Innovation and AI in China’s Biotech Sector
Innovation and AI in China’s Biotech Sector
Owing to reg reform and a strong innovation ecosystem, China’s biopharma industry has bloomed — bringing attendant political controversy but also showcasing the potential of global collaboration.
Angela Shen is the newest member of the ChinaTalk research team. Today, she’s breaking ground with an in-depth biopharma explainer.
On June 13, Chinese drug-research company XtalPi 晶泰科技, also known as QuantumPharm, debuted on the Hong Kong stock exchange for US$126.7 million. The AI-powered drug-discovery startup’s digital prediction algorithm and computational models helped Pfizer design Paxlovid, the world’s first FDA-approved oral COVID-19 drug — saving precious time for the drug to enter large-scale production. XtalPi is a leader in the application of AI to expedite the expensive, laborious nature of drug development, with life-saving results. Founded at the Massachusetts Institute of Technology, with innovation centers and industrial parks in Boston, Beijing, Shanghai, and Shenzhen, XtalPi also models the global interdependencies of the pharmaceutical value chain.
Fundamentally, biotechnology involves reading and designing new biological “code,” including DNA, RNA, proteins, and metabolites. Underlying all life on Earth, this “code” is incredibly complex; only in recent decades — with the help of new technologies such as AI — has humanity shown the potential to understand and shape these building blocks of life. With its ability to process and analyze enormous amounts of data and simulate intricate systems, AI stands out as a potentially revolutionary tool for the synthesis of biological drugs that can diagnose, cure, treat, or prevent disease.
AI algorithms, for instance, can be used to develop cancer therapies personalized to patients’ cancer and immune cells. “Self-driving laboratories” combine AI and automated machines to rapidly expedite drug discovery and testing processes. AI models can predict designs and conduct simulations to identify possible molecules for novel drugs.
Like in many other countries, pharmaceuticals constitute the largest segment of China’s biotech sector. China’s 14th Five-Year Plan prioritizes innovation-driven development, particularly in AI, biotech, and pharmaceuticals. With the exchange of ideas, talent, and resources across national boundaries, China has advanced rapidly. Radical technologies like AI and biotech, however, also have a dark side — and fear of the threats they pose to national security have driven countries like the United States to initiate policies focused on technological decoupling.
The question is, are the benefits of global biotech collaboration (e.g. better innovation) outweighed by the risks (e.g. national security)?
In other words, what should the future of global biotech innovation look like?
ChinaTalk is looking for sponsors! Respond to this email to connect.
From policy to market: understanding drivers of tech innovation in Chinese biopharma
The biopharmaceutical sector is known for long time horizons, sustained investment flows, and intrinsic uncertainty. Drug discovery and development requires high scientific and technical know-how. For both scientific and regulatory reasons, drugs must endure an extensive testing and approval process before manufacturing and commercialization can even be considered.
Due to these barriers, innovation can be expensive and difficult. And China’s pharmaceutical market has only recently embraced innovation, as a result of top-down strategic prioritization of novel science and technology development.
In the last decade, Beijing has implemented policy reforms which better foster a regulatory environment that rewards biopharmaceutical innovation. Before 2015, the Chinese Food and Drug Administration (CFDA) 国家食品药品监督管理总局 — the main governing body for drug review, approval, and monitoring — suffered from extreme incompetence, including a major bribery scandal and massive approval backlogs. With foreign firms blocked from the Chinese market due to time-consuming approval requirements, Chinese pharmaceutical firms had little incentive to innovate, instead mainly producing generic versions of existing drugs.
Then, in 2015, the CFDA endured a policy overhaul to improve efficiency and transparency in the drug approval process, aligning with the “Healthy China 2030” “健康中国2030”规划 national-level commitment to improve health outcomes through medical innovation. After hiring more than 600 new employees and introducing a Generic Quality Consistency Evaluation, among other policy changes, the CFDA cleared a backlog of 20,000 drug-approval applications within two years. In the first round of auditing alone, 85% of drug filings either failed or withdrew, in an event described as the “July 22 massacre of the pharmaceutical industry.” After filtering out low-quality and incompetent actors, the industry cleared a path for stronger quality controls. This leads us to 2017, when China joined the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) and started adhering to the ICH-GCP (Good Clinical Practice) guidelines. Facing higher standards, domestic firms boosted investment in new product development, setting themselves up for success in global markets.
Meanwhile, incentives shifted away from generics and toward novel drugs. Established in 2018, the National Healthcare Security Association began conducting regular rounds of price negotiations with drug companies for inclusion on the National Reimbursement Drug List (NRDL). To access the national medical insurance scheme’s large market, firms agreed to tighter profit margins on generics, increasing the relative profitability of innovative drugs.
