Three Emerging Positive Trends to Watch in China Opening Up Huge Long-term Market Opportunity
October 1 , 2018
Jefferies Franchise note| Biotechnology,October, 2018

Three positive developments in China have evolved recently that could benefit the development, regulatory, reimbursement and - perhaps just as importantly-investment framework for biopharma. While still early, the Chinese govt is shifting from a network mostly "closed" to US Biopharma towards a more "open" and pro-innovation stance for medicine that could theoretically boost the China branded drug market from modest to one of the largest in 10 years.

A rising tide in the East....China has historically been a market essentially closed off to US branded Biopharma due to lack of visible regulatory path, limited if any reimbursement framework, and thus modest commercial opportunity. Hence, investors have rightfully had essentially zero in models for China and there has been little to no investment in the Chinese emerging biotech industry. Given more USA drugs now getting approved in China and regulatory and reimbursement changes starting to take effect, we see this as an early, but materially changing, investment opportunity over the long term (3-5+ years) and unlikely to be so "ignored" by Wall Street. In theory, over time, an estimated $20-25B "branded" drug approval market today could grow to $50-100B+ (or perhaps one-third of the US$325B branded market) and an important and material market eventually bigger than Japan or many EU countries. Indeed, AZN is now doing $3.0B in China drug sales and Novo is at $1.5B already... Adding only 20-50% of what AZN or Novo do for AMGN or GILD (which are starting to build out investment here) could be 5% accretive to revenues over the next 3-5 years. In addition, smaller China focused biotechs are ramping and stand to benefit.

We see two key takeaways for investors: (1) On the smid-cap side, Chinese-focused pure-play drug development companies like BGNE ($9.5B market cap) and ZLAB ($1B)  are seeing capital inflow as the market opens and numerous IPOs are lined up for the HK exchange and could see US capital inflow given it's early in the cycle (see charts inside) for the underlying infrastructure changes to take effect; FGEN ($4.8B), partnered with AZN, has first Roxa approval in China coming at YE and a year before US/EU approval. (2) Based on our conversations with AMGN, GILD and others - large biopharma is growing its investment here and in APAC and will continue to grow this market infrastructure and make more headway over the next 3-5 years - adding pot'l incremental emerging long-term market oppt'ys. 

A Deep Dive looks at 3 ongoing fundamental positive market shifts: (1) Drug approval reform... China FDA (CFDA) new regulatory rules encouraging innovation: eliminated and punished fraudulent drug companies and subsequently issued new formal and straightforward regulatory guidelines for approvals, removed many China based clinical trial requirements, instituted a "Priority Review" innovative overseas drugs list to speed approvals, and recently approved many USA drugs including MRK's Keytruda and AMGN's Repatha PCSK9. (2) Reimbursement reform... China gov't instituted a more formal reimbursement process and will start paying for more new drugs. This is opening up the commercial opportunity as drugs could actually be paid for now even if at a lower price - as significant volume can still drive material revenue opportunity. While all fairly small right now, AMGN has disclosed plans to build commercial infrastructure and GILD recently got two HCV drugs approved and has a partnership via KITE with Fosun China to commercialize Yescarta CAR-T. (3) Capital investment coming in.... Changed Hong-Kong new-issue stock listing requirements to encourage significant new capital investment. This has driven waves of Chinese who were trained and worked at USA Pharma/Biotech companies to go back to China to start China biotech companies with underlying US/Western modern approaches to drug discovery. As a result, venture capital is growing quickly in China to fund this next wave of biotechs as these "home-grown" China companies may or may not have the upper hand in support and reimbursement from the Chinese government.
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