How China turned the tables on biopharma's global dealmaking
Tuesday, October 26, 2021
Source: Endpoints News
Fenlai Tan still gets chills thinking about the darkest day of his life.
Three out of eight lung cancer patients who received a tyrosine kinase inhibitor developed by his company, Betta Pharma, died in the span of a month. Tan, the chief medical officer, was summoned to Peking Union Medical College Hospital, where the head of the clinical trial department told him that the trial investigators would be conducting an autopsy to see if the patients had died of the disease — they were all very sick by the time they enrolled — or of interstitial lung disease, a deadly side effect tied to the TKI class that’s been reported in Japan.
Dejected and anxious, Tan returned to Betta’s office in Beijing. Yinxiang Wang, the co-founder and general manager, was waiting for him. Wang didn’t want to know what was said at the meeting; why don’t they go have dinner together with their colleague Xiaojie Wang to take their minds off of it?
“We had like five bottles of liquor,” Tan recounts.
Patient deaths are always a devastating blow in any trial, but the stakes were especially high for Betta that night in 2007. Four years after Yinxiang Wang and Lieming Ding first started the company, Tan — who had befriended them while studying together at the University of Arkansas for Medical Sciences in Little Rock and offered moral support for the startup from afar — finally joined them in Hangzhou to lead the clinical development. After multiple investors turned them down, calling them crazy, they had barely scraped together the money, from a real estate company, government grants and other sources, to start testing their only drug, an EGFR-targeting TKI dubbed icotinib, in humans. This trial was their one shot.
As he downed the shots of off-brand Maotai — the cheapest they could find — Tan was prepared for the worst case scenario.
“The trial will stop here, the company will stop here, and we go (into) bankruptcy,” he remembers thinking. “We’ll just pack up and go back to America to start our postdoc again.”
In the end, he didn’t have to. The autopsies showed that lung cancer, not ILD, killed the patients. Betta soon resumed the Phase I trial and sailed through Phase II and Phase III studies all the way to approval in 2011 as China’s first targeted therapy.
There have been seismic shifts from the China Tan inhabited back then to where he finds himself today. Few Chinese companies these days, especially those staking a claim in first- or best-in-class races, would fear going bankrupt because of one trial setback. Money is flowing from every direction.
The transformation is incredible not just for its speed and scale, but also how many layers and waves were packed into a short 20 years.
Kerry Blanchard, an Eli Lilly vet who took his first trip to China in 2003 and now serves as CEO at Everest Medicines, breaks the past two decades down, roughly, into four periods by the role Chinese biotechs played in the world: From 2000 to 2007, he saw them mostly doing activities for hire; 2007-2012 was a period of offering packaged commodities; 2012 ushered in the designer stage; then in 2017 they began to serve up customization.
And we’re on the cusp of a fifth stage.
“Now in 2021,” says Peter Lebowitz, global oncology therapeutic area head at J&J’s Janssen, “if we have a target that we like, or a platform that we like, and the team doesn’t bring the Chinese opportunities to me — which they usually do — I’m going to say, we need to see if there’s anything in China, right? And what we find is that those companies in China, when we’re going after something, there are always opportunities in China. Always.”
Whereas setting up a company in China for China was once a bold and revolutionary concept, many around the country’s biotech ecosystem now have a new mantra: “in China, for the world.”
“It’s been dramatic,” he says.
In retrospect, China’s rise in biopharma may seem inevitable: If nothing else, the sheer size of the population spells a boon for both drug research and sales. But the world didn’t always see it that way.
Before Nisa Leung hopped aboard Qiming Ventures to spearhead its healthcare investments, the Stanford MBA grad started a company called Novamed to try to distribute US approved drugs in China. Despite the size of the country, by any metric tracked by an American company, the Chinese market was tiny.
“When we wrote to these companies in the US, they were like China, where? Where’s China? Is it next to Japan?” she recalls. “I mean, nobody cared about China.”
Blanchard, then a “discovery guy” at Lilly, initially considered China one of the few potential places he could leverage to boost the number of molecules ready for the clinic at a given cost.
“I looked outside the US in many geographies,” he says. “And I made several bets — I had sites in Singapore, I collaborated a lot with companies in India, a lot with companies in China, trying to build what we needed.”
According to Blanchard, China ultimately won out because of the growing talent pool: the mass of scientists, chemists and engineers graduating from the higher education system whom Lilly can recruit to staff its labs.
Leung has her own theory — namely that India’s refusal to enforce patent protection (or outright eagerness to revoke those very patents, as was the case with Pfizer’s Viagra) scared Big Pharma away. There is also a more capitalist explanation.
“What we found at the end of it, the big benefit China provides is the CRO, is the service because there’s arbitrage of the cost difference, the discrepancy,” said Darren Ji, who managed R&D and business development for Procter & Gamble’s pharmaceuticals unit in the early 2000s before starting his own companies and investing with Lilly Asia Ventures.
Regardless of their motivations — and each likely had their own mix of reasons — one by one, Lilly, AstraZeneca, Bayer, Roche, J&J, GlaxoSmithKline, Novartis and others began setting up shop on the ground, often in Zhangjiang Hi-Tech Park in Shanghai.
The multinationals were the first customers for contract research organizations like WuXi AppTec, handing them money to build out networks, purchase equipment and eventually wade into process development and manufacturing. For a time, even biotech startups, such as the now-defunct Shanghai Genomics, also used the money they earn from services to subsidize their internal drug hunting. (It wasn’t the only model; Betta managed to pull in new investments, while Shandong RemeGen survived on the sales of traditional Chinese medicines.)
But they did more than that. Those English-speaking offices in Zhangjiang Hi-Tech Park became a breeding ground for the next generation of biotech workers and leaders.
Lilly, for instance, quickly came to the realization that their chemists would leave after six months or a year if they were simply ordered to synthesize a certain compound a certain way. To keep them for longer, it assigned more interesting projects that exposed them to new biological assays and established direct lines of contact between scientists in Shanghai and Indianapolis.
The domestic pharmaceutical industry didn’t tap into the global pulse “until the multinationals began to build R&D sites in China,” observes Min Li, the last head of GlaxoSmithKline’s R&D site in China before it shuttered. “I think that is something that should not be understated.”
Hutchison MediPharma is one of the few homegrown biotechs born at the dawn of the millennium that are still alive today. Granted, it’s a bit of an outlier: Bankrolled by well known Hong Kong-based conglomerate CK Hutchison Holdings, the initial idea for the company was to bring traditional Chinese medicines to the world by screening through the herbs in a scientific manner, profiling them and assembling libraries of information about which exact molecules within them were inferring therapeutic benefits.
So when Hutchison wooed Christian Hogg, then at P&G, to become employee #1, he thought it was a natural extension of his career in consumer products. The story around Chinese medicine was largely what helped Chi-Med (now Hutchmed) pull off an IPO in London back in 2006, even if the company had started pivoting to oncology drug discovery after hitting chemistry, manufacturing and control hurdles.
Then came the financial crisis.
“That killed off many companies,” Hogg says. “We lost 85% of our market value between 2006 and 2009 because of the financial crisis. We were down to sort of $30 million US market cap. It was very difficult.”
For Hutchmed, the crunch time led to collaborations with Lilly, AstraZeneca, J&J and Nestle Health Science. Lilly ended up licensing the VEGFR inhibitor fruquintinib, while AstraZeneca picked up the MET inhibitor savolitinib.
“As we did those deals, more and more investors built confidence in us because, you know, if our assets were good enough for J&J and AstraZeneca and Lilly, they had to be sort of pretty solid innovations,” Hogg says.
Similarly, deals with Merck helped put BeiGene — then a fresh startup helmed by John Oyler, who was known in the circle for running the CRO BioDuro — on the map.
Arbitrage was still very much in play, even if the calculations have become more sophisticated. As Pearl Huang, a co-founder of BeiGene once remarked to Endpoints News: “To be honest, the platform for BeiGene was always the geography.” As long as you have experts in drug discovery who know how to pick targets and make molecules, China was the most capital efficient place to run a biotech business.
