Chinese drugmakers look overseas to beef up pipelines with licensing deals

Early-stage biotech companies are leading the trend of Chinese drugmakers beefing up their product pipelines through overseas licensing deals.

In 2019 alone, Chinese companies signed 85 deals to obtain rights to treatments and technologies developed abroad, ranging from drug discovery platforms to immuno-oncology therapies, up from 37 in 2017. In 2020, the number totaled 83 as of Oct. 20, according to data by consultancy firm McKinsey & Co.

Experts predict this pattern will continue in the near future as overseas companies need local partners to commercialize their drugs in the world's second-largest pharmaceutical market, while Chinese companies need to ramp up their pipelines.

"We believe the trend will continue and it will have a double-digit growth rate. The more supportive regulatory environment for innovative drugs and the fast-growing China drug markets could be the main drivers. [For example] the lag of new drug launches in China has reduced to three to four years nowadays from eight to 10 years," said Vicky Zhu, Hong Kong-based healthcare analyst with investment bank SPDB International Holdings Ltd.

U.S. pharmaceutical giant Eli Lilly and Co., for instance, licensed seven treatments to Chinese drugmakers from 2015 to 2019, the highest among all overseas companies, while Shanghai-based Zai Lab Ltd. was the largest buyer with 15 deals, according to a March 2020 report by Chinese data service provider Pharmcube.

"[For multinational companies], their mature products are facing pricing pressure [in China] and are costly to promote, so a Chinese pharma might be more efficient," said Justin Wang, Shanghai-based partner at L.E.K. Consulting.

However, experts said Chinese drugmakers will become more selective in their future licensing deals as they mature.

"People will be pickier and more actively seeking products that they want instead of passively waiting for products divested by others," said Ronnie Ede, CFO of Suzhou, China-based biotech Innovent Biologics Inc.

'Quickly building critical mass'

China's biotechnology industry only started to grow over the past decade, and with investors in Asia more comfortable with drugmakers who have products in late-stage development or at market, licensing deals have become a popular way for healthcare companies in the country, especially biotech startups, to jump start their businesses. There are even a handful of companies, such as Zai Lab and Everest Medicines Ltd, whose pipelines are built around drugs licensed from others.

"Demand for innovative medicines has increased substantially over the last five years, yet most of the innovative drugs are still only available outside of China. We view an in-licensing strategy as a highly efficient way to quickly build critical mass, enhance capabilities and accelerate the path to commercialization," said Ian Woo, president and CFO of Everest Medicines.

When the company listed in Hong Kong in October 2020, all eight products in its pipeline had been developed externally, including Trodelvy, or sacituzumab govitecan, which it licensed from Immunomedics Inc.

Fourteen of the 21 products in Nasdaq- and Hong Kong-listed Zai Lab's pipeline are also licensed from others, including ovarian cancer drug Zejula from GlaxoSmithKline PLC and brain tumor therapy Optune from NovoCure Ltd.

"In the past five years, we have proved to the market our capability of picking the right products to license in. These licensed products helped us grow and generate cash flow and set the way for our own research and development," Zai Lab said in its response to S&P Global Market Intelligence.

The company's sales are mainly generated from Zejula and Optune, with Zai Lab's total revenue more than tripling year over year to about $48.96 million in 2020, according to a March 1 earnings report.

However, Innovent's Ede said therapies developed in-house will gradually become the pillar of Chinese drugmakers' pipelines as these companies and investors become more sophisticated and focus their research and development capabilities.

"We do see the trend continuing as many Chinese companies look to shift from progressing 'me too' or 'me better' medicines to truly innovative products. Licensing deals have long been a part of global biopharmaceutical companies' strategy to augment their internally developed pipeline, so we also expect leading Chinese companies to adopt a similar strategy in the long run," said Woo.

Everest has started its own drug discovery effort, Woo added, while Zai Lab said it now has seven self-developed products undergoing preclinical and clinical studies.

Ede said more Chinese companies will look into treatments that can be used in combination with their existing therapies and aim for markets outside of China.

"More and more [Chinese] companies will be looking into global rights. This will increase not just licensing in, but may increase merger and acquisitions of small companies," Ede said.

From drugs to discovery platforms

L.E.K.'s Wang said treatments for diseases with a huge patient base and unmet needs will be popular for Chinese companies searching for licensing targets.

"Oncology has been the focus but you will see more diversified interests. Neurology, for example, is increasing [as well as] other specialty drugs such as dermatology and nephrology," he said.

Innovent's Ede said Chinese companies will also become more interested in drug discovery platforms and related technologies.

In June 2020, Innovent licensed the rights to use Roche Holding AG's chimeric antigen receptor T cell platform, as well as technologies to develop immunotherapies for cancer, with the Swiss pharmaceutical company retaining the option to license the resulting products Innovent will develop outside of China.

"That is a very unique licensing deal. We are not licensing a product, but we are licensing a platform to enhance our capability of developing drugs. These kinds of collaborations can also expand in the future," Ede said.

Similarly, in 2019, Sino Biopharmaceutical Ltd. unit Nanjing Chia Tai Tianqing Pharmaceutical Co. secured the rights to develop cancer therapies using Abpro Bio Co. Ltd.'s DiversImmune drug discovery platform in a deal worth up to $4 billion — the largest licensing deal conducted by Chinese buyers between 2015 and 2019, according to the Pharmcube report.

Ede said artificial intelligence drug discovery platforms, messenger RNA, gene editing, CAR-T cell therapies and antibody-drug conjugates — a type of targeted therapy for cancer — are among assets that Chinese companies may be interested in next.