Capital Markets Open Up and M&A Activity Rises: How Will China's Innovative Drugs Embark on a Golden Decade?
In late October 2019, at the inaugural Global Frontier Technologies in Biopharmaceuticals and Policy & Regulations Conference hosted by Tongxieyi, Dr. Wang Yinxiang recalled to reporters the circumstances of his return to China to start a business in 2003: “At that time, mainstream domestic pharmaceutical companies were predominantly focused on generic drugs, with very few innovative endeavors. There were essentially no venture capital funds specifically dedicated to innovative drugs, most experiments required collaboration with research institutes, and suitable talent was extremely difficult to find.”
Many regard 2015 as a turning point in the development of China’s innovative drug sector. Since the launch of the “4+7” centralized procurement pilot at the end of 2018, new drug research and development (R&D) has seemingly become an irreversible trend for the sustainable growth of domestic pharmaceutical companies, with technology, capital, and talent flowing into the field in abundance. In August 2019, Chipscreen Biosciences, the first original-drug company to apply for listing on the STAR Market, officially entered the public capital market. In November, Hengrui Medicine announced that it had acquired two blockbuster original drugs in clinical trial stages for RMB 1.16 billion. At least from a capital perspective, China’s new drug R&D industry is forming an innovation ecosystem akin to those in mature European and American markets.
However, has an innovative ecosystem for new drug development truly taken shape in China? What key issues warrant attention as the biopharmaceutical industry embarks on a decade of rapid growth? After gathering insights from industry professionals, investment firms, and regulatory authorities, VCBeat has identified the following answers.
1. The gap between domestic and international new drug development is narrowing;
2. Industry M&A has emerged, but activity levels remain low;
3. Clinical research is constraining the innovation process of original drugs;
4. “Overtaking on a bend” is a false premise; Me-too new drugs will remain the mainstream trend in the future.
Legend Capital is one of the earliest institutions in China to invest in innovative drugs. Hong Tan, Managing Director, has observed that over the past decade, both investors and pharmaceutical companies have undergone significant shifts in mindset. Between 2011 and 2014, few were willing to invest in innovative drug projects. However, after 2015, a dramatic reversal occurred: R&D-focused pharmaceutical companies with certain technological barriers became highly sought-after, and their valuations surged accordingly. The mindset shift among traditional large pharmaceutical companies took place after the dust settled on the “4+7” volume-based procurement policy. Their previously steady strategy of using generic drugs to fund innovative drug development rapidly pivoted toward direct investment in new drug R&D.
In fact, over the past two years, regulatory authorities have also adapted to industry changes by implementing numerous adjustments aligned with international standards, striving to narrow the gap between China and other countries in areas ranging from the definition of innovative drugs to priority review.
One manifestation of the narrowing gap is the increase in the number of patents. Dr. Wang Yinxiang pointed out that, from the perspective of the number of innovative drug patents, China's R&D level has entered the second tier globally. However, it should also be noted that domestic pharmaceutical companies still lack global competitiveness in sales channels.
Currently, many domestic biotechnology companies are gradually narrowing the competitive gap with multinational pharmaceutical corporations in the downstream stages of new drug development by conducting global multi-center clinical trials. According to incomplete statistics, more than ten original drug projects are currently undergoing multi-center clinical trials across various regions worldwide, including China, the United States, and Australia. The time lag between the market launch of new drugs domestically and internationally has been reduced from decades in the past to as little as a few years recently.
However, Sun Kuiyong, an Academician of the U.S. National Academy of Engineering and Chairman of Yuanli Life Sciences, highlighted potential risks in accelerating new drug development. The drug development cycle is lengthy, with new data emerging continuously; excessive compression of this data may lead to various issues. To assess the R&D capabilities of a biotechnology company, one must look beyond surface-level advancements to evaluate its underlying scientific strength, as drug development largely tests a team’s problem-solving abilities.
At present, smaller biotechnology companies are the main force driving drug innovation in China. In competition with multinational pharmaceutical corporations, biotech firms with significant technological advantages can demonstrate efficiency benefits by concentrating R&D investments and strategically planning global clinical trials, often achieving faster progress in research, development, and clinical trials for specific targets. However, their weaknesses in global commercialization are also evident, which will undoubtedly constrain their long-term growth.
