S PECIAL RE PO R T

China Market Opportunities for

International Pharmas
An extract from “Life Sciences Unicorns: From a China Investment
Perspective”
S PECIAL RE PO R T

Contents
1. Introduction....................................................................................................3

2. Strategic Opportunities in China..............................................................4

3. MNC Pharmas: Adapting to the New Normal........................................7

4. New Entrants: Options & Trade-offs ..................................................... 16

5. Partnership Considerations ..................................................................... 19

6. Conclusion.................................................................................................... 21

About the Author and the Book, in which the report

was originally published................................................................................ 23

About L.E.K. Consulting

We’re L.E.K. Consulting, a global strategy consultancy working with business leaders to seize competitive advantage and
amplify growth. Our insights are catalysts that reshape the trajectory of our clients’ businesses, uncovering opportunities
and empowering them to master their moments of truth. Since 1983, our worldwide practice — spanning the Americas,
Asia-Pacific and Europe — has guided leaders across all industries from global corporations to emerging entrepreneurial
businesses and private equity investors. Looking for more? Visit www.lek.com.

L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this
document are properties of their respective owners. © 2023 L.E.K. Consulting LLC

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1. Introduction
China’s pharmaceutical market presents an immense opportunity for
pharmaceutical companies from home and abroad. With a vast population,
significant unmet clinical needs, and a rapidly improving regulatory and market
access environment, international pharmas have strategically expanded to China
to invest in this dynamic market. Over the past four decades, these companies
have made substantial investments, introduced hundreds of innovative medicines,
and played a pivotal role in advancing the Chinese pharmaceutical industry.

This L.E.K. Special Report explores the strategic opportunities available in

China for international pharmas. It explores the changing landscape of the
pharmaceutical market, examining how MNCs (Multinational Corporations)
have adapted to the “new normal”, fueled innovation, and embraced digital
transformation. Additionally, the report sheds light on China’s increasing
contributions to global innovation, offering a compelling reason for international
pharmas to explore partnerships and collaborations in the country.

The report, ‘China Market Opportunities for International Pharmas’ is written by

Justin Wang, Partner at L.E.K. Consulting, China. It is an extract from the book
‘Life Sciences Unicorns: From a China Investment Perspective’ written by Mr. Da
Liu and published by The Commercial Press (Singapore) Limited in June 2023.

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2. Strategic Opportunities in China

China’s pharmaceutical market is characterized by the sheer size of its patient
base and by significant unmet clinical needs, as well as by the rapidly improving
regulatory and market access environment. These factors have long been the key
drivers for international pharmaceutical companies (or “pharmas”) that made
strategic decisions to enter China and invest in the Chinese market.

In 1981, Japan’s Otsuka was the first international pharma to enter the People’s
Republic of China, through a joint venture (JV) with the local government of
Tianjin. Together with the establishment of Sino-American Shanghai Squibb
(SASS), Xi’an Janssen and a few other entries, this marked the start of a new
era for the Chinese pharmaceutical industry. Over the past four decades, these
international pharmas have invested more than US$20 billion in the Chinese
market1, contributing to the development of commercial infrastructure,
manufacturing, and advanced research and development (R&D). International
pharmas have introduced more than 350 innovative medicines2 for the benefit of
Chinese patients, and trained hundreds of thousands of technical and commercial
talents for the Chinese pharmaceuticals and biotech industry.

Data published by IQVIA shows that as of 2021, hundreds of international pharmas

are operating in China, contributing to about 30% of the Chinese in-hospital
pharmaceutical market.

• In 2021, five of the top 10 pharmas by hospital sales are international

companies, with AstraZeneca taking the top spot ahead of any other domestic
or international peers. Others on the list are Pfizer (No. 4), Roche (No. 5), Bayer
(No. 9) and Novartis (No. 10).
• AstraZeneca’s osimertinib (Tagrisso) for lung cancer attained the fastest new
drug application (NDA) approval in the history of the National Medical Products
Administration, or NMPA (then China Food and Drug Administration, or CFDA),
taking less than two months.
• Merck & Co./MSD’s GARDASIL9 (9-valent HPV vaccine) received the fastest
conditional approval in NMPA/CFDA history, in just nine days, on grounds of its
significant efficacy breakthrough.
• Of the 59 innovative products that were granted expedited reviews by the
NMPA in 2021, 29 (49%) are from international pharmas.

Over the past decade, as mentioned in other chapters of “Life Sciences Unicorns,”
Chinese pharma companies have begun to accelerate their investments and R&D

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activities in innovative therapies, moving rapidly from generics to fast followers

to their present position: leading global development in certain therapeutic areas
and modalities. This — in parallel with evolving policies, expedited regulatory
pathways, expanded reimbursement coverage, centralized procurement and
pricing pressures in China — has fundamentally changed the market environment
and competitiveness for international pharmas in the country, posing challenges
yet also presenting new strategic opportunities.

