Safeguarding China's Innovative Drug Achievements: Urgent Action Needed

Chinese Innovative Drugs Are Navigating Unprecedented Complexity.

China’s innovative drug industry has experienced robust growth in the past, revealing the potential to rival the United States. A substantial number of “Me-Better” and even “Best-in-Class” innovative drugs have emerged in China, with a cohort of representative Chinese biotechnology companies rising to prominence, such as BeiGene, Akeso, Baili Tianheng, and Ascentage Pharma.

However, the innovative drug industry is capital-intensive. Companies that have already established their reputations both domestically and internationally are still in the early stages of achieving commercial profitability. Even BeiGene, a frontrunner in the field, reported total revenue of $2.5 billion for the full year 2023 but remained unprofitable, with R&D expenses amounting to $1.778 billion.

Compared with other multinational corporations (MNCs), Merck & Co. invested over $30 billion in R&D last year, while Johnson & Johnson, Roche, Novartis, AstraZeneca, and Pfizer each exceeded $10 billion. According to an analysis by a Nature subsidiary journal, the return on investment for overseas innovative drugs has hit a 20-year low, with virtually no book-value returns. Nevertheless, MNCs have never ceased their R&D investments, as the pharmaceutical industry requires sustained, heavy capital commitment to innovation to yield returns.

As the difficulty of developing new drugs increases, recouping R&D investments and achieving favorable product pricing have become major challenges for innovative pharmaceutical companies in China. The vastness of overseas markets, particularly the strong purchasing power in the United States, has prompted many Chinese biotech firms to pursue global expansion. Legend Biotech’s Carvykti achieved $500 million in sales last year, with first-quarter data this year indicating continued rapid growth; BeiGene’s zanubrutinib has truly become a “blockbuster” drug with annual sales exceeding $1 billion. However, given the extensive pipeline and large product base of Chinese biotech companies, the number of successfully commercialized drugs remains disproportionately low.

In the past two years, China’s innovative drug sector has witnessed a new wave of business development (BD) prosperity, renewing our hope. In the first half of 2024, there were 17 overseas licensing-out deals, with the total disclosed transaction value reaching $14.3 billion—a year-on-year increase of 47% in deal count and over 40% in transaction value. In terms of therapeutic areas, Chinese biotech companies have achieved breakthroughs across multiple fronts, including oncology, metabolism, and autoimmune diseases; however, underlying concerns are also emerging within the industry.

Deal Done: Are Pipeline Products “Undervalued”? How to Value Biotechs After Licensing Out Assets Following Capital Infusion and Recognition from Big Pharma? What If Milestone Payments and Sales Royalties Are Unfavorable, and What If Bargaining Power Is Lost Post-Development?

As Chinese biotech companies become increasingly important participants, and even leaders, in global innovative drug development, overseas collaborations are essential. However, this also blurs corporate identity—are they Chinese biotechs or American biotechs? While we take pride in the early-stage R&D capabilities of China’s innovative drug pipelines, how should we safeguard the achievements of China’s innovative medicines?

Of course, the emergence of these issues is partly because business development (BD) remains a novel concept for most Chinese biotech companies. On the other hand, financial pressures compelling biotechs to seek rapid capital recovery have also constrained their ability to secure more favorable deal terms, or more broadly, to negotiate better conditions for their long-term development.

Investment in innovative drugs remains fraught with contradictions. Despite the proliferation of policies encouraging innovation, substantial long-term capital remains hesitant. State-owned capital faces the dual mandate of pursuing investment returns and achieving governmental strategic objectives, while being unable to tolerate losses. Meanwhile, mid-to-late stage market funds have adopted a conservative stance toward biomedical innovation, leading to an awkward situation where projects are left unclaimed after the initial wave of early-stage and small-scale investments.

If Chinese innovative drugs remain in a state of chronic underfunding, will the gap between China and the United States continue to widen, or will it continue to narrow as we hope? Many people likely already have their own answer.

Recently, we spoke with Dr. Wang Xiaoyan of the GSR United Runpu Medical Fund.Dr. Wang Xiaoyan has nearly 15 years of investment experience in the biopharmaceutical sector. Her previous investment portfolio includes multiple listed companies such as Innovent Biologics, Laekna Therapeutics, MicuRx Pharmaceuticals, and Adagene Inc. The Runpu Medical Fund has invested in emerging biotech companies including Bowang Pharma, Ruijian Medicine, and Newlink Bio.

