HONG KONG – The Chinese stock market has spent the first three weeks of the year in a virtual free fall, hitting a year-long bottom last Friday. Two weeks of constant drops have spooked overseas investors who have pulled their money out of the market. The good news for biopharma investors, however, is that the space has held up relatively well, and the overall pharma market in China is still expected to experience double-digit growth.

The Shanghai Composite Index plunged from 3,296.26 on Jan. 4 to hit a low point of 2,900.97 on Jan. 15. The market dropped more than 7 percent on the first trading day of the year and 18 percent during the first two weeks, which put it in technical bear territory. The market had its best day in several months on Jan. 19 but continued dropping on Jan. 20, when it closed at 2,976.

A bright spot came on Jan. 19, with the announcement that China's economy grew 6.9 percent through 2015 – albeit the slowest rate in 25 years but still in line with expectations.

"The fall is not caused by any particular incident – it's rather a systematic risk which could happen any day – and the sector is dragged down by the overall situation," said David Li, assistant vice president for health care research at Bocom International. "We still expect China's pharmaceutical sector to grow at 10 to 20 percent over the year, which is higher than the GDP growth rate."

While it is unclear how much the recent falls have affected domestic investors, the same can't be said for their foreign peers.

"I've been talking to overseas investors recently and most of them have very negative attitudes towards China's stock market," CLSA's China health care analyst Serena Shao told BioWorld Today. "They worry about the fundamental aspects of the market, but they also worry about the political instability and corporate governance issues in China.

"When the stock market is up, people choose to neglect some of these issues, but as soon as the market goes down, people start to pay more attention to them," Shao added.

"Because of this 'stay-away' attitude of the foreign investors, large amounts of capital are flowing out of the Chinese stock market, causing liquidity issues," said Shao. "And because of the overall opinion on the stock market, there will be less investment in the pharmaceutical stocks, too."

Still, Shao noted that in comparison with other sectors such as consumers and gas and oil, biopharma "is actually doing OK. That's because pharmaceutical companies can still deliver positive earnings in the next couple of years; some of the high-quality companies such as 3SBio can deliver 30 percent annual growth, which is impressive."

SIGNIFICANT ROOM TO GROW

One of the biggest biopharma groups in China, Walvax Biotechnology Co. Ltd. (SH:300142), posted its 2015 annual earnings forecast. The company said it lost about ¥460 million (US$70 million) last year because of increased R&D, clinical trial and registration costs. Walvax's stock price dropped from ¥11.55 to ¥10.65 on Jan. 7 and closed at ¥10.36 on Jan. 20.

In fact, the R&D spending of Chinese biopharma companies has been rising steadily in the past few years. According to a BMI Research industry trend analysis report, the local industry's appetite for medical research has been growing as reflected by the rising R&D expenditure.

Leading companies have increased R&D spending. Guangzhou Baiyunshan Pharmaceuticals Holdings Co. Ltd., for instance, had a R&D expense of ¥2.1 billion in 2014, up from ¥1.8 billion a year before. Similarly, Shanghai Pharmaceuticals Holding Co. Ltd. raised its R&D spending by 13 percent year over year in 2014.

"There remains significant room to grow, as despite the growing investment into R&D, research spending as a percentage of total revenue among Chinese firms lags multinational drugmakers," noted the report.

"It depends on the individual company," Shao said. "Most of the HK-listed companies are reporting good R&D results such as Luye Pharma's U.S. trial for its antipsychotic drug. Fosun Pharma and 3SBio who are working on their biosimilar projects will also have positive news coming out this year."

Luye Pharma Group Ltd.'s stock (HK:2186) dropped from HKD8.11 (US$1.04) on Jan. 6 to HKD6.65 on Jan. 20.

3SBio Inc.'s stock (HK:1530) price fell from HKD11.14 to HKD10.5 on Jan. 7 when the overall market went down. It closed at HKD9.71 on Jan. 20.

Fosun Pharmaceutical Group Co. Ltd. (HKEX:2196) fell from ¥22.32 on Jan. 6 to ¥19.21 on Jan. 20.

Although the overall performance of Hong Kong's stock market has been just about the worst among developed market bourses over the past couple of years, many more biopharma companies are looking to Hong Kong for their IPOs.

"They might have some concerns about the timing of their IPO, but it's still a good choice to go public in Hong Kong," said Shao. "For many years, Hong Kong has had a similar layout of pharmaceutical companies to the Mainland market, and here they have access to more international investment. The only concern is about the timing."

AN UNEXPECTED DEAL

Not all the recent stock drops have been a direct result of the bearish market sentiment.

Surprising many, China's state-owned drugmaker, Sino Biopharmaceutical Ltd. (HK:1177) announced a major transaction with China Cinda Asset Management (HK:1359) on Jan. 8, in which Sino Biopharma agreed to subscribe for 1.9 billion new H shares (shares of Chinese companies in Hong Kong) of Cinda at the price of HKD3.05 per share. The purchase will cost Sino Biopharma HKD5.8 billion and the deal is said to provide the company with Cinda's resources in terms of financing. Sino Biopharma's stock price dropped 20 percent from HKD6.63 to HKD5.3 on the day it announced the deal.

"As one of the largest pharmaceutical companies in the Hong Kong market, Sino Biopharma has significant advantages in terms of R&D, market promotion, growth of core products and product pipeline," said Li in an investor note. "We are deeply surprised by its equity cooperation with Cinda. . . . We are not fully convinced that such cooperation would bring significant benefits to Sino Biopharma in its core business.

"It is rumored in the market that Cinda would deliver some hospital resources to Sino Biopharma," Li added. "However, we don't believe Cinda has significant advantage in hospital operation management."

Sino Biopharma's partly owned subsidiary, Chia Tai Tianqing Pharmaceutical Holdings, also recently entered into a licensing agreement with Janssen Pharmaceuticals, a unit of Johnson & Johnson, for the development of a hepatitis B treatment in a $253 million deal. (See BioWorld Today, Jan. 8, 2015.)