The CFDA, now known as the National Medical Products Administration (NMPA) 国家药品监督管理局, has since issued hundreds of policies that tighten definitions to reduce unoriginal drug applications, strengthen evaluation standards, and create expedited approval pathways for certain products. Between 2011 and 2021, the median approval time for drugs decreased by over six months. With streamlined approval processes, stronger drug-approval standards, and greater financial incentives, Chinese domestic firms finally had good reason to pursue innovative drug development.
Beyond a more favorable regulatory environment, Chinese biopharma innovation has benefitted from the availability of talent, capital, and infrastructure. Beijing’s well-known talent programs aim to encourage academic entrepreneurship, foster knowledge exchange with foreign universities, and establish a highly skilled scientific and technical workforce in China, including in the life sciences. High concentrations of talent, resources, and infrastructure in government-supported high-tech parks and biotech “clusters” benefit from agglomeration effects that further facilitate innovation.
Moreover, venture capital and private equity (VC/PE) financing is very accessible. This includes Chinese corporate VCs like Qiming Venture Partners 启明创投 and Sinovation Ventures 创新工场, foreign VCs like Sequoia Capital, and government-sponsored VCs. Direct government support also exists in the form of subsidies, grants, and programs. For instance, the National Natural Science Foundation of China (NSFC) 国家自然科学基金委员会 awarded 51,600 grants in 2022 for exploration and innovation. On the municipal level, Shanghai recently promised up to 100 million yuan per year to companies making R&D progress on innovative drugs or conducting high-level clinical trials overseas. Finally, initial public offerings (IPOs) — especially on the Hong Kong stock exchange and Shanghai stock exchange’s science- and technology-focused STAR market — have been a vibrant source of capital, reflecting public and investor interest in China’s biopharma potential.
Chinese contract research organizations (CROs) and contract manufacturing organizations (CMOs) are critical players in the story of Chinese biopharma innovation. CROs provide outsourced services for early-stage R&D, including clinical-trial management, biostatistics, and regulatory affairs. CMOs do the same thing but for drug manufacturing, and contract development and manufacturing organizations (CDMOs) do both. These organizations offer highly skilled workforces, advanced technology, research infrastructure, and regulatory knowledge that can reduce costs significantly for biotech and pharmaceutical companies. Chinese CROs and CMOs are especially valuable for their connections with local academic institutions and hospital systems. While North America and Europe still dominate the global CRO market, leading Chinese CROs like WuXi AppTec 药明康德 and Pharmaron Beijing 康龙化成 have been able to expand globally, with over 75% of their revenue coming from clients outside China in 2021.
By some metrics, this focus on innovation is working: Using high-impact research output to gauge country-level technological expertise, ASPI’s Critical Technology Tracker reported that in 2023, China ranked first in synthetic biology and biological manufacturing. The number of biotech Patent Cooperation Treaty (PCT) filings from China increased from 266 in 2013 to 1,920 in 2023, exceeding the European Union. China is now second in the world for clinical trials on the International Clinical Trials Registry Platform (ICTRP). China’s share of the global drug-innovation pipeline increased from 4.1% in 2015 to 13.9% in 2020, reflecting rapid growth.
Part of this progress is thanks to new applications of AI. Chinese startups received 31% of the global share of funding for AI-driven drug discovery, with seven of the top twenty highest-funded firms originating in China. These firms include XtalPi — which boasts the highest pre-IPO capital raised at US$786 million — as well as Insilico Medicine 英矽智能, METIS 剂泰医药, and Xbiome 未知君. So far, they seem to be putting that funding to good use: XtalPi’s technology helped identify a gastric cancer treatment in six months, a shorter timeline than usual; Insilico Medicine took less than 18 months and US$2 million to develop the first-ever fully AI-discovered drug to reach Phase II clinical trials. Chinese big tech players are also gradually leveraging their existing AI capabilities to enter the biopharma and medical space, as illustrated by Tencent’s iDrug.
These AI developments benefit from China’s public healthcare system, which enables data agglomeration. China’s vast population and extensive network of public hospitals facilitate the collection of large data sets — an essential ingredient for training AI. The government manages the use of this biodata, which can include a person’s genetic information, health records, and demographic details. To enforce this state control, a policy mandates that all digital healthcare services work with physical hospitals, inhibiting the advance of privately owned platforms. Simultaneously, measures like “Healthy China 2030” promote data standardization and connections between data centers, helping produce usable data for AI.
