Three Major Challenges Facing Chinese Innovative Drug Companies on the Path from Biotech to Pharma

Editor’s Note: This article is reprinted from PharmaCube, authored by Yu Jian. VCBeat has been authorized to republish it.

On the Distinction Between Pharma and BiotechI was once confused about the difference between pharma and biotech. It was not until someone pointed out that the most fundamental distinction lies in their R&D drivers: pharma’s R&D is market-led (driven by clinical needs), whereas biotech’s R&D is science-driven. However, when interviewing innovative drug companies (commonly referred to as biotechs), the vast majority of founders mentioned that their product initiation and development strategies are largely based on clinical needs.

This outcome may, on one hand, be attributed to insufficient source innovation stemming from weak foundational research in China; on the other hand, it may reflect the greater risks and challenges associated with “science-driven” ventures, which domestic startups and investors are currently unable to bear.

When discussing their vision, 90% of enterprises are not content with remaining mere biotech companies; instead, they strive to position themselves as integrated pharmaceutical companies encompassing R&D, manufacturing, and sales. This implies that for a company to achieve long-term success, it must not only identify the right R&D direction but also possess strong financial resources, talent, and collaborative capabilities within the industry.

From Biotech to Pharma, a series of challenges are clearly evident. For instance, there is limited source innovation and constrained R&D funding during the research and development phase; quality control and reasonable capacity forecasting in the manufacturing process; and various challenges arising from product homogenization in the sales process, among others.

In terms of the degree of innovation, among the innovative drugs previously approved in China, there have been few first-in-class drugs featuring source innovation. Most are follow-on innovative drugs falling into the me-too or me-better categories, with some even becoming me-worse. Drugs such as apatinib and icotinib were also developed through chemical structural modifications based on innovative drugs already marketed overseas.

The absolute amount of R&D investment by Chinese pharmaceutical companies is only about one-tenth that of multinational giants. Even BeiGene, which was initially driven by R&D and is now striving to become a major pharmaceutical company, invested $679 million in R&D in 2018, still falling short of even a fraction of Johnson & Johnson’s top-ranking expenditure. In terms of proportion, the average R&D intensity (R&D spending as a percentage of revenue) among the top ten domestic pharmaceutical companies stands at around 10%, which is also lower than the approximately 20% R&D intensity observed in developed countries.

Another issue is that innovative pharmaceutical companies are currently emerging in large numbers, yet their awareness of patent protection remains generally weak, although this situation has begun to improve. After all, prior to 1984, China’s Patent Law had not yet been established, and the domestic pharmaceutical manufacturing capability was relatively low; innovation at that time mainly consisted of chemical formulations that could not previously be produced domestically. Following the enactment of the Patent Law, most enterprises adopted a drug development model focused primarily on process improvements, with patent applications concentrated on process protection. However, their ability to protect molecular mechanisms and certain platform technologies remained relatively limited.

Taking the currently popular development of biologic drugs as an example, a patent analyst told reporters that domestic biopharmaceutical companies have far weaker intellectual property awareness in amino acid sequence development and spatial architecture compared to foreign pharmaceutical companies. Even though many biopharmaceutical companies have applied for domestic patents, they still face certain challenges when applying for international patents if they wish to expand globally.

Furthermore, Chinese innovative pharmaceutical companies have limited capabilities in clinical trial design. At a conference, a key opinion leader (KOL) bluntly stated that, taking the fiercely competitive PD-1/L1 landscape as an example, most clinical trial protocols are merely copied from foreign drug development plans, lacking any distinctive features. In fact, PD-1/L1 inhibitors are not panaceas; primary and acquired resistance do occur. It is therefore worth exploring how to rationally and effectively combine them with chemotherapy, radiotherapy, other immune checkpoint inhibitors, large-molecule monoclonal antibodies, and oncolytic viruses.

