HONG KONG – The late December IPO of Shanghai Junshi Biosciences Co., shortly after the company got a green light for the first made-in-China immunotherapy treatment, delivered a strong close to 2018 for the country's biotech industry. But it did little to mask the huge losses that Chinese pharma stocks suffered through the year.
That dichotomy is at the heart of a bipolar reality at play in Chinese biotech. On the one hand, the whole industry is poised to continue experiencing enormous growth. On the other hand, headwinds are increasingly making the Chinese market look more like a developed one (full of complexity and nuance) than an emerging market still looking to find its footing.
Chinese biotech has been slow to take off compared to industries such as telecoms or high tech, where powerhouses like Tencent or Lenovo have a significant global presence. To catch up, China has been revamping its regulatory system.
Nevertheless, with strong financing channels in place to support new and innovative companies, government policies to facilitate innovation and an increasingly streamlined regulatory structure, China's biotech industry is well placed to take on a more influential role this year. That role will go beyond expanding revenues for big pharma.
Innovations and IPOs
China's pharmaceutical industry has been growing for years. It's already the second-largest national pharmaceutical market, worth $122.6 billion in 2017. Health care consultancy Iqvia expects it to also be the biggest emerging market, worth between $145 billion to $175 billion by 2022. By 2020, the Chinese government aims to have a health care market worth an astounding $1.16 trillion.
But all that growth has not translated into fantastic performances for biotech stocks in Hong Kong or mainland China. Throughout 2018, those stocks were hit by concerns over the impact of the trade war with the U.S. and China and by a widespread biotech sell-off, helping make Chinese stock markets in Shanghai and Shenzhen the worst performers of all major global markets.
Hong Kong-listed Shanghai Fosun Pharmaceutical Group Co Ltd. (HK:2196) spent all of last year on a losing streak, falling from HK$52 (US$6.63) in January 2018 to HK$22 as of Jan. 11. Lee's Pharmaceutical Holdings Ltd. (HK:0950) managed significant gains in the first half of the year, climbing from below HK$10 to as high as HK$14.30, but it started to drop in July and was trading at HK$5.80 on Jan. 11. Sino Biopharmaceutical Ltd. (HK:1177) fell from HK$13.12 in June to HK$5.45 on Jan. 11. CSPC Pharmaceutical Group Ltd. (HK:1093) lost more than half its value between May and January to hit HK$12.06.
Stocks in Shanghai or Shenzhen fared the same or worse. Shanghai Pharmaceutical Holdings Co. Ltd. (SHA:601607), for instance, fell from ¥27.04 (US$4.01) in May to ¥16.31 by Jan. 11. As of Dec. 31, 2018, the MSCI China Health Care Index was down 26.4 percent for the year to date, compared to a fall of 18.8 percent for the broader MSCI China index.
Those numbers hide a reality of rapid growth for the industry as a whole, growth that is the almost inevitable byproduct of years of economic expansion and an emergent middle class that has created enough demand for the latest pharmaceutical products. The emergence of an innovative and influential biotech industry with a modern regulatory structure is a more recent development.
That development was underlined at the end of last year when, almost at the same time as Shanghai Junshi went public, two international companies — Fibrogen Inc. and Astrazeneca plc — applied to China's National Medical Products Administration (NMPA) to market roxadustat, a new oral treatment for patients with anemia caused by chronic kidney disease (CKD) that are on dialysis.
What's interesting is that Fibrogen and Astrazeneca chose China as the first place to apply for marketing approval. It was a first for multinational companies that have traditionally chosen developed markets for their first regulatory applications. It was also a first for the NMPA, the latest incarnation of China's central drug regulator. (See BioWorld, Dec. 19, 2018.)
Other companies are likely to follow the same route, particularly as approvals in China become faster and more efficient.
Regulatory improvements
Earlier iterations of China's regulator were more focused on setting up bureaucratic checks to protect consumers and domestic players in a massive market that was often plagued by production issues, corruption in supply chains and counterfeit medicines. However, those regulators have had to learn to deal with increasing levels of innovation emanating from Chinese biotech companies.