Much like the US and UK, China also has its own genomic database, the China National GeneBank (CNGB) 国家基因库生命大数据平台, which contains over 10 million genetic-data samples. Owned and funded by the government, the CNGB is operated by BGI 华大基因, a major Chinese gene-sequencing company. The state keeps these databanks well-connected and accessible for Chinese researchers: the NMPA has approved biodata access for a number of Chinese companies working on AI-related drug research such as Yidu Tech 医渡科技, and a set of data-management guidelines released in 2022 makes it easier for market actors to access data.
The use of AI in biopharma, however, is still in its nascent phase. Many challenges have yet to be solved, including integration with internal R&D systems, in-house AI enablement capabilities, scalability, data collections and security, and so on. Future progress will also first require overcoming many nations’ increasingly securitized approaches to biotech and biodata.
Threats posed by biotech: national security and global supply chains
The theft of critical data and technology can compromise sensitive research and potentially lead to the misuse, manipulation, or weaponization of biotech advancements. Driven by these security concerns, as well as underlying geopolitical tensions and competitive pressures, the US and China have strategically sought to decouple biotech supply chains.
A wave of this anxiety occurred in the US in 2021, when the US imposed sanctions on Chinese life sciences organizations and proposed a ban on the National Institute of Health’s ability to fund China-affiliated entities. A report by the US National Counterintelligence and Security Center even questions the motives of conventional corporate behavior like acquisitions and partnerships by all Chinese biotech firms.
On biodata and national security:
China takes a protectionist approach to biodata. Unlike its counterparts in the US and UK, the China National GeneBank is almost exclusively accessible to researchers who are Chinese citizens. The 2020 Biosecurity Law 生物安全法 reinforces government sovereignty over biodata and bans foreign actors from collecting, preserving, or providing domestic biodata. Cooperation with foreign researchers is limited by the Ministry of Science and Technology’s (MOST) 科学技术部 various regulations on human genetic resources. Due to these guidelines, high-profile research projects between top Chinese, US, and UK universities have had licenses revoked by Chinese regulators. Foreign firms, meanwhile, must get approval from the Cyberspace Administration of China (CAC) 国家互联网信息办公室 for all cross-border data transfers, a process known for being time-consuming and difficult. These data-access asymmetries exacerbate market barriers inhibiting US and foreign biotech firms from operating and innovating in China.
In the US, a 2024 Biden administration Executive Order prohibited the high-volume export of biodata to China. A few weeks ago, the US House passed the Biosecure Act, which bans procurement, contracts, and funding for biotech companies designated as national security threats. Five Chinese entities — BGI, MGI 华大智造, Complete Genomics, WuXi AppTec, and WuXi Biologics 药明生物 — are directly targeted.
Unlike China, the US’s restrictions are motivated less by protectionism and more by fears of privacy, blackmail, and counterintelligence risks. In 2021, BGI faced controversy for proposing to help run COVID-19 testing spaces in the US; many saw BGI’s proposal as a ploy to control American healthcare data. Various biodata theft attempts have sparked additional anxiety around alleged links to China. However, there are limits to the malicious use of biodata — processing, storing, transferring, and using biodata that is often decentralized or unstandardized can lead to countless errors along the way.
Even so, China’s biodata collection faces a different set of concerns: human rights violations. Human rights organizations have raised concerns about China’s systematic collection of biodata without informed consent or reasonable justification. For example, biometric collection in Xinjiang and Tibet has used pretexts of anti-terrorism campaigns and medical programs. These genetic databases may serve policing purposes such as forensic profiling and surveillance, with potentially discriminatory or repressive consequences. Chinese research found to be linked to such data may have significant ethical implications.
On global supply-chain interdependence:
The US’s pending restrictions on Chinese biotech have highlighted another dimension of the biopharmaceutical industry: a globalized value chain. Chinese entities targeted by the Biosecure Act manufacture key pharmaceutical ingredients and drugs for foreign firms, including more than forty-five US-headquartered companies. About 80% of the Active Pharmaceutical Ingredients (APIs) used in the US are manufactured abroad, mainly in China and India. Facing US legislation, multinational corporations (MNCs) like Bristol Myers Squibb have needed contingency plans to make up for the sudden change in supply. In fact, at least twenty-three US biotech firms have warned of dependencies on WuXi AppTec. This overdependence on Chinese drug makers has raised alarms in both the US and the EU, who cite notable risks of supply-chain disruption, drug shortages, and poor product quality.
Without the ability to outsource to these Chinese CROs and CDMOs, however, US drug development costs are projected to rise. The greatest impact would be on manufacturing capacity, with slowdowns in clinical trials delaying innovation pipelines and raising costs. Small, mid-size, and virtual biotech companies in the US and Europe would be especially affected, as their business models commonly rely on outsourcing proof-of-concept drugs until they reach clinical stages.