A key opinion leader (KOL) candidly told reporters that patients are no longer who they used to be. With the widespread adoption of WeChat, patients have long since formed professional WeChat groups to discuss treatment options and drug characteristics. The influence once held by clinicians in dominating patient enrollment has gradually diminished, with some patients potentially knowing more about pharmaceutical companies’ drugs than the developers themselves.

The final factor is mindset. Currently, innovative pharmaceutical companies in China are generally quite impatient. Particularly amid soaring financing and operational costs, the business model of burning through cash on a large scale and continuously without possessing core technologies akin to “billion-dollar molecules” has left investors highly anxious.

Previously, due to the significant advantages of domestic pharmaceutical companies in market access, local Chinese experience, and speed to market, multinational pharmaceutical companies primarily entered China through patent licensing and collaborations. This process created opportunities for some domestic pharmaceutical companies to “raise capital to acquire assets.”

However, with policy changes, former advantages may become “constraints.” For some innovative drug companies, if they encounter products that directly compete with those filed by multinational pharmaceutical companies, the CDE’s conditional acceptance of overseas clinical trial data means that foreign pharmaceutical companies can enter the Chinese market more rapidly.

“I do not comment on price wars; each company has its own strategy. As I have said before, production capacity is definitely a major issue. If you want to expand production, the bioreactors must be re-filed for regulatory approval. For biologics, any change in the size of the fermentation tank requires regulatory filing and comparison with the original clinical trial data, which involves extensive comparability studies, and the registration process itself takes time.” This was Wu Xiaobin’s view on the competitive landscape of PD-1/L1 inhibitors, expressed on multiple occasions.

Whether production capacity is truly a problem remains a matter of differing opinions. Many have countered that Chinese companies excel at resolving manufacturing challenges. Dr. Xu Ting, Chairman of Jiangsu Alphamab Oncology, recently acknowledged that antibody screening and production are no longer bottlenecks, resulting in an abundance of candidates for any given target. In the future, the key will lie in achieving differentiation among antibody therapies.

Behind production capacity, what deserves greater attention is perhaps quality. Much like the “consistency evaluation” for generic chemical drugs—officially termed the “Evaluation of Consistency in Quality and Efficacy”—quality comes first; if quality fails to meet standards, discussing efficacy becomes meaningless.

Take PD-1 inhibitors as an example. As the head of the first company to launch a PD-1 inhibitor in China, Li Ning, CEO of Junshi Biosciences, stated at a small closed-door meeting that the trend for PD-1 inhibitors is toward the approval of an increasing number of indications, accompanied by intensifying competition. He expressed caution regarding the FDA’s openness to Chinese PD-1 inhibitors entering the U.S. market. In his view, whether domestically produced PD-1 inhibitors can meet the FDA’s review requirements remains to be seen, as this involves not only clinical data but also a series of issues such as manufacturing site inspections and quality control.

Henlius Has Launched the First Biosimilar Developed in Accordance with Biosimilar Standards. According to CEO Liu Shigao, over the years, very few biosimilars have been approved and launched in China, primarily because the transition from small-scale trials to pilot-scale production and finally to full-scale manufacturing is extremely challenging. All quality attributes must fall within the ranges specified for the reference product, while production costs must remain lower than those of the reference product; otherwise, commercialization would be meaningless despite ensuring quality.

The “4+7” volume-based procurement is not the first time the government has implemented measures to reduce drug prices, but it is the most impactful in history. This may be partly attributed to the strong image conveyed by the newly established National Healthcare Security Administration to the public. Some media outlets have pointed out that since 1996, the government has led more than 30 rounds of drug price reductions.

In fact, it is not only in China that governments worldwide share a common goal: to achieve the maximum impact with minimal expenditure. Consequently, controlling healthcare costs has naturally become one of the key strategies. Even if multinational pharmaceutical companies do not face the “4+7” volume-based procurement program in China, most of their products will still encounter pricing challenges in other markets, unless they are exclusive brands or demonstrate exceptionally significant therapeutic efficacy, thereby granting them sufficient bargaining power.

