China has been of great interest to global healthcare investors and organizations. This month, we featured four guest speakers from different industry groups under heathcare to share their thoughts on China’s healthcare innovation and globalization.
Lists of industry experts (listed in an alphabetic order)
Hua Ye, M.D., MPH, Founder and CEO of BioNova Pharma, Shanghai, China
Ren Feng, Ph.D., CEO, CSO and Head of Drug Development of Insilico Medicine, HongKong, China
Shi Zhengzheng, M.D., Ph.D., Partner, President of the Department of Medical and Pharmaceutical Investment and Dean of the Institute of Life Sciences, Yingke PE, Shanghai, China
Zhang Yiling, Ph.D., Chairman of Longwood Valley MedTech, Beijing, China
Part 1 Overview of changes in China’s healthcare system
There have been many changes towards China’s healthcare sector, whether in the form of policy reforming or industry transformation over the past few years. Along with those changes, innovation started to play a significant role in the economic development in China.
“China’s healthcare industry is growing with great momentum,” Dr. Shi said, “China has established the world's largest basic medical insurance network. Although China’s current healthcare expenditures only account for ~6% of its total GDP, much lower compared to some developed countries, it is on the other hand indicating that there is a great space for the future development of China’s healthcare sector.”
In terms of healthcare innovation, China’s share of the global R&D pipelines rose to 13.9% in 2020, up from 4.1% in 2015, showing the trend of moving up to a higher tier.
From investor’s perspective, two “landmark” events: (1) Chapter 18A was added to HKEX's listing system in 2018, and (2) Science and Technology Innovation Board was officially launched in 2019, have created more pathways for capitals to exit. “Subsequently, the number of Chinese pharmaceutical IPOs increased sharply,” Dr. Shi said.
To catch those opportunites, Yingke PE has set 50-60% of its funds to invest in China’s healthcare sector. Many of Yingke PE’s portfolios have successfully went public on renowned stock exchanges in mainland China and Hong Kong, which inlcude Sanyou Medical (688085), Chengdu Kanghua Biological (300841), Genor Biopharma (06998:HK), MicuRx Pharma (688373) and Genuine Biotech (IPO filed).
“However, over the past year, China's medical and healthcare industry has been experiencing ‘a cold-winter period of venture capitals’ due to changes in the volume-based procurement, policies, and some attitudes towards the market. A trend of ‘invest early, invest small, invest the new track’ is being seen among investors.” Dr. Shi told EqualOcean.
The regulatory reform of Chinese pharmaceutical industry started in 2015.
“The initial wave of new policies that emphasized on the quality and compliance resulted in IND withdrawal of a large proportion of pharmaceutical enterprises due to self-inspection failure. A series of subsequent policies encouraged and promoted innovation of new drugs, which stimulated the growth of biotech and pharma companies in China.” said Dr. Hua.
Relevant data showed that currently, the United States accounted for 50-60% of innovative new drugs; the European Union, 20-30%; Japan, 10 percent and China, however, accounted for only 2 to 3 percent. A gap in innovation still exists between China and the developed countries.
“The number of pharmaceutical companies are by no means the criterion for judging pharmaceutical innovations. Although there are tens of thousands of pharmaceutical companies in China, by and large they are mostly repeating what Western counterparts did, especially for anti-neoplastic drugs.” Dr. Hua said.
To attract VC and minimize the risk of development failure, the large number of start-ups have adapted the "fast follow strategy" by positioning company pipelines in those proven targets and have developed many me-too drugs in the past few years.
“However, this is pseudo-innovation. In my humble opinion, at this juncture, we need to think about how to achieve genuine innovation where drugs can truly benefit patients. The non-differentiated drug development can only cause hostile competition and stretch our country’s limited medical resources. In the near future, I can see there is a need of industrial consolidation and VC being more innovation- or differentiation- focused. As the in-depth regulatory policy reform continuing, I can see that the industry will take off again and become a truly innovative powerhouse in the world.” Dr. Hua told EqualOcean.
Dr. Ren Feng has also experienced all these changes in China’s pharmaceutical industry, from the start of financing of innovative drug companies in 2015-16, the peak reached in 2018, and the current "winter period of venture capitals".
“Before year 2018, the majority of drugs made in China were generics, as the profit of which was higher than that of making novel drugs. Under the circumstance back at that time, leading novel drug enterprises, such as Hengrui, were also making some me-too drugs to time the market, which made it possible for Chinese patients to buy drugs that were not available before. It was also a type of innovation in some ways,” Dr. Ren said.
With the establishment of global R&D centres by foreign companies and the shortening of time gap between domestic and foreign drugs to market, some companies that make me-too drugs transitioned to making me-better or differentiated drugs. “Therefore, we can see that over the past decade, from generic drugs to me-too drugs to differentiated drugs, there are more and more people talking about the originality. No matter which tier China's pharmaceutical innovation is currently at, I also believe that China's healthcare industry can catch up with the pace of foreign countries in the future.” Dr. Ren Feng told EqualOcean.