China provides not only a sizable and growing pharmaceutical market but also
strategic value for companies operating a global business. As an increasingly
important source of innovation for the global pharmaceutical and biotech
industry, China generates first-in-class and best-in-class assets that represent
significant, global commercial opportunities. At the same time, it offers world-
class clinical development capabilities and resources, with a large patient
population — backed up by abundant funding from both public and private
institutions that place biotech and life sciences at the top of their investment
priorities.

Despite recent geopolitical tensions and market fluctuations, most multinational

corporations (MNCs) within the pharma sector remain committed to the Chinese
market, with continued presence and investment in the country. These MNCs show
great confidence in the future of the Chinese pharma market and its role as a
critical, integral part of the global industry.

“Greater China is an important region for global

pharmaceutical products broadly, and specifically for
medicines that treat cardiovascular and metabolic
diseases.”3
 CEO, Arrowhead, April 2022

“The one thing I’ll say about China is that, going forward,
and given the fact that the country is now so open to
innovation, we are now thinking about China as we think
about any other country.”4
 President, Novartis, February 2022

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“[China serves] not only as a market but [to a great extent]

as an innovation hub. That’s also the reason why we are
present in China across the full value chain, from research,
development [and] manufacturing to distribution.”5
 CEO, Roche, February 2021

“Tremendous patient need and a fast-developing healthcare

infrastructure make China a strategic priority. We are eager
not only to expand late-stage therapies to the broader
patient population there, but also to accelerate our clinical
development efforts in Asia and [to] better understand and
address the needs of patients there.”6

 CEO, BridgeBio, August 2020

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3. MNC Pharmas: Adapting to the New

Normal
China’s pharmaceutical market has evolved significantly since the first MNCs
came to China in the 1980s, and the speed of change has only accelerated in the
past few years. Facing this reality, and in order to adapt to this “new normal,” MNC
pharmas have been called to make bold transformations in their China strategies.

Accelerated path to market

Over the past six or seven years, China’s NMPA has made continuous efforts to
standardize product registration processes and introduce expedited registration
pathways for innovative therapies. China also, in 2017, joined the International
Council for Harmonization of Technical Requirements for Pharmaceuticals for
Human Use (ICH), aiming to upgrade the nation’s drug regulatory system to
international standards. As a result, the development and launch of new drugs
has been expedited through China’s early involvement in international multicenter
clinical trials (IMCTs). This has led to more rigorous and globally recognized clinical
trials, and to the use of Chinese patient trial data to support global registrations.

In 2017, the NMPA (then known as the CFDA) recorded a mere 82 IMCTs — a figure
that nearly tripled in 2021, including more than five times the Phase I and II trials,
contributing to 37% of the 302 IMCTs recorded that year. Over 80% of these
IMCTs were carried out by international pharmas.

Table 1
Launch lag between China and global first launches (2016 vs. 2021)

2016: 4 products in total Launch lag (years)

Sirturo (bedaquiline) 3.9

Prevnar13 (pneumococcal conjugate vaccine) 6.9

Cervarix (HPV vaccine) 8.8

Zavesca (miglustat) 14.0

Average lag (2016) 8.4

2021: 32 products in total Launch lag (years)

Gavreto (pralsetinib) 0.5

Enspryng (satralizumab) 0.7

Qinlock (ripretinib) 0.8

Evrysdi (risdiplam) 0.8

… …

Xenazine (tetrabenazine) 12.8

Average lag (2021) 5.7

Source: NMPA, FDA, European Medicines Agency, L.E.K. analysis

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As a result, the lag between the first global launch (excluding China) and China’s
launch for innovative therapies is rapidly narrowing (see Table 1). In 2016, only four
new international pharma drugs were approved in China, with an average lag time
of 8.4 years after their first global launch. In 2021, the NMPA approved 32 NDAs
by international pharmas, with an average lag of 5.7 years. Notably, Blueprint
Medicines’ pralsetinib (Gavreto®), which was licensed to CStone, obtained
approval in China just six months after its first ex-China approval by the U.S. Food
and Drug Administration (FDA).

In addition, starting in 2020, within designated hospitals in several locations

(namely Boao Lecheng International Medical Tourism Pilot Zone in Hainan
Province and the Greater Bay Area in Guangdong Province), China has allowed
importation and clinical usage of innovative drugs and medical devices that
have already been approved in a developed market but are not yet approved
domestically. Real-world data generated from these designated hospitals can
now be used to support NMPA registrations in China, creating an opportunity for
Chinese patients to access innovative therapies from abroad much earlier than
would otherwise be possible. Almost all MNC pharmas in China have established
an “early access” task force to fully leverage this opportunity.

Faster to peak, faster to cliff

In terms of pricing and reimbursement, China established the National Health
Security Administration (NHSA) in 2018, consolidating the administration of
all drug pricing, procurement and reimbursement into one central government
agency. Upon inception, the NHSA initiated a series of drug pricing and
reimbursement reforms that have profoundly changed the commercial life cycle of
pharmaceuticals and hence the pricing strategies of all pharma companies.