Having witnessed the growth cycle of China’s biotech sector, Dr. Wang Xiaoyan believes that biotech companies should not focus solely on mergers and acquisitions (M&A) and business development (BD). Instead, they should employ a broader range of investment strategies and design more financial instruments to safeguard investments in innovative drugs and maintain market vitality. In particular, banks, insurance capital, local governments, and patient capital can play new roles in fostering collaboration between Chinese biotech firms and multinational corporations (MNCs).

VCBeat: At what stage has China’s current biopharmaceutical development arrived?

Wang Xiaoyan:Before the current wave of China’s biopharmaceutical industry took off, innovative drugs were sold domestically at higher prices than abroad. However, thanks to over a decade of dedicated efforts by professionals in the pharmaceutical sector, many drugs in China are now priced at a fraction—sometimes as low as one-tenth—of their international counterparts. I believe Innovent Biologics’ statement is not mere rhetoric: to develop high-quality innovative medicines that are affordable for the general public. Nevertheless, we must consider how to ensure the sustainable development of these pharmaceutical companies that have made significant contributions to the national economy and people’s livelihoods.

We have now entered a stage where we must consider how to foster the growth of more towering trees in China’s biopharmaceutical industry. Over the past decade, domestic investment in new drug R&D has approached one trillion yuan, yet very few seedlings have emerged, and even fewer have the potential to grow into mature trees. This outcome is partly due to the low success rate of new drug development, and partly because the financial strength of investors has failed to keep pace.

VCBeat: What is the current state of China’s biopharmaceutical R&D capabilities?

Wang Xiaoyan:From an early-stage perspective, China is now seeing original innovations emerge from zero to one. Over the past two years, we have observed and invested in such ventures. However, given their early-stage nature, it is essential to consider where their next funding round will come from. Yet, when seeking that subsequent round, you may find that former co-investors who previously participated at this stage are no longer investing.

VCBeat: In the current market environment, business development (BD) is indeed a viable pathway for securing funding. How do you view the collaborations between Chinese biotech companies and these multinational corporations (MNCs)?

Wang Xiaoyan:“Going global” is indeed crucial. Given the domestic payment environment, biotech companies must collaborate with globalized firms to achieve sustainable growth, as these partners hold the most extensive and critical market resources. However, the current challenge lies in the fact that even our most promising biotech firms often lack the leverage to negotiate substantial profit-sharing arrangements. Due to limited capital and resources, they are unable to match multinational corporations (MNCs) in terms of proportional investment.

VCBeat: So, should we focus more on discussing the subsequent cost-sharing arrangements?

Wang Xiaoyan:Consider the two representative cases of Baili Tianheng and Legend Biotech. Last year, Baili Tianheng partnered with Bristol Myers Squibb (BMS) on the rights to its novel EGFR/HER3 antibody-drug conjugate (ADC), BL-B01D1. The deal featured an upfront payment of $800 million, with potential total transaction value reaching up to $8.4 billion, setting a new record. Beyond the unprecedented financial terms, the most significant aspect is that Baili Tianheng did not relinquish its rights in the U.S. market—the most critical market for innovative drug sales—but instead opted to co-develop the drug with BMS, sharing both costs and profits.

This transaction structure is similar to that of the deal between Legend Biotech and Johnson & Johnson, implying that Baili Tianheng will secure a higher proportion of profit sharing in the U.S. market in the future. Legend Biotech holds a 50% profit-sharing ratio, backed by the financial strength and support of its parent company, GenScript Biotech. Similarly, Baili Tianheng’s confidence in its own product has enabled it to demonstrate significant bargaining power.

It is entirely reasonable for biotech companies to focus on biotech activities and pharmaceutical companies to focus on pharma activities; however, it would be a pity if biotech firms license out their promising pipelines only to receive single-digit percentage royalties.

VCBeat: Is there any way to support biotech companies in gaining greater influence during this period?

Wang Xiaoyan:I recommend developing new investment product designs. For instance, could banks and insurance capital introduce “licensed debt” instruments? This would provide capable biotech firms with greater leverage to negotiate and secure more favorable deals with multinational corporations (MNCs). Moreover, I believe such “large-scale” and “long-term” capital can also generate solid returns by leveraging the keen investment acumen of MNCs.

Multinational corporations (MNCs) often possess strong judgment capabilities and excel at evaluating the value of pipeline assets. Leveraging their extensive presence in the pharmaceutical sales market, deep understanding of market demand and competitive landscapes, as well as rich experience in research and development (R&D) and regulatory registration, MNCs have a clear grasp of key milestones and potential risks. This enables them to comprehensively assess the quality and potential of pipeline assets.

