China’s Five-Year Plan for Biotech Making it Increasingly Attractive for Global Pharma

Beijing-based Daxue Consulting thinks China will be the world’s leading producer of pharmaceuticals in less than 10 years. Some will stay in the local market. A lot of it will come here.

Since at least 2012, China has made biotech, including pharmaceuticals, a major part of its annual Five-Year Plan. These are Beijing’s official economic sectors and sub-sectors the Chinese government supports with loans, grants, subsidies, and other incentives in the hopes to build national champions, regional champions, and ultimately, global champions in the space.

It is then no surprise that as labs close and consolidate across major drug manufacturing centers in Europe, for example, they continue to increase the headcount and outsource in China.

It is a little-known secret that Pfizer’s German partner, BioNTech, partnered in a $200 million deal with Shanghai Fosun Pharmaceuticals to make the Covid-19 vaccine in China. This deal was ultimately blocked because China wants its own home-grown anti-Covid vaccine fighting star power lab.

Setbacks like that do not turn off big pharmaceutical companies to China, however. The big global drug makers continue to partner with China not just because it is a low-cost producer, but because they want to sell drugs into China’s home market.

Roche Pharmaceuticals, the second biggest drug maker in the world after Sinopharm of China, is increasing its headcount around the world. In 2012 they had 36,511 employees in Europe and 17,976 in Asia, most of them in China and India. By 2021, their European headcount rose to 43,181 and Asia rose even more in percentage terms to 22,674.

In 2016, Pfizer invested $350 million in a greenfield biotech center in Hangzhou. It was completed in 2018. Pfizer has 28,000 employees in the U.S., according to its 2021 10-K filing. And around 11,000 and rising in China.  Pfizer is still an American company. They have 10 labs in the U.S.; and four in China. But while India has long been known as the go-to outsourcing partner for Western pharmaceutical companies, especially for active ingredients and low-cost generics, China is gaining. It will take part of India’s market, seek to replace part of it on the low-end side, and stands ready to be a contract manufacturer for Western labs like Pfizer for new branded drugs. Some drugs will likely be exported, including to the U.S.

To those on Capitol Hill who have bemoaned China’s ability to learn a market, compete in that market, and then come to dominate that market, the future of the pharmaceutical industry is following a similar path.

China Pharma: Many Roads Point Its Way

China is on the cusp of being a pharma industry powerhouse. It is already rivaling India in terms of active pharmaceutical ingredients (API) and is a prime source of key starting materials used in making those API in India, for example.

China is the world’s second-largest pharma market. The country’s growing middle class, its sheer number of millionaires and billionaires looking to stay alive and healthy, and lackluster demographics picture make for a strong healthcare market overall, including medication, but not limited to that.

The pharma side of China’s mega healthcare market is growing. Over the last half-decade, the market capitalization of Chinese biopharma companies grew from $1 billion in 2016 to over $200 billion in 2020. According to CEC Capital, Chinese healthcare startups raised RMB 190 billion in 2020, up from RMB 92.8 billion in 2019.  And from 2010 to 2020, 141 new drug and biotech companies were launched in China, compared to 79 start-up labs in this space between 2000 and 2010. By comparison, the number of biotechnology companies in the U.S., EU, and Japan declined over the last decade.

China’s Five-Year Plan: Become Leader in all Things Biotech

Over the last years, China issued 14 Five-Year Plans, starting in 1953. The Five-Year Plan is a guiding document that leads policies for the country’s investments in industrial sectors and in social development. The 14th plan came out last year and goes to 2025, though many of the sectors named are long-term targets – with objectives and goals set for 2035.  The plan is managed and led by the Central Committee of the CCP.

The latest plan laid out the development of China’s pharmaceutical industry, giving us some clues to find the investment hotspots and development strategies of the CCP over the next five years. Pharma is part of the biotechnology sector, which includes new medical equipment for drug deliveries, or advanced equipment used in drug production. So China is not just focused on generics, new drugs, or R&D for itself and foreign branded drug makers, but also investing in the equipment that is required to make those medicines in a lab.

Nowadays, China has many innovative drug companies. However, it is not known to have any “first in class” or “best in class” drug companies. China is a volume play for now, which should not be discounted. The CCP is not interested in China just being a low-cost, high-volume producer of generic drugs, or even branded ones in partnership with the West. Under the Five Year Plan, it is clear that when China says it was to have a “leadership” position, it means they are not interested in being global pharma’s little sidekick.

China will use a “dart board policy” – a market theory that states if you throw a lot of money at a lot of different companies, the chances you will come close to the bullseye a couple of times are as good as the investor who just picked a favorite company or two. China is throwing lots and lots of darts.