NRDL negotiations
For international pharmas, newly approved innovative drugs are now eligible for
annual negotiations to enter the National Reimbursement Drug List (NRDL) as
early as the same year of receiving NMPA approval — no more yearslong waits
for the next round of NRDL review, as in the pre-NHSA era. In exchange, however,
for international pharmas looking to list an innovative therapy on the NRDL, the
NHSA is one of the toughest negotiators and demands a steep price cut, usually
in the range of 50%-60%. Each negotiated contract is valid for two years before
a mandatory review for renewal, at which time pharmas usually can expect a
further (but more moderate) price cut of around 10%-20%. Drugs negotiated
onto the NRDL are eligible for approximately 70% reimbursement, i.e., the
patient co-pays 30%, reducing their out-of-pocket expenditure on a therapy by
80%-90%. As a result, prescription volume typically increases significantly after

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an NRDL listing, requiring the pharma company to invest quickly and heavily in
commercialization efforts in order to achieve this very steep ramp-up curve.

Listing on the NRDL through negotiation at low but acceptable prices thus
remains the key strategic objective for international pharmas when it comes to
most innovative therapies. For those whose products are already commercialized
in the U.S., Europe and other markets, the marginal costs of serving the Chinese
market may justify price compromises in exchange for significant volume
upsides. To protect pharmas from potential challenges from payers in other
markets on international reference prices, the NHSA also provides the option of
not formally disclosing the negotiation results.

According to NHSA data, in the five rounds of annual negotiations from 2017 to
2021, international pharmas chose to cut prices on 140 imported drugs in order
to be listed on the NRDL, representing about 50% of all successful negotiations.
It is widely understood that there is an annual cost ceiling of approximately
RMB300,000 (or US$45,000) for what the NRDL could accept. The government
believes that the NRDL should cover drugs that are, post-negotiation,
affordable to ordinary Chinese families whose annual household disposable
income (according to data published by the National Statistics Bureau) was
RMB92,000, or approximately US$13,500. Therefore, ultra-high-price drugs and
therapies such as CAR-T or those for rare diseases are yet to benefit from the
NRDL. The NHSA stated in October 2020 that it “attaches great importance
to medical security for patients with rare diseases, and constantly explores
the establishment of drug security mechanisms for rare diseases, including
critical disease insurance, medical assistance, special funds, charity projects
and commercial insurance,” 7 and thus would aim to develop a “multi-layer co-
funding” mechanism to support payment for rare-disease drugs.

Volume-based procurement
In addition to expanded spending on reimbursement for innovative therapies, the
NHSA aims to save money on older and genericized drugs. Many observers see
this structural change in spending as a chance to “vacate the cage for a new bird,”
and it is a critical piece of the puzzle in terms of China’s healthcare and pharma
market reforms. With volume-based procurement (VBP), first introduced in 2018,
manufacturers of originator and generic drugs with the same molecule name
bid for a committed volume through the government’s centralized procurement
process. Incumbents typically face a 60%-80% price cut in exchange for
committed volumes in the selected jurisdictions; companies that give up or lose the
VBP bid are eligible for only a small fraction of the hospital prescription volumes. A
series of strict hospital prescription monitoring measures ensures compliance with
the volume commitments.

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Between November 2018 and November 2021, six batches of national VBP were
carried out, covering 234 drug varieties.8 According to the NHSA, VBP savings on
drug spending between 2019 and 2021 potentially reached RMB260 or US$36
billion. Only a small number of international pharmas were willing to offer
products (mostly originators) with a large enough price cut to win VBP, leading to
an average success rate of approximately 12% (compared with more than 50%
for domestic pharma products, mostly generics).9 Those who bid aggressively
expected volume gains to partially offset the price reduction, so their revenues
would resume growth from a lower base after the “VBP reset.” The majority of
international pharmas chose to walk away from VBP to maintain high prices
despite the cost of losing committed volumes in their core hospital markets.

Until the introduction of VBP, off-patent originator (OPO) products had long
been the “cash cow” for many international pharmas. With continued investment
in clinical education and branding, the majority of these OPO products were
able to demand a much higher price than generics while still capturing dominant
market share. Although some pharmas were able to maintain or even increase
sales volumes, for many — win or lose — VBP resulted in a sharp revenue decline.
To mitigate their losses, many MNC pharmas reduced sales and marketing
investment in the hospital channel; shifted resources to market access and
hospital listing efforts (to minimize obstruction in the distribution pathway); and
increased efforts in private hospitals, retail pharmacies and ecommerce channels,
all of which are not subject to VBP procurement rules.

Shifting product life cycle

The typical product life cycle in China for innovative drugs has fundamentally
shifted (see Figure 1), with the ramp-up in the initial years after launch accelerating

Figure 1
Illustrative drug lifecycle shift in China (2000s vs. 2020s)

Product revenue (2000s) Product revenue (2020s)

Quicker
Long, fat 2000s ramp-up 2000s
tail post (NRDL
LoE boost)

Slow ramp-up
Steep decline
post LoE
(VBP impact)

2020s
Y0 02 04 06 08 10 12 14 16 18 20 22 24 Y0 02 04 06 08 10 12 14 16 18 20 22 24

Global China Timeline China in Wave 1 Timeline

Launch Launch Global Launch
Source L.E.K. analysis

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now that drugs have much earlier access to the NRDL, and with the post-LoE
(loss of exclusivity) decline likely becoming much steeper as the launch of generics
triggers VBP. For international pharmas, reconsidering their commercialization
strategy in China and reshaping their go-to-market model have been on top of
their agenda.

Going digital
In the “pre-digital era,” international pharmas helped shape China’s
pharmaceutical commercialization model with an approach focused on academic
promotion. Today, they are also pioneers embarking on a digital journey.

The early movers are more focused on ecommerce and social media coverage, as
well as online conferences and events. Fundamentally, as in any other country (and
even more so in China), digital channels have become a critical means of accessing
information. Gradual easing of governmental restrictions on online drug sales
and increased scrutiny over sales rep visits to hospitals and physicians have been
important external forces behind continued investments in these digital efforts.
The rapid expansion of VBP, too, has driven the pharmas to significantly reduce
commercialization investments and, as a result, turn to online and digital tools to
maintain their reach to a broad customer base while controlling costs. Furthermore,
the COVID-19 pandemic and the Chinese government’s strict movement control
policies accelerated the challenges involved in providing patients with access to
hospitals, and pharma reps with access to healthcare professionals (HCPs).

According to a 2021 Yibai (100doc) survey, more than 80% of international oncology
pharmas spent approximately 30% of their marketing budget on digital channels,
compared with less than 20% for the majority of the Chinese oncology pharmas.10
WeChat is a critical tool for disseminating medical information to target HCP
audiences, through pharmas’ own official accounts as well as third-party channels
that publish proprietary articles sponsored by, in many cases, pharma companies.
Conferences and events are also moving online, saving on costs for the host and
significantly removing constraints on audience size. This trend is particularly helpful
in reaching the large number of HCPs in lower-tier markets (such as county and
community health centers), who are rarely invited to the live events.

International pharmas are also working closely with the leading third-party
digital health platforms (such as JD Health and AliHealth) and internet hospitals
(innovative approaches similar to telemedicine services) in connecting the dots
between diagnosis, treatment and patient disease management. Leading
MNC pharmas such as AstraZeneca, Novartis and Sanofi have all established
partnerships in China on this front, with dedicated internal digital or innovation

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teams steering their efforts, often led by senior talent with extensive internet
or digital experience outside the healthcare/pharma industry. Certainly, a key
challenge to overcome is payment, as the current reimbursement policies are still
shy of providing full coverage for digital services.

In the 2022 APAC Hospital Priorities Survey by L.E.K. Consulting, one-third of

senior managers from the 120 Chinese public and private hospitals surveyed
reported currently using some form of digital tool, with the remainder either
experimenting with or exploring digital solutions. The importance of investing
in digital health capabilities has increased significantly compared with the
previous year, ranking fourth among all strategic priorities of Chinese hospitals
(see Table 2). This trend is anticipated to continue on a steep trajectory, offering
tremendous opportunities for Chinese and international pharmaceutical
companies alike to help shape — and improve — hospital and patient experience in
the digital era.

Table 2
Chinese hospitals’ strategic priorities over the next three years (ranked by importance)*

Percentage
2022 rank Top strategic priorities 2022 2021
point change

#1 Improving clinical outcomes 76% 53% +23

#2 Standardizing clinical care protocol within and across hospitals 72% 53% +19

#3 Improving healthcare worker safety 70% 48% +22

#4 Investing in digital health capabilities 66% 39% +27

#5 Investing in new IT systems 66% 55% +11

#6 Reducing acquisition costs of capital equipment 63% 49% +14

#7 Reducing cost of medical supplies 63% 52% +11

#8 Improving labor efficiency/workflow optimization 58% 50% +8

#9 Recovering from financial impact of COVID-19 58% 48% +10

#10 Working with other sites of alternative care 58% 51% +7

*Survey question: How important are the following strategic priorities for your hospital over the next three years?
Source: L.E.K. 2021, 2022 APAC Hospital Priorities Surveys

Sourcing innovation from China

Another key mandate for many international pharmas is to scout for innovation
originating in China. As local Chinese pharmas and biotech companies accelerate
their R&D efforts, they are quickly catching up and (in some areas) are on the
cusp of innovations parallel to their counterparts’ in the developed markets (see
Figure 2).