“The situation was very unique, because there was a gap in terms of the level of development stage of the drug industry in the US and China,” says Jianmin Fang, who started the antibody and antibody-drug conjugate player RemeGen in 2008.
Investors still took a lot of convincing. Leung, the VC from Qiming Ventures, lined up early investors for Oyler but failed to get her own partners on board for the investment. A drug discovery and development company that won’t generate revenue for at least seven or eight years was a tough sell when compared side by side with already profitable generic makers.
The company that Qiming did come around to was Zai Lab, which was founded by Hutchmed’s former CSO, Samantha Du, to in-license drugs from the US or Europe and tailor development programs to score speedy China approval while researching new candidates in house.
“Zai and others, they really became one of the first virtual models where they can rely on a lot of CROs and they don’t need big teams,” Leung says.
Qiming led Zai’s $30 million Series A round in 2014. Its current market cap on Nasdaq? $9 billion.
‘It’s like a sport’
Still, the generation of Chinese biotech entrepreneurs who left behind promising careers in the US hoping to make a difference in their homeland in the 2010s found themselves facing a different set of restrictions.
“The environment, the culture, the policies all centered around making generics,” writes Jingwu Zang, who first returned from Belgium to run GSK’s Shanghai center and later founded I-Mab.
The shift was gradual and painstaking. By 2013, Qiang Lu — a Brandeis-educated scientist who held roles at Wyeth and Novartis — had helped WuXi open up a biologics business. Yangtze River Pharmaceuticals, then China’s biggest drugmaker by revenue, recruited him because they were hoping to add a new molecular entity to the mix.
Execs there, Lu recalls, had no idea how different creating a new drug would be from generics, how long that would take, or even how to calculate the return of investment.
“I did a lot of educational stuff there,” he says.
Clinical and medical expertise were also lagging, according to Li, the former GSK exec who succeeded Zang. When a drug developer wants to understand unmet needs in neurodegenerative diseases, for instance, they doesn’t just need the simple answer of Alzheimer’s. Whereas when he was at Johns Hopkins, he could’ve walked down the street to ask a neurologist colleague about Alzheimer’s subtypes, genetic links for each and potential druggable targets. China at the time didn’t have as many clinicians involved in that kind of research, who could offer such collision of ideas that are crucial to breakthroughs.
“With every great idea, there are probably 15, 20, 100 bad ideas that wouldn’t work,” says Li, now also the CEO of his own startup, SciNeuro. “Or they wouldn’t work because you didn’t really run into the right person who can tell you there is a way to deal with this, even though you think there’s no way of doing it.”
Yet the biggest challenge for companies hoping to design a drug from scratch and steer it toward approval, by far, was still regulatory.
That was likely why no single person was more often credited for China’s biopharma boom than Jingquan Bi, an economically savvy technocrat who became director of the China Food and Drug Administration in 2015. Within three years, he cleared out a backlog of generic drug filings, implemented a self audit system that put pressure on companies to be honest about data quality, shaved the average time for IND review from years to months and went on an aggressive hiring spree.
With priority review and other new measures in place, and as China joined ICH (the international body governing rules for drug development and regulation), the whole system also became a lot more transparent.
“It’s like a sport,” Li says. “If there’s no clear rule, why am I going to play it?”
Further outlining the parameters of the game, China introduced the first full review to the National Reimbursement Drug List.
“The first batch of novel oncology drugs to go on the NRDL were added to the NRDL in late 2017,” Hogg says. “So suddenly, you’ve got Herceptin, Avastin, Erbitux, Sutent, you’ve got all of these targeted therapies that are suddenly on the reimbursement list.”
If the impact wasn’t immediately clear, it became so in 2018, when the likes of Roche, AstraZeneca, and Novartis reported substantial growth in China despite the steep discounts they had to make in order to get on the NRDL.
That same year, the Hong Kong Stock Exchange reformed its rules to allow pre-revenue biotechs to apply for an IPO under Chapter 18A — opening up a new exit for private investors who may want to recoup their money before companies start actually selling drugs.
The pioneering biotechs did the rest. BeiGene and Hutchmed both listed on Nasdaq in 2016, with Zai Lab soon joining in 2017. Their ever-soaring valuations (and subsequent mammoth secondary listings in Hong Kong) sent a clear message to investors about the money to be made.
Even though candidates originating from US or European biotech companies continued to present attractive opportunities — new players continue to be formed to this day to target specialty needs for development and commercialization; both LianBio and Overland are thriving — push and pull factors of regulatory reforms and financial successes weaved into an irresistible whirlpool, drawing startups deeper and deeper into some form of innovation.
Zai Lab, the pioneer of in-licensing, has always maintained in-house discovery as a key balance to the external assets. Kerry Blanchard’s Everest has also recently set up its own research operations, exploring everything from antibodies to RNA.
“We want to be the whole ball of wax,” he says.
From Innovent to Legend
In a sense, Innovent perfectly encapsulates the subtle and frequent shifts in the thinking around China biotech over the past decade.
The biotech, founded by Michael Yu back in 2011, is multiple waves compressed into one company. First conceptualized by Fidelity as a contract development and manufacturing organization specializing in biologics, it caught the attention of Lilly Asia Ventures when Lilly decided it needed a local partner that can reliably manufacture biologics at a global quality standard and facilitate its regulatory dealings in China.
After making an investment, though, Lilly got interested in a discovery and development partnership.
“We were losing momentum after about two years of effort,” says Blake Salisbury, Lilly’s director of corporate BD at the time. “And then Innovent said, oh, and by the way, we have this preclinical PD-1, and we could put that on the table.”
That afterthought PD-1 would eventually become not just the center of that deal but the second homegrown checkpoint to be approved in China (where Salisbury notes Innovent has a “commercial engine” in place) and, after some back and forth, a centerpiece of Lilly’s promise to shake up drug pricing in the US.
Around 2016, when Lilly restructured its BD group, Salisbury wound up getting a job as Innovent’s dealmaker. Making that same jump from Lilly to the Suzhou biotech two years later was Kerry Blanchard, who served briefly as CSO.
“When I came to Innovent, I think I would say one of the striking things is the focus on speed of delivery,” he says. “And I would say almost speed at all cost mentality.”
By that, he clarifies, he doesn’t mean cutting corners or doing slapdash, low quality work. To be faster than everybody else, the strategy was to over resource — put more people on the projects than what other companies would, “because the speed is the commodity.”
The fast follower approach continued to play out in the PD-(L)1 space as EQRx and Novartis lassoed in candidates from CStone and BeiGene, respectively.
But the real reversal in licensing direction, where drugs from China aren’t just me-too competitors, came in 2017, when an obscure biotech by the name of Nanjing Legend took the podium at ASCO.
Frank Fan, Legend’s CSO, walked up and presented data from a trial of its BCMA CAR-T showing a jaw-dropping 100% overall response rate among multiple myeloma patients.
Among the crowd was J&J’s head of clinical development hematologic malignancy, who walked up to Fan to raise the possibility of a collaboration given J&J’s expertise in myeloma. Less than six months after that initial meeting, the pharma giant announced it was paying $350 million upfront to get its hands on the what is now cilta-cel.
“Of all the drugs that I’ve done, all the deals that I’ve done — and I’ve done a lot — this was the one where I got the most resistance,” Lebowitz says.
Skepticism poured in both within the company and from its industry peers. How could you trust data from an unknown group (as Fan later told Endpoints) that didn’t even have a website? What if they were manipulate or worse, made up? Given the lower standard of care in China, wouldn’t these patients be less sick and, therefore, easier to treat? At a time when there were plenty of high-flying US CAR-T players to team up with, which peers at Gilead and Celgene did with Kite and Juno, why would J&J go with this? One brash comment particularly stuck with Lebowitz: Janssen didn’t do their due diligence.
What ultimately sealed the deal, according to the exec, were multiple trips to China where J&J visited the clinical trial sites, combed through the data, met with the Legend team — and heard, in person, Fan talk about the multiple variations his medical group had tested of its BCMA CAR-T to tease out the optimal design, dosage and regimen.
