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Who is paying for pharmaceutical innovation?

May 02,2026

Breaking down drug innovation, it all boils down to one sentence: "Drug innovation is expensive, but someone has to pay for it." When we stack up the numerous controversies of the past, we realize that the question of drug innovation has never been about "whether it’s worth it", but rather: Who pays? By what mechanism? And how long can they pay?

In ethical debates over drug innovation, one reality is deliberately avoided: the global drug innovation system has never been one of fairly shared costs, but a highly asymmetric payment structure.

In this regard, I would like to share my views on several frequently discussed issues concerning drug innovation.

01 The U.S. Is Not "More Innovation-Friendly" — It’s Forced to Bear the Costs

The U.S. market’s ability to sustain innovation (now faltering, driving price cuts and MFN pricing) stems not from a superior system, but from the consistent failure of political efforts to socialize or nationalize healthcare in the U.S. This allows high drug prices to persist. The overlap of public insurance, commercial insurance, and patient co-pays creates a unique pharmaceutical market: companies can bundle failure costs, capital costs, and time costs into drug prices.

This does not boost efficiency; it reflects a plain fact: the "first pot of gold" for the vast majority of global innovative drugs comes from U.S. patients. This is not a moral judgment, but an accounting reality. In the 1980s, Europe and Japan were global drug innovation hubs (European innovative drugs were twice as many as U.S. ones at the time). After 2000, most European pharmaceutical giants shifted their R&D, sales, and capital focus to the U.S., while today fewer than 40,000 drug R&D personnel remain in Japan. This is why Trump vehemently demanded U.S. drug prices align with other nations, accusing them of free-riding on U.S. costs.

02 China’s Problem Is Not "Lack of Innovation" — But "Who Pays?"

Over the past decade, a unique environment in China has fueled explosive growth in domestic innovative drugs—a fact evidenced by BD deals in 2024–2025 and a recent U.S. congressional proposal urging the FDA not to audit Chinese clinical data, which highlights the pressure of Chinese innovation on U.S. pharmaceutical firms. However, China’s drug innovation fundamentally rests on an implicit premise: it can complete an investment-return loop without relying on a domestic payment system (at least for now).

This has created a distinct, delicate, even contradictory structure for China’s innovative drug market:

R&D conducted in China (low cost)
Some clinical trials in China (high efficiency)
Pricing power held abroad (especially in the U.S.)
Profits realized overseas (mainly in the U.S.)

An unspoken reality of this model: China’s innovative drug industry effectively serves "others’ payment systems." We excel at value creation but capture little value. A politically incorrect conclusion: whoever pays holds the "sovereignty" over innovative drugs—including the power to define efficacy (effective/ineffective) and set prices.

03 China’s Innovative Drug "Global Expansion" Is a Forced Choice

Many frame China’s BD-driven global expansion as a strategic strength or industrial upgrade (a shift from generics to innovation). But when accounting for payment dynamics, the reality is different: Chinese firms do not prefer going global (many returnee entrepreneurs initially aimed to create affordable innovative drugs for Chinese people)—they have no choice (due to volume-based procurement, national drug negotiations, a capital winter, etc.).

Domestic insurance prioritizes cost control and price suppression; commercial insurance remains too small to support high prices; patients’ out-of-pocket capacity is limited, preventing a stable market. The result: domestic revenues cannot cover costs, leaving only one viable market—one that "allows profits": the United States.

A harsher reality: decades of easy profits in China’s pharmaceutical industry spawned countless companies; university expansion over the past 20 years has produced more pharmaceutical professionals (including PhDs) than the U.S. With so many returnees, firms, skilled personnel, and a massive patient population, it is hard to imagine any path forward other than innovative drugs. Yet the critical question—who will pay?—remains unanswered.

04 A Sharper Question: Is the China Model Sustainable?

The core structure of China’s innovative drug industry today is a triangular relationship between China, the U.S., and global capital:

China provides cost-effective R&D capacity
The U.S. provides high-margin payment ability
Global capital arbitrages between the two

This sounds logical: China gains cash flow, the U.S. accesses affordable early-stage projects. But the model’s sustainability hinges on two assumptions:

The U.S. continues paying premium prices for new drugs
China accepts externalized value realization long-term

Both assumptions are now under strain: the U.S. IRA Act and Trump’s new policies make drug price cuts inevitable; China increasingly emphasizes "self-reliance and control" and "value repatriation" (via new drug pricing rules and support for emerging pillar industries). A material shift in either will crack the system—the recent U.S. congressional reaction to FDA audits of Chinese clinical trials is a warning sign.

05、An Inevitable Conclusion

Today’s global drug innovation boom exists not because the world pays for innovation, but because one market overpays: the United States. China’s current role is as a low-cost, efficient, young innovation contributor (now the world’s second-largest source of new drugs after the U.S. in the past two years), acting as a global innovation manufacturer supplying R&D resources. However, we have outsourced the most critical step of commercializing innovation: value realization.

This is not a moral judgment, but a structural issue—and structural imbalances eventually require redistribution.

Returning to the core questions: Who pays? By what mechanism? How long can they pay? Drug innovation is a capital-driven scientific gamble: capital funds failures, and success remains stochastic to this day. Whether capital will pay for failures, how much, and for how long determines a nation’s success in innovative drugs.

To secure definition and pricing power and solve value realization, China must address three gaps: