Investors from the West are buying into the China biotech story, citing a large market, regulatory reforms and rapid — if not yet genuine — innovation, but they are also aware of what risks lie ahead.

A panel joined by U.S.-based investors at the hybrid 2021 China Healthcare Summit talked about China's biotech space on Nov. 17.

When Amgen bought a 20% stake in Chinese biotech company Beigene, which went public on the Nasdaq along with Chinese peers like I-Mab and Zai Lab, U.S. investors started to sense something big was imminent.

Brad Loncar was one of the first U.S. investors to jump into the China biotech space. Loncar, CEO of his firm Loncar Investments, created The China BioPharma ETF (Nasdaq: CHNA) to help invest in the space.  

“One of my favorite statistics to tell new investors to this story is, in 2010, the market value of Wuxi AppTec on the New York Stock Exchange was $1.6 billion. Today, the combined value of Wuxi AppTec and Wuxi Biologics is over $150 billion,” he said at the 2021 China Healthcare Summit on Thursday. “It's really amazing.”

Over the years, China’s market of over 1.4 billion people has been attracting foreign investments to many sectors. Healthcare is no exception — more people means more patients and unmet needs.

Beijing’s determination to transform the country’s pharmaceutical sector from making cheap generics to developing high-tech innovative drugs has also brought regulatory changes. China joined the ICH in 2017 to align their clinical trials with global trials and also allowed overseas data to be used in their drug approval applications. These two recent milestones, along with many others, have sent encouraging signals to durgmakers and investors.

“Given the recent regulatory reforms and some of the commentary by China, some of the changes they’ve had over the last couple years, and the large population there, it's a great place to [develop drugs],” said Nimish Shah, Partner at U.S.-based venture capital firm Venrock. “It sounds rather simplistic, but that's kind of how we look at it.”

Early movers in the U.S. feel like they have made the right bet. Chinese biotech companies, such as Beigene, Zai Lab, I-Mab, Innovent, Hutchmed, Hengrui and Remegen are constantly making headlines with new deals, new data and new filings. They have also started to license out their internally-discovered assets to global pharma giants.

InnoCare out-licensed its BTK inhibitor to Biogen, Jacobio its SHP2 inhibitor to Abbvie, Remegen its HER2-targeted ADC to Seagen, I-Mab its CD47 inhibitor to Abbvie, Beigene and Innovent their PD-1 inhibitors to Novartis and Eli Lilly, respectively — all unimaginable a few years ago.

“You'll be seeing some of the initial startups in China moving beyond China to the West with their products and brands. We want to be at the nexus of them,” said Lonnie Moulder, Managing Member at Tellus BioVentures and a board member at Zai Lab.

Some spaces seem more compelling for investment, such as oncology, cardiovascular, infectious, autoimmune and rare diseases simply because of the sheer number of patients in China.

Moulder pointed to specialty therapeutic areas that see great unmet needs, as more common indications are already covered by primary care, and the related drugs are older and less expensive generics.

“There are molecules elsewhere in the world that are showing fantastic data sets. Those should be brought to China and companies that have those would be interesting investments,” he said.

But some investors may still feel hesitant to jump into the space. China is regarded as a market far away, highly unpredictable, and one that shows little respect to intellectual property. Moulder urges his peers to let go of such prejudices.

He said China “absolutely respects patents just as other markets,” adding that despite tensions between the U.S. and China, there are “great interactions” between the regulatory authorities. Processes that have long been established in the West have now been incorporated in China, and with China adhering to ICH guidelines, companies can use data generated in China for regulatory filings in the U.S.

“Yes, there are me-too products that come quickly, but that’s entrepreneurship,” said Moulder. “It's a copycat, but it's a legitimate copycat. It's not in any way violating patents that are issued.”

The crowded space in China’s biotech market has long been criticized. Once a concept is validated in the West, a flock of Chinese players quickly jump on the idea. PD-1/L1 antibodies, for example, highlight how China still lacks genuine innovation but demonstrates extraordinary and speedy execution. To date, 71 Chinese drugmakers have filed 424 NDAs for their PD-1/PD-L1 candidates, CDE officials said in September.

To tap the opportunities in China’s biotech space, U.S. investors must understand that the game in China is different. Currently, being first in the market means more than investing time in basic research and drug discovery, and Moulder believes that rapid innovation is the key to success.

“[Y]ou'll get your reward in a short or medium period of time, and then it'll diminish because of competition, and you'll need to have another innovation,” he said, adding that competition is fierce in China. Bringing products elsewhere in the world to extend their life cycle for revenue is a way to maximize profits.

China’s healthcare industry also faces pricing pressure from a government that seeks the lowest prices. When it comes to updating the national reimbursement drug list, drugmakers very often offer to cut prices by more than half to gain access to hundreds of public hospitals. In 2020, for instance, Bayer slashed the price of its off-patent acarbose by nearly 90%. The belief is that the large number of patients and overseas partnerships will eventually offset the initial shortfall.

Citing orphan drug development as an example, Moulder argued that the patient population in China in some cases is four to five times larger than that in the U.S. Though the pricing in China is substantially lower, some orphan drugs could still generate up to $500 million in sales at their peak.

“I think it's important for people to recognize there aren't many products that are over $500 million in annual sales in China,” he said, adding that even a big product might only bring up to $800 million a year.

“If a company has a portfolio of two or three products that [make] hundreds of millions of dollars a year in revenue, that’s a lot of value if they actually evolve to being cross-border to have relationships and revenue coming from other parts of the world.”

Chinese authorities not only weigh in with price negotiations, but also regulations that could disrupt a sector overnight. The case of Didi Chuxing, a ride-hailing service company facing data security investigations, is a warning for those investing in Chinese companies. But panelists said investors simply need to take cues from the tone regulators to foresee what might be coming.

“If one paid attention to the speeches and writings of the leadership in China, every one of those was anticipated. They were described for several years now as to what leadership’s view is on some of those practices in some of those sectors of industry,” said Moulder.

He explained that recent regulatory upheavals were aimed at squeezing out low-quality generics to make way for innovative drugs, and pricing pressure will translate to motivation to develop better quality drugs.  

“Valuations are down a bit on China companies right now because of that reaction, but I feel that will correct itself,” he said.

New York-based investor Ingrid Yin, Co-Founder at Maytech Global Investments, shares the same view.

“The government’s guidance and direction [shared] a similar tone for two years. It’s just that changes were implemented so quickly this year that surprised a lot of people,” she said, adding that amid these changes, China remains committed to adopting innovation as it continues to support imported and homegrown innovative products.

Looking ahead, the panelists expect to see Chinese biotech companies out-license more of their products to global players and turn into cross-border or even global operations. Time will tell which companies are able to keep up.

“More Chinese companies are establishing sort of stealth, small operations and offices in the U.S., trying to get a feel for the U.S. environment and recruiting people. Some of them already are beginning to do global development,” said Moulder.

“The next step may be a co-development, co-commercialization arrangement… Ultimately, some of those initial stealth, small organizations in the U.S. or Europe are going to bring the products forward themselves. Within 10 years, there will be a whole array of cross-border companies eventually evolving into global operations,” he added.

Venrock’s Shah left a more cautiously optimistic note.

“In terms of the market, we expect continued growth, but I do think there will be more dispersion,” he said. “There'll be a separation from high quality companies and companies that are not. For a couple of years, we’re just seeing a rising tide that lifts all boats. I think that's going to stop.”

Editing by Justin Fischer