Editor's Note

Over the past 10 years of China's innovative drug industry, Biotech has undeniably been the protagonist. The world has witnessed the birth of several great Biotech companies, with an increasing number of firms across different fields finding their niche and forging their own paths.

The third instalment of our China’s Innovative Drugs: A New Decade, A New Journey series focuses on the theme of the development pathways of Chinese Biotechs. Against the backdrop of evolving global industry ecosystems, we highlight Biotechs’ own growth stories, examining how they make critical choices under broader industrial climates and specific corporate environments, and which factors shape their trajectories. More importantly, we contextualise each company within the historical coordinates of the industry to uncover the underlying industrial and historical logic behind their evolution.

Since 2022, the survival landscape for Chinese Biotechs has shifted significantly. Superficially, frequent license-out deals for innovative drugs from Biotechs have occurred, and more companies have attained financial profitability. At a deeper level, many firms have recalibrated strategies, undergone or completed cognitive transformations, realigned with their Biotech identity and abandoned the fixation on becoming a Biopharma.

How to interpret these changes? The capital winter offers the most simplistic explanation, but more fundamental are cyclical forces or the inherent operational logic of the industry itself.

When discussing the development pathways of Chinese Biotechs, we go beyond narrating individual survival cases to show how universal industrial logic influences strategic decisions at different growth stages. Hopefully, this foundational framework will not only explain the industry’s transformations over the past decade but remain relevant for decoding changes in the decade ahead.

Where Does Biotech Funding Come From?

Capital is undoubtedly a core factor driving biopharmaceutical innovation and constraining company development. It can be said that throughout the entire lifecycle of a Biotech company, it constantly faces the dual challenges of "securing funding" and "spending funds".

During periods of capital market prosperity, venture capital (VC) funds dominate, and their preferences and criteria shape the operational models of Biotechs. In the first half of the past decade, Chinese VC funds primarily chased "localised versions of major targets", leading to up to over 100 followers each targeting established overseas targets like PD-1, BTK and EGFR. As VC investments in these major targets reached saturation, they shifted toward higher risk tolerance, funding earlier stage technologies and targets, driven by excitement and optimism about the high returns promised by novel technologies.

The sudden COVID 19 pandemic in 2020 temporarily amplified this sentiment, sparking an RNA technology platform investment boom in China. Even seasoned professionals briefly believed these new technologies would save the world.

Experienced Biotech leaders know the optimal time to raise capital isn’t when you need funds, but when you can secure them. Whether funding is attainable depends at the company level on whether R&D milestones are achieved, and at the industry level on macroeconomic conditions and the broader capital sentiment toward biotech.

If venture capital loses confidence in biotech or specific technological fields, funding inflows will halt. Observing the stock performance of Biotechs on the US NASDAQ reveals multiple openings and closings of Biotech investment windows. Over the past 30 years since 1992, Biotechs in the US stock market have experienced four distinct capital boom bust cycles.

This means every surviving Biotech will face a period of scarce capital post bubble burst, often termed the "post VC era". During this phase, many Biotechs struggle to secure funding. When the "funding gap" in both primary and secondary capital markets becomes critically wide, Big Pharma companies emerge as Biotechs’ best allies, providing what amounts to "lifesaving funds". The relationship between Biotechs, venture capital and Big Pharma can be viewed as a cyclical dance.

However, corresponding to capital market cycles, Big Pharma companies have their own business cycles, primarily determined by the patent cliffs their core products inevitably face. Fluctuations of the scale of USD 10 billion in core product revenues force Big Pharma companies to continuously adjust their business strategies. Major strategic shifts typically occur every 8 to 10 years for these corporations.

Although blockbuster drugs generating USD 10 billion revenues still emerge regularly, the global pharmaceutical industry has entered an era of "blockbuster scarcity". Pharma giants face significant revenue contraction risks as patent protections and market exclusivity for numerous major drugs expire within the next five years. Bristol Myers Squibb alone sees nearly 90% of its product revenues threatened by impending patent expirations – creating a massive market gap requiring urgent measures.

For Biotechs worldwide, this presents an unprecedented supercycle for deal making with Big Pharma. During this period, Biotech R&D directions inevitably align more closely with Big Pharma's preferences.

Broadly speaking, Big Pharma urgently needs to fill revenue gaps left by expiring pillar products. Their current aggressive asset hunting in obesity, autoimmune diseases and neurology reflects these markets' capacity to sustain multiple blockbusters. Consequently, Biotechs with late-stage clinical assets in these areas become prime acquisition and deal targets for Big Pharma. Early-stage Biotechs struggle to attract Big Pharma interest unless operating in hot fields like ADCs or GLP-1.

