Over the last 18 months, against the backdrop of reforms driven by China’s Food and Drug Administration (CFDA), China has experienced a wave of investment and innovation in the biotech sector that continues to gain momentum.
This trend is best exemplified by the successful IPOs of Zai Lab and Wuxi Biologics, in 2017, following BeiGene’s IPO in 2016.
We’ve also seen a large increase in capital available to support the development of early stage biotechs, the growing number of licensing collaboration deals signed between Chinese biotechs and multinationals, and regulatory changes supporting the emergence of China firms. For example, the Hong Kong Stock Exchange (HKSE) is considering opening its doors to pharmacos, biotechs, and medical device companies with at least one core product beyond the concept stage.
Yet this is only the beginning of what we expect will become a profound and lasting trend. Today’s biotech wave could very well turn into a tsunami. Numerous companies are already planning their IPOs for 2018 - Innovent, Hua medicines, Henlius, and Ascentage Pharma come to mind. And capital continues to pour into healthcare funds. This in turn is likely to convince more Chinese returnees to take the leap, and launch their own entrepreneurial venture.
Signs of overheating? A manifestation of herd mentality? Skeptics point to the traditional cycle of China investments: identify a great opportunity, achieve a few milestones, and then witness a slew of copycats follow the same strategy, ultimately eliminating any chance of sustainable value creation.
Could this happen to biotech in China? Before we make that call, let’s look at 7 trends shaping the market in 2018 and beyond:
1. The rise of the biotech unicorns
Supported by healthy valuations, the cumulative market cap of listed Chinese biotechs will exceed USD 35 billion, with the most valuable ones breaking the USD 10 billion mark. Owning a portfolio of Chinese biotechs will prove to be a very valuable investment (disclaimer: I do not currently own any of those stocks, and do not plan to own any).2. Licensing of US and EU pipeline assets to Chinese biotechs
Numerous deals will be announced where mid-sized US and EU based biopharma out-license the rights to develop their pipeline assets to China-based biotechs. Foreign biopharma will see this as “free money” requiring relatively little effort, and several Chinese biotechs will be willing to overpay for the rights, to put themselves “on the map”.
3. Innovative molecules originated by Chinese biotechs
A few Chinese originated innovative molecules from biotechs will secure market authorization from the CFDA and launch at an attractive price point relative to competing molecules in the class, prefiguring new competitive dynamics to account for.
4. The emergence of China as a global manufacturing hub for biologics
Contract manufacturing will take off, with a significant ramp up in total installed capacity. China will emerge as one of the largest biologics manufacturing hubs in the world.
5. Brain drain of local talent from multinationals
An increasing number of senior Chinese managers working at pharma multinationals or investment banks will take the plunge and leave for local opportunities, attracted by the promise of a faster moving environment, the chance to put a Chinese company on the global map, and the potential financial upside. Multinationals, already thin on the senior management bench, will need to quickly refresh their value proposition to keep their best talents.
6. Regulatory hiccups draw focus on the drug development process
One visible hiccup at the CFDA level will be all it takes to put the spotlight back on the Achilles heel of the drug development process, with processes and quality standards at many clinical trial sites still playing catch-up with the regulators’ vision, and the staff of the CFDA not moving at the same speed as its leadership.
7. Clinical trial failure for a leading drug candidate
A lead candidate in phase IIb or phase III will fail, demonstrating that the probability of success for China biotechs are not greater than that of others worldwide, and that investors need to re-calibrate their expectations on valuations.
So what will separate the winners from the losers in the battle for China’s biotech market? Superior science and distinctive business acumen.
Superior science will translate into medicines with clearly differentiated clinical profiles, both on efficacy and safety. They could establish their position in extremely crowded markets, in particular in oncology. As an example, China currently has more ongoing CAR-T programs in development than the US.
Distinctive business acumen will be essential to build the right leadership team, develop a forward-looking vision, and establish a clear view on what is necessary to not only develop new drugs, but also build a sustainable business that can drive successful uptake and adoption by medical practitioners.
Ultimately, China biotech will emerge as an important contributor to global innovation. The forces at work are just too powerful to discount the possibility.
The ride will get a little bumpy, though, so fasten your seat-belts…