Hence the revamp, some of which took place over the past year. The former China Food and Drug Administration became the NMPA in September and introduced faster approvals for new drugs and a priority list of 48 drugs for rare diseases already approved by authorities in the U.S., EU and Japan but not registered in China over the past decade. (See BioWorld, Aug. 15, 2018.)
Lewis Ho, a partner in the life sciences practice at law firm Loeb & Loeb LLP, noted that the rapid approvals have taken some companies by surprise, leading to a "mad scramble" to recruit sales reps and set up sales networks.
More drugs have also been added to China's National Reimbursement Drug List (NRDL), which determines the treatments covered by national insurance. In October, 17 cancer drugs were added after several rounds of price negotiations. (See BioWorld, Oct. 12, 2018.)
The NRDL consists of two categories. List A drugs are clinically necessary and affordable enough to be fully reimbursed. List B drugs are newer and more expensive and require copays of between 10 percent to 30 percent of the price.
Those regulatory changes were spurred by the current wave of innovation in China's biotechs, which began in the mid-2000s.
In 2007, global pharma conglomerate Glaxosmithkline plc was one of the first multinational corporations to open an R&D center focused on neurodegenerative diseases in the country. By 2012, McKinsey & Co. found that 13 of the top 20 global drugmakers had set up such centers in China.
"It sparked a new wave of research in the country," Ho told BioWorld Asia. "Government, academic and commercial organizations needed researchers. Chinese scientists were coming back from abroad and discovering a whole new world. Many of them went on to set up their own companies.
"The Chinese government wants to push its biotech industries to succeed," he added.
In that area again, China's industry ended 2018 on a high note. In December, the NMPA conditionally approved Shanghai Junshi's toripalimab as the first made-in-China immunotherapy treatment for melanoma. With the impetus of that approval, the company raised $394 million in a Hong Kong IPO. (See BioWorld, Dec. 27, 2018.)
More financing
Junshi is just one of five biotech firms that tapped into the significantly improved pipeline for financing in greater China.
Pre-profit biotech companies are still not allowed to list in mainland China (in either Shanghai or Shenzhen), but since April they are allowed to list on the Hong Kong Stock Exchange (HKEX). Another eight listings are now in the pipeline for consideration. (See BioWorld, Nov. 29, 2018.)
"After 12 years, many of [China's innovative] companies are maturing," Ho said. "It's a great time for the Hong Kong Stock Exchange to catch the next wave."
Cheaper generics
Innovative drugs may be enjoying the benefits of the reforms, but but companies on the other end of the spectrum, generic drugmakers, have some reason to worry, despite the natural appeal of cheaper drugs in a market where demand is ballooning.
In December, a pilot drug procurement program was announced. As part of that program, 11 major Chinese cities would buy 31 generic drugs in bulk through a tendering process that would result in only one supplier for each medication. Fortunately for biotech firms, no first-in-class drugs were included in that list.
A hepatitis B drug from Sino Biopharmaceutical Ltd. won one of the bids, but at 90 percent below the previous winning price. The price of Jiangsu Hengrui Medicine Co. Ltd.'s high blood pressure drug was also reduced by 60 percent.
There were also fears that it could create a slip in quality and supply chain problems.
Companies protested that drastically reduced prices from the new tendering process would result in low or insufficient profits to allow for innovation to continue unabated. Chinese drug company stocks plunged. In fact, many stocks had their worst single day in a decade on Dec. 6, 2018, and the MSCI China Health Care Index dropped 8.4 percent. (See BioWorld, Dec. 13, 2018.)
"The tendering process cut the price of certain drugs by up to 90 percent. The Chinese government, like other governments around the world, is trying to find ways to subsidize much-needed treatments for its people," said Ho.
The upshot is that China's biotech industry is suffering from the same push and pull experienced by other markets generally lumped in the "developed" category. Everyone wants more innovation and is willing to devote enough financial and regulatory resources to support it. At the same time, the need to tighten budgets and offer affordable drugs is high on the list of priorities.
The most successful companies are likely to be those that navigate the profitable middle ground.