Could we be entering “bubble” territory with publicly traded Chinese biotechnology ventures? With all of the conditions present for a massive success, extreme volatility and lack of profits make this an investment sector not for the faint of heart. In a market where it is not uncommon to see wild fluctuations in share price, money is to be made and lost in the short run.

The Wild East

The Chinese government started liberalizing its drug industry and a massive flood of capital, talent and biotech company launching represents a continuous flow of potential. However, few treatments actually make it through all three phases of clinical research, through regulatory approval and to commercialization. However, if they do vast returns are possible.

Recently, Eric Ng writing for the South China Morning Post, introduced the reader to the “Wild East.” Take Hua Medicine, a biotech searching for the next diabetes breakthrough, and how its share price dropped 40% over a three day period due to disappointing clinical trial results. However, after executives reassured investors, the share price shot up 30% in the days after.

Risk vs. Reward: If you have the Stomach

How do investors that don’t have science backgrounds get into the market here? Is it worth the risk? What should investors invest in? Mr. Ng reports that in China there are mixed views among his profession, where some analysts argue that it is better to keep money in the big Chinese players such as Sino Biopharmaceutical and CSPC Pharma (both listed on Hong Kong exchange). Why? They have brand, market position and distribution channels for commercialization.

On the other hand, more bullish analyst suggest the fortunes could be too great to pass up—if one of the upstarts hits a home run—such as Innovent Biologics, BeiGeneHua Medicine, and CK Life Sciences, which are all listed on the Hong Kong Exchanges as well. The investors with the wherewithal to take some risk for big growth potential should consider the more volatile stocks these analysts contend.

The analysts favoring the latter include Kelvin Chen (PhD chemical and biomolecular engineering from Hong Kong University) working for Bocom International Science. Mr. Chen declared that the “Emerging biotech leaders” have outperformed year-to-date the established players, and “As more product sales figures and clinical trial results are announced next year, we will see an even clearer lead of the winners from the rest of the pack.” But that position could change next year.

Emerging Upstarts

Healthcare and agriculture tycoon Victor Li Tzar-kuoi’s conglomerate CK Hutchinson has a biotech subsidiary called CK Life Sciences, which has been up 92% in 2019 mostly from the last few weeks based on favorable interim results on a Phase III clinical trial for a skin cancer drug. BeiGene, an oncology-focused venture, is up 45% this year. Innovent Biologics gained 13.4%—far better than the Hang Seng Index, which has grown a scanty 1.9% in 2019. On the other hand, emerging player Hua Medicine has fallen 38% over the year. It goes both ways.

Clinical Trials are Key

TrialSite News tracks clinical trials worldwide—with an emphasis on sites and their staff.  What research centers are working on what new clinical developments? What are promising cures? Who are some start investigators? Who are some bad actors to watch out for? It is imperative to bring transparency and access to the incredibly important activity known as clinical trials. China is on our mind, and we have commenced an ongoing project to get a better understanding of the growing site and investigator landscape in China. Transparency in China represents a fundamental requirement for long-term sustainability.

Of late success or failure in China’s biotech markets comes down to the clinical trial results. Stock price in China will soar or tank depending on results. But drug development and clinical trials represents a long term proposition so there will be different classes of investors in the mix—those seeking to profit from short term volatility and, of course, others that maintain a long term view. But there are deep fundamentals to consider in understanding clinical trials, like who are their sponsors?; how well capitalized are they?; how are the studies designed?; where and how they are conducted? Other considerations include the therapeutic area and specific indication they address and the results, such as response rate, or in the case of oncology studies, “survival time,” whereas for other non-critical diseases, the endpoint could even be a cure. Mr. Ng of South China Morning Post acknowledges that there are “no golden rules” for factors such as trial response hence making matters more complex.  

