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Reflections on a Recent Trip to Asia

Apr. 26, 2019

Brad Loncar, CEO of Loncar Investments and creator of the Loncar China BioPharma Index, offers some thoughts on the progress of China biotech after a recent trip to the region.

In late March and early April, I spent two and a half weeks traveling throughout Asia meeting with companies, attending the China Healthcare Investment Conference, and visiting with investment bankers, journalists, and other observers of the market there. Stops on the trip included Beijing, Shanghai, and Hong Kong. My previous trip was as recent as November and I am impressed by how much progress has been made on the ground (drug approvals, initial public offerings, trials, partnerships, etc.) since then. It has given me a new appreciation for the term ‘China Speed.’


Victoria Harbor, Hong Kong.

I created the index that powers the China BioPharma ETF (Nasdaq: CHNA) last year because I believed something important is brewing in China biotech. (View all CHNA ETF holdings). What I saw on the trip has not only reinforced that view, but also crystallized in my mind how what is happening in Asia has the potential to impact the biopharmaceutical industry more broadly (see the $30,000 PD-1 inhibitor, for example). My biggest takeaway: this is not just a China story… it is a biotech industry story. China biotech has the potential to affect many aspects of our business.

Here are five things I saw on the trip:

1. Pricing, Pricing, Pricing

As innovative drugs come to China and are now being paid for, one thing that has been made clear is how this market will have a very different business model than the West. This was without a doubt the key topic of discussion during my travels. Competition is fierce and it is driving down drug prices to incredible levels. While we already knew that conceptually, there is now a real world example to drive the message home. A domestic company, Shanghai Junshi Biosciences, received approval for its PD-1 inhibitor late last year and priced the drug at an equivalent of less than $30,000 USD. Let me say that again, there is a PD-1 inhibitor selling for less than $30K in the world today (the average price is $150,000 in the United States).

To understand the market dynamics that have brought this low price, I recommend you read this informative interview with Junshi’s CEO Dr. Li Ning. Dr. Li spent 13 years as an oncology reviewer at the U.S. Food and Drug Administration (FDA) and understands drug development well. He describes how critical it will be in China to be included on the National Reimbursement Drug List (NRDL) and how there is a race among companies like his to get drugs developed, submitted, and priced low enough so that they are the winning bidder. He also explains how costs in China are about a third of what western companies are used to so domestic players can still make good margins on these low prices.


Dr. Li Ning CEO of Shanghai Junshi Biosciences during a recent CHNA ETF interview.

Where this gets interesting is when you begin to consider the potential implications to the rest of the world. First, the concept of reference pricing is beginning to gain traction in the United States and other parts of the world. While maybe not overnight, these low prices will likely have a butterfly effect and begin to impact the price of drugs in other geographies over time. Second, Chinese companies are already developing drugs in the United States and elsewhere, and might bring aspects of this model to the West. If you don’t think we are ready for it, read BioCentury’s recent coverage of how Rick Pazdur, director of FDA’s Oncology Center of Excellence, called on Chinese companies to bring low cost PD-1s to the U.S. at the American Association of Cancer Research (AACR) annual meeting in Atlanta.

2. Hong Kong Stock Exchange’s Biotech Experiment is Gaining Steam

It is no secret that the first few listings under the new biotech rule of the Hong Kong Stock Exchange did not start trading well last fall. It didn’t help that macro pressures like the trade war pushed stocks lower globally and made a not-so-great situation even worse. The first one, Ascletis, sank immediately and remains deep underwater today. The second, a secondary listing by the already Nasdaq-listed BeiGene, is also currently well below the HK$108 price that it raised money at in Hong Kong. Finally, the diabetes drug developer Hua Medicine has essentially traded flat while it awaits the result of a first phase 3 trial of its drug Dorzagliatin in the fourth quarter of this year. These were not the rocket ships out of the gate that some in the industry were hoping for.

First impressions are hard to shake and some observers formed their opinion of the Hong Kong biotech experiment after these initial few listings. I think that is too bad because since that time there has been quite a turn. It started with Innovent Biologics (a company that has been conducting quality science since it was founded in 2011), which has approximately doubled since its October initial public offering (IPO). All of the biotech IPOs that have followed, including Junshi Biosciences, CStone Pharma, and Cansino Biologics, are trading well above their offering prices currently. A secondary listing in Hong Kong by WuXi AppTec has also performed very well. The takeaway message is that it was probably not wise to form an opinion about an important new era like this after only a few stocks have traded for a couple of months.


Exchange Square outside of the Hong Kong Stock Exchange.

With this renewed momentum, I expect biotech listings in Hong Kong to begin to pick up steam again this year. There were about a dozen companies that signed up for IPOs last year but paused their plans in the fall. Industry observers I met with during my trip have said to expect these to start again. For example, Mabpharm and Hansoh Pharmaceutical recently re-filed after letting their initial applications lapse so you can probably expect to hear something from them soon. All in all and despite the headlines, I think the new biotech chapter at the Hong Kong Stock Exchange is on a good trajectory. Last year at this time there were no companies listed and the fact that there are now a handful of innovative biotech firms trading in Hong Kong is quite a historic thing. This is only the beginning.

Expect to hear more about this when the Hong Kong Stock Exchange (HKEX) holds its “HKEX Biotech Week 2019” at the exchange’s Connect Hall in Hong Kong on May 28 and 29.