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Figure 2
China: Innovation stages and timeline

Parallel
Development
Fast Following
Chinese companies
catching up with the
Pivoting to Chinese companies latest trends; approval
innovation continue to follow times are parallel with
mature/late-stage international pharmas in
Chinese companies begin targets globally; approval
Innovation to develop new China; some companies
timeline gap narrows for achieve global-first status
stage compounds in approved/ Chinese vs. international in their innovative MoAs
mature targets pharmas

Betta Betta AlphaMab

Example Hengrui Hengrui I-Mab
companies Hansoh Akesonio
Junshi EpimaAb

Timeline 2000-2010 2010-2020 2020 and beyond

Note: MoA=mechanism of action

Source: L.E.K. analysis

Gaining global recognition

Over the past few years, numerous Chinese pharmas and biotech companies
have enriched their pipeline by moving from “China first” products to “global first”
molecules. In 2021, according to the U.S. FDA records, a total of 26 drugs received
a breakthrough, fast-track or orphan drug designation, exemplifying the quality of
innovations coming from China now (see Table 3).

Table 3
Example first-in-class* drugs under development in China (August 2022)

Company Product Therapeutic area Mechanism of Action Clinical stage

Remegen Telitacicept Autoimmune BLyS/APRIL fusion protein Approval

Alphamab KN046 Oncology PD-L1/CTLA-4 bispecific antibody Phase III

Ascletis ASC40 Oncology FASN Inhibitor Phase III

Generon F-652 Hepatitis IL-22 agonist Phase II

Junshi JS-004 Oncology BTLA4 antibody Phase II

Jacobio JAB-3068 Oncology SHP2 inhibitor Phase I/II

Fosun ORIN1001 Oncology IRE-1α inhibitor Phase I

*First molecule globally within a specific mechanism of action

Source: Pharmaprojects, NMPA/CDE, L.E.K. analysis

Many of these Chinese biotech companies have a clear ambition to become a

full-fledged pharmaceutical company and commercialize these products in China
on their own. At the same time, the strategic importance of opportunities outside
the Chinese market is rising, especially given the low prices currently resulting from
NRDL negotiations, which limit revenue potential within China. However, very
few Chinese biotech companies have the confidence and appetite to set up their
own commercialization capabilities in the developed markets. This presents an

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opportunity for international pharmas to realize commercial value outside China

by enriching their global portfolio with innovative assets originating from China.

China-to-international deals
China-to-international licensing deals have increased remarkably in both volume
and value recently, especially over the past two years (see Figure 3). In 2021,
about 45 deals (totaling more than US$10 billion) were disclosed where a Chinese
organization licensed ex-China rights to an international licensee, with an average
deal size of more than US$500 million (see Figure 4).

Figure 3
China-to-international licensing deals (2015-2021, Number of deals)

100

83
80

60

45
40 36 35
29 Others
25
20 19

Oncology
0
2015 2016 2017 2018 2019 2020 2021

Source: Cortellis, L.E.K. analysis

Figure 4
Average size of China-to-international licensing deals (2015-2021, US$million)

600
523
500

395
400
338
300
232 220
200
140 133
100

0
2015 2016 2017 2018 2019 2020 2021

Note: Includes only deals with value announced

Source: Cortellis, L.E.K. analysis

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Novartis, AbbVie, Lilly and Seagen are among the international pharmas that
have struck major deals, which undoubtedly demonstrates continued global
confidence in the high quality and strong commercial appeal of Chinese innovation
(see Table 4). The Chinese government’s efforts over recent decades in building
and cultivating a healthy biotech innovation ecosystem are now bearing fruit.
International pharmas view China no longer as a source of mere “me too” followers
in the pharma industry, but as a powerhouse supplying truly innovative pipelines of
products that will require heavy bids.

Table 4
Top oncology out-licensing deals (>US$500 million) by Chinese pharmas (August 2020-August 2022)

Deal size*
Date Licensor Licensee Product(s) Territory
(US$,million)
Aug. 2022 Jemincare Genentech JMKX-002992 650 Global

July 2022 CSPC Elevation SYSA-1801 1,245 Global ex. Greater China
Oncology
June 2022 Henlius Organon HLX-11, HLX-14 644 Global ex. Greater China

May 2022 Kelun MSD Undisclosed 1,363 Global ex. Greater China

May 2022 LaNova Turning LM-302 1,100 Global ex. Greater

Point China and South Korea
Mar. 2022 Adagene Sanofi Masked monoclonal and 2,518 Global
bispecific antibodies
Dec. 2021 BeiGene Novartis Ociperlimab 2,900 Canada, EU, UK, U.S.,
Japan and six other markets
Aug. 2021 RemeGen Seagen Disitamab vedotin 2,595 Global ex. Asia, plus
Japan and Singapore
June 2021 Allist ArriVent Alflutinib mesylate 805 Global ex. Greater China

Feb. 2021 Junshi Coherus JS-006, JS018-1, toripalimab 1,110 Canada, U.S.