The 14th Five-Year Plan calls for an average annual increase of more than 10% in R&D investment across the industry. It also places a higher requirement for internationalization, explicitly stating that “cultivating a number of world-famous brands; forming a number of large pharmaceutical companies with globalized R&D and manufacture ability and high proportion of international sales” is the aim. Worth noting, the largest pharmaceutical company in the world, Sinopharm, is owned by China National Pharmaceutical Group Corporation, a state-owned enterprise.

Pharma is a strategic industry for China. All facets matter. From the low-cost high-volume production India is known for, to the novel and innovative, which is what the European and American drug makers are known for. China is going after both segments. Most countries regard the pharmaceutical industry as a key industry. It is one of the most hotly traded products in the world, along with things like cars and oil.

The China Impact on U.S. Pharma

APIs and intermediates are key raw materials to manufacture pharmaceutical formulations like tablets, capsules, and injectables. China, due to its own home market and not exports, is the biggest producer of medication and the biggest exporter of pharmaceutical ingredients – both APIs and key starting materials.

China wants to become a bigger player in the contract manufacturing market, currently led by Lonza, Inc., a Swiss manufacturer with labs in the U.S., as well as three in India and five in China. This market for outsourced pharma labs is expected to grow by more than 14% over the next five years.

During recent years pricing pressures from governments have driven manufacturing contractors (CMO) to expand offshore. Contractors, who do not have their own in-house menu of drugs, but often work for numerous bigger companies and do an entire gambit of lab work, be it drugs, health supplements, or food. They main offshoring centers are India, China, Singapore, South Korea, and Malaysia. Significant investment continues to flow into Asia from the big pharma companies, with many western CMOs expanding operations in China.

Chinese contract development and manufacturing organizations (CDMOs) are also extending their services into biologics, even as homegrown biotechs begin to develop the capability and capacity of independent biologics to secure quality and supply. China’s top CDMOs and biotechs now account for about 7% of the world’s monoclonal antibody capacity, a key injectable that saved many patients battling Covid pneumonia. Many CDMOs are in the process of improving their manufacturing capabilities to bring them up to par with those of global leaders. These organizations are an important part of China’s Five Year pharmaceutical plans. Some of China’s biggest in this space include Asymchem, Pharmaron Beijing, and WuXi AppTec. They received more than three-quarters of their revenues from non-China customers in 2021, according to McKinsey & Company.

All of them are expanding their geographical footprint. Shanghai-based dMed merged with Clinipace, a clinical research organization based in Raleigh, North Carolina, to give just one example mentioned in an August 2022 report by McKinsey & Company.  

The McKinsey report puts forward three possible scenarios for the progress of China’s biopharma industry by 2028. China-originated drugs become much more prominent in two of the scenarios, while the global influence of China’s biopharma industry stalls or moves in reverse in the third.

A few factors will determine which scenario materializes. One is the extent of China’s progress in research and success in clinical trials. Another is China’s ability to integrate into global regulatory systems, according to McKinsey.

Geopolitics could also limit China’s global progress.

But even if the U.S. and Europe were to make it harder for China’s global pharmaceutical giants – and its newcomers — to sell into their markets, low-cost drugs are what every patient needs and China will be able to deliver on that just as India has. It will be a case of Washington and Brussels wanting one thing (tough on China) and global pharma wanting the opposite (partnering with China). Not to mention hospitals, which also want low-cost drugs.

Moreover, China will have its own market to tend to, not to mention all of Asia.

China has no reason to doubt that companies like Pfizer will leave. Drug companies want to be in China both for access to its market, and for research and development costs and talent pools.

The takeaway is that the U.S. government needs to include pharmaceuticals as part of an industrial strategy, like it has done with certain clean technologies in its Inflation Reduction Act. USTR Katherine Tai said, after the passing of that law, that the U.S. should consider giving other sectors priorities as well, in a nod to industrial strategies needed to counter the state-controlled capitalism of China. The U.S. pharmaceutical sector is at increasing risk of losing out to Asia, where China is rising, India is already dominant, and global pharmaceutical companies are reducing their lab footprint in favor of outsourcing. China wants to pick up that market. Who doubts that they will?

When it comes to our global drug supply, China will not be in fourth place – behind the U.S., Europe and India — for much longer.

According to Nature magazine’s 2021 Nature Index, China has eight of the world’s top 100 life sciences institutes. The U.S. has 51 and all of the European Union has 28. But China’s right up there with the United Kingdom (9) and Germany (7), two of the European countries with the most appearances on that index. China is also No. 2 in terms of “high quality, published, scientific research” overall, trailing only the United States. Germany comes in a distant third.

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