The Business Secrets Behind Chinese Pharmaceutical Companies' Strategic Moves into the Gene Industry

Preface

The greatest thing about games is that they have rules.

1 Chinese Pharmaceutical Companies’ “Indirect Approach”

In the field of new drug development, European and American pharmaceutical companies were the first to master the rules of the game. Roche, a Fortune Global 500 company, has long been widely acclaimed for its performance in this arena: On average, it takes 12 years, an investment of RMB 6.6145 billion, 7,000,874 hours, 6,587 experiments, and 423 researchers to bring one drug from initial laboratory research to final shelf availability.

A study conducted by the Center for the Study of Drug Development at Tufts University in Massachusetts found that the average cost of drug development between 1995 and 2007 was $2.6 billion. Therefore, pharmaceutical companies embarking on the development of innovative drugs require substantial capital investment and top-tier R&D personnel, and the process carries a high risk of being terminated midway due to various factors or adverse effects.

Such high risks have led domestic pharmaceutical companies to take a shortcut from the very beginning. Currently, there are nearly 5,000 pharmaceutical companies in China, with more than 90% being generic drug manufacturers. According to statistical data provided by the China Food and Drug Administration (CFDA), the total number of approved drug registration numbers in China has reached 189,000, with over 95% being for generic drugs.

The high proportion of generic drugs in China is inextricably linked to the substantial costs associated with innovative drug research and development.Data from the Center for the Study of Drug Development at Tufts University in the United States indicates that the average cost of developing a new drug is approximately $2.6 billion. In 2013, the R&D expenditure of China’s top ten pharmaceutical companies accounted for only 1% of their sales revenue, a figure that pales in comparison to the 17.8% R&D intensity observed among the global top ten pharmaceutical companies.

This “indirect approach” adopted by Chinese pharmaceutical companies has become a unique “Chinese characteristic” in the current landscape. Small and medium-sized generic drug manufacturers have two potential paths forward: one is to “align with industry leaders,” i.e., to partner and grow by affiliating with large pharmaceutical companies through various means; the other is to “pursue transformation,” achieving strategic shift by enhancing R&D capabilities and leveraging capital for comprehensive restructuring. Chen Zhisheng, Chief Technology Officer of WuXi AppTec’s New Drug Development Division, stated that China’s pharmaceutical market is currently characterized by fragmented and intense competition, but will inevitably evolve into a “tripartite balance.” He expressed hope that China’s future pharmaceutical landscape will feature three to five major generic drug manufacturers, alongside two to three hundred innovative drug developers.

However, such a landscape is not a sustainable long-term strategy.While solidly advancing generic drugs will remain a strategic priority for Chinese pharmaceutical companies for the foreseeable future, the rapidly emerging gene industry has revealed a new “blue ocean” opportunity to many leading domestic firms.



2 New Drug Development Driven by the Genomics Industry

In fact, the costs associated with more successful drugs are significantly lower than those of less successful ones. The low success rate in new drug development has dramatically driven up R&D costs to a level comparable to the valuation of a unicorn company. This model inevitably prompts pharmaceutical companies to consider whether a better approach exists that can keep drug development expenses under $500 million as they plan for future growth.

In Part II of the “Gene Wars in Pharmaceutical Companies” series, titled “Embarking on the ‘Internet+’ Path,” I previously proposed a viewpoint: To achieve this goal, two steps are necessary—first, to enhance efficiency and effectively reduce drug R&D costs; second, to improve precision by re-evaluating failed drugs while increasing the success rate of drugs under development. Currently, driven by “Internet+” and “Gene+,” these two objectives may well be realized.

Currently, genetic testing provides a precise tool for targeted tumor therapy, thereby enabling the first practical implementation of personalized medicine, an important application that has gained clinical recognition. From traditional chemotherapy agents to targeted therapies, genetic testing allows patients to receive accurate and timely personalized treatment, while sparing those with gene mutations lacking corresponding targeted drugs from companion diagnostics or overtreatment.

