After decades of notoriety for inferior “copycat” products, Chinese industry is now captivating the world with its breakneck pace of technological progress. However, there is one industry that is often overlooked in conversations on Chinese innovation: biopharmaceuticals.
China’s biopharmaceutical industry has been on the top of many watchlists coming out of the pandemic. In 2020, Chinese companies submitted 19 biotech-related assets to be reviewed by the US Food and Drug Administration (FDA). Furthermore, the average share price of Chinese biotechnology companies doubled in 2020, significantly outperforming those of American and European counterparts. In one of the global economy’s harshest periods, the Chinese biopharmaceutical industry has shown the world its robust nature.
For these reasons and more, foreign investors are interested in the promising future of Chinese biopharmaceuticals. For many, the excitement surrounding the industry outshines its imperfections. However, as is the case for many strategic industries in China, there remain additional risks and barriers to entry for foreign participants in the Chinese biopharmaceutical market that are crucial to understand before entering.
China’s Biopharmaceutical Industry
Biopharmaceuticals are medicines created from living organisms and modified at the molecular level. The use of living cells in these medicines’ production is what distinguishes biopharmaceutical products from traditional pharmaceutical products. Biopharmaceuticals have attracted particular attention in the healthcare industry due to their ability to treat autoimmune diseases.
What Is the State of China’s Biopharmaceutical Market?
If Chinese biopharmaceuticals are a globally competitive industry, why are they not discussed in the media as often as other Chinese technological advancements, such as electric vehicles and artificial intelligence? One possible explanation is that the industry has just recently begun to grow quickly.
Chinese regulatory reform on biopharmaceuticals over the past five years has acted as a catalyst for industry growth. In the early days after Chinese regulators initially permitted clinical trials for biopharmaceuticals in the early 2010s, the industry enjoyed relatively relaxed oversight. There were few protocols for researchers to follow, and most were selectively enforced. However, public outrage over the death of a college student due to an unregulated cellular therapy treatment in 2016 motivated regulators to crack down on the industry. Shortly thereafter, stricter policies on both research and development (R&D) and clinical trials were released and, crucially, enforced. This has since defined a clear process for present day researchers to properly prepare procedures and products for regulatory approval.
How Has the Government Supported China’s Biopharmaceutical Industry?
The new regulatory policies not only increased R&D safety, but also streamlined the registration process for biochemical products and procedures. Prior to the reforms, the average review time for new drug applications submitted to the Chinese Center for Drug Evaluations was 15-40 months. However, when the revised policies were implemented in 2017, the average review time dropped to 2-10 months. Poignantly, 100 new molecules were created that year, showing a dramatic increase in biopharmaceutical approvals of nearly 300% from just three years earlier in 2014. The marked decrease in registration time for new biopharmaceuticals thus brought an immediate impact on the overall health of industry development.
Regulatory reform also lead to an uptick in growth and innovation in biopharmaceuticals. In 2018, China’s biopharmaceutical market had a total value of approximately US$130 billion, making it the second largest biopharmaceutical market in the world. Its success continued into 2021, as the National Medical Products Administration approved the first chimeric antigen receptor (CAR) T-cell therapy product in China, which is designed to treat cancer patients in the event of a relapse. CAR T-cell therapy involves altering a cancer patient’s T cells to target and destroy the cancer cells in their body. Although the innovation and quick development in the industry is fairly recent, this discovery and more are on track to elevate biopharmaceuticals into China’s next major global industry.
Opportunities for Foreign Investment in Chinese Biopharmaceuticals
Foreign Companies Can Use China’s Drug Registration Process
In 2016, the National Medical Products Administration (NMPA) released policy on the submission of international drugs. According to the revised policies, foreign sponsors could leverage the same expedited clinical trial and approval process as local Chinese organizations by submitting new drug applications in China. The regulatory environment for foreign companies further improved in 2017, when the NMPA permitted international clinical trial data to be submitted as part of the approval process in China. This has been viewed as a strong incentive for foreign companies that may be looking to shorten product launch timelines and reduce the amount of expensive clinical trials required by competing markets like that in the US. As a result, many foreign companies consider China a competitive location for biopharmaceutical registration.
China Has Potential to Be a Global Leader in Cellular Therapy
Currently, the Chinese biopharmaceutical industry’s greatest competitive strength lies in cellular therapy. As previously mentioned, the first CAR T-cellular therapy product was approved for administration in China earlier this year. However, this is not China’s only success related to cellular therapy. Between 2017-2019, over 80 international cellular therapy clinical studies were submitted in China, making it the world’s largest sponsor of cellular therapy-focused clinical studies. Of course, China’s successes are not limited to international collaboration: local Chinese academic and hospital-sponsored programs account for 89% of the CAR-T cellular therapy trials completed between 2019-2020. Domestic and international contributions have both aided in stimulating Chinese cellular therapy development. If these levels of clinical studies continue, China could become a global leader in cellular therapy.
