This article was produced in partnership with the Shanghai Academy of Social Sciences.

China’s pharmaceutical market was worth $137 billion in 2018, making it the world’s second largest. And demand will only grow over the next few years, as the country cares for its rapidly graying population.

Yet, although this trend represents a real opportunity for Chinese companies, the country’s homegrown pharmaceutical industry leaves much to be desired.

For years, China lay at the bottom of the global pharmaceutical production chain: a source of low-cost labor and little else. Although the domestic pharmaceutical industry has improved its production capacity and even fostered a basic ability to research and develop new drugs over the past few decades, it remains far off the global pace. Industry experts often describe China’s pharmaceutical sector as “big, but weak.” In other words, for all its market size, many of the country’s pharma firms remain unable to consistently innovate or produce safe, high-quality drugs.

To meet rising demand and stimulate the growth of a strong pharmaceutical industry, officials have adopted a series of reforms, including stringent new drug quality regulations, incentives for medical innovation, and streamlining the pharmaceutical distribution process.

China is by no means alone in trying to stimulate innovation in pharmaceuticals. Competition is especially fierce in the rapidly growing field of biopharmaceuticals — drugs developed from or using biological material. A healthy biopharmaceutical sector means more than just better public health outcomes, it represents a thriving, interdisciplinary high-tech industry that can strengthen ties between the science community and the finance world. China sees promoting biopharmaceuticals as one way to improve the country’s research capabilities and level up its manufacturing base.

With this in mind, the country’s leaders have also passed reforms meant to streamline the drug approval process, widen market access for international firms, and make China an attractive market for multinationals looking to introduce new treatments.

But birthing a new industry takes more than just incentives and a friendly regulatory environment. If China is to cultivate a high-quality biopharmaceutical sector, it must rely on its strengths, including an increasingly mature R&D ecosystem and a reservoir of talented research personnel trained both at home and abroad.

The country’s capital markets also have a role to play, and venture capitalists and private equity firms have shown enthusiasm for investing in the pharmaceutical sector through new initiatives such as the science and technology-focused STAR market.

China’s biopharma market grew nearly 25% per year between 2012 and 2016, from $9.4 billion to $22.8 billion. And at least one newly released report estimates this trend will continue into the near future, meaning that by 2021, the market could more than double in size to $48.8 billion. This growth rate far surpasses that of the North American, European, and Japanese markets, and naturally encourages excitement among investors.

Biopharma’s economic prospects have also attracted the attention of local and national government officials across the country. Major cities such as Beijing, Tianjin, Guangzhou, and Suzhou have all established biotechnology parks.

One of these parks, Shanghai’s Zhangjiang Biotech and Pharmaceutical Base, offers an example of what officials are trying to do. Founded in 1994, over the past 20 years it has fostered a relatively complete production chain by leveraging the network effect of more than 400 R&D groups, 10 tertiary institutions, almost 70 scientific institutions, and more than 200 technology sharing services, which give small and medium sized enterprises access to equipment and experiment spaces.

One of the advantages Zhangjiang has over some of its competitors in other cities is Shanghai’s relative size and economic strength, which makes it easier to convince international firms to set up offices there. Tenants include major brands such as Johnson & Johnson, Merck, and Fosun Pharmaceutical. And the presence of big multinationals has helped concentrate high-level talent in the area, which in turn provides a boost to smaller domestic firms.

There are also signs that multinationals have stopped viewing China as simply a market for their products and started embracing its R&D potential. Swiss-based Roche is currently planning a new office in Shanghai that will be the company’s third-biggest, after its Basel and San Francisco branches. Roche has said it hopes to use the office to strengthen its position in China and explore its potential for research. In the past, most large multinational firms preferred to simply import drugs developed elsewhere.

Meanwhile, domestic firms are trying to compete by investing in their innovation capabilities and expanding their presence abroad. Two years ago, China joined the International Council for Harmonization of Technical Requirements for Human Use with an eye on boosting exports by bringing the country’s regulatory practices in line with international standards. And Chinese companies have set up a number of offices abroad, such as Shanghai Pharma’s Philadelphia lab.

In the future, I hope China will continue to make needed reforms, open up market access, and build avenues for further international cooperation.

Editor: Kilian O’Donnell.

(Header image: E+/VCG)