For Legend, teaming up with J&J wasn’t just about bringing its therapy outside of China, either. One of the biggest accomplishments for the pact besides affirming the drug’s clinical efficacy in the US, CEO Ying Huang says, was building out a GMP grade manufacturing facility in China with help from J&J.
“It’s not just facility per sé, because GMP is not just about the equipment you have, it’s also about the mentality and the way you conduct manufacturing,” he says. “So we would require that kind of help from a partner in training our workforce.”
Zang, the I-Mab CEO, likewise cited AbbVie’s years of experience with antibody production as a key appeal to their CD47 tie-up, on top of the hefty $180 million upfront.
Both Legend’s cilta-cel and I-Mab’s lemzoparlimab are being positioned as best-in-class candidates that could help their pharma partners beat programs from high-profile rivals like Bristol Myers Squibb, Gilead and Pfizer — who sourced their drugs from the US. The same story goes for RemeGen and Seagen, which inked a $2.6 billion alliance to pluck a HER2 ADC from the Chinese partner. Many more will come.
Best and brightest
The founding team at Betta Pharma has now somewhat scattered. Yinxiang Wang and Xiaojie Wang launched Jacobio, which boasts of an SHP2 pipeline that AbbVie swooped in to partner on. Tan started Lupeng Pharma with a new partner, Yi Chen, with goals of taking on AbbVie and Roche’s Venclexta.
In selecting drugs to pursue, Tan’s first consideration is always the US and European markets. If it’s something that multinational companies won’t be interested in, “I will not start the project at all.”
“There’s no way,” he says. “If you only want your drug from China for China, only the Chinese market, you will not have success.”
For now, the job of calling those shots and connecting the dots largely falls on the shoulders of experienced executives, like Darren Ji’s co-founder and CSO at Elpiscience, Hongtao Lu, who cut his teeth at GSK and Zai Lab.
“All the pipeline strategies that we have came from his brain and his consultation with our scientific advisors,” Ji says.
The massive outflow of “the best and brightest people” from China to the world in the 1980s and 1990s, after all, underpinned the tremendous growth of the biotech sector.
“The reason the acceleration has been so fast in China for the last 20 years, 15 years is because actually, we didn’t have to rely on academic institutions for innovation, we were able to bring really highly qualified research and development people back to China to get this going,” Hutchmed’s Christian Hogg says.
Will China have to switch up its model eventually to shift reliance from overseas returnees and tap into local universities for new startup ideas? That’s likely up to VCs — like Qiming, like 6 Dimensions, like Hillhouse — who have the capability to brainstorm, incubate, staff, fund and guide biotech spinouts.
“It’s important to understand that technology will not walk out of the lab to be translated on their own,” remarks Simone Song, managing partner at Hong Kong-based ORI Capital.
The next 10 years
A common complaint among seasoned Chinese biotech execs is that the drug development landscape has become too crowded. Hot targets pull in way too many players who are not just me-too but me-a-little-bit-worse. Case in point: the dozens of PD-(L)1 clogging up the pipeline.
“I would expect some washout,” Ji says.
Before then, most expect a squeeze in talent where companies simply can’t find enough CEOs, CMOs, CSOs or CFOs to run the show, or hire enough mid-level managers to handle projects.
Regulations around experts of genetic materials are still in flux and murky. In fact, Legend’s co-founder Frank Zhang was arrested and placed under house arrest last year as part of a mysterious customs investigation related to GenScript, the CRO from which Legend was spun out.
As more players enter the race, the cost of doing experiments and running a clinical trial — whether it’s reagents, sites or investigators — is also ballooning.
Qiang Lu is now the CEO of GenFleet, an oncology/immunology-focused company that recently licensed a KRAS drug to Innovent. While tacitly acknowledging these new challenges, he doesn’t get bothered.
“I got used to this,” Lu says. “The first day I returned from the States, and I was still running the lab in WuXi. I sort of feel completely different environments here in China. And nowadays, it’s improving a little bit, but still, there are some issues. But my point is, those are, you know, technicalities. As long as I have something, as long as I made up my mind to pursue something, I wouldn’t be bothered by those technicalities.”