Rise of China's Biopharma - Is USA Biopharma ready to upgrade?

There has been a shakedown between China and USA and this time it is not the semi-conductors war. It is Biopharma!

What Triggered this Geopolitical Showdown?

• In Sep 2024, the U.S. Congress passed the "Biotech Security Act," imposing restrictions on federal contracts with five major Chinese biotech firms - WuXi AppTec, WuXi Biologics, BGI Group, MGI Tech and Complete Genomics, citing national security concerns, due to their alleged ties to the Chinese government and military
• Lawmakers asserted that the sanctions were necessary to prevent China from gaining a military edge through biotechnology
• These restrictions have arisen from an increasing sense of insecurity about maintaining U.S. dominance in the biotech sector
• What appears to be a concerted effort for protecting national security may have many economic angles at play -The sanctions may also be an outcome of economic interests of American pharmaceutical giants aimed at containing significant amount of revenues which are or could have been shared with Chinese biotech, which in all circumstances, seems to be a fair from their point of view
• However, as per experts' opinion, The Biosecure Act reflects a delayed effort by US to contain the impending damage by the growth of Chinese Biotech companies, even at the peril of alienating itself from global biotechnological cooperation crucial for advancing public health and American companies already have started putting out some of these fires -Have a read!

The Impact:

• On one side, as a reactionary outcome (or maybe a financial resolution), China's WuXi AppTec has finally decided to sell its cell and gene therapy manufacturing unit Advanced Therapies to U.S.-based private equity firm Altaris LLC for an undisclosed sum. It is expected that the other four companies, which have also suffered restrictions due to this act, might follow suit
• However, on the other side, just before wrapping 2024, American pharmaceutical companies struck a handful of deals with China-based biotechs, with ADCs as the "star candidate" for majority of these deals, indicating that Chinese drugs have become more trustworthy
• As per Jefferies/Biospace, this uptick in U.S.-based companies licensing drugs from China in 2023 and 2024 is occurring despite “geopolitical hiccups

However there is more than what meets the eye – Were the reasons of these sanctions entirely geopolitical or there were other forces behind these moves – Let’s take a deep dive!

?Is it really about National Security?

• Proponents of the bill express fears that reliance on Chinese biotech firms could lead to vulnerabilities in the US supply chain, particularly in pharmaceuticals and medical supplies
• Some experts contest that the perceived security risks are overstated, suggesting the bill reflects broader geopolitical tensions rather than specific threats from the targeted companies
• The lack of clear criteria for which companies are targeted raises questions about the transparency and fairness of the legislative process
• The bill has drawn condemnation from China, which views it as discriminatory and detrimental to cooperation between the two nations in critical sectors like biotechnology

Potential Economic Ramifications

• Experts warn that blacklisting Chinese biotech firms may backfire, leading to increased costs for American consumers and delays in drug development due to disrupted supply chains
• The legislation could also provoke retaliatory measures from China, further straining economic ties and hindering bilateral trade
• Analysts suggest that a more cooperative approach might yield better outcomes for both nations, particularly in addressing public health challenges

Industry Responses and Future Implications

• Some targeted companies have publicly denied any security risks, arguing that they comply with international regulations and have no access to sensitive US data
• Industry leaders emphasize the importance of maintaining open lines of communication to avoid unnecessary disruption in biotechnological advancements
• If the bill progresses through the Senate, it may set a precedent for further legislative actions against Chinese companies, potentially escalating the ongoing technology rivalry

How did Chinese Biopharma become a looming threat for its US counterparts?

According to BCG, the innovation in China is tripartite

TRANSFORMATION 1: Formation of new Biopharma companies:

• The number of new Chinese biopharma companies has grown exponentially (~140 companies between 2010-2020) and this growth comes as a stark pointer considering that company formation in other major markets such as the US, EU-4/UK has declined