China's medical equipment sector has also experienced some drastic changes over the past years, especially the orthopaedic surgery equipment sector, the development of which is shifting towards digital transformation.
“The digitalization of large medical equipment enterprises has been carried out for more than 20 years in some western countries. However, when I returned to China in 2018, there were only one or two small enterprises doing surgical robots and artificial intelligence-powered medical equipment in a small scale, and most of the R&D of medical equipment were still in the traditional laboratory. Only in recent three to five years, there are venture capitals starting to support the development of digital products, such as orthopaedic robots in China. Thus, China is still in the initial phase in this respect and possess both opportunities and challenges in the long term.” Dr. Zhang told EqualOcean.
Part 2. Strategies of localization of China’s healthcare innovation
BioNova Pharma
The business strategy of BioNova Pharma, a start-up biotech established in 2018, can be simply summarized as a three-step business model. The first step is to quickly build up a team and fully utilize their clinical expertise by licensing in drugs in the Greater China region. “By doing so, we can quickly attract talent and VC funding to position ourselves for the next step: homegrown innovative drugs in drug discovery.” Dr. Hua said.
The second step is to collaborate with CDMOs for drugs of novel targets with global rights based on BioNova’s judgment in biology and medical needs. "Once the discovery projects are advanced to the clinical stage, it naturally brings BioNova to the third step which is going global. When our wholly owned new target drugs enter the clinic, we will carry out global development either by ourselves or out-licensing to capable MNCs.” Dr. Hua said.
As for the pipeline built-up strategy, BioNova focuses on assets that can take full advantage of team’s strengths and background. “While treating cancers by a variety of drugs is getting more and more competitive, we pay attention to new drugs that can treat complications from the current effective therapies or treatment-induced resistance,” he added, “Therefore, our innovation is not to follow the trend and the crowd but follow our own strategic planning and judgments.”
Now the preliminary results of BioNova’s first step have been seen as its first licensed-in first-in-class product has been approved in the United States, Europe, Australia and other countries. They have also submitted NDA application to NMPA in November last year. “What we licensed in may not necessarily be a heavy-weight drug, but it must be a highly anticipated good product with clinical significance.” Dr. Hua Ye told EqualOcean.
Insilico Medicine
Insilico Medicine has gone through two developmental phases. The first phase was from the establishment in 2014 to the end of 2020, during which, Insilico invested a lot of time in inventing and optimizing their AI platforms and got those platforms partially verified through collaborations with big international pharmaceutical companies. In the first phase, Insilico mainly focused on the improvement of their AI technology, while providing some services to large pharmaceutical companies.
The second phase is from 2021 to the present. “After 2021, we established a R&D center in China for making genuinely novel drugs,” Dr. Ren said.
“To support local innovation needs in China, firstly we settled down in Shanghai. And 95% of the CROs we cooperate with are in China, which greatly improves our drug R&D efficiency. Secondly, we have deployed some projects adapted to China's national conditions. For example, in our COVID-19 project, we are targeting 3CL-protease, the same target as Pfizer's Paxloid, however, we can reduce the steps of drug synthesis through incorporation of AI, which will ultimately reduce the overall cost and increase the accessibility of drugs to benefit more patients.”
Meanwhile, Insilico Medicine is also working on calculating the targets that have not been noticed through their AI platform. “Although the failure rate may be higher, it will be of great help to meet China's local medical needs with great significance.”
Longwood Valley MedTech
Longwood Valley MedTech specializes in providing digitalized complete solutions for orthopeadic surgeries, aiming to solve clinical problems.
Currently there are three major problems faced by the orthopeadic surgeries in China.
Orthopeadic surgeries are still very much dependent on the expertise of specialists. At present, surgeons rely on their own experience in operation, and there are not many digital products to assist them. However, doctors in grassroots hospitals may not have as much experience as senior specialists, thus their operations may not be accurate enough.
“Take joint replacement as an example, for the past 30 years, medical equipment companies throughout the orthopeadic industry have been focusing on improving the design and materials of artificial joint prostheses, but neglected the surgical techniques of doctors,” Dr. Zhang Yiling said.
There is a social problem which is the uneven distribution of quality medical resources. It can take six months or even a year for a patient to get a specialist appointment. The late start of the deployment of digitalization in homegrown medical equipment enterprises in China is another challenge for localized innovation.
Although there are challenging problems to solve for the orthopeadic surgery industry in China, doing local innovation does enjoy several advantages.
First of all, although we start late, but our starting point is high. The gap with foreign technology including industry barriers is not high. Secondly, our localized innovation is to solve the local clinical problems based on China's national conditions. Further, from the perspective of our products themselves, Longwood Valley MedTech and Johnson & Johnson Medical Technology have a very deep strategic cooperation, which can ensure the improvement of both localized innovation and international business layout in the future.
