Chinese Biotechs Warrant Investor Consideration

Numerous companies on the way to becoming players on the international stage

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Nov 17, 2020
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Pharmaceuticals is the only sector that has all three characteristics foreign investors are looking for in Chinese investments: an industry that will consolidate, pro-growth policy reform and support and innovation. So said John Yung, Citi head of Asia health care research, according to an article in the South China Morning Post.

It's clear that China is committed to becoming a major player in biotechnology, and the government is taking steps to help its home-based companies meet that goal. To enable innovative drugs get to market faster, China's version of the Food and Drug Administration started to allow foreign clinical data to support new drug applications and simplified its review procedures, according to FiercePharma.

Many of the emerging Chinese companies are being run by nationals who returned home after being schooled by large multinational companies elsewhere around the world.

The combination of government support and local brainpower is yielding substantial results. In 2017, 42 new molecules won approval in the Chinese market, up from seven in 2016, according to data compiled by GBI Health. In 2018 and 2019, those numbers were 60 and 57, respectively. And as of Nov. 1, the tally was 139 for chemical drugs and 77 for biologics, GBI Health data shows.

Of course, capital is the engine that drives the industry and Chinese companies are benefitting from rules changes on the Hong Kong and Chinese mainland that enable biotechs to raise money on public trading platforms, even though they're not yet profitable.

FiercePharma reported that in 2019, Chinese biopharma companies registered altogether 81 financing rounds. As of Nov. 1, there have been 133 fundraising rounds (including secondary offerings), with total announced values estimated at around $12 billion

FiercePharma has identified 10 biotech companies most likely to compete internationally one day. What makes them unique is that all but one has caught the eye of Big Pharma, which is buying into their research and development, not the other way around.

The only company among the 10 that is not publicly traded is Harbour BioMed. Let's take a look at the first three of the nine.

Beigene, Ltd. (BGNE)

The company has a lofty goal: become China's Genentech. Toward that end, Beigene is concentrating on cancer, particularly those types that are common among Chinese people. The disease is prevalent among China's population and it's a market that needs more effective answers.

BeiGene went public with a $158 million Nasadq initial public offering in 2016. But its turning point came a year later when the company took over Celgene's entire Chinese commercial operation, including rights to three drugs.

Last fall, Amgen Inc. (AMGN, Financial) bought more than 20% of BeiGene for $2.7 billion and then pumped in another $421 million so it could keep its percentage ownership after BeiGene made another public offering in July.

Meanwhile, BeiGene's internal efforts are starting to bear fruit. A year ago, the company earned an OK from the FDA for a cancer treatment, becoming the first China-discovered drug to be designated a breakthrough from the regulatory organization.

Today, BeiGene shares trade at more than $284, up about 37% from a year ago. Six of seven analysts rate it a buy or strong buy with an average target at its current price, reports Yahoo Finance.

Hutchison China MediTech Ltd. (HCM)

The stock of Chi-Med, as it's known, has gained 30% in the past 12 months and at its current price of over $31, it has a market cap of more than $4.4 billion. Four analysts have the shares between a buy and strong buy, reports Yahoo Finance. Its average target price is more than $37.

Chi-Med has several joint ventures with established Chinese pharma companies concentrated on prescription drugs and consumer health products, as well as distribution and marketing services for third parties.

At the head of Chi-Med's innovation platform – known as Hutchison MediPharma -- is former Pfizer Inc. (PFE, Financial) executive Weiguo Su. This unit has all the characteristics of a biotech.

In 2018, a Chi-Med colorectal cancer drug became the first China medicine for a major cancer type to be taken from start to finish in the country.

Chi-Med has relationships with Eli Lilly and Co. (LLY), BeiGene, AstraZeneca (AZN, Financial) and Innovent Biologics Inc. (HKSE:01801, Financial) and has several drugs in various stages of development.

A major issue facing Chi-Med has nothing to do with its products. The company could face delisting if legislation is enacted that affects foreign companies that refuse to let U.S. regulators inspect their audits. However, Chi-Med puts the odds of that happening as "zero."

CStone Pharmaceuticals (HKSE:02616, Financial)

Five-year-old CStone put itself on the map in September when Pfizer invested $200 million for a nearly 10% piece of the company, with up to $280 in milestones for exclusive rights to China commercialization for the biotech's cancer therapy.

CStone's strategy is to use three cancer products as the foundation for its pipeline. CEO Frank Ningjun Jiang, who spent 14 years at Sanofi (SNY), told FiercePharma that the company's pipeline "has both the scale and mix to develop one of the largest oncology combination therapy portfolios among all China-based biopharmaceutical companies."

While two in-licensed drugs may be the company's first to hit the market, CStone is building around the cancer medication sugemalimab, pursuing indications in several types of the disease.

Unlike the two companies preceding it on the list, CStone shares are down about 13% in the past year, to about $10. The company has a market cap of nearly $12 billion. Analyst data on Yahoo Finance is not available.

Disclosure: The author holds a position in Amgen, Eli Lilly, Sanofi and Pfizer.

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