Amidst the gloom prevailing in China’s economic environment, and the difficult commercial performance of most multinational pharmaceutical companies in China last year, many industry experts believe that a new era of Chinese innovation in bio-pharma may be soon upon us.

The excitement of pharmaceutical executives and investors at the recent BioCentury China healthcare conference was palpable, fueled by a flurry of new measures announced by the China Food and Drug Administration (CFDA), following guidance by the State Council. We’ve seen the recent emergence of innovation-focused Chinese companies, such as Zai Lab; several high visibility partnerships between local companies and MNCs (for example between Eli Lilly and Innovent, or AstraZeneca and Wuxi AppTec); and the announcement by BeiGene, the Beijing-based immuno-oncology discovery and development company, of its planned IPO on NASDAQ.

Is this excitement really warranted?

Skeptics point to years of unsuccessful attempts at reforming the CFDA, recent setbacks in the registration process for new drugs, and a stream of scandals around data integrity of published research as evidence that China cannot make the leap towards innovation. Instead, they argue, China will continue to be known as a market dominated by “cheap generics”.

Optimists, on the other hand, point to the strong push by the central government to promote bio-medical as a strategic industry, changes at the top of the CFDA, real efforts to clear the backlog of new drug applications, the continuous wave of returning talent, and improving funding conditions as indicators that China is well on its way to becoming a biopharma innovation powerhouse.

The stakes are high: for Chinese patients, for the industry, and, potentially, for patients around the globe.

To more objectively measure the progress made by China towards its goal of creating a competitive biopharma industry, we created the China Drug Innovation Index (CDII).  We developed the Index with guidance from BayHelix, a not-for-profit organization of Chinese leaders in the life sciences industry, and a “Who’s Who” of innovation focused leaders.

We structured the CDII along 5 key dimensions that, in our experience, are critical to the establishment of a healthy innovation ecosystem: policy, funding, capability, local innovation output, and level of integration with global.

We asked participants to rate China on a scale from 0 to 10, with 10 being the best, and the US being set as a benchmark at 8. Here are some of the key findings from our research:

  • Overall, the outlook is very positive, with 50% of respondents considering that the momentum behind drug innovation in China has “significantly accelerated” in the past 12 months. Another 39% considered that the momentum has “slightly accelerated”. As the GM of one leading Pharma MNC put it during the conference, “In six months we have seen more progress than in the last 5 years”.
  • Opinions are divided though on what China will ultimately achieve in drug innovation. 29% see China achieving a “top 3 global contributor” role by 2025 in global drug innovation, while 62% believe that China will need to settle for a “solid 2nd tier player” position.
  • Not surprisingly, policy is rated the lowest at 3.1 out of 10, reflecting that the changes announced by the CFDA still carry some real uncertainties when it comes to implementation. More fundamentally, this low rating reflects the urgent need for better policies to support access to innovation, particularly around pricing and reimbursement . As of today, over 50 innovative drugs launched since 2011 have not yet secured national level reimbursement status in China, constraining the addressable patient pool to a fraction of the potential need.
  • Funding achieves the highest rating at 5.4 out of 10, reflecting relatively easy access to capital for innovative companies, as well as direct investments by central or provincial level governments. By some measures, we estimate that funding for biopharma R&D reached $8.9 billion in 2014, growing at 27% CAGR since 2010. It could reach $25-30 billion by 2025, a number that stands in contrast to the US figure of $68 billion in 2014.
  • On capabilities, China fares relatively well in CMC (chemistry, manufacturing, controls) (5.0), discovery (4.9) and clinical development (4.6). As another marker of progress, publications in international journals are growing at 20% per year, and represent about a quarter of the volume published by the US research community. Some companies such as Wuxi AppTec and BGI are pushing the envelope on drug discovery and development.
  • Critically, the novelty of the innovation coming out of the Chinese labs is still rated quite low, at 3.8. Chinese pharmacos remain focused on me-too or me-better targets in drug R&D, with too few exceptions.
  • Finally, contribution to global innovation remains limited, as reflected by its low score of 3.6. Several indicators are trending up, for example cross-border R&D deals have been growing at 30% CAGR since 2010, and co-authorship with overseas researchers has been rapidly expanding. But participation by China in global trials has actually declined since 2010.

In a separate post, I will look into the complex dynamics of access to innovative drugs by Chinese patients, and pose the question “who will pay for innovation in China?”

Franck Le Deu is a Senior Partner with McKinsey & Company. Based in Shanghai for the last 10 years, he leads our Healthcare Practice in Greater China. Please reach out to connect on LinkedIn. You can also follow him on Twitter @fle864