Venture capitalists may choose to abandon biotech investments and exit the sector, but Big Pharma companies have no such option – nor would they take it.

Naturally, Biotechs don't face binary choices between venture capital firms and pharma companies. The three don't engage in exclusive competition but rather form a complex, complementary industrial triangle.

In optimal scenarios, this represents an innovation to market relay – after securing venture funding and advancing products to human trials with clinical data, Biotechs can obtain more favourable funding and commercialisation support from Big Pharma. Investors achieve exits, while pharma companies gain products and generate market profits.

Behind the Shift in Funding Sources: The Rotation Between Technology and Product Trends

The source of funding is so crucial that when it undergoes significant structural changes, Biotech companies must correspondingly adjust their business strategies and directions. Whether a Biotech's funding primarily comes from VCs or Big Pharma actually reflects the biopharmaceutical industry's cyclical shift in enthusiasm between "technology" and "product" assets.

Since 2000, the narrative has repeatedly alternated between technology platform frenzies and returns to product focus. Technology platform frenzies are typically driven by venture capital firms, while the return to products is propelled by Big Pharma companies.

During technology platform frenzies, Biotechs leading new technological trends can more easily secure funding from VCs, often sparking waves of entrepreneurship. However, the frustrating reality is that most technological advancements represent evolution rather than the anticipated revolution in drug development. Overeager investors overestimate technological feasibility while underestimating industry complexity. When the capital frenzy subsides, startups ultimately realise that building the largest technology platform isn't the final answer – what Big Pharma truly values is whether a company can transform that technology platform into commercially viable products.

An interesting case study emerges from the 1980s and 1990s with the rise of plant molecular vector technology, a recombinant protein production method using plant biotechnology to manufacture protein drugs. Two pioneer companies emerged in the late 1980s and early 1990s respectively, followed by a second wave of entrants in the mid to late 1990s. The first product based on this technology only reached the market in 2012.

A 2015 study interviewed 16 leading companies in this field – 4 had ceased operations, 2 had been acquired, and the rest remained small to medium enterprises. The research sought to understand the rationale behind each company's key decisions throughout different development stages, from founding to eventual closure or ownership change. Questions examined included initial financing methods, original objectives, development and exit strategies, and product selection approaches.

Although focused on plant molecular technology Biotechs, the study's themes and findings clearly apply to all Biotechs in the pharmaceutical sector.

Different funding sources impose varying operational control demands, requiring Biotechs to carefully craft financing strategies that support development plans. All Biotechs, including those mentioned above, face critical choices when seeking funding: whether to take venture capital, partner with large corporations or pursue government grants and subsidies.

Among the studied companies, those established during the 1990s tech stock boom all chose venture capital and succeeded. This demonstrates that Biotechs establishing themselves during periods of strong institutional investment interest in biotechnology enjoy greater success potential. On another critical question, when these companies were asked whether their founding basis was "technology" or "product", only four companies responded that they were driven by clearly defined target products, while most were platform technology driven. During the founding stage, maintaining "naive" excitement and optimism about new technologies is understandable, but many Biotech companies remain committed to improving technologies over extended periods, continuously burning cash and pressuring operating capital. They generally fail to recognise the development risks of new technology platforms while underestimating product development cycles, with most companies taking around five years to finalise a product, and some even requiring nine years.

Prolonged product development timelines create fatal risks and consequences. During these extended periods, capital markets may shift from boom to bust, patent landscapes and market environments continuously evolve, and various unforeseen issues inevitably emerge, such as being overtaken by companies developing superior alternative therapies. These factors exponentially increase failure risks.

While many Biotech companies make mistakes in product selection, those that are ultimately successful understand the critical importance of transitioning from technology to product. They pay particular attention to what products Big Pharma wants to acquire, with some even making it their core strategy to develop products attractive for licensing, leading to eventual acquisition. Most Biotechs generate revenue through product out-licensing, as many Chinese companies currently do. They typically have clear strategies and business pathways, such as completing IPOs before Phase II clinical trials after securing venture capital, or advancing products to Phase II clinical stages before attracting stronger partners to share subsequent development costs and risks.

Some Biotechs transform into contract research organisations (CROs), creating cash flow and profits through their technologies and services. Surviving Biotechs demonstrate flexibility, with some fundamentally altering their business plans while maintaining liquidity. This adaptability proves crucial to their success.