Jan. 2021 BeiGene Novartis Tislelizumab 2,200 Canada, EU, UK, U.S.,
Japan and six other markets
Nov. 2020 Henlius Binacea HLX-35 768 Global ex. Greater China

Oct. 2020 CStone EQRx CS-1003, sugemalimab 1,300 Global ex. Greater China

Sep. 2020 I-Mab AbbVie Lemzoparlimab 1,940 Global ex. Greater China

*Includes upfront and milestone payments

Source: Cortellis, L.E.K. analysis

In 2021, more than 60% of the approximately 400 pharma collaborations in China
were cross-border.11 Beginning in late 2021 and continuing into 2022, the Chinese
biotech market plunged amid ongoing concerns over geopolitical tensions, forced
delisting from the U.S. stock exchanges and a slowdown in China’s macroeconomic
growth, casting shade on cross-border deal-making. Despite such volatility, long-
term confidence in China remains the mainstream view among investors. In 2022,
international pharmas continued to invest in sourcing innovation from China,
with Sanofi, Turning Point, Merck (MSD) and Elevation Oncology, among others,
striking licensing deals of more than US$1 billion each with Chinese innovators.

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4. New Entrants: Options & Trade-offs12

International pharmas have employed a range of options to enter China, but most
companies, especially biotechs, take partnering into consideration first. Whereas
larger, established companies mostly invested in their own presence outright,
smaller firms might look to China only as a source of funding or incremental
opportunity, and thus would choose to out-license the rights to their products.

For those that are not yet operational in China, choosing the right approach before
discussing partnership strategy is a critical task. The choice regarding method of
entry goes beyond simply locating the right local partner company. An effective
entry strategy should be geared around the pharma’s overall strategic plan and
commercial objectives. These objectives are unique for each firm and may change
depending on internal objectives specific to China (and more broadly to Asia), the
firm’s current stage of development, and the key decision-makers’ willingness to
invest financially and operationally.

Entry strategies can be grouped chiefly into four broad categories as described
below, each with its own advantages and challenges (see Figure 5).

Figure 5
Options for Chinese market entry

Level of control
High Low

Acquisition Greenfield Joint venture Out-licensing

Presence Presence Presence No presence

Pros • Immediate access to • Full control of business • Leverage partner • Good for company
existing products, resources to fill in gaps with limited local
talents and other local • Full revenue booking and save time presence or strength
capabilities
• Build own brand, • Shared investment, • Low investment and
• Full control of business capability and network risks and upsides easy recovery/upside
• Full revenue booking • Can use support from • Low risk
service partners (e.g.,
CRO, CSO)

Cons • High upfront • Need to ramp up on • Requires time and • Limited control over
investment full set of capabilities/ effort to identify right product sales, brand
infrastructure at all partner and negotiate and marketing
• Difficult to find right fronts from scratch
target • Difficult to set up • Low profitability
• Speed to launch may potential
• Risks from integration be slower given • Potential conflict of
newness to market interest

Note: CRO=contract research organization, CSO=contract sales organization

Source: L.E.K. analysis

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Acquisition
Acquisitions provide a jump-start into a new market, with already established
infrastructures, existing supply chains and ready commercial portfolios. This is in
addition to, and can work in cooperation with, the acquiring firm’s own pipelines.
By entering Asia through its acquisition of Invida in 2011, Italy’s Menarini achieved
a commercial presence in 13 Asia-Pacific markets (including China, Australia,
and major Southeast Asian countries such as Singapore and Malaysia) with a
single purchase. In another example, Australia’s CSL acquired Chinese plasma
fractionator firm Wuhan Ruide in 2017 in order to expand into the local market for
plasma-derived products.

Greenfield
Starting a brand-new business in China can produce a highly committed organic
growth process. The level of upfront investment can be limited to supporting
product registration via regulatory consultants and/or contract research
organizations, and it does not require much direct physical infrastructure.
Alternatively, the greenfield approach can start with initial setups and
preparation for product registration, with an eye to making further decisions
about acquisitions or joint ventures later in the game. This method was used by
FibroGen, Gilead, Biogen (all U.S. companies) and Taiho (a Japanese company)
to enter the Chinese market. Alternatively, U.S. pharma Biohaven (acquired by
Pfizer) established a new entity in China, Bioshin, to develop and commercialize its
pipeline products in China and other Asia-Pacific markets.

Joint Venture
A JV is the most frequently considered option for biotech companies on the cusp
of becoming international commercial operators. Firms seeking entry through a
JV have an interest in maintaining some level of their own presence in China yet
are often daunted by the challenge of managing an operation on the opposite side
of the globe, where cultural norms are unfamiliar. A joint venture is a good option,
therefore, for executives who feel more comfortable having “locals” navigate the
market. JV projects must navigate steep communication and cultural challenges
while maintaining the integrity of both Chinese and international partners.

Kite (acquired by Gilead) and Juno (acquired by BMS) both opted to setting up a
joint venture in China, with Fosun in 2017 and WuXi AppTec in 2016, respectively, to
develop and commercialize their CAR-T and other cell therapies. Both JVs had their
first CAR-T product approved in China in 2021. More recently, Allogene formed a JV
with Overland (backed by Hillhouse Capital) in 2020 in order to operate in China
and other Asian markets, and Arrowhead formed Visirna with Vivo Capital in 2022
for the Greater China market. The participation of private equity and venture
capital funds provides alternative sources of funding and a greater degree of
managerial flexibility.

