Is Pharmaceutical Innovation the Next Investment Hotspot? Exclusive Interview with Zhou Dayong of China Renaissance on Pharma Innovation Investment Insights

In recent years, driven by policy, talent, and technology, the healthcare and pharmaceutical sectors have unleashed new vitality. The biopharmaceutical field, in particular, is akin to a volcano poised for eruption, likely representing the next major opportunity following genetic testing. This year, a cohort of biopharmaceutical companies focused on innovative R&D has secured financing in succession: WuXi STA, Hua Medicine, and AdagenePharmaceuticals, Ascentage PharmaApart from their shared focus on innovation, the name China Renaissance appeared in all these financing cases, catching the reporter’s attention.

Even if you are not familiar with China Renaissance, apps such as JD.com, Didi Chuxing, Meituan, and iQIYI undoubtedly occupy a significant portion of your smartphone’s storage. Behind the series of financing rounds, mergers and acquisitions, and initial public offerings undertaken by these most influential giants in China’s internet industry, China Renaissance has always played a pivotal role. Even 58.com and Ganji.com, which competed fiercely for a decade, ultimately merged under the brokerage of this investment bank. It is fair to say that China Renaissance is highly formidable in the TMT sector.

While achieving success in the TMT sector, China Renaissance has once again turned its attention to the healthcare and pharmaceutical industries. From serving as the financial advisor to Pharmaron in 2008, followed by Dian Diagnostics, United Family Healthcare, and Yestar, China Renaissance’s areas of focus have covered mobile health, medical devices, specialized hospitals, and pharmaceuticals. In recent years, the firm has been increasingly active in the field of pharmaceutical innovation, successively acting as the financial advisor for Adagene, Hua Medicine, and Ascentage Pharma. It can be said that since entering the healthcare sector, China Renaissance has seemingly locked its sights on pharmaceutical innovation, maintaining a close and consistent follow-up. Why is China Renaissance bullish on pharmaceutical innovation? We interviewed Zhou Dayong, Managing Director of the China Renaissance Healthcare team, to discuss his perspective on the new landscape of pharmaceutical innovation.

Between 2006 and 2016, a significant influx of capital and startups entered the innovative drug market, giving rise to a cohort of successfully listed companies represented by Beta Pharma. However, overall, pharmaceutical innovation in China is still in its early stages, with a substantial gap remaining between China’s R&D capabilities and those of international counterparts.

Addressing the gaps, Zhou Dayong stated:“Gaps signify demand, indicating that we will have abundant opportunities in the future.”

From the perspective of market demand, China boasts a demographic advantage with a vast consumer base. In terms of technological support, China possesses the world’s second-largest scientific workforce after the United States, along with numerous research institutions and a substantial pool of biotechnology talent. On both the supply and demand sides, China represents the second-largest market globally, where current market gaps signify future opportunities.

In addition to market potential, government encouragement and promotion of pharmaceutical innovation have also made the future prospects in this field promising. Compared with generic drugs, innovative drugs have a longer approval cycle. In this regard, the accelerated mechanism of the U.S. FDA is very mature. For major diseases or orphan drugs without alternative treatments, as long as corresponding evidence is provided, a green channel can be opened. “Addressing this pain point, China is also adopting such a mechanism to alleviate the pressure caused by long queues for drug approvals,” said Zhou Dayong.

“On the other hand, the state also provides certain incentives and support for domestic innovative drug companies,” added Zhou Dayong. The most evident manifestation of this is the change in the definition of “new drugs” within the regulatory framework for innovative pharmaceuticals. What constitutes an innovative drug? Only those undergoing simultaneous clinical trials in China and globally can gain recognition in China and qualify for the green channel approval process.

“This means that multinational corporations entering China must prioritize the Chinese market and introduce their latest products,” stated Zhou Dayong. Moreover, this enables domestic Chinese enterprises to compete with multinationals on an equal footing, which is crucial for the rapid growth of Chinese companies.

The Chinese government attaches great importance to new drug innovation, explicitly prioritizing the development of innovative drugs in its strategic planning. Moreover, numerous national major special projects have separately highlighted the development of innovative drugs. This not only reflects the state-level emphasis on pharmaceutical innovation but also underscores the broad prospects of this field.

However, for investment institutions, investing in innovative drugs is akin to walking a tightrope, with the risk of failure looming at any moment. Cases where billions of dollars were spent only for clinical trials to end in failure are not uncommon. Meanwhile, the drug development cycle is lengthy, and China’s capital market still lacks exit channels tailored for innovative drug investments, unlike NASDAQ. These factors have made investment institutions even more cautious about investing in innovative drugs.

Zhou Dayong believes that investment in innovative drugs should focus on products with large market potential. There must be sufficient market demand to achieve returns despite the low probability of success, such as in the fields of tumor immunotherapy and diabetes. If a drug has a small market size and a low probability of success, the likelihood of a successful investment will be further reduced. Therefore, from the perspective of the pharmaceutical industry, markets with substantial demand represent a key direction.

Biopharmaceutical R&D consists of three stages: the first is the preclinical stage, where clinical trial approval has been obtained but clinical trials have not yet commenced; the second is the clinical stage, which is divided into Phase I, II, and III clinical trials; and the final stage is market launch. From a market perspective, the earlier the stage of new drug development, the higher the risk of failure, while the probability of successful R&D increases geometrically in the later stages.

“Given China’s capital landscape, teams that have already obtained clinical trial approval and are even conducting Phase II clinical trials are more ideal,” said Zhou Dayong. Drugs that have secured clinical trial approval have, to some extent, significantly reduced the risk of failure. “If one seeks a relatively balanced trade-off between risk and return, this stage represents a more ideal point of entry,” Zhou added.