Of course, this approach is quite tricky, and it is not easy to seize the window of opportunity. Perhaps when a biotech company signs a New Drug Application (NDA) agreement with a multinational corporation (MNC), it presents an entry point for addressing this “licensing debt.” MNCs are typically very cautious when signing NDAs; at this stage, banks can begin their due diligence, extend credit lines to the biotech firm, and implement appropriate mechanisms to control loan disbursement.

VCBeat: Can it be viewed as a win-win situation?

Wang Xiaoyan:Currently, banks have low non-performing loan ratios, with some arguing that this reflects insufficient support for innovative enterprises. I believe banks are also eager to identify high-quality biotech companies; however, they need to rely on more specialized professionals to assess the quality and competitiveness of biotech technologies and products in order to effectively manage risk. This is entirely understandable, as significant financial losses would deepen distrust in the biopharmaceutical sector, ultimately harming the entire industry.

MNCs serve as effective risk mitigators. By curating a list of “MNC-Preferred” biotech firms, banks can provide financial support to these high-potential companies, thereby better leveraging the robust global commercialization capabilities of major pharmaceutical enterprises to maximize the value generated by the early-stage R&D prowess of Chinese biotechs.

Perhaps this would constitute a more robust biotech ecosystem, one in which a mechanism of mutual understanding and trust is established between banks or other types of capital providers and biotech companies, thereby enabling our biotech firms to better engage in global competition. Of course, building such an ecosystem will take time and require extensive promotion; we hope that all stakeholders in the industry can join forces to drive its development.

Early-stage funds are often well-positioned to observe the cutting-edge developments in China’s biopharmaceutical sector, particularly the enhancement of talent quality and the iterative improvement of R&D capabilities. However, due to limited capital reserves, early-stage funds cannot consistently support these high-potential biotech companies throughout their growth journey. While facilitating subsequent financing rounds is a common post-investment practice for such funds, difficulties in raising capital after Series B—or even after Series A—can pose significant obstacles to biotech growth. Ultimately, broad-based market participation is essential. As seen in recent years, enthusiastic capital inflows from both primary and secondary markets, with successive rounds of funding relay, have helped companies reach financing milestones on the STAR Market and under Chapter 18A of the Hong Kong Listing Rules, thereby enabling breakthroughs for certain enterprises.

Take Akeso, for example: its ivonescimab monotherapy has demonstrated superior efficacy compared to Keytruda. Meanwhile, Ascentage Pharma has recently closed the largest business development (BD) deal in the history of China’s small-molecule oncology drug sector and is preparing for an initial public offering in the United States. Without early-stage capital investment, these companies would not be able to deliver the returns they now offer investors—especially in today’s environment, where clinical trials are increasingly costly and new drug discovery requires even greater financial commitment.

Earlier this year, Bi Jingquan also specifically pointed out at the 15th Healthy China Forum that, “Without new funding to support laboratory research, animal testing, and Phase I, II, and III clinical trials in humans, innovation in biopharmaceuticals may come to an abrupt halt.”Biotech investment has been present in China for some time, yet the models have become entrenched. Even if traditional equity financing leading to an IPO is not always viable for securing capital, the industry should explore more diverse investment avenues rather than maintaining a cautious distance from biopharmaceuticals.

BIO CEO John Clawly recently stated unequivocally, “China will continue to be a vital part of a vibrant biotechnology ecosystem... They cannot become the dominant player or the leader. This must remain under U.S. leadership.”

However, whether China’s biopharmaceutical sector can truly assume a leadership role does not depend solely on the BIO organization. China’s pharmaceutical industry already boasts a solid demand base, advanced technological support, and a high-caliber talent pool. Whether the industry will continue to ride the wind and waves, scaling new heights, or become mired in quagmires and plunge into the abyss, hinges on the choices and actions we take today.

In recent years, Chinese pharmaceutical companies have continuously enhanced their independent innovation capabilities, with an increasing number of domestic innovative drug enterprises expanding into overseas markets to seek broader development opportunities. However, in this process, many Chinese pharmaceutical companies face challenges such as insufficient funding and lack of experience, which often limit their ability to maximize benefits in international transactions.

To support Chinese pharmaceutical companies in expanding into overseas markets, we call on the industry to strengthen collaboration and provide more diversified investment and financing channels along with supportive tools. Our article series will continue to share innovative insights from industry experts and relevant case studies, helping to further drive the rise of Chinese pharmaceutical companies on the global stage.