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Out-licensing
The rise of biotech startups in China has complemented and facilitated the
rise of out-licensing to Chinese firms. Companies such as Everest, CStone and
CANbridge allow international firms to out-license, develop and commercialize in
China with limited direct presence. Smaller pharmas such as Puma, Mirati, Tesaro
and Blueprint have granted companies exclusive product rights in China in return
for upfronts and milestones (see Table 5).

Table 5
Examples of in-licensed drugs approved by NMPA (non-exhaustive)

Product Therapeutic area China approval date Licensor Licensee

Ramucirumab Oncology March 2022 Lilly Innovent

Ivosidenib Oncology February 2022 Servier (Agios) CStone

Dinutuximab beta Oncology August 2021 EUSA BeiGene

Carfilzomib Oncology July 2021 Amgen BeiGene

Avapritinib Oncology March 2021 Blueprint CStone

Pralsetinib Oncology March 2021 Blueprint CStone

Ripretinib Oncology March 2021 Deciphera ZAI Lab

Niraparib Oncology December 2019 Tesaro ZAI Lab

Source: NMPA, L.E.K. analysis

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5. Partnership Considerations13
Once international pharmas start down the path of partnership, the selection
criteria for identifying suitable Chinese partners are mostly consistent with
partner selection patterns in other regions. The approach to partnering with
multinational/international pharmas in China versus domestic Chinese pharmas
does not necessarily differ.

Key selection criteria include the following:

• Upfront financials. A willingness to supply capital is a universal requirement
for biotech companies in the development stage. The injection of cash upfront
is often necessary so these firms can run late-stage trials. Plus, it represents
validation of the technology.
• Clinical trial competence and access. Given China’s requirement of Phase III
clinical trials for product registration, clinical trial competence and access to key
opinion leaders are particularly important for innovative companies. This is also
reflected in the desire for therapeutic area expertise of the potential partner.
• Commercial capabilities. Partners are expected to possess demonstrated
commercial expertise based on hospital coverage, market access and market
positioning. This means, for example, a larger company in China must have at
least 1,000 large teaching systems (known as “Level 3A hospitals”) out of the
20,000 hospitals nationwide in order to have a reasonable coverage.
• Intellectual property (IP) protection. IP protection continues to be a key
concern raised by international pharmas and is often a key selection criterion
exclusive to emerging markets. Without enforceable and effective IP protection,
pharmas either would refuse to consider China (or any other markets with an
underdeveloped IP protection system) or would seek out partners that are
considered “safer” from this perspective.

Over the past five years, international pharma out-licensing deals in China
continued to grow at 13% compound annual growth rate, with more than 100
deals reached in 2020 and close to 90 in 2021 (see Figure 6). Among such deals,
approximately 80% are licensed to a Chinese partner and the remaining 20% to
international peers already operating in China — a ratio that has remained largely
stable over the years. Yet vast differences exist, typically by nationality, in the
perception of different partner group types.

Local Chinese pharmas

Established Chinese pharma companies have been operating in the market for
decades, building up extensive clinical, commercial and regulatory experiences and
networks. Many are transitioning now from their traditional generics business to

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Figure 6
International pharma out-licensing deals in China (2016-2021, number of deals)

120
103
100
82 86
35 International
80 13
69 21 licensee
60 53 14
42 16
40 Local
14 68 73
61 licensee
55
20 37
28
0
2016 2017 2018 2019 2020 2021

Source: Cortellis, L.E.K. analysis

innovation, and from developing internal pipelines to actively seeking in-licensing

opportunities. Although the decision-making process is usually efficient, in many
cases there is a trade-off: potential concerns over regulatory, commercial, IP
protection and other types of compliance, especially among licensors less familiar
with the Chinese market.

Furthermore, a considerable number of newly established Chinese biotech

companies are focusing on innovation. In addition to developing their own pipelines,
they are aggressively licensing international assets in order to jump-start their
clinical development and commercial presence. Despite not having much of a track
record in successful registration or commercialization of innovative drugs, these
companies are typically led by experienced industry veterans from established
international or Chinese pharmas, and are backed by financial investors that provide
the funding needed for clinical development and commercialization.

International pharmas
There are significant advantages associated with having international pharmas as
partners in China as well, especially in terms of safety perceptions. The top reasons
for partnering with an MNC are related to safety and risk reduction: key merits
include extensive regional or global experience, more robust IP protection, a strong
corporate reputation, and stringent compliance practices. China-only or Asia-only
development and commercialization deals are usually part of global or regional
pharmas’ business development considerations — or even a key element of portfolio
expansion in the region. The trade-off here, however, depends on the organization’s
business development functions: transactions with MNC pharmas likely require
decision-making at the regional and global level, potentially resulting in lengthier
timelines and increased transaction costs. In most cases, when considering China-
only deals, MNC pharmas also have a much stronger preference for late-stage
pipelines or commercialized products and are reluctant to commit major clinical
development investments for China-only in-licensing deals.