While genetic testing has enabled more precise practical applications of personalized medicine, the broader goal of precision medicine driven by genomic science extends beyond clinical diagnosis to encompass personalized therapeutics powered by gene therapy drugs.

Biopharmaceuticals and Biotherapy: Including Immunotherapy, Gene Therapy, and Stem Cell TherapyThere are two basic approaches to gene therapy: ex vivo interference, and ex vivo modification of cells (genetic modification) followed by reinfusion into the body. Research in biotherapy represents a typical model of translational medicine, with the ultimate goal of developing pharmaceutical drugs for disease treatment. According to statistics from researchers, nearly 30 companies in China are currently developing gene therapy drugs. Meanwhile, the number of publicly listed companies that have invested or intend to invest heavily in biotherapy continues to grow.

In the United States, a single dose of gene therapy for a patient with pancreatitis costs approximately RMB 1.4 million. Glybera, the first gene therapy drug launched in the Western world by the Dutch biotechnology company UniQure in 2013, carries a price tag of up to €1.2 million per patient.

Both traditional pharmaceutical companies and emerging gene technology firms have recognized the future development trends of the gene industry. This trend has driven the practical application of two key aspects of precision medicine: “genetic testing + gene therapy.”

Taking the field of new anti-tumor drug development as an example, the Global Cancer Report 2014 shows that global cancer cases are growing rapidly, increasing from 14 million in 2012 to 19 million in 2025, with China ranking first in new cancer cases. In 2012, the number of cancer cases in China was 3.065 million, accounting for about 1/5 of the global total; the number of cancer deaths was 2.205 million, accounting for about 1/4 of the global total. Over the past five years, the compound annual growth rate of the global anti-tumor drug market has been 7.6%, far higher than the average growth rate of 4.3% in the global pharmaceutical market. In 2014, global annual spending on anti-tumor drugs exceeded $100 billion.

Faced with such a vast market, in addition to continuous innovation in innovative drugs, the development of genetic science has opened up a new path for new drug research and development.

In the practical application of precision medicine, a key scenario for genetic testing is its use in companion diagnostics to guide the selection of cancer treatment regimens.Researchers analyzed medication data from 1998 to 2012, examining clinical trial data for 199 unique drug compounds in 676 patients with non-small cell lung cancer (NSCLC), and established a drug risk prediction model. The data revealed that Phase III clinical trials represent the most significant hurdle in drug development prior to approval, with statistical data showing a success rate of only 28%. However, when trials are guided by biomarkers developed through companion diagnostics, the success rate can increase to 62%.

According to analysts’ forecasts, the global in vitro diagnostics (IVD) market will grow from $3.14 billion in 2014 to $8.73 billion in 2019. During the clinical trial phase of drug development, companion diagnostics play a significant role in guiding medication use; on one hand, they improve the accuracy of treatment response, and on the other hand, they help reduce patients’ medication costs by stratifying patients and identifying those most likely to benefit from the therapy.

The application of gene therapy in precision medicine is currently reflected in personalized treatment enabled by rapid DNA sequencing technologies.One example is the development of tumor neoantigen vaccines leveraging genomic sequencing technologies. Historically, cancer biologists have sought to stimulate the immune system to attack molecules on the surface of cancer cells by targeting specific molecular markers. However, because normal cells and cancer cells sometimes share identical antigens, this overlap has led to the failure of numerous cancer vaccine trials. No two patients can possibly possess the same cancer cell-specific neoantigens; therefore, the complexity of the immune system necessitates that cancer vaccines be truly personalized from the outset. By enabling the immune system to identify and attack antigens found exclusively on a patient’s cancer cells, neoantigen vaccines can activate an immune response against malignant cells. Once this technology achieves industrial scale, the vaccine used to treat a specific type of cancer in any given individual will be unique.

Based on numerous current studies, the immune system is highly likely to be the most powerful adversary of cancer. In this sense, integrating genetic science with clinical trials of tumor vaccines for industrialization represents a potential commercialization direction in the coming years.

