China’s Biotech Ambitions: A Threat to Western Pharma?

In the world of pharmaceuticals, blockbuster drugs like Keytruda, a cancer immunotherapy treatment, dominate the industry. Since its 2014 launch, Keytruda has generated over $130 billion in revenue for its American manufacturer, Merck, including $29.5 billion in 2023 alone. Yet, in September 2023, a new experimental drug achieved something unprecedented: in late-stage trials for non-small-cell lung cancer, it nearly doubled patients' progression-free survival—11.1 months compared to Keytruda’s 5.8 months. Even more remarkable was the company behind this breakthrough: Akeso, a Chinese biotech firm.

China’s Quiet Biotech Revolution

While China’s strides in artificial intelligence have captured global attention, a quieter transformation is occurring in biotech. Traditionally known for manufacturing generic drugs, supplying raw ingredients, and managing clinical trials, China is now a hub for innovative drug development. The country has emerged as the second-largest producer of new drugs, trailing only the United States.

This shift has caught the attention of Western pharmaceutical giants. Facing expiring patents that could cost them up to $140 billion in annual revenue by 2030, these firms are turning to China for fresh innovations. In 2023, nearly one-third of large licensing deals—those valued at $50 million or more—involved Chinese firms, a threefold increase from 2020. The total value of drugs licensed from China to Western companies surged 15-fold in the same period, reaching $48 billion. Recognizing this potential, Merck secured the rights to a therapy developed by another Chinese biotech, LaNova Medicines, for $588 million in November 2023.

Policy Reforms and the Rise of China’s Biotech Industry

China’s biotech boom is no accident. Nearly two decades ago, the government identified the sector as a strategic priority. However, real momentum began in 2015 when regulatory reforms streamlined drug approvals. The national drug agency expanded its workforce and cleared a backlog of 20,000 applications in just two years. Approval times for early-stage human trials plummeted from 501 days to just 87.

This regulatory shift coincided with an influx of "sea turtles"—Chinese scientists returning home after studying or working abroad. With China’s massive domestic market attracting global drugmakers, the industry benefited from an infusion of expertise, investment, and talent. More favorable listing rules further boosted investor confidence. As a result, private funding for Chinese biotech firms skyrocketed from $1 billion in 2016 to $13.4 billion in 2021.

Beyond Generics: China’s Fast-Follower Strategy

Initially, Chinese pharmaceutical firms focused on replicating Western drugs. Now, they are employing a "fast-follower" approach—taking existing treatments and refining them for improved safety, efficacy, or delivery. Since drug development often begins by targeting a specific protein or gene, modifying existing drugs allows Chinese firms to conduct trials faster and at a fraction of the usual cost.

Between 2021 and 2024, the number of Chinese drugs in development doubled to 4,391, with nearly 42% categorized as fast-followers or entirely original treatments. China has been particularly successful in developing antibody-drug conjugates (ADCs), an advanced cancer therapy that links antibodies to chemotherapy payloads. Because ADCs rely on existing components, success hinges on optimizing their combination—a process in which Chinese firms excel.

Speed: China’s Competitive Edge

Speed is a critical advantage for Chinese drugmakers. According to Michelle Xia, founder of Akeso, “We can do things twice or even three times faster than anywhere else in the world.” Clinical trials—the longest and most expensive phase of drug development—are expedited due to China’s large patient pool and government incentives for hospitals and doctors to participate in research. This efficiency attracts global pharmaceutical firms, as even trials focused on Chinese patients provide valuable data for future approvals elsewhere.

The improved quality of Chinese clinical trials is also gaining recognition from global regulators. Akeso’s lung cancer drug, for instance, delivered such compelling trial results in China that the U.S. Food and Drug Administration (FDA) advanced it directly to late-stage trials.

Licensing and the "NewCo" Model: China’s Route to the U.S. Market

Despite its innovation, few Chinese firms directly sell their drugs in the United States. Instead, they strike licensing deals, granting Western partners marketing rights in exchange for upfront payments, milestone-based fees, and royalties. Akeso’s Keytruda rival was licensed to Summit Therapeutics, an American biotech firm, for $500 million upfront, with an additional $5 billion in potential milestone payments and a share of future royalties.

Another emerging trend is the "NewCo" model, where Chinese companies spin off clinical assets into independent U.S.-based entities managed by local executives. This strategy enables Chinese firms to retain partial ownership and reap greater financial rewards if the drug succeeds. Investment bank Jefferies estimates that at least eight such companies have launched since May 2023.

Challenges Ahead: Funding and Geopolitical Risks

Despite impressive growth, China’s biotech sector faces challenges. Private investment in Chinese biotech hit a seven-year low in 2024, reflecting a broader global downturn in biotech funding. Investors now prioritize companies with clear revenue streams or strong international potential. Some fear that the surge in licensing deals may reflect past funding booms rather than sustainable growth, raising concerns about the long-term viability of China’s drug pipeline.

An even greater threat comes from rising geopolitical tensions with the United States. The American pharmaceutical market remains highly lucrative for Chinese biotech firms due to its relatively high drug prices. However, trade restrictions—so far focused on high-tech industries—could extend to biotech. Efforts to curb Chinese involvement in biotech services and equipment have stalled in Congress, but with U.S.-China trade under increased scrutiny, the industry’s future remains uncertain. Already, Chinese firms receive lower licensing fees for experimental drugs than their American counterparts due to perceived geopolitical risks.

Conclusion: A New Global Player

China’s biotech sector has rapidly evolved from a generics manufacturer to an innovation powerhouse. Its combination of regulatory efficiency, scientific expertise, and aggressive R&D investment has placed it at the forefront of global drug discovery. Yet, while its rapid rise is undeniable, sustaining this momentum will require overcoming funding hurdles and navigating complex geopolitical dynamics. Whether China’s pharmaceutical revolution continues at its current pace may depend as much on diplomacy as on science.