From traditional to leading edge: China’s pharmaceutical industry revolution

The foundation of traditional Chinese medicine is Qi – the life force or energy that flows through a body. If, for any reason, the Qi in your body was to go out of balance or get blocked, one would end up falling ill. A wide range of plant- and animal-based medicines would then be used to unblock those pathways and to restore the balance of Yin and Yang in the body.

While traditional Chinese medicine techniques like cupping and acupuncture gain popularity both at home and abroad, China has been quietly making giant strides in the traditional pharmaceutical and biotechnology sectors. In the past, it applied the principles of scale and an integrated supply chain to manufacture inexpensive generics faster and cheaper than its competitors.

Cut to present day, China’s pharmaceutical industry is on the cusp of becoming a global leader in both drug discovery and development. According to Morgan Stanley, annual revenues from drugs originating in China could reach USD$34 billion by 2030 and USD$220 billion by 2040. Currently, drugs from China account for only 5% of all USFDA approvals, but that is estimated to rise to 35% by 2040. So how did China go from a middling pharma player to the hot house of innovation and manufacturing that we see today?

Broadly, we can trace three key factors that are fueling this boom:

1. Reforms – The comprehensive series of reforms needed to move the needle in this space did not happen overnight. Over the last decade, China has made a deliberate push to move from a large-scale generics manufacturer to an innovation powerhouse by pushing through the following reforms.

• • Increasing innovative drug approvals – In 2017, measures were introduced to reduce the review timeline of innovative drugs to 60 days, increasing the efficiency of the drug development process. The result has been a record 93 drugs receiving first approval from the National Medical Products Administration (NMPA) in China in 2024 with China surpassing Europe and Japan as the second largest country to receive first approvals.
  • Investment inflows – Funding is crucial for innovation and reforms such as 18A listing rules in Hong Kong and the launch of STAR Market (touted as Shanghai’s equivalent to NASDAQ) allowed pre-revenue biotech companies to list and raise money.
  • Globalization – In response to intense competition at home, Chinese pharmaceutical companies have started to spread their wings abroad through strategic partnerships. This is being executed by applying for global approvals for drugs developed in China and through so called out-licensing agreements, where Chinese companies further the development of their unique IP by leveraging the R&D and commercialization network of western pharma giants.

2. Speed – To accelerate development of novel drugs, China’s regulator is proposing to further cut the clinical trial review period from 60 to 30 working days, matching the time line of USFDA. The presence of large pools of patients in Chinese cities further expedites the go-to-market process.
3. Talent – China graduates around five million science, technology, engineering and mathematics (STEM) graduates every year. The recent crackdown in immigration in the United States has led many talented Chinese scientists and professionals (nicknamed “sea turtles”) to return home. The recent announcement by the Chinese government of the K visa program could further accelerate this trend.

This combination of speed, abundance of talent and structural reforms could throw up multiple opportunities in the Chinese pharma space. It is next to impossible to predict which company could win the next out-licensing deal. Similarly, picking the next big biopharma product requires a high degree of technical expertise. Hence our investment in Sunresin New Materials Co. Ltd. (300487 CH) takes a picks and shovel approach to this space.

Sunresin is a specialty resin manufacturer, making more than 200 different types of resin for a variety of applications from purifying water, extracting lithium to serving as an enzyme carrier for drug development including GLP-1 drugs. While its life sciences business makes up about a fourth of its revenue, given the trends discussed above, the growth opportunities and potential runway could be enormous.

The consumables that Sunresin manufactures have high barriers to entry, more stable risk profiles vs. betting on winning drugs and underlying high growth in total addressable market. Its products are used both for upstream synthesis of various active pharmaceutical ingredients (APIs) and for downstream separation and purification that determines the final quality of the drug.

Key trends that underpin Sunresin’s growth include:

1. Growth of the biologics (large molecules) market that is growing faster than the chemical drug (small molecules) market. Biologics production has an upstream API synthesis phase that requires carriers and a downstream purification phase that requires chromatographic media (CM) to capture target molecules.
2. Sunresin produces both upstream carriers (for both large and small molecules) and downstream chromatographic media. Entry barriers are high as both products can make up 15–40% of production cost and are crucial to the final quality of the drug. Switching suppliers by commercial drug makers can be costly and time consuming.
3. Rise of import substitution in China and rise of overseas opportunities from out-licensing deals could further underpin growth.
4. Build out of new high-end life sciences capacity that could support 10x of current sales.

Between its proven products, new capacities and tailwinds from the growth of biologics and the larger China bio pharma sector, we see Sunresin as a key winner in the race to find the new blockbuster drugs on the back of China’s booming pharmaceutical sector.