The Risks for Foreign Investors
Market Entry is Difficult for Foreign Companies
Restrictions on international biopharmaceutical companies in China have relaxed in recent years. However, most foreign companies lack access to many of the advantages enjoyed by their local Chinese counterparts. For example, foreign investment in cellular therapy-focused technology is restricted. Foreign players interested in cellular therapy would then need to rely on joint venture partnerships with local companies to enter the Chinese market. While many firms have found success in China by way of joint ventures, forced intellectual property transfer remains a concern for institutions that partner with Chinese entities.
For other subsegments of the industry, regulation can be even more strict. According to China’s Foreign Investment Negative List 2020, it is prohibited for international entities to invest in the development and application of therapeutic technologies. International contributions might have played a role in facilitating the growth of the Chinese biopharmaceutical industry, but that does not mean they are rewarded with easy access to the buying power of the domestic market.
Limited Enforcement of IP Protections
China’s historically limited enforcement of IP protection in China has frustrated countless foreign companies. In 2017, the National Bureau of Asian Research reported that the US economy had lost approximately US$225 billion due to IP theft, and the sum will only continue to grow. Due to the Chinese government’s desire to build up its own technology industry, local businesses have often been able to steal IP from foreign companies with little-to-no repercussions. From the government’s perspective, the pursuit of domestic innovation supersedes the need to protect the interests of international entities. This is especially concerning for foreign companies involved with biopharmaceuticals. Their research is particularly vulnerable to theft during the regulatory review process and could be used in the domestic market without their approval. Such risks have made many international companies reconsider entering the Chinese market.
As a result, the government has taken steps in recent years to take the protection of foreign IP more seriously. The US China Phase One Economic Trade Agreement signed in 2020 had a special section dedicated to pharmaceuticals, stating that the government would establish a method of addressing patent disputes as efficiently as possible, even allowing the patent holder to receive compensation in the event of their product being infringed. Additional policies were implemented later that year, with the Standing Committee of the People’s Congress passing reform laws that would enforce IP protection on pharmaceuticals. Although these issues are finally being properly addressed, it cannot be guaranteed to what extent these policies will be enforced. Therefore, foreign biopharmaceutical companies should continue to weigh the risks of a Chinese market expansion seriously to safeguard their research.
Forced Technology Sharing
International biopharmaceutical companies must also deal with the mandatory sharing of technology with the Chinese government. In order to invest, sell, or do any form of business in China, foreign firms are expected to share their findings with the Chinese government. This has been a concern for countless industries operating in China, and biopharmaceuticals is no exception. International companies may be able to minimize how much of their technology is shared directly with a local company via joint ventures; however, they cannot avoid sharing all of their research with the Chinese government.
Similar to the limited IP protection, the Chinese government has been forced to address the issue of forced technology sharing in recent years. Article 1.9 of the US China Phase One Economic Trade Agreement states that the Chinese government will “prohibit the unauthorized disclosure of undisclosed information, trade secrets, or confidential business information by government personnel or third party experts.” Furthermore, the government will only request the amount of information necessary to satisfy security views. These policies should improve the situation regarding the amount of data shared with the government and local companies; however, there is still uncertainty regarding the level of compliance.
Unauthorized Promotion of Biopharmaceutical Procedures
Some domestic entities have taken advantage of China’s rise in biopharmaceuticals to swindle naïve consumers. The Chinese government has not legalized the selling of cellular intervention, but that has not stopped countless unauthorized stem cell-based procedures from appearing online. These advertisers claim that their products can cure various terminal illnesses, even going as far as to legitimize the products with counterfeit credentials. For example, a certain advertisement promised that its product could utilize both cellular therapy and bone marrow transplants to cure a patient’s amyotrophic lateral sclerosis (ALS). ALS Association Vice President Lucie Bruijn, Ph.D. criticized the advertisement, stating that there is no evidence that bone marrow transplants are an effective method of curing patients with ALS. She further argued that it was unethical for these companies to profit off of promises to cure patients with unproven procedures.
The promotion of unauthorized procedures is also harmful to international biopharmaceutical firms operating in China. As previously mentioned, many foreign companies often form joint ventures with local companies. If a foreign company has the misfortune of partnering with a dishonest local company, they could be exposed to significant reputational risk or even fraud allegations. As such, international organizations must be cautious when selecting a Chinese company with which to create a joint venture. It is prudent to partner with a firm with significant on-ground knowledge that is familiar with the Chinese market to help evaluate potential partners based not only on credentials, but also ethical practices.
Biopharmaceuticals are a rising star in the conversation on Chinese technological innovation. The streamlined registration system and large pool of strong domestic and international competitors have developed Chinese biopharmaceuticals into a globally competitive industry. Foreign companies interested in entering the Chinese biopharmaceutical market will be granted access to incentives that rival those in their home country. Nevertheless, foreign companies must also overcome a potentially treacherous environment that could endanger both their IP as well as their organizational reputation. However, there are market entrance strategies that can minimize these risks, and as long biopharmaceutical companies are sufficiently prepared, there remains unprecedented opportunity for those brave enough to enter.