China biopharma — enter the Oktagon

The world’s toughest arena for drug innovation; will biotech go the way of EVs?

China observers call it the world’s “toughest fitness center.” Get fit here, they say, and you can take on any challenge globally.

I like the analogy, as it captures many elements of the unique competitive dynamics playing out in China. Increase your flexibility and speed of metabolism, learn new training techniques, build new organizational muscles and confront hyper-committed competitors.

Something more existential is at stake though. A sharper analogy, I propose, is the “China Oktagon,” based on the infamous Mixed Martial Arts (MMA) fighting cage.

Step in, emerge a winner, or else…

Some readers will be familiar with the concept of China “in-volution” — a state-orchestrated, hyper-fast-cycle innovation race blending scale, speed and distorted market forces. An organized chaos that, across a range of industries, drives innovation, but also erodes economic profits for all participants, too often to the point of being unsustainable. A race to the bottom.

A case in point is electric vehicles. The China central government made EVs a priority in the early 2010s, kick-starting an investment wave that benefited from a critical contribution by the industry-leading multinational, Tesla.

Fast forward to 2025. The wave has spawned over 100 players. China is now the clear world leader, with the best designs, best performance, best innovative features, and generates an ever-growing output (~70% of global volume, according to IEA.org).

The U.S., EU, Japan and South Korea are playing catch-up.

The China EV industry, however, suffers from unsustainable economics. The price war is deep, overcapacity is rampant, and it’s led to accusations of dumping in overseas markets. Participants have a high dependency on local government subsidies, and zombie companies keep walking. Only a few larger players like BYD are believed to be profitable, but are not without their controversies.

The central government is now launching initiatives to rationalize the industry and make it more sustainable, for example, phasing out subsidies, promoting consolidation, cracking down on price wars, and other policies.

This assessment holds true across a range of industry segments in China: solar panels, lithium-ion batteries, the steel industry, food delivery — the list goes on.

Could we be on the same path in biotech?

The top-line picture is very positive. In less than a decade, a Cambrian explosion has spawned an entire China ecosystem that is starting to impact the global biopharma industry (for more on this, see “Vision 2028 - How China could impact the global biopharma industry”). 

Thousands of biotechs emerged, with only part of the iceberg visible. This “organised chaos” has started to yield real breakthroughs, in ways of working, in processes and increasingly in scientific output.

In fact, China biotech is already reshaping global biopharma, going beyond a set of conventional beliefs.

As my former McKinsey colleagues recently described it, China’s sphere of expertise and influence in biotech/biopharma is going:

•   Beyond oncology into new therapeutic areas, including metabolic, immunology, and CNS

•   Beyond ADCs and mAbs, growing strengths in next-generation platforms, such as cell and gene therapies, RNA and radioligand therapies

•   Beyond fast following, cultivating novel biological discoveries, as evidenced by a growing number of frequently cited publications in top-tier journals

•   Beyond labor costs, adding speed to R&D, by leveraging end-to-end parallel execution, an abundant clinical research ecosystem and a relentless execution mindset

•   Beyond borders, moving from China-based trials to global footprints, in particular for early-stage trials

•   Beyond the bench, applying AI and robotics into drug discovery, as a global trail blazer

As the 15th Five-Year Plan highlighted, this journey is just getting started, with biotechnology at the center of China’s industrial priorities.

The FYP treats biotech as a “new quality productive force” to drive sustainable growth, address health/security challenges, and compete globally. The plan calls for accelerated innovation in gene editing, stem cell therapies, regenerative medicine, and precision oncology. It emphasizes an AI-biotech fusion for drug discovery and personalized medicine, building on 14th FYP achievements.

The latest plan is likely to trigger a new wave of funding by investors, backing more home-grown entrepreneurs, and likely drawing the acute interest of more Western based industry participants.

This being said, a careful look at the China biotech industry shows several flaws, reminiscent of other industries impacted by in-volution.

•   Overcapacity: too many companies pursuing the same targets, too many investors, in particular in the 2020-22 time frame, got on the hot biotech trend, too often lacking the level of expertise needed to nurture and build distinctive companies — “distinctive” being the bar for success in this global industry.

•   Inefficient capital allocation, characterized by many duplicate infrastructures built by competing provincial and local governments, as well as local subsidies supporting zombie companies that should go under. Now we observe potential overdependence of the latest generation of companies on government funding, coming with strings attached, as VC funding has dried up.

•   Insufficient rewards by the local innovation market. Chinese biotechs are driven to price war behaviors, through volume-based procurement (VBP) of generics, and the National Reimbursement Drugs List (NRDL) on the innovative side. The truth is that the pricing levels in China are too low to sufficiently reward innovation. Very few Chinese biotechs that bring products to market generate the profits needed to sustain their innovation cycle. Multinationals of small and medium sizes, with narrow portfolios, face the same challenge. Only large multinationals, benefiting from a scale effect, are able to extract acceptable profitability, although not yet at levels comparable to other major markets.

•   Limitations in ability to go to the West with attempts curtailed by geopolitical considerations such as the Biosecure Act, and high entry barriers. As of today, very few Chinese companies have found a path abroad, in particular to the “profit engine” of the industry. BeiGene, now BeOne Medicines, was the trailblazer, and has evolved now into a global company, anchored in Switzerland, and economically centered in the U.S. Legend Biotech built on its landmark partnership with Johnson & Johnson to build its presence abroad. SystImmune’s partnership with Bristol Myers Squibb includes the right to co-develop and co-commercialize in the U.S., and Innovent Biologics just signed a deal with Takeda Pharmaceutical to find a way to the U.S., through co-promotion of innovative assets. There might be a few more examples, but the explosion of out-licensing deals from China to the West, with biopharmas, biotechs and VC partners, while worth celebrating, is driven by local market limitations and the difficulty to go abroad on your own.

•   Limited exit options, with a narrow IPO market (at least until the recent re-opening of the Hong Kong stock exchange window) and unfavorable M&A conditions that deter internal consolidation and keep foreign investors at bay.

So how could this play out going forward? Some of those flaws could be addressed, with a series of levers to pull.

•   Market access conditions could improve more rapidly (for example, with emergence of a viable commercial insurance market and ease of pricing pressure through NRDL), and yield better returns for all participants. More locals could reach the market independently, and more multinational corporations could deepen their commitment to the China market.

•   A flight to quality, already under way, could accelerate, with investors learning from their past mistakes and incubating higher quality companies, pursuing real differentiation and capitalizing on strengths of various ecosystems globally with an “integrative biotech model.”

•   Leading Chinese biotechs could scale and build stronger muscles, both internally and externally. Jiangsu Hengrui and Innovent Biologics are early contenders, and more could emerge.

•   Capital market regulations could loosen up, offering more exit options and driving much needed consolidation.

•   Geopolitical tensions could cool off, making it easier to build creative partnerships between China and the West, and project outward with momentum.

Regardless of the direction and pace of development, the industry evolution in China raises existential questions for multinationals: Are you ready to enter the China Oktagon? Can you afford not to?

Franck Le Deu is founder and Managing Partner of KerZheng Ventures. He is a Senior Partner Emeritus with McKinsey & Company, based in China for over 20 years.

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