• As per a report by Clarivate, there have been 3 key initiatives that have contributed towards the transformation of the Chinese Biopharma - The 'Made in China 2025' strategy, The 'Healthy China 2030' and the '14th Five-Year Plan'
• There has been a concerted effort to focus on biotech innovation and huge push from the Chinese government under its 14th Five-Year Plan
• In the 14th Five year Plan, emphasis has been laid on research around cutting edge science and technology on biological drugs, innovative vaccines and antibody drugs. Focus on building manufacturing prowess for innovative drugs continues to drive competitiveness amongst domestic players. Drug review and approval timelines for drugs for urgent clinical needs and rare diseases has been expedited
• Domestic companies are now approving more homegrown drugs than imported ones, reflecting a major shift in drug development and approval processes
• In addition to these major drivers, There have been a series of reforms in the Chinese Biopharma industry since 2015, that have been strategically focused to reduce approval times, and improve patients access to innovative therapies
• These reforms include establishment of a marketing authorization holder (MAH) system and a priority review pathway for innovative drugs, both of which have led to increase in new drug applications as well as approvals
• Chinese molecules became increasingly important in 2023 and 2024 and as per the the latest report from Stifel, which indicates that nearly a third of molecules sourced by big pharma through licensing deals are coming from China, which is no surprise given the well laid and well rounded plan that was being followed since 2015
• China’s out-licensing deals grew from 15 in 2019 to 33 in 2023 with a huge focus on oncology, and some key partnerships in small molecules and biologics and the share of global R&D involving Chinese pharmaceutical companies increased from 5% in 2017 to 16% in 2024

In 2023, the number of Class 1 and 2 new drug approvals was 89, which is more than seven times the number approved in 2018 -Clarivate

TRANSFORMATION 2: Increase in Funding & Infrastructure Support:

• Funding. Increase in PE/VC funding has "pushed" the growth of Chinese Biopharma - Today, China has the second-highest funding globally
• Infrastructure There has been a significant support by the Chinese government for the development of science parks and city hubs for innovation and R&D by offering land to developers on very attractive terms. This effort and financial incentive translated in the growth of biotech science parks from 400 to about 600 from 2016 to 2020

TRANSFORMATION 3: A carefully synced cycle of innovation -From "me-too" drugs to a leader in global innovation

• Innovation in China happened in three distinct phases: from monotherapy “me-too” and “me-better” companies, to indication expansion /antibody technologies, and finally to novel targets and modalities (such as cell therapies)
• A report from Clarivate states that he focus of innovative R&D in China has shifted from small molecules to biologics, with the proportion of biologics increasing from about 40% in 2015 to 58% in 2023
• Notably, the number of antibody drug conjugate (ADC), bispecific antibody, and CAR-T pipelines has increased by seven, five, and four times, respectively. Additionally, emerging therapies such as siRNA, exosomes, CAR-NK, and mRNA have entered late stages of development.

Planned technological Pursuit

• Chinese companies are rapidly adopting advanced technologies such as CRISPR gene editing and CAR-T cell therapy, achieving notable successes in clinical trials
• The number of clinical trials in China almost doubled from 2,979 in 2017 to 6,497 in 2022, surpassing U.S. trial numbers
• China currently leads global registrations for new drug clinical trials, particularly in oncology and immunotherapy

Global Impact and Cooperation

• Chinese-made drugs are becoming recognized globally, with over 50 innovative drugs available on the international market in 2023
• Collaborations between Chinese firms and U.S. companies, such as a $1 billion partnership for cancer therapy development, highlight China's capability for independent innovation
• Chinese biopharmaceuticals are not only affordable but are also essential for patients in developing countries, showcasing their potential to benefit global health

“As of July 2024, 86 new drugs under active research in Mainland China have received special designation from the U.S. FDA (breakthrough therapy, priority review, orphan drug, fast track)” -Clarivate

• As per Informa, In 2024, there were 17 China biopharma that signed partnerships with an ultimate value of $1 billion or more. The total value of these deals was $34.6 billion with upfront payments of $1.5 billion. Although many of the companies won’t reach the everything-must-be-perfect billion-dollar targets, the size of these agreements shows that China’s biopharmas have the attention of their western competitors/partners. Chinese-developed assets are holding their own in western markets
• China is taking a range of steps, including regulatory changes, funding of biomedical research and venture capital (VC), restructuring of the industry to eliminate many smaller producers, expanding medical tourism, and expediting listings on the Hong Kong exchange, to propel China to become a major global biopharma competitor—particularly by developing a world-class generics industry.

However, while some of these policy actions are fair and legitimate, many are not because they are “innovation mercantilist” in nature, seeking to unfairly benefit Chinese firms at the expense of U.S. and other foreign firms. Clarivate

• In other words, China is seeking to challenge the United States in one of the most high-value-added, innovation-intensive industries in the world—the kind of industry for which the United States has held a competitive advantage for decades

The Bottomline

U.S. Economic Interests vs. National Security

USA Biopharma industry has its hands full - LOE and loss of revenues due to patent expiries of blockbuster drugs, the rise of AI driven drug discovery which most companies are still grappling with & of course the IRA and other policies which will bring about a formidable changes in their pricing & access conundrum. Whew!