In the United States, large pharmaceutical companies and biotechnology firms primarily integrate their respective strengths through industrial mergers and acquisitions (M&A). However, M&A activity among Chinese enterprises is rare, and the overall scale of such transactions lags far behind that of mature pharmaceutical markets. According to Dr. Wang Yinxiang, this is partly because China has not yet produced large pharmaceutical companies with absolute dominant strength. Pharmaceutical M&A deals often involve tens of billions of dollars, placing immense pressure on the cash flow of large pharmaceutical companies. On the other hand, biotechnology firms in China mainly adopt a follow-on innovation strategy in their R&D, resulting in high product homogenization and limited global competitiveness. Consequently, these firms cannot offer acquirers sufficiently large potential sales volumes. In the global market for new drugs, Chinese companies account for no more than 10%, which significantly constrains industrial M&A activity.
Meanwhile, due to factors such as a relatively limited pool of high-quality targets and abundant capital, valuations in the primary market for biotech companies remain elevated, which has also dampened the M&A enthusiasm of large pharmaceutical firms to some extent.
However, industrial M&A is an indispensable component of the new drug innovation ecosystem. On one hand, new drug development is a process that requires the integration of resources across different stages to form synergistic efforts. On the other hand, statistics show that there are over 5,000 pharmaceutical companies in China, maintaining rapid growth, with the majority having secured at least one round of financing. From the perspective of capital exit channels, industrial M&A represents an important direction.
For a long time, as a major producer of generic drugs, China’s demand for clinical trials remained suppressed. However, after 2015, the top-level design featuring the consistency evaluation of generic drugs and incentives for new drug R&D highlighted the value of clinical trials, leading to a shortage of resources. He Ruyi, Chief Scientist of Healthcare at SDIC Innovation, who has years of advisory experience with drug regulatory agencies in both China and the United States, believes that clinical trial conduct in China is still in its early stages and struggles to meet the needs of new drug development.
China.
On the one hand, domestic researchers lack professional training in clinical trials, and there are few qualified principal investigators (PIs), which has become a key factor constraining the development of clinical trials in China. In addition, supporting staff at clinical trial sites are also in short supply; many pharmaceutical companies struggle to find truly competent clinical trial directors despite significant investment.
The shortage of clinical trial talent is closely related to the limited number of clinical trial sites in China. In the past, due to safety concerns regarding clinical trials, regulatory authorities exercised caution in approving clinical trial sites, resulting in a very narrow scope of approval. According to statistics from Xueqiu, an information disclosure platform for the secondary market, there were only 125 clinical institutions in China before 2004. Following the issuance of the "Measures for the Qualification Accreditation of Drug Clinical Trial Institutions (Trial)" in 2004, the number of approved clinical trial sites increased significantly, reaching approximately 600 at present. However, this figure remains far from sufficient to meet the demands of domestic new drug development and consistency evaluation.
In October 2017, the “Opinions on Deepening the Reform of the Review and Approval System to Encourage Innovation in Drugs and Medical Devices,” issued by the General Office of the Communist Party of China Central Committee and the General Office of the State Council, explicitly stipulated that a filing-based management system would be implemented for the qualification accreditation of clinical trial institutions. Institutions meeting the conditions for conducting clinical trials may, after registering and filing with the designated website of the food and drug regulatory authorities, accept commissions from drug and medical device registration applicants to conduct clinical trials.
Analyses suggest that the number of clinical trial sites is no longer a bottleneck for innovative drugs and bioequivalence (BE) studies. This constraint is particularly easing for generic drugs that solely conduct BE trials involving the recruitment of healthy volunteers. Furthermore, reforms in the drug review and approval system explicitly encourage conducting international multicenter Phase II and III clinical trials at sites in China. The aim is to elevate the overall standard of clinical trials in China by engaging domestic clinical trial personnel in international studies.
On the other hand, industry standards for clinical trials in China are only just beginning to be established. In fact, clinical trials are not esoteric or highly specialized endeavors; they can be conducted by researchers who have received basic training. However, China is only at the initial stage of developing the regulatory frameworks and management systems for clinical trials, with significant room for improvement.
In July 2018, the National Medical Products Administration (NMPA) issued the "Announcement on Adjusting the Review and Approval Procedures for Drug Clinical Trials" (Document No. 42). While meeting public demand for medications and reinforcing applicants’ primary responsibility for research and development, the announcement reflects a policy orientation that encourages innovation and accelerates new drug development, providing clear guidelines on how to enhance the quality of clinical trials in China.