To achieve this, scientists must first conduct large-scale genomic sequencing of both tumor cells and healthy cells. In addition to identifying the differences between them, it is essential to investigate the functional significance of these mutations. Leveraging bioinformatics technologies and specialized algorithms, third-party genetic big data companies can assist pharmaceutical firms in identifying antigens arising from these mutations. The process of initiating neoantigen discovery typically takes no more than one month. The overall cycle, from rapid whole-genome sequencing of a patient’s tumor cells to the production of a personalized vaccine, spans 8 to 10 weeks, at an approximate cost of $60,000. Producing a new vaccine for each cancer patient is prohibitively expensive. However, as the cost of genomic sequencing continues to decline—dropping from millions of dollars in 2000 to just $1,000 today—it is highly likely that major international pharmaceutical companies will strategically position themselves in advance to capitalize on the commercial potential of tumor neoantigen vaccines.

In 2015 alone, Gritstone Oncology, a San Francisco-based startup, secured $102 million in Series A financing, led by Versant Ventures and The Column Group. Neon Therapeutics, based in Cambridge, Massachusetts, raised $55 million. In November, Paris-based pharmaceutical giant Sanofi announced a partnership with BioNTech of Mainz, Germany, to develop neoantigen vaccines.

From genetic testing to gene therapy, these are all practical applications of precision medicine driven by the gene industry. International pharmaceutical giants have already taken the lead in strategizing the application of gene sequencing technologies in new drug development. Apart from relying on generic drugs as an indirect approach, can domestic pharmaceutical companies leverage the rise of China’s gene industry to achieve “overtaking on a bend”?



3 Domestic Pharmaceutical Companies' "Overtaking on a Bend"

As an industry matures, the “7-2-1” rule typically emerges: the market leader captures more than half of the share, reaching 60–70%; the second-largest player holds a stable 20–30% share; and the remaining less than 10% is fiercely contested by a large number of small enterprises.. The landscape of domestic pharmaceutical companies is far from mature; it can only be described as being in a transitional phase. During this stage, no single dominant giant has emerged to capture more than half of the market.

Over the past decade, major international pharmaceutical companies have commonly adopted mergers and acquisitions (M&A) as a strategy for rapid growth. Through M&A, these companies can quickly expand their product portfolios, extend product life cycles, and rapidly gain a competitive edge in new markets. In the capital-driven business landscape, traditional growth models are no longer suited to market shifts in the post-information revolution era. Only through M&A can companies outmaneuver competitors and accelerate performance growth.The trend accompanying M&A strategy is an increase in deal size and a decrease in deal volume, a process in which the “7-2-1” rule plays a role.

No domestic pharmaceutical company has risen to the top as rapidly through mergers and acquisitions as Guangzhou Pharmaceutical Holdings Limited (GPHL). According to the 2014 Top 100 Chinese Pharmaceutical Industry List released by the Southern Institute of Pharmaceutical Economics, GPHL ranked first. The prescription drug sales revenue of its pharmaceutical segment was approximately $2.25 billion, slightly lower than the $2.31 billion in sales revenue reported by India’s Sun Pharmaceutical, which ranked 48th among the global top 50 pharmaceutical companies. Since the 1990s, GPHL has rapidly expanded through mergers and acquisitions, with its asset restructuring with Baiyunshan Pharmaceutical Group being the largest such transaction. Currently, GPHL has more than 30 subsidiaries, and its product portfolio includes modern traditional Chinese medicines, Western medicines, and biologics. Its products are sold to mainland China, Hong Kong, Macao, Southeast Asia, Europe, the United States, and other countries and regions.