Moreover, decoupling US and China biotech supply chains might not be feasible or necessary. Switching to Indian suppliers is more expensive and impractical, since India depends on China for around 80% of APIs. US-China dependency goes both ways: China still relies on US-made patented drugs, especially to address surging rates of cancer. US exports of pharmaceuticals, medicines, and medical equipment to China are growing, amounting to US$14.9 billion in 2023. Instead of just anticipating risks, the US and other nations could reframe the conversation to explore how to maximize the global benefits gained from Chinese biotech’s growth.
The value of global collaboration
China’s participation in biotech innovation has undoubtedly produced global benefits.
Academic exchange and research partnerships consistently lead to innovation. Scientists’ international mobility correlates with boosts in research quality. Research collaboration has been common in the last few decades: six of the top ten ranking US research institutions — Berkeley, Harvard, Michigan, MIT, UCLA, and Yale — have at least one biotech-focused partnership with a Chinese counterpart.
Firm-level activity between Chinese and foreign biotech firms — such as out-licensing, investment, and partnerships — is unlikely to stop. Many Chinese biotech firms, including those focused on AI-driven drug development, have always been multinational. XtalPi was established by three quantum physicists at MIT and maintains a location in Boston. Insilico Medicine boasts locations in Boston, New York, Montreal, and Abu Dhabi.
In-licensing and out-licensing deals that exchange technology, intellectual property, or products are common practice among Chinese, American, and European firms. More MNCs are pursuing out-licensing deals, which means that they are choosing purchase rights to drugs produced by China’s advancing innovative capabilities. In 2023, Chinese biotechs and MNCs signed thirty-three out-licensing deals — over twice as many as there were in 2019. Twenty-seven of these deals centered around innovations in oncology, highlighting China’s growing focus on cancer. During that period, therapies originating from China also earned designations from the US FDA, including fast-track status, which is granted to new drugs that address unmet medical needs.
Despite geopolitical tensions, companies like Merck and AstraZeneca have continued to provide financing and make deals in China. MNCs have supported local innovation in China through investment, incubators, and technology platforms. And this investment is not one-sided: in 2018, China invested US$1.45 billion in US health and biotech industries, accounting for 27% of its overall investment in the US. Cross-national firm partnerships have already borne fruit, exemplified by the XtalPi-Pfizer collaboration for the development of the oral COVID-19 drug. XtalPi also recently announced a collaboration with Eli Lilly to leverage its AI and robotics drug discovery platform. Future partnerships remain likely.
Geopolitics notwithstanding, collaboration is paramount for keeping the world safe and healthy. The most extreme and serious risks of biotech and AI — such as bioterrorism and unethical gene editing — require a globally accepted framework of governance. The current patchwork of disparate national regulations will not stop bad actors from simply relocating and exploiting biotech in ways that have international consequences. Coordination of regulatory standards may also unlock life-saving benefits — harmonization of cancer clinical trials between China and the US, for example, could save an estimated 1 to 2 million lives each year. Collaboration is also necessary for life-saving innovation: without China’s WuXi AppTec, for instance, the development of treatments for cystic fibrosis, leukemia, endometrial cancer, and ovarian cancer would all be hampered.
From these examples of global collaboration, a framework gradually emerges of how the US and other countries can reap the benefits of Chinese biotech expansion: fostering connections and knowledge exchange improves the quality of research and may lead to novel insights; allowing corporate deal-making and partnerships expands public access to innovative Chinese drugs; and synergizing governance systems improves the distribution of existing treatments and opens the doorway for new drugs. Meanwhile, Chinese citizens could benefit if Beijing eases its protectionist stance on biodata and pharmaceuticals, leading to more impactful research and better access to critical treatments.
Looking toward the future: moving beyond pharma
Debates over security and competitiveness that challenge future international collaboration in biopharmaceutical research reflect broader questions affecting biotech and other emerging technologies. How to resolve these debates is of the utmost importance, especially since innovations in biotech have critical significance for not only medicine, but also agriculture, military and defense, healthcare, energy, and materials.
No technology comes with a pre-set positive or negative conclusion. The rise of AI-driven drug development showcases the speed and strength of the world’s culture of scientific collaboration. At the same time, biopharma AI’s corresponding costs and risks reflect the challenges of adapting to groundbreaking emerging technologies, especially amid today’s escalating geopolitical tensions. If handled correctly, innovations in AI applications in China’s biopharma industry will unlock treatments that improve and save millions of lives.