China R&D innovation, investment catching up to the global markets

HONG KONG – Chinese pharmaceutical firms have come a long way, transforming themselves from makers of active pharmaceutical ingredients (APIs) to innovative drug developers in a couple of decades. The secret sauce in that transformation has been investment in R&D.

Now, more companies are looking toward international markets, growing more comfortable with international compliance rules and building reputations in U.S. stock markets.

“The most important thing is that Chinese pharmaceutical companies are more focused on innovation and R&D than ever before,” said Serena Shao, a China health care analyst at an independent brokerage and investment house during a media briefing as part of the annual CLSA Investors’ Forum in Hong Kong Tuesday. “Ten years ago, many Chinese companies were only doing the low-margin, labor-intensive API business.”

The R&D gap between China and the global markets is narrowing. According to CLSA data, the R&D expense ratio at Chinese pharma companies has increased from 3.9 percent of total revenue in 2009 to 6.9 percent in 2014. However, in terms of absolute numbers, China still has a long way to go. The R&D spending ratio in India has increased from 5 percent to 8.2 percent, and in the U.S. from 5.9 percent to 7.7 percent in the same period.

Some of the major pharmaceutical companies in China, including as industry leader state-owned Sino Biopharmaceutical Ltd. (HK: 1177), Jiangsu Hengrui Medicine Co. Ltd. (SH: 600276) – which just announced the construction of a $240 million biopharma plant in Jiangsu – and Shanghai Fosun Pharmaceutical Group Co. Ltd. (HK: 2196), have boosted their R&D investments in the past five years.

Sino Biopharm spent about $140 million in 2014 on R&D, which is seven times higher than the $20 million it spent in 2009. Fosun has the highest average R&D investment growth at 51.2 percent. That company spent about $90 million last year on R&D.

More money is only one part of that R&D equation in China. Helping with both technology and experience is a small army of returnees, professionals trained abroad.

“Things are quite different from 10 years ago when everyone wanted to find a good job in the U.S.,” said Shao, who returned to China three years ago from a U.S. biotech company. “About 2 million talents have came back to China; they bring back both state-of-art technologies and the mindset, logic and experience.”

In terms of the number of management executives who have international background, out of the top Hong Kong-listed biopharmaceutical companies, 3SBio and Fosun have stood out, with four company leaders who came back to China.

And the benefits of that newfound focus on R&D extends beyond Chinese companies.

Multinational corporations (MNCs) have also pushed Chinese pharma R&D forward by collaborating with local companies and doing clinical trials in the country at lower costs.

“Clinical trials could cost $100,000 in the U.S.; the cost in China is probably one-tenth of that,” Shao toldBioWorld Today.

Recent collaboration deals between China pharmaceutical companies and MNCs include the Beigene Co. Ltd. and Boehringer Ingelheim GmbH deal relating to strategic supply and manufacturing agreement for Boehringer Ingelheim’s Shanghai site to manufacture biopharmaceuticals in China for Beigene’s clinical oncology trials. Luye Pharma Group Ltd. (HK: 2186) inked a deal with Korean company Hanmi Pharmaceutical Co. Ltd. for co-development of small-molecule oncology drug poziotinib.

REACHING OUTWARD

Chinese pharmaceutical companies are also aiming for more approvals in the international markets. Shao said Luye and Fosun both have plans to get more approvals in the U.S. market in 2016 and 2017.

“The single biggest challenge for Chinese companies to go international is the mindset,” said Shao. “In the U.S., the FDA [has] very strict regulations on tedious things . . . Chinese people are smart, but the compliance to these implemented strict rules is a challenge to them.”

Chinese regulations are very different, and the U.S. market is very well developed and has more detailed regulations that impact how research is done.

“A lot of the Chinese companies [were] not comfortable with the regulations and guidelines at the first stage,” said Shao. “But after years of education, the pioneers are catching up and are probably doing better than some local companies in terms of compliance.”

However, despite of the progress Chinese pharmaceutical companies are making, U.S. investors in general still have doubts about the corporate governance of Chinese companies and their technologies. It takes time for them to realize the fundamentals are changing for Chinese companies.

“U.S.-listed Chinese companies, in some ways, are undervalued compared with their peers listed in Asian markets because the local investors here understand them better about their business nature,” said Shao.

Chinese companies, on the other hand, consider being listed in the U.S. a good opportunity to build up their reputations in global markets and promote their products. Many of those pharmaceutical companies are still planning to go public in the U.S.

“We’ll probably see several Chinese pharmaceutical companies listed in the U.S. in the next year or two, instead of more companies coming back,” said Shao.

“The biotech sector remains undisturbed in the stock market,” she added. “The sector bounced right back after the Black Monday of the Chinese stock market earlier, people still have long-term faith for this sector.”