Looming competition from the east

A number of initiatives taken by the Chinese government to strengthen its pharmaceutical sector have started to bear fruit – Beigene’s ‘zanubrutinib’ became the first innovative drug by a Chinese firm to be approved by the US FDA. While this development offers hope for other Chinese biotech firms, it also indicates a brewing competitive threat for the industry bigwigs.

Recently, a Chinese clinical-stage company, Biegene, received an FDA approval for its BTK inhibitor, zanubrutinib, used for the treatment of mantle cell lymphoma (a rare kind of blood cancer) – wherein the drug showed superior clinical efficacy vs. J&J/Abbvie’s blockbuster drug Imbruveca. This approval can be considered as a breakthrough for China’s biotech companies, which had earlier failed to secure FDA approval for their respective innovations.

Favourable Chinese policies

To cater to the high unmet demand for innovative drugs in China, the government has taken various important steps, such as ‘Made in China 2025’ and ‘Healthy China 2030’ policies – while the former has prompted pharma companies to manufacture locally, the latter has given birth to various domestic healthcare companies. On the regulatory front as well, CNDA (China National Drug Administration; previously known as China’s FDA) has turned lenient by shortening the approval time – by priority reviewing, and conditional approving, and lowering the approval requirements – companies are now allowed to use foreign clinical trial data for approvals in China.

To lend financial support, the listing of early-stage companies (with no sales) is now allowed on the Hong Kong Stock Exchange. All these measures have stimulated investment by Chinese biotech firms, particularly for innovative drugs — currently, there are ~800 (>3x vs. 2012) innovative molecules in Chinese biotech firms’ pipelines, of which 70-80 molecules are in late-stage. Remember, the world’s second-largest pharmaceutical market, China (c.$132bn), is poised to grow at a CAGR of 12% until 2022.

Threat to industry bigwigs

Currently, most of the innovative late-stage drugs, which are germinating in China, are often out-licensed or partnered with foreign players. However, as these companies obtain more government support and financial boost (as discussed above), they are more likely to run their own clinical trials in the US and Europe – as these regions’ regulatory authorities don’t consider Chinese trials. A trend in this direction is already visible – China’s first home-grown cancer drug, discovered by Chi-Med, is in clinical trials in the US, and several other biotech companies have started running clinical trials in multiple regions. It is only a matter of time before China begins to compete with the US and Europe in different therapeutic areas.

China’s biotech out-licensed to western players

Source: AlphaValue Research

M&A – a counter attack?

Although the pharma giants are way ahead in terms of innovation, the pace at which the Chinese are innovating does pose a risk in the mid/long-term. To counter this, we may witness increased M&A activity from the industry biggies in China. Some of them have already started to test the waters – AstraZeneca will be launching a $1bn healthcare fund in partnership with China International Capital Corporation, while Amgen has bought a 20% stake in Biegene and Grifols has acquired a 26% stake in Shanghai RAAS