And just when you want to catch a breath - Comes the rising wave of China's Biopharma industry, which has been growing by leaps and bounds over the last decade. Significant leaps in the biomedical innovation and technological advancements like the use of AI and big data has been very well received and incorporated in the drug discovery process as well as in reducing R& timelines and costs. This legislation aims to reduce U.S. reliance on Chinese biotech innovations by barring federal agencies from contracting with these companies

According to American lawmakers, these measures are crucial to safeguarding U.S. national security, as they believe Chinese biotechnology poses a potential threat

However, There are contrarian views indicating that the sanctions are? manifestation of a deeper unease about the growing competitiveness of China's biotech industry, which is working its way to being a crucial forces in the global Biopharma market.

What culminated into these restrictions seems to be a delayed reaction towards the burgeoning growth of Chinese Biopharma's growth, both in terms of innovation as well as strategically planned partnerships with US Biopharma. US Biopharma has realized the innovation potential of Chinese Biopharma Companies and continue to partner with Chinese companies

What can US Biopharma Companies Do to "Safeguard" Their Interests?

The US can take several steps to protect its biotechnology firms and maintain its global leadership in the field- As per ITIF, Key Pointers include:

Strengthening Domestic Innovation:

• Increase R&D Funding: Boost funding for agencies like the NIH to stimulate research and development. This includes supporting the development of new technologies like AI and quantum computing to lower the cost of drug discovery and production. Legislation similar to the CHIPS Act, allocating at least $5 billion to incentivize the establishment of new biomedical production facilities, could be implemented. A joint industry-university-government R&D partnership should be supported to reduce drug development and production costs.
• Investment Incentives: Expand investment incentives for biopharmaceutical companies to encourage domestic innovation and production. This should include consideration of policies ensuring beneficiary access to innovative treatments, such as passing the MCED Screening Coverage Act to address coverage gaps
• Data-Driven Drug Development: Support data-driven drug development by implementing good data-sharing policies and utilizing privacy-enhancing technologies (PETs). The Privacy Enhancing Technology Research Act, currently in the Senate, should be supported

Improving IP Protection:

• Strengthen the IP System: Enhance the intellectual property system to incentivize long-term medical research and deter IP theft. This requires proactive measures to combat espionage and the illicit transfer of trade secrets, as evidenced by numerous documented cases of IP theft by Chinese entities.

Mitigating Supply Chain Vulnerabilities:

• Reshore Manufacturing: Support policies to increase domestic production, including R&D for biopharmaceutical process innovation, funding for biomedical manufacturing centers, and financial support for new domestic biomedical production facilities. A focus on innovation in advanced manufacturing, pharmaceutical "new prior" knowledge, and training/education of the workforce is crucial. This aligns with the recommendations of the National Institute for Pharmaceutical Technology and Education.
• National Security Measures: Pass legislation, like the BIOSECURE Act, to protect national security by limiting the involvement of foreign biotechnology companies deemed a security risk (like several Chinese companies) in US government contracts and research collaborations.

Addressing Price Controls:

• Resist Excessive Price Controls: Limit government drug price control schemes. While beneficial to low-income populations in the short-term, excessive price controls significantly reduce pharmaceutical firms’ net profits and hamper future drug R&D investments, allowing China to gain ground.

By implementing these multifaceted strategies, the US can proactively safeguard its biotechnology firms, fostering innovation, ensuring national security, and maintaining its global competitiveness in the biopharmaceutical industry

Conclusion

The rise of Chinese biotechnology poses significant challenges to American dominance in the field. If the U.S. continues to implement restrictive measures rather than embrace global cooperation, it risks falling behind in the technology race, ultimately impacting healthcare advancements worldwide

Disclaimer: This article represents a fact-based research piece and is not in any manner a guidance document or represents an exhaustive review. Few excerpts have been derived from paid financial analysts' report and may not be available for free distribution. In case of any missed or incorrect hyperlinks or incorrect data, please message!

The author represents a CI firm called Intelligience. Please DM her for a detailed discussion around the evolving CI landscape in Biopharma!

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