How China’s innovation system really works
As debate grows over whether China is winning the technology race, executives should focus instead on how its innovation system is designed – and what that means for competition....
Asian hub
Global pharma invests in China on the strength of a booming national biotech sector
IMD research reveals the top four key attributes of successful companies in the Chinese pharma sector, including their global and local strategies as well as their acquisitions and investment in local companies, best cost logistics and production, and development of a robust pipeline of new innovative solutions, including oncology and weight-loss treatments.
Hengrui Pharmaceuticals may be a new kid on the global block, but as the largest pharma company in China, it’s also making an impression on the international stage by partnering with Elevar to market its so-called “liver cancer cocktail” and by creating subsidiary Luzsana Biotechnology to commercialize their extensive drug pipeline from China.
The foundation for these developments is a booming biotech industry in China, which is also attracting attention and investment from foreign drugmakers. AstraZeneca, Roche, and Pfizer – long-term leaders in the market – have been making deals in search of innovative drugs and are increasingly entrusting the commercialization of some products in China to domestic firms.
China biotech still dominated by international corporations
In our research for the 2024 China Company Transformation Indicator (CCTI) we investigated the top pharmaceutical companies in China. As expected, half of these are foreign multinational corporations (MNCs), but we also saw a dozen innovative national pharmaceutical and biotech companies entering the ranks as well as six traditional Chinese medicine makers. In our study (our methodology) we look at 44 variables across eight factors, ranking from investors’ expectations of future growth and pharmaceutical pipeline factors to early innovation results in the Chinese market and business robustness.
It’s no surprise that the top 10 pharmaceutical companies in China are all foreign MNCs except Hengrui, with Pfizer, Roche, and AstraZeneca leading the pack. Compared to the global rankings by the Future Readiness Research Center at IMD, the same three top performers are also in the global top five.
This is partially a function of companies like Pfizer, which are on a global hunt for new, innovative medicines while controlling costs. The solution to this often involves partnering up with strong national players. The most important factors driving their success in China are early innovation results for Chinese patients and business diversity, followed by pharmaceutical pipeline factors and ESG efforts in China. Interestingly, the CCTI indicates that each of the top performers is investing in the future – in most cases at the expense of short-term business robustness and investor expectations.
What do the top performers have in common?
There are four key attributes of the top performers, according to our study.
1. Globalizing and integrating R&D
For many decades, Pfizer, Roche, and AstraZeneca have all invested in local R&D, which they have increasingly integrated into their global R&D networks. In 2020, Pfizer implemented the “Two 80% Strategies” which, by the end of 2022, aimed to involve China in over 80% of Pfizer’s global early and pivotal clinical studies, with 80% of these projects simultaneously filing for approval in China. For Roche, over 80% participation by China in global Phase III clinical trials has been achieved. Meanwhile, AstraZeneca upgraded their local innovation centers into a Global R&D China Center in 2021.
2. Investing in becoming part of the ecosystem
In the last few years, leading pharma companies have been focusing on becoming more deeply embedded in the national Chinese biotech ecosystem by acquiring and investing in innovative local companies. For example, AstraZeneca is paying $1bn to acquire CAR-T specialist Gracell Biotechnologies in the first full buyout of an innovative Chinese biotech firm by a ‘Big Pharma’ company.
3. Best cost logistics and production
Driven by cost considerations at a global level, and to help with commercializing in China, the top performers tap into local partnerships, leveraging local distribution capabilities. In November 2023, Pfizer announced a partnership with Keyuan Pharma, a subsidiary of Shanghai Pharma, to distribute and promote its pneumococcal vaccine Prevenar 13 in China. In August 2023, AstraZeneca signed a deal with China’s CanSino Biologics to produce its potential mRNA vaccines.
4. Developing an innovative pipeline for breakthrough treatments
All the top players have focused on new innovative solutions such as rare disease, oncology, and weight-loss drugs to fill the drug pipeline locally and globally. For example, Roche has made a potential $1bn deal with China-based MediLink Therapeutics to develop a next-generation antibody drug conjugate (ADC) in oncology. In November 2023, AstraZeneca announced a licensing agreement with Shanghai-based Eccogene for a potential obesity pill, which belongs to the same category as Novo Nordisk’s injectable weight loss treatment, Wegovy. AstraZeneca, Roche, and Pfizer are among the other global giants searching for competing products in this category. Innovation is the name of the game.
Hengrui is making all the right moves to make it a contender in the global pharma sector
Hengrui has a substantial pipeline, with more than 250 ongoing clinical trials. Their investment in R&D has been close to 30% of their 2022 revenues; commensurate with the level required for a successful pharma company.
Moreover, the company has been pushing its international strategy for the past five years. Hengrui signed a significant deal with US-based Incyte that is potentially worth up to $795m. This deal involved out-licensing rights outside of Greater China for a clinical-stage anti-PD-1 monoclonal antibody candidate. Such deals have not only provided financial benefits but also expanded Hengrui’s global footprint and collaborative opportunities in drug development. By the end of 2022, Hengrui’s products had entered more than 40 countries. They will almost certainly continue to accelerate global market development, focusing on emerging markets.
Signals for the future development of biotech in China
What more can we spot on the radar? Outside the top 10, we see heavy investments in the drug pipeline and R&D investment growth by Chinese biotech and pharmaceutical companies, such as Changchun High and New Technology Industries Group, Livzon Pharm, and Sichuan Kelun Pharmaceutical.
While not yet demonstrating top business success, their R&D and patent growth rates are already translating into top 10 positions for future drug pipelines. This may be one of several factors that qualify them for overall leading positions in biotech and pharmaceuticals in China in the future.
The research for the China Company Transformation Indicator (CCTI) was carried out by Wei Wei and Kunjian Li at IMD’s research hub in Shenzhen, China, under the supervision of research director Mark Greeven, Professor of Innovation and Strategy at IMD. For more insights on China’s business landscape, explore the other article in our China Company Transformation Indicator 2024 series, focusing on how Nike’s dominance in the Chinese apparel market is threatened by the ‘Guochao’ phenomenon.
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