As Big Pharma faces a 'patent cliff', China’s biotech boom is emerging as the industry’s most critical lifeline

A new blockbuster drug can generate tens of billions of dollars a year when it first goes to market. Each therapy typically gets two decades of patent protection. However, when that period is over, competitors are allowed to release generic or biosimilar medicines. It’s great news for patients. But the loss of exclusivity can decimate revenue. Over the next five years, about $314 billion in sales are expected to be affected.

The expected losses will peak in 2028, the year that Merck’s patent expires on its top-selling cancer drug Keytruda. Drugmakers learnt painful lessons from the last revenue cliff , which began around 2010 and lasted about four years. Driven by the loss of patent protection for a number of branded anti-depressants, anti-psychotics, and painkillers, it resulted in a period of muted sales growth.

To avoid a similar fate, Big Pharma has been going after promising targets to replenish pipelines. There is so much revenue to replace that the shopping spree has extended to a phenomenon not seen during the last patent-cliff cycle: A surge in licensing agreements with Chinese companies to take their experimental therapies worldwide. The dealmaking has been frenzied, with seven of the top 10 biggest agreements since 2020 happening this year.

Cancer research and licensing has traditionally been an area of dominance. However, over the past two years, metabolic disease and immunology deals have accelerated, pointing to a widening of China’s innovation ambitions, according to Alison Labya, senior analyst at GlobalData.

It’s impossible not to see parallels with the auto industry. For decades, both sectors in China were stuck playing catch-up. Homegrown carmakers were churning out vehicles as per blueprints from their foreign partners at a time biotech firms were copying ‘me-too’ drugs from abroad. That era is over. Chinese EVs now offer best-in-class technology, while their pharma counterparts are holding their own in early-stage research and development (R&D).

The similarities end there. Automakers are striding confidently into the world, selling their wares so successfully that even allies have imposed effective tariffs. However, medicine is a far more tightly-regulated industry. Chinese drugmakers still have a long way to go in later-stage work such as overseas trials, regulatory submissions and bringing products to the international market. In the meantime, partnering with legacy firms is the best strategy.

There are valid worries about rising regulatory risk in the US, home to many Big Pharma members, in spite of a one-year trade truce. I have written before about China’s dominance of the production of foundational ingredients to make medicines. There is a need for Washington to try to decouple in specific areas deemed to be of national security concern. However, this applies to supply chains of certain commoditized materials behind everyday necessities such as antibiotics—not to the kind of novel therapies that could result from Chinese innovation.

Recently, US lawmakers unveiled another defence authorization legislation, an annual bill that must be passed by Congress to approve military spending. This year, it is particularly notable because it includes a revised version of the Biosecure Act, which could restrict federal contracts with Chinese biotech firms. Due to strong industry opposition, the Act failed to be included in last year’s legislative package.

This watered-down version does not name any firms specifically. But it does allow the US Department of Defense to include companies on a roster called the 1260H, which alleges they work with the People’s Liberation Army. The larger question is whether Wuxi AppTec, which provides outsourcing services to the cream of Big Pharma (the TSMC of biotech), might be added.

Inclusion on the 1260H list doesn’t come with any immediate penalties but carries reputational risk. Because the contractor works with dozens of the world’s biggest pharma companies, being added would disrupt supply chains. But again, this firm isn’t in the business of developing its own treatments.

With the patent cliff arriving, global pharmaceutical giants are looking for new acquisition and licensing candidates. China remains a ripe target. Legitimate research breakthroughs shouldn’t be stifled by geopolitical concerns. They should be commercialized and made available to people who need them. ©Bloomberg

The author is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region.