The second example is WuXi AppTec, which was discussed in detail in the 25th article of my gene industry analysis series, “Three Key Players Worth Watching in the Precision Medicine Landscape” (follow the WeChat official account Gene Space: gene_world). This Chinese company specializes in outsourcing services for the pharmaceutical and biotechnology sectors. It has actively expanded and strengthened its overseas operations primarily through mergers and acquisitions (M&A) and investments, serving as a typical representative of companies pursuing global expansion. During interviews with L.E.K. Consulting, its Chief Operating Officer stated that “overseas M&A is one of WuXi AppTec’s primary growth strategies.” The company has consistently sought to acquire cutting-edge technologies by purchasing international firms. The first acquisition launched by WuXi AppTec after its listing on the New York Stock Exchange was AppTec Laboratory Services, a U.S.-based company providing services to the biopharmaceutical and medical device industries. In 2014, WuXi AppTec acquired NextCODE Health, a leading genetic analysis and bioinformatics company with operations in both the United States and Iceland. This acquisition positioned WuXi AppTec with the potential to become a global leader in the field of genomic medicine.

A side effect of M&A strategies is the relative deceleration of innovation capabilities. Under pressure from competition and pricing, pharmaceutical companies need to achieve $10.3 billion in prescription drug revenue, while medical technology companies require $4.4 billion in sales revenue, to rank among the top 20 globally; to enter the top 50, prescription drug revenue must reach $2.2 billion. As M&A strategies can no longer drive rapid growth, many leading pharmaceutical companies are urgently seeking new strategic approaches.

The second strategy is to pioneer innovative products and enter new markets. The precision medicine applications driven by genetic products, as mentioned earlier, represent the coveted new “blue ocean” for pharmaceutical companies. Whether through seeking strategic partners and contract research organizations (CROs) or relying on innovation-driven new drug development, companies can expand into new therapeutic areas, shorten R&D timelines, and reduce costs.

Pfizer serves as a prime example, with 70% of its sales revenue derived from blockbuster drugs. Many of these products were ultimately acquired by Pfizer following successful co-promotion agreements with other companies, driven by their strong sales performance. Notable examples include Celebrex, originally a product of Pharmacia, and Lipitor, initially developed by Warner-Lambert. Over the past two decades, the proportion of revenue contributed by blockbuster drugs among the top 10 pharmaceutical companies rose from 26% in 1995 to 43% in 2000.



Domestic pharmaceutical companies have achieved an “indirect breakthrough” through generic drugs; can they achieve a “leapfrog advancement” in the field of precision medicine in the future?

Mergers and acquisitions, partnerships, innovative product development, and entry into new markets are all strategic plans for Chinese pharmaceutical companies to break into the global top 20 in the future. From the perspective of layout in the gene industry, Chinese pharmaceutical companies need to actively promote their strategy of entering new markets. Currently, WuXi AppTec and BGI Genomics have taken the lead in the layout of the gene industry. As the growth stage is still far from reaching the "7-2-1" rule, Chinese pharmaceutical companies and gene technology companies need to continue exploring new markets with a global perspective and constantly explore international markets.

Mergers and acquisitions (M&A) in China will continue to occur. M&A activities between pharmaceutical companies and genetic technology firms will remain active over the next three years. With the continuous development of genetic technology companies (which should be distinguished from gene sequencing research service providers), particularly the rapid rise in China of tech firms specializing in genetic big data and medical big data (unlike traditional sequencing service providers transitioning into so-called “genetic big data companies,” the tech firms referred to here are asset-light entities with backgrounds in internet technologies and bioinformatics, lacking heavy assets such as equipment and laboratories), the M&A trend for pharmaceutical companies will be characterized by an increase in deal size and a decrease in the number of transactions.

Attempts to pioneer innovative products will begin among China’s leading pharmaceutical companies. Due to the lengthy timelines, high costs, and low success rates associated with new drug development and commercialization—especially when compared to generic drugs, which offer lower costs, reduced risks, and faster capital recovery—China’s pharmaceutical industry has become heavily concentrated in generic drug production. Within this landscape, domestic gene technology companies have been able to achieve significant independent growth. It is believed that these startups, through three to five years of technological accumulation and amidst fierce industry competition, will gradually identify promising entry points in the healthcare sector.

Undoubtedly, gene technology companies represent an immeasurable new force in China’s future healthcare and biopharmaceutical industries, warranting high expectations.

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