@exeris.com
Dr. Enrico Polastro is a Vice-President of Arthur D.Little; polastro.enrico@adlittle.com