From the perspective of new drug development mechanisms and sources in China and the United States, China holds a cost advantage. Leveraging this cost advantage, the prevailing model for new drug development in China currently involves acquiring preclinical-stage drug candidates from abroad, conducting clinical trials in China, and ultimately entering the global market. Teams that have already secured preclinical drug assets and obtained approval for clinical-stage trials possess a competitive edge in terms of risk control, development timelines, and technological capabilities.

Zhou Dayong concluded, “It is a highly prudent strategy to leverage the strengths of global basic research by licensing preclinical drug candidates from the numerous mature R&D institutions abroad, and then conducting clinical trials and commercialization in China.”

Zhou Dayong also emphasized that for Chinese pharmaceutical companies to develop and rise, they must pursue an internationalization strategy. He believes that the internationalization of Chinese enterprises unfolds in three stages: the foundational level is team internationalization, leveraging overseas talent for R&D; the second stage is product internationalization, involving the sale of Chinese products abroad; and the final stage is corporate internationalization, achieved through the acquisition of foreign pharmaceutical companies to realize the internationalization of both technology and the enterprise itself.

“As Chinese enterprises deepen their internationalization, they will encounter an increasing number of challenges, with talent and cultural issues being the foremost,” said Zhou Dayong.

Chinese companies going global first encounter the barrier of a shortage of international talent. Language and cultural barriers, as well as a lack of understanding of foreign investment and R&D systems, pose significant challenges. Yet even greater challenges stem from differences in foreign cultures and rules of engagement. For Chinese enterprises to internationalize, they must first understand international norms. How to negotiate, how to sign contracts, and how to conduct mergers and acquisitions are all areas that require Chinese companies to invest considerable time in adaptation and communication.

“Of course, there will be challenges in other areas, but the most fundamental issue remains talent.” Zhou Dayong paused for a moment in contemplation. “China has two to three hundred domestically owned pharmaceutical companies listed on stock exchanges, and what they lack most is talent.”

In addition to domestic pharmaceutical companies, China’s pharmaceutical sector has also seen the emergence of a new wave of dynamic players. Over the past decade or so, a large number of overseas-trained professionals have returned to China to launch startups. Some of these talents have joined local companies, helping them achieve internationalization, while others have chosen to establish their own innovative drug companies, giving rise to a cohort of “returnee-led” pharmaceutical innovation enterprises. If internationalization poses challenges for domestic firms, it represents a distinct advantage for these returnee-led companies. From a technical perspective, returnee professionals possess internationally advanced expertise, bringing back highly mature technologies and work experience. Culturally, they are well-versed in both international and Chinese markets. Consequently, after achieving success in China, these enterprises find it considerably easier to expand into global markets compared to their purely domestic counterparts.

“Companies like Beta Pharma and Innovent will play a significant leading role in the internationalization journey of Chinese enterprises.” Zhou Dayong believes that these companies hold advantages in collaborations with multinational corporations and in their product pipelines, and may even acquire overseas innovative drug companies in the future.

Of course, in addition to pharmaceutical companies, Zhou Dayong believes that the China Renaissance Healthcare team itself also faces internationalization challenges.

Zhou Dayong stated, “For enterprises, China Renaissance is not only about helping them secure capital; more importantly, it lays a solid foundation for their future development.” These innovative drug companies are very young and research-focused, yet they lack in-depth understanding of capital markets and management structures. Beyond product R&D, China Renaissance provides these companies with one-stop services, assisting them in streamlining corporate systems and equity structures, and offering advice on subsequent new drug development, talent acquisition, and future international M&A activities. For biopharmaceutical startups, the China Renaissance Healthcare team acts more like a corporate steward, facilitating business growth.

However, the biopharmaceutical sector is the most internationalized industry in China, yet it also exhibits the largest gap compared to global standards. Abroad, there are several outstanding investment banks specializing in biopharmaceuticals; they possess a deeper understanding of the sector and are more attuned to the needs of these companies. Furthermore, a cohort of advanced biotechnology companies overseas provides robust support for industry development. “Therefore, in our efforts to facilitate the internationalization of China’s pharmaceutical industry, we must first address our own internationalization,” stated Zhou Dayong. “To tackle this challenge, China Renaissance is actively recruiting overseas talent, bringing in professionals with biopharmaceutical expertise and international backgrounds to achieve the internationalization of our Healthcare team.”

Furthermore, talent specialization is another issue Huaxing is currently considering. Biopharmaceutical technology is so new and evolving so rapidly that it encompasses numerous specialized subfields. As this market is still in its early stages, many people fail to recognize the value and direction of investment. It is essential to attract more specialized professionals with deeper expertise to better assist investment firms and entrepreneurs in identifying value.

As its business cases have multiplied, China Renaissance has gradually evolved into a resource-rich platform in the healthcare sector, bringing together numerous healthcare investors, scientists, and even companies listed on China’s A-share market. For corporations, China Renaissance assists in talent acquisition, strategic capital market planning, and identifying available resources; for investment institutions, it serves as a beacon, helping them uncover future opportunities. In summary, China Renaissance is playing an increasingly pivotal role in fostering the organic integration of capital and industry.

“Moving from a financial advisor to a resource platform represents the greater value of China Renaissance,” Zhou Dayong concluded. “The value of this platform has already been demonstrated in the TMT sector, and China Renaissance’s success in TMT will gradually be replicated in the biopharmaceutical sector.”