Valuation and Outlook

As analysts undertake valuations, they look to drug pipeline, probabilities of success in securing marketing authorization from regulatory bodies, commercialization capabilities, partnerships, and the like. CuiCiti’s head of China health care research, notes that in reviewing company valuations they factor in all the key information and calculate a value per share for each drug in a valuation model applying a multiple of four over their forecast future peak annual sales. Cui from Citi notes to South China Morning Post that each drug in Phase II and Phase II (focus on efficacy) has roughly a 50% chance of eventually securing marketing authorization in China. While drug candidates in Phase I (safety) face an average success rate of less than 10%. And Cui notes that preclinical candidates are not factored into the analysts’ valuation models.

UOB’s Kay Hian senior health care analyst Carol Dou suggests many of their clients stay to value over growth as they “are more comfortable investing in pharmaceutical firms with stable revenue and profit growth with a mature product portfolio.” Ms. Dou emphasized that risk premiums go sky high with emerging biotech. They are, of course, pre-revenue and the “need to show that they can successfully market their drugs once they get approval to sell them, which is an additional challenge.” Emerging biotechs can opt to partner for a sales team or invest heavily to build such a force—but the risks involved with the latter are significantly high as compared to the bigger players that “know every doctor in large hospitals.” Hence, “It is easier for them to educate the doctors about their innovative drugs and to recruit patients for clinical trials.”

Nothing of Value comes Easy or Fast

Of course, many investors in China believe that these emerging biotech stock returns are far more certain and, in fact, they really are in the short run. Unrealistic expectations can create bubble-like conditions—and in the short run, risks there appear high as more money flows into more startups contributing to a exponentially growing clinical trials pipeline that ultimately could be larger than present capacity to manage with high levels of quality. This was in part the concern of a STAT piece last year where Anne Poli suggested a number of challenges from questionable informed consent practices to inadequate clinical trials infrastructure and poor transparency factored in to make China quite a questionable proposition sustainable, long term value creation.

TrialSite News algorithms monitor Chinese clinical research and observe the infrastructure for clinical trials, while rapidly advancing, is not as robust and predictable as in the U.S., Japan or Europe. A number of initiatives involving Western pharma and CROs to help raise the bar concerning investigator, coordinator and monitor quality surely is a good thing, but in all reality, will take years to manifest in the mature “vocational certainty” required for a robust, mature clinical trials industry there.

The Chinese government certainly seeks to accelerate this transformation and the intentions are overall good—there is a serious push for progressive drug development reform and modernization. And it is happening fast. Few doubt the wherewithal of China to rapidly and materially transform—in just a few decades, The Middle Kingdom emerged as the second largest GDP. In fact, as measured by PPP, it surpassed America. But contrarian forces are at play as well—forces that a PhD thesis could center on.

Mr. Keynes

Mr. John Maynard Keynes, the notable economist, famously declared that “in the long run, we are all dead.” This shared human condition surely affects how and when we invest.  

In the long run, the potential for a large, robust drug development industry is certain in China. Why? Well, with the world’s largest population, an incredibly enterprising and entrepreneurial culture—despite government still wed to what we believe are some antiquated notions of state central planning—a commitment to education, a vast new middle class (larger than the entire United States population by some estimates), and growing consumer demand for high levels of quality of life—including health care. However, these forces may unfold differently than many in the “West” may assume—a severe uneven development drives growing challenges to allocation of capital, talent and productive assets—especially when it comes to health care and access as we have articulated—not to mention a nascent (but rapidly improving) medical and clinical research infrastructure) and socio-economic and political conditions that sharply divide from the political economies of Europe, North America and Japan. A different experience and reality means that one can’t simply take past experiences and project a certain rational into the future.  

But the inevitable decision investors must make is guided by the shared human condition Mr. Keynes understood so well—we are all dead in the long run and for many of us, that is unfortunately sooner rather than later: hence, why not live it up in the short run—true wisdom for those that possess the access to enter such markets, the stomach to bear such risk, the wherewithal to survive such loss should things go south, and the probability of that occurring in the short run is considerable.

Source: South China Morning Post

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