After satisfying local needs, going global is a critical path for the future development of China’s healthcare innovation.
For investors, one of the common investment logics lies in whether the exit mechanism is clear and whether there is a good return on the exit.
“Currently the reality is that even if an innovative drug becomes commercially successful, the company still has to figure out whether its returns can truly cover its costs,” Dr. Shi said.
If a company sets its sales only within China, there will only be one payer which is the health insurance, according to current volume-based group purchasing policy which significantly cuts the prices of drugs, the revenue is unlikely to cover its R&D cost. “Hopefully in the future, with commercial health insurance and diversified payer mechanisms, things will be better,” he added.
“For innovative drugs which take ten years and a lot of risks to make, our investment logic is that it needs to meet three conditions, ‘internationalization’, ‘differentiation’ and ‘diversification of cash realization’. For example, we like to seek projects registered both in China and the United States and projects at the late stage, preferably under international multicenter clinical trials. Under such conditions, there will be international sales and bills will be paid globally. As for ‘diversification of cash realization’, there are also mergers and acquisitions (M&A) to consider in addition to IPOs and commercialisation,” Dr. Shi told EqualOcean.
Part 3. Challenges of globalization of China’s healthcare innovation
“All scientific and technological innovations in the world came from one core driving force which is the commercial exclusivity that brings back hefty returns.” Dr. Hua said in a statement.
When there is no financial returns on innovation and investment, the industry is hard to grow.
“In my opinion, joint efforts should be made to fundamentally change the current situation of the industry, including drug regulations, health insurance and reimbursement policies, and the mindset of capital market,” Dr. Hua added.
The pricing of innovative drugs should reasonably reflect the R&D investment and risks borne by the enterprises, so that enterprises will be motivated to continue to invest in innovations and take risks. Such positive feedback can set the industry into an upward spiral.
“Before the day arrives, we should not position our new drugs in the domestic market only. We should invest in new drugs currently off global value and try to go for globalization. This is the hope for companies to survive and to develop at this juncture. Thus, my point is that none of these difficulties possess an obstacle, except for one which is there is a need of change in the government policy and attitude.” Dr. Hua Ye told EqualOcean.
Dr. Ren Feng also shared that going global and to mature markets can better demonstrate the whole value of the innovative drugs. “Insilico also faced some problems in the past while going global, and one of the biggest was the trust,” said Dr Ren.
Perhaps due to the cultural and historical differences, some foreign enterprises do not trust the data and technology of Chinese enterprises enough while it may turn into a completely different scenario in another setting.
“For AI-powered drug discovery companies, only by building stronger trust and database, can the probability of going global be higher. There are no short cuts and we need to be patient and not be in a hurry,” Dr. Ren Feng told EqualOcean.
For orthopeadics, the standardization of surgery is almost the same at home and abroad. The difficulty was the application of digital solutions.
“For example, when I first came back to China to do this kind of digital solution in 2018, most doctors had low acceptance of digital products and did not think digital products were in urgent need. However, in recent years, as we continue to launch digital products to solve clinical problems, promote market education, and strengthen the training of doctors, more and more doctors begin to accept digital products.” Dr. Zhang Yiling said.
Therefore, what innovation enterprises should do to conquer those challenges is to constantly polish their products according to clinical needs, continuously iterate and optimize, and do things that are truly helpful and valuable to clinical practice.
“As the product is introduced, more and more doctors will gradually accept digital products. This is also a very good phenomenon that we have seen in the last year or two.” Dr. Zhang Yiling said in a statement.
Part 4. Outlook of globalization of China’s healthcare innovation
Although there are many challenges faced by China’s healthcare companies in the path of going global, China still possesses a lot of strengths in supporting heathcare innovation.
One is that China is a big country with one of the fastest growing ageing population in the world which exhibits high demand for healthcare. The other one is that we are transforming to “thriving mode” from “surviving mode”.
“I think there will be a huge amount of capitals pouring into healthcare innovation in China. Secondly, China’s CXO companies have been at the forefront of the world and realized internationalization. For some CXO companies, more than half of their orders are from the overseas, supporting both local and global innovation at the same time,” Dr. Shi said, “The third advantage is that China is in the leading position in some emerging technologies in the healthcare sector, such as the medical robot, AI-assisted drug discovery, gene and cell therapy, ADC, stem cells and regenerative medicine.”
Meanwhile, China’s disease spectrum is different from that in other countries. A rare disease abroad may be a common disease in China. “China is expected to take the lead in these therapeutic fields with rich clinical resources and spread these breakthroughs worldwide,” Dr. Shi added.
The last one is the cross-border innovation, which will lead to the emergence of next-generation revolutionary products. There are not only a large number of excellent engineers in “hard” science and technology in China, but also a large number of biotech R&D researchers created by the Biotech bubble in recent years.
“The cross-border collaboration of the two groups of engineers in multidisciplinary fields may lead to breakthroughs in the future.” Dr. Shi Zhengzheng told EqualOcean.