At the Tongxieyi Conference, the topic of Chinese pharmaceutical companies achieving “overtaking on a bend” was repeatedly discussed. After interviewing industry professionals, investors, and regulatory experts, VCBeat identified a common perspective: in the view of practitioners, the notion that Chinese pharma companies will achieve such overtaking in the next decade is a false premise.
New drug development is a contest of comprehensive competitive strength, encompassing capabilities, speed, and efficiency; possessing a standout advantage in only one area is insufficient to surpass competitors. More importantly, new drug development is a process of long-term accumulation. Many large pharmaceutical companies have established their own methodologies through prolonged exploration in the research and development of both large-molecule and small-molecule drugs. Only by forming unique methodologies through practice can they secure a place in the global market. Hua Ye, Founder and CEO of Yehui Pharmaceutical, stated that the domestic innovative drug sector remains fragmented and requires integration. Breakthroughs will come through self-cultivation and generational inheritance.
Zhao Dayao, CEO of Youhe Pharmaceutical, previously worked for multinational pharmaceutical companies for many years and led the establishment of R&D centers in China for major foreign pharmaceutical firms. He believes that in the next decade, domestically produced innovative drugs will account for approximately 10% of China’s pharmaceutical market, with “me-too” innovative drugs remaining mainstream. “However, follow-on innovation is not necessarily unworthy of encouragement; if it serves patients and delivers significant clinical value, it is worthwhile,” Zhao pointed out.
In assessing trends for “me-too” innovative drugs, Lu Xianping, Chairman and General Manager of Chipscreen Biosciences—the first company in this space to go public—and Li Ning, Executive Director and General Manager of Junshi Biosciences, which spearheaded the launch of China’s first domestically produced PD-1 inhibitor, have reached the same conclusion.
Lu Xianping believes that over the next decade, China’s pharmaceutical industry will exhibit three key characteristics: First, against the backdrop of the “4+7” volume-based procurement policy, domestic generic drug manufacturers with superior management, production, execution, and market coverage capabilities will become major suppliers of generic drugs. Second, in the realm of innovative drugs, the majority of companies will continue to engage in price competition centered on “me-too” drugs, which help meet clinical needs. Third, a subset of innovative enterprises will enter global competition by pursuing differentiated, source-level innovations aimed at addressing unmet clinical needs.
Li Ning highlighted the importance of payment innovation in new drug development, pointing out that China’s healthcare payment system is complex and that commercial insurance will see significant breakthroughs over the next decade.
Nevertheless, by staying grounded while aiming high, it is not impossible for domestic pharmaceutical companies to surpass the United States in the development of First-in-Class new drugs. Among the average 30 new drugs approved annually in the U.S., only 2–3 involve novel targets. From the perspective of new target discovery, the gap between China and abroad in First-in-Class innovation is gradually narrowing.
In reality, new drug development requires self-driven initiative; blindly following large pharmaceutical companies will lead to challenges. Domestic innovative pharmaceutical companies need to identify suitable strategic niches based on trends and their own capabilities, and then focus their efforts accordingly.
Increasing investment in basic scientific research is another consensus reached by industry insiders regarding the direction of domestic new drug development over the next decade. In basic scientific research, Chinese scientists should be given the freedom to unleash their imagination, which will become a crucial link in enabling domestically produced innovative drugs to enter the global market. New drug development is a science-driven capital process that requires the injection of capital from investors with genuine expertise, thereby enhancing the international competitiveness of domestically produced innovations.
Sun Yongkui stated that universities and research institutions should prioritize investment in basic research, as it is the wellspring of new drug development; without it, creating novel drugs would be exceedingly difficult. Basic research can become another arena for capital competition. In this context, professional investors need to continuously seek out domestic innovations and cultivate both data-driven evaluation capabilities and business development integration skills. “Business development integration capability will be critically important to the innovative development of China’s pharmaceutical industry over the next decade. We are pleased to see that some domestic players have already begun to acquire such capabilities, and the contribution of domestic capital market investments to fostering these capabilities is undeniable.”
Despite the challenges ahead, by conducting a timely analysis of the industrial ecosystem for new drug development in China, we have reason to believe that domestically produced innovative drugs are entering a golden decade.