3. There is Literally a Frenzy to In-license Western Drugs to China

Another topic that repeatedly came up during my travels is how fierce the competition is today to in-license compounds from the West into China. At the China Healthcare and Investment Conference (CHIC), CStone Pharma CEO Frank Jiang said it is not uncommon for there to be 20 Chinese companies bidding on a good asset. I have heard the same during private discussions with other executives. This is due to China’s overall shift to innovation and also because regulators last year announced changes that make it easier for foreign data to be used as the basis for approvals domestically, especially for unmet needs. See this recent interview with China Grand Pharma’s CEO Rocky Shao where he describes the positive change as well.


Dr. Frank Jiang, Chairman and CEO CStone Pharma speaking on a panel at CHIC 2019.

If you are a U.S. company that does not yet have a China strategy, I think this means you need to get moving or risk missing out on a potentially big market. There are a lot of opportunities to get involved because China is still wide-open for most innovative things, but being first to market matters a lot. Executives from U.S. companies ask me all the time how to get started in pursuing a China strategy, and there is really no easy answer other than to get on a plane and meet the biotech community on the ground. I recommend planning your trip around one of the many conferences that are springing up. Most of the biotech activity in China is in the Shanghai area (Zhangjiang Hi-Tech Park) and the conferences are as well so use them as a starting point.

The CHIC conference, which is held in March and celebrated its 10th anniversary this year, is a great one for starters, although you just missed it this year. CHIC was founded by a group of venture capitalists and is the longest running conference in the region. Others good ones coming up include the ChinaBio Partnering Forum on May 8-9, Phacilitate Leaders Asia (which focuses on cell therapy and regenerative medicine) on October 15-16, the Endpoints News/PharmCube US-China Biopharma Innovation & Investment Summit on October 29-30, and the BioCentury Healthcare Summit on November 18-20. All of them are in Shanghai.

4. There is also a Frenzy for Talent that is Driving up Costs

Drugs from the West aren’t the only thing fierce competition exists for. Another is talent. A comment I heard repeatedly from many executives is that the competition is so fierce for senior executives who have western experience developing drugs that it is driving up the cost significantly. This shortage is one area that people frequently cited as something that “keeps them up at night.” While there is plenty of educated talent from within China to fill many roles, it is these very senior c-suite level and senior scientist positions that require years of regulatory experience that are in tight supply currently. In fact, during a March 27 Bloomberg interview, Innovent Biologics CEO Michael Yu said that the shortage has lately led to salaries for these positions to often be higher in China than in the West and that Innovent is starting to shift some work back to the United States and other areas because of it.

This is one area that I think is worth watching closely because it has the potential to become a bottleneck. Biotech is an ideas and knowhow business. There is no shortage of talented, educated people in China to support the growth of the industry. However, as Chi-Med CEO Christian Hogg mentioned in a previous interview, you cannot teach someone in a classroom how to get a drug approved by the U.S. Food and Drug Administration. That is only gained with experience, and the people who have been there and done that are in short supply given the growth of the industry and competition for them. Many companies keep research and development (R&D) centers in the United States for this reason and I would not be surprised to see this trend continue to grow more.

5. Chinese Companies are Getting More Drugs into the Clinic in the United States

Speaking of the United States, a final topic that I discussed with many people during my travels and something that I have been very impressed with lately are the number of Chinese companies that are getting innovative drugs into the clinic in the U.S.. Recent examples of this include Innovent Biologics announcing that the first patient has been dosed in the U.S. for its anti-CD47 antibody, I-Mab Biopharma announcing that the first patient has been dosed in the U.S. for its anti-GM-CSF antibody, and Junshi filing the first IND (application to begin a clinical trial) anywhere in the world for its anti-BTLA antibody in the U.S.

One thing that I think is special about what is happening in China today and something that is important to know is that many of these companies do not just hope to be leaders domestically in China, they have plans to be global biotech leaders. The science they are conducting is of the highest quality and at a globally competitive standard. Those drugs listed above are not me-too drugs. They are innovative and have the potential to either be first in class or best in class. This is an important change for Chinese companies that you would not have seen in drug-development as recently as a couple of years ago.


An advertisement for the PD-1 Inhibitor, Imfinzi, on the Hong Kong subway.

Some of the credit for this is due to an important regulatory reform that China agreed to in the summer of 2017. That was when the country joined the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, or ICH for short. Joining ICH was important because it put companies in China on the same regulatory path whether they are doing research for the China market or the U.S. and Europe. In essence, it has lifted all work to the same global standard. Today the type of preclinical work a company needs to do and even the submission documents are largely the same regardless of which country data is being submitted to. This will be a key success factor for Chinese companies both domestically and abroad.

To Conclude…

I always return home energized after visiting the biotech community in China. This trip was no different. When I compare what the biopharma sector looks like today versus when I visited China one year ago for the CHIC conference, there are tangible signs of progress. One year ago there were no biotech companies listed in Hong Kong under the new biotech rule and today there are seven. One year ago there were no PD-1s approved in China and today there are four, two of which were developed by domestic Chinese companies. There was the approval in September of Chi-Med’s fruquintinib, the first new innovative cancer medicine to be entirely discovered, developed, and approved in China. Finally, Henlius Biotech also saw in February its biosimilar to Rituxan approved. These are clear signs of progress.

While these events have been exciting to watch, I believe the sector is just getting started. I am a strong believer that what is happening in China biopharma today is akin to the birth of the U.S. biotech sector in the 1980’s and 1990’s. With a surge in new capital available to companies, important regulatory reforms, entrepreneurs returning home and starting companies that are conducting world-class science, and a listing venue available to biotech companies for the first time on the Hong Kong Stock Exchange, there are many arrows of change pointed in the right direction. I am already looking forward to the next trip.

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Opinions expressed are those of the author, interviewee, or Funds and are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Fund holdings and allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security.

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