China’s biotech companies are struggling to become profitable as Beijing’s pricing policy undermines attempts to build a homegrown pharmaceutical industry through capital markets. China allowed medical biotech start-ups, such as BeiGene, Zai Lab, and RemeGen, to list early in a bid to fuel the growth of its industry and help local companies develop innovative drugs.

Since 2018, 40 early-stage companies have floated in Hong Kong under a special listing rule for pre-revenue biotech companies. But nearly five years later, none of them is making a profit, according to a Financial Times analysis of public data. While it is not unusual for biotech groups to take time to become profitable, reforms to Beijing’s policy on drug pricing have raised questions about their chances of success.

In China, hospitals buy drugs from companies at a price pre-negotiated with the government, which reimburses most of the cost. Over the past five years, the government has expanded the number of products in the reimbursement programme to include more new, patented pharmaceuticals. Without the ability to charge high prices for an innovative drug, companies find it difficult to recoup research costs.

The latest price negotiation in early January added a total of 111 new drugs to the reimbursement list, with an average price cut of 60 per cent, similar to previous years. “The payment reforms starting in 2018 have affected the revenue and profits of pharmaceuticals,” said Zhao Bing, an analyst at Huajing Securities.

In Hong Kong, the average valuation of biotech companies fell 30 per cent in 2022, and more than three-quarters are trading below their listing price. The pace of new listings also halved, from 9 in 2021 to 5 in 2022.

Zhu Pai, managing partner at Shenzhen-based Efung Capital, said some projects that “promised to sell [for] billions of yuan end up [bringing in] only tens or hundreds of millions,” and companies find themselves unable to cover their huge research and development costs or support subsequent research.

“China’s biotech [sector] was hit hard last year,” he said. The pressures have led to a wave of consolidation. Harbour BioMed, which focuses on immuno-oncology, sold its Suzhou factory to Wuxi Vaccines and has cut its pipeline of drugs. Cancer drugmaker Cstone Pharmaceuticals ceased operations at its Suzhou facility in early November in order to lower costs.

“I think we get a lot more questions, and all of our peers do, around profitability,” said Josh Smiley, chief operating officer at Zai Lab, a Nasdaq and HKEX-listed company valued at more than $8bn.

“New money today is much harder,” Smiley said, adding that Zai Lab is confident of profitability in three to four years. China’s zero-Covid policy, with significant restrictions on movement across the country, slowed down the R&D approval process owing to the difficulty of recruiting patients and conducting clinical trials without interruptions.

The number of new drug approvals for domestic companies last year was only 11 by mid-December, lower than 31 products in 2021, according to research by Shenwan Hongyuan Securities.

In addition to its start-ups, China has an established pharmaceutical industry, which increased revenue by 19 per cent in 2021. But most of its participants make generic drugs, originally developed overseas, rather than inventing their own.

The new generation of Chinese biotech companies benefited from a series of reforms since 2015, which promised to accelerate the drug approval process while raising the regulatory bar in line with international standards.

But three years later, authorities introduced the new pricing rules to trim government healthcare budgets and private patient expenses, disappointing investors. “I think the market probably has shown us that you may need to be more cautious of the commercial outlook,” said Jordan Liu, assistant partner at Bain.