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6. Conclusion
The Chinese pharmaceutical market, at US$300 billion, is the world’s second-
largest pharma market and continues to enjoy expectations of the highest potential
growth among major economies. Underlying drivers for healthcare demand,
including the country’s aging population, rising living standards and improving
healthcare infrastructure, will sustain strong growth in the foreseeable future.

For international pharma companies, when it comes to serving the unmet

healthcare needs of the 1.4 billion population as well as participating in an
increasingly important hub for global pharmaceutical, life sciences and digital
innovation, China is too important a market to neglect. Understanding how to
interpret policy directions and navigate the complexities of this market is critical
for companies looking to seize these opportunities.

The objectives of policymakers and regulators in China are clear: they are making
every effort to cultivate high-quality innovation and provide affordable healthcare
to the world’s largest population, who are pursuing a new level of happiness and
well-being. The NMPA is among the most open-minded Chinese government
institutions and is working relentlessly to catch up with the highest global
standards. In the Chinese pharmaceutical market, international companies are
granted the same rights of access as their domestic counterparts’. What’s more,
neither the origin of innovation nor the location of production is a limiting criterion
for procurement decisions.

After all, China is a developing market, and participants should expect policies
to keep evolving. Some changes may seem abrupt, and regulations may appear
vague, as policymakers persist in adapting to the rapidly evolving technologies and
market dynamics — but their objectives remain consistent. In a market as unique
as China, established global institutions cannot simply be replicated domestically.
For these reasons, “crossing the river by feeling the stone” has been (and likely will
continue to be) the best approach to ensure continued advancement.

China’s grand vision is to “build a community for mankind with a shared future” — a
solemn commitment to openness and inclusiveness. The pharmaceutical industry,
with both Chinese and international participants complementing each other, will
contribute to and benefit from this journey.

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Endnotes
1
https://www.iyiou.com/news/2017071750256Ministry of Commerce, Report on Foreign Investment in China

2
DXY Insight

3
 lobal Genes, https://globalgenes.org/2022/04/25/arrowhead-and-vivo-capital-launch-joint-venture-in-china-to-develop-
G
rnai-based-therapies/

4
 ierce Pharma, https://www.fiercepharma.com/pharma/astrazeneca-sounds-slowdown-alarm-jefferies-beats-85b-drum-
F
chinas-branded-drug-market

5
Xinhua News, http://www.xinhuanet.com/english/2021-02/05/c_139722043.htm

6
BridgeBio, https://bridgebio.com/news/bridgebio-pharma-expands-reach-into-china-and-other-major-asian-markets-
through-strategic-collaboration-with-perceptive-advisors-founded-company-lianbio/

7
NHSA, http://www.nhsa.gov.cn/art/2020/10/13/art_26_3714.html

8
A variety is defined as a specific dosage form of a molecule (e.g., immediate-release oral form of rivaroxaban)

9
 uccess rate is defined as number VBP winners divided by total number of VBP participants; data excludes Batch 6 for
S
insulins where different rules were applied

10
100doc, Digital Marketing Insights of Oncology Pharmas, March 2021

11
ChinaBio, State of China Life Science - 2021

12
Adapted and updated from Heading East – Biopharma International Expansion to China and Asia, L.E.K. Consulting, 2018

13
Adapted and updated from Heading East – Biopharma International Expansion to China and Asia, L.E.K. Consulting, 2018

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About the Author

Justin Wang
Justin Wang is a Partner of L.E.K. Consulting and head of L.E.K.’s China practice. Justin
is a leader in the firm’s Healthcare and Life Sciences practice. He has more than 20 years
of experience in strategy consulting, advising Chinese and international clients in the
pharmaceutical, medical technology, healthcare services and other sectors.

Justin has extensive experience in providing strategic advice on growth strategy, product
commercialization, pricing and market access, China localization and partnerships, M&A and
licensing transactions, and organizational and operational issues. He frequently speaks at
industry forums on market trends and insights, and his expert commentary has appeared in
many trade journal articles.

About the Book, in which the report was

originally published

Life Sciences Unicorns: From a China Investment Perspective by Da Liu

This book systematically expounds the history of the global pharmaceutical industry in the
past 50 years, adopts the philosophical theory of “paradigm” and “paradigm shift”, analyzes
the current investment hot areas, and predicts potential “life sciences unicorns”. Written by
many industry opinion leaders, this book is a rare professional work that combines practice
with theory, combines Chinese characteristics with a global perspective, and combines
business with science. With the purpose of popularizing knowledge and education, this book
uses a large number of cases, introductions, recommended books and report catalogs, so
that readers can learn and think systematically and comprehensively.

23 L.E.K. Consulting