China emerging as a global biotechnology player

Key takeaways

• Significant state-supported investment in research and development, combined with established life science infrastructure, is bolstering the rapid growth of a Chinese biotechnology industry.
• China has seen early success as “fast followers,” licensing and commercializing drugs developed by Western biopharmaceutical companies into a domestic health care market with large patient populations.
• We believe China must develop and commercialize its own treatments to become a profitable biopharmaceutical competitor. This has begun to occur as an expanding number of Chinese biotechs are now licensing new compounds to multinational pharmaceutical firms.
   

Swift evolution sparked by healthcare push, R&D spending

China’s quest for independence from the West, most notably the rise of its own technological prowess as evidenced by global leadership in electric vehicle production and the success of its DeepSeek AI model, is also reshaping an overlooked part of the world’s second-largest economy: health care. Just five years ago, China was dependent on Western companies for access to leading drugs. Today it is investing heavily in the research and development (R&D) necessary to create its own therapeutics through a homegrown biotechnology industry. The fruits of these innovative efforts are starting to show, which we believe will create opportunities for global investors.

A viable biotechnology industry is part of the country’s push over the last 50 years to elevate its health care system to treat an aging and sick Chinese population. Commercial biotech treatments are needed to address diseases and other conditions beyond the scope of traditional Chinese medicine, which today still represents  30%–50% of treatments, according to the World Health Organization. Yet China is not simply trying to improve domestic medical care, it is also seeking to claim a profitable share of the global biopharmaceutical market.

Compared to the United States. and other developed markets that currently dominate clinical development and sales of prescription drugs, China arguably has greater life sciences infrastructure and institutional support. The country’s focus on technological self-sufficiency has led to more STEM graduates than the rest of the world combined and about 50% of the world’s total.¹ The country produces 120,000 PhDs every year, three times the US output.²

In terms of research and development, spending as a percentage of gross domestic product (GDP) rose to around 2.7% of GDP in 2023 from 0.9% 20 years prior³ and China has approached parity with the United States in gross domestic spending on R&D (Exhibit 1). China surpassed the United States in total clinical trials in 2021 and continues to widen its lead. These advantages allow China to become a leading maker of commercial molecules to treat cancer and other diseases with large patient populations.

Evolving Toward Blockbuster Drug Development

Chinese biotechnology companies are not yet at the leading edge in developing breakthrough drugs with blockbuster potential. However, they have thus far been successful either licensing and commercializing drugs from Western innovators or developing drugs that act as “fast followers” in large disease markets established by Western companies. Chinese firms often license drug candidates developed in the West from smaller US biotechnology companies that lack the capital and regulatory expertise to sell into the domestic Chinese market. In the case of fast followers, certain technologies that become commoditized, such as antibodies and certain small-molecule drugs, can now be produced more effectively by Chinese companies.

One of the drivers of new commercial therapeutics in China is the country’s National Reimbursable Drug List (NRDL)—a list of drugs for which the state health insurance system will reimburse out-of-pocket costs to a large proportion of its patients. China has a population four times the size of the United States, and a higher prevalence of medical conditions such as certain cancers. While China agrees to pay a fraction of the US price for prescription drugs, it can partially offset this with higher patient volumes. Drugs targeting oncology and rare diseases will likely command lower price concessions due to increased need. In addition, a new development of a C-class drug list (to be finalized in 2025) allows for more costly drugs to fall under China’s health insurance coverage without being held to the same price concession standards of the NRDL.

The paths to profitability in the Chinese biotech industry are evolving rapidly and there will be a mix of business models, from developing products for domestic to a combination of domestic and foreign markets. Profitability at the moment is slim, but we expect to see this industry continue to evolve quickly and gain attention across the biopharmaceutical space.

Cost and efficiency are the primarily selling points for Chinese labs in developing early-stage compounds for large cap partners. Over the last several years, these Chinese biotech companies have leveraged their production expertise and deep population of biologists and chemists to develop an impressive innovation engine. An expanding number of Chinese biotechs are now producing new compounds that multinational pharmaceutical firms are licensing in accelerating numbers (Exhibits 2 and 3).