Taking Amgen’s PCSK9 monoclonal antibody Repatha (evolocumab) as an example, its price decreased by approximately 60% within the first year and a half after launch. Amgen claimed this was to improve the accessibility of Repatha among low-income populations, while competitive pressure from rivals and the desire to capture market share were the unstated reasons.

Junshi Biosciences’ executives appear remarkably sanguine. Amid widespread industry skepticism regarding its pricing logic, the company has conveyed messages that reflect a broad strategic perspective and forward-looking vision. One executive even stated publicly, “If reducing the annual cost of PD-1 therapy to RMB 30,000 can unlock an incremental market worth RMB 60 billion annually while remaining affordable for the national medical insurance system, why not embrace it?”

However, there is a widespread consensus that price wars in saturated markets are “zero-sum” games. Only by following the example of multinational giants, which frequently form strategic alliances to forge closer partnerships and explore larger incremental markets, can companies achieve mutual success rather than emerging battered and bruised.

Humira’s global sales have approached $20 billion. Industry insiders revealed that the drug’s sales in China in 2018 were less than RMB 100 million, primarily due to its prohibitive price, which made it unaffordable for patients. The good news is that, at the time of writing, the product has applied for a voluntary 60% price reduction in certain regions.

It is not just Humira; multiple multinational pharmaceutical companies have proactively reduced prices. Industry insiders told reporters that the underlying motivations are clear: first, to counteract the loss of existing market share caused by price cuts from competitors in the “4+7” centralized procurement program; and second, to secure inclusion (or retention) in the upcoming adjustments to the National Reimbursement Drug List.

Undoubtedly, more multinational pharmaceutical companies will participate in centralized procurement in the future and actively strive for inclusion in the National Reimbursement Drug List (NRDL), exchanging price reductions for market share. For domestic drugs with similar mechanisms of action or efficacy to those of multinational pharmaceutical companies, what sales strategies should be adopted in an era where "kickback-driven sales" are gradually fading away?

Chairman Mao stated that the victory of China’s revolution depended on “encircling the cities from the countryside,” rather than relying on encircling the countryside from the cities. The author is uncertain whether this methodology is applicable to the pharmaceutical industry.

Yet, as it stands, the majority of new drugs are being developed for patients in first-tier cities. While China’s innovative pharmaceutical companies exhibit an unwarranted confidence in the science behind targets discovered by others and seek to command high premiums, have they ever considered what the general population outside these major urban centers truly needs?

While multinational pharmaceutical companies, with R&D budgets large enough to acquire numerous biotech firms, are already establishing a presence in fourth- and fifth-tier cities and even county-level markets, some so-called “innovative” enterprises are still circling in major metropolitan areas, locked in swirling negotiations with investors over whether their valuations should be 10x or 15x. One wonders who will ultimately foot the bill for such “innovation.”

Sharing the latest data from the National Bureau of Statistics: China records approximately 8.1 billion medical visits annually. As of the end of 2018, the total population of mainland China was 1.395 billion, with the combined population of Beijing, Shanghai, Guangzhou, and Shenzhen reaching around 80 million. These four first-tier cities, accounting for merely 0.33% of the national land area and less than 5% of the population, once generated nearly one-eighth of the country’s GDP.

It is precisely for this reason that Beijing, Shanghai, Guangzhou, and Shenzhen, along with “new first-tier” cities such as Hangzhou, Nanjing, and Qingdao, are considered to represent the current fundamental economic landscape of China. Meanwhile, beyond these first-tier and new first-tier cities, more than a billion people in China are distributed across nearly 300 prefecture-level cities, almost 3,000 county-level divisions, over 40,000 towns and townships, and close to 700,000 administrative villages, harboring immense potential for incremental market growth.

Finally, we pay tribute to every professional working on the front lines of pharmaceutical R&D, production, and sales! We hope that while you are dedicated to drug development, you will also look back at the land behind you.