Post 2018, venture capital became the primary funding source for China's innovative drug industry, but early-stage capital inflows didn't trigger technology platform frenzies, instead chasing more certain models like license-in strategies and fast-follow drugs. Only after 2020 did early-stage, small-scale, and technology-focused investments become trends, giving rise to truly cutting-edge technology-driven domestic Biotech companies that subsequently integrated into global "technology-to-product" cyclical development logic.

When discussing the "shifting industry winds" Chinese Biotechs have faced recently, we're essentially observing transitions between biopharmaceutical technology and product cycles. Companies that keenly detect these shifts, quickly assess situations, make decisive transitions - whether securing cash flow through business development or achieving endgame acquisition by Big Pharma - will glimpse victory's dawn.

The Window Period for Biotechs to Become Biopharmas

The global biopharmaceutical industry divide - where Biotechs focus on technology and Pharma focuses on products - has become increasingly defined over the past 30 plus years. In this ecosystem, highly active technological innovation takes place in biopharma, while commercial market dominance remains firmly with Big Pharma companies, making the path from Biotech to Biopharma extremely narrow.

Historical data on new drug approvals illustrates this. Between 1997 and 2002, nearly 40% of new products approved in the US came from Biotech companies. From 2010 to 2020, among all 50 first-in-class oncology drugs approved by the US regulator, 46% were independently discovered by small Biotechs, with only 14% originating from Big Pharma. When including collaborative projects, Biotech participation rose to 62%, far exceeding Big Pharma's 26%. Yet conversely, in 2024 the top-10 pharmaceutical companies by revenue were all diversified Big Pharmas, with no Biotech presence.

Other industries don't operate this way. Small startups can maximise commercial returns through disruptive technological innovation, completely reshaping market landscapes. Why is biopharma different? The fundamental reason lies in varying commercialisation environments faced by startups across sectors.

The commercialisation environment - encompassing economic conditions and strategic opportunities for transforming innovative technologies into products - determines whether startups choose to cooperate or compete with existing market leaders. Further considerations include whether to integrate into established commercial systems and value chains, or create entirely new ones, weighing respective input-output ratios.

In the case of the drug industry, building commercialisation systems from scratch enables Biotechs to enter markets and directly compete with more mature pharma companies, but requires massive capital investment while facing intense competitive pressure. Alternatively, partnering with established Big Pharma through licensing, co-development or outright acquisition integrates innovations into existing commercial value networks, but eliminates the possibility of displacing established systems through innovation.

Overall, Biotechs face greater commercial disadvantages. Most research-driven Biotechs choose to collaborate with at least one pharma company during commercialisation to access market resources. Regarding marketing, Biotechs have largely abandoned direct competition with pharma. Today's Big Pharma companies have grown even more massive through continuous mergers, reinforcing their traditional commercial advantages. Modern blockbuster drugs typically require global commercialisation capabilities that no Biotech can match against Big Pharma.

However, this industry structure is not completely fixed. Big Pharma companies' increasing reliance on Biotech innovation is altering the power balance between them, leading to changes in the nature and models of collaboration - reflected not only in deal structures but also in their attitudes toward Biotech partners. The emergence of contract sales organisations (CSOs) has also provided Biotechs with more options beyond partnering with Big Pharma. This means Biotechs now have greater negotiating power and opportunities to secure larger commercial shares when collaborating with Big Pharma.

Therefore, when discussing the window period for Biotechs to become Biopharmas, we're essentially referring to the period when autonomous commercialisation by Biotechs offers better input-output ratios than partnering with existing Big Pharma companies.

Product market competitiveness remains paramount. Amgen, one of the pioneering Biotechs founded in 1980, launched its first drug Epogen (epoetin alfa) in 1989, with sales soaring to USD 140 million the following year. In 1991, its second blockbuster Neupogen (filgrastim) was approved, accelerating the company's growth. Today, a Biotech aiming to become a Biopharma still requires at least two world-class blockbuster drugs.

Additionally, establishing new commercial market chains from scratch demands substantial financial support. Only cash-rich Biotechs with significant bank reserves can maintain autonomy, while those aspiring to grow into Biopharmas need diversified funding sources to strengthen risk resilience.

Many Chinese Biotechs have recently abandoned autonomous commercialisation paths, temporarily relinquishing Biopharma ambitions. This choice reflects constraints imposed by biotech industry development patterns rather than mere pragmatic compromises.

Not every Biotech must become a Biopharma, as this strategy represents an exceptionally narrow gate. The opening and closing of this gate relates to capital flows driven by risk preferences, strategic shifts by Big Pharma, fluctuating power dynamics between capital and industry players, and the market competitiveness of Biotech products. It is only when all elements align perfectly that this gate opens for those chosen.