The China Challenge to U.S. Biopharma

Marc Pentopoulos, of Vista Point Capital, who manages the biotech portion of the Palumbo Emerging Growth strategy, published what we think is an important report discussing the evolution of Chinese competition with the biopharma industry. Here is a summary of his comments:

Chinese biotech companies have largely caught up to their Western counterparts in their ability to make traditional small molecule and antibody drug candidates against novel targets.  They also have a competitive benefit in that they are often able to develop their drug candidates through early clinical studies much faster and cheaper than Western companies.  We have seen the progress in the many deals lately where Western pharmaceutical and biotech companies have in-licensed Chinese developed products.  This has the potential to shake up the biopharmaceutical industry, firstly impacting smaller biotech companies, and then later potentially putting larger pharmaceutical companies in the cross hairs.   Below is the typical drug development pathway which goes from identifying a new drug target through selecting a drug candidate and testing it by running preclinical and clinical (Phase I, II, III) trials to show efficacy and safety, prior to marketing approval.

Chart 1. The arrow highlights where Chinese bio-techs have made the most advancements, coming in faster and cheaper than their US counterparts: Charts source: Duxin Sun, Univ of Michigan

China’s Cost Structure: A Strategic Advantage

If Chinese companies can now do the Compound Screening through Phase I clinical studies steps cheaper and faster than Western companies, it puts them at a competitive advantage vs Western biotech companies.  Big pharma benefits short term as it allows them to buy “de-risked” assets from China more cheaply than buying a US company.  Why pay $2 billion for a US biotech company when you can in-license ex-China rights on a similar drug for $50 million? Longer-term as China gets the capital from licensing products to US pharma companies, they can eventually build their own Phase 2 through commercial capabilities which will allow them to compete with the big pharmaceutical companies.

US biotech will need to step up to the China challenge, using AI to optimize drug candidates, discovering new ways of using technology to find new disease targets and new treatment modalities that will obsolete the older methods of drug discovery.  Companies that can deploy these technologies to speed up and optimize the drug discovery process along with bringing down the costs of drug development will be winners, but there will be many casualties along the way.  We feel the field of proteomics will become more prominent as companies will need to fully understand the biology of the target, allowing for more accurate targeting of the disease, and generating insights that allow them to create more intellectual property along the way.  Tools and techniques to more speed up preclinical work will be winners, and we may see “one and done” therapies like gene editing play a bigger role and companies look to ways to more effectively treat diseases and eliminate future competitive pressures.

The status quo looks to be changing in the biopharma industry and Chinese competition will present U.S. big pharma with challenges, and only the most innovative, nimble organizations will flourish and grow.

Have a great week!

 

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The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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By: Adam