Killing Chinese Life Sciences, Part II-Birth, Adolescence, and Adulthood

The most recent and prominent United States (US) attempt to limit cooperation with Chinese life science businesses has stalled, but is hardly dead. Current Speaker of the House Mike Johnson said he intends to have the BIOSECURE Act signed into law before the end of 2024.[1] Irrespective of the impasse, American firms are becoming cautious and reaching out to potential alternatives in places like India even if they are not notably diminishing their ties with Chinese companies.[2] How did we get here? This blog details the development of the Chinese life sciences sector from the 2000s onward, the Chinese government’s considerable role in advancing it development, and the issues raised by that involvement.

China’s biotech/biopharmaceutical market exploded after 2000. Between 2000 and 2005 alone, it grew 30 percent. Initially, Chinese players stressed generics because relatively poorer Chinese consumers, government agencies, and overseas customers wanted low-cost products and because this minimized research & development (R&D) costs. For similar reasons, Chinese firms also emphasized diagnostic services. Later, they began to give more attention to innovation as income levels increased, consumer expectations rose, government budgets expanded, support for the industry surged, and local business capabilities advanced. It was not too long before Chinese companies started entering the contract services business, using their low costs, smooth and large-scale clinical trials, and local knowledge as selling points to secure business in R&D, preclinical development, and manufacturing as well as drug registration and market consultation.[3] Contract work remained critical as shown by around 40 percent of all Contract Research Organizations (CROs) globally being based in China.[4] Despite the globalization of the Chinese biotech sector, Chinese companies continued to focus on the home market due to its appealing potential, their lack of access to global markets and partners, and their limited capabilities and credibility.[5] As time progressed, China’s biotech sector continued to expand with it achieving the world’s third-largest biopharmaceutical manufacturing capacity by 2016 and becoming the 2nd largest biopharmaceutical market by value two years later.[6] Moreover, the country witnessed significant growth in biotech research parks, venture capital (VC) firm numbers and funding amounts, and new drug launches. There was substantial growth in cross-border licensing deals, too.[7] Despite the aforenoted signs of vitality, Chinese biotech firms remained primarily in the low-value (non-innovative) end of the sector, focusing on biologics, generics, and CRO and contract manufacturing organization (CMO) work.

Beijing has long championed China’s biotech sector.[8] One form has been high-level political support. For instance, President Xi Jinping specifically mentioned biotechnology in a speech at the 2022 20th Party Congress and also highlighted it as being important for the health of the people, national security, and the development of the “Chinese nation” at a Chinese Communist Party Politburo meeting.[9] A second has been the prioritization and specific mention of the sector, which was designed a “Strategic Emerging Industry” in 2010, in multiple Five-Year Plans (FYP) such as the 13th (2016-2020) and 14th (2021-2025) FYPs, industrial development plans such as Made in China 2025, and sector related initiatives.[10] A third has been financial support in the form of grants, free or discounted land and facilities, direct investment, the construction of biotech parks, collaboration and coordination with government, military, and university labs, funding for training, and support for the development of VC and private equity investing activities.[11] Aside from the above, the government has been actively attracting Chinese scientists to return to China.[12] Lastly, China has undertaken legal, regulatory, and institutional reforms relating to intellectual property (IP), interagency coordination, and drug approvals.[13] More negatively, China has supported the growth of its biotech sector by inter alia blocking or limiting foreign direct investment in it, failing to control IP leakage during patent application and certification processes, sluggishly processing foreign patent applications, and limiting foreign access to as well as foreign use of genetic data.[14]

The size of China’s biotech industry, its critical role in subsectors like biologics and CRO and CMO, and Beijing’s prioritization of, extensive support for, and close direct and indirect ties with it raise numerous anxieties. American policymakers, for instance, worry about intentional (e.g., Beijing imposing sanctions) or unintentional (e.g., shipping or weather related) disruptions to US access to critical products and/or the goods needed to make them. There further are concerns that the data that Chinese firms have or are accumulating can be used by Beijing to monitor or blackmail others. On a related note, there also are worries about individual privacy rights being violated given historical poor data oversight in China. Turning to the realm of economics, some fret that China’s poor IP protections, Chinese companies’ access to large data pools, the Chinese government’s unwillingness to give equal market and data access to foreign firms, and national and local support for the industry put them and their home countries at a competitive disadvantage.[15] Finally, some like to highlight China’s poor drug safety record.[16]

Chinese biotech sector has developed notably and remains a powerful player in many biotech subsectors. It is obvious, though, that much of its progress to date is attributable to government support. The limits of China’s biotech industry (mentioned above) and the extent which it relies on government support raise questions about the severity of the competitive threat that it poses. The fourth blog in this series will contemplate the political and military risks the industry raises. The next blog will unpack in greater depth US-China ties in this vital sector of the future.