4,000,000 reasons to back China biotech

Anyone who doubts China could produce the next Roche Holding AG or Pfizer Inc. need only look at the country’s cancer figures: More than 4 million new patients or close to 12,000 per day diagnosed in 2015, the latest public data available.
Global investors have settled on a favored contender in Jiangsu Hengrui Medicine Co., whose Shanghai-traded shares have surged about 80 percent in the past year. Buyers from overseas have accumulated 14 percent of the drugmaker through the Shanghai-Hong Kong stock connect.
Hengrui’s potential in cancer drugs is its main attraction. With the disease becoming a major health issue in the world’s most-populous nation, it’s in the right place at the right time. The company, based in Lianyungang in the eastern province of Jiangsu, boasts one of the largest oncology sales forces in China. Anti-cancer drugs already contribute more than 40 percent of its revenue.
More importantly, Hengrui has a promising pipeline for cancer immunotherapy treatments, which work by boosting the patient’s immune system to fight the disease. The five PD-1/L1 inhibitors approved by the US. FDA generated about $6 billion of sales last year, or about 15 percent of total oncology drug revenue, estimates Goldman Sachs Group Inc. China still relies on chemotherapy as its primary cancer treatment.
Hengrui is pushing ahead. Its research spending surged 48 percent last year to 1.8 billion yuan ($287 million), or 12.7 percent of sales. The company may file for approval to market its first biotech drug in the second half and push out innovative drugs every two to three years thereafter, reckons China International Capital Corp.
There’s a caveat: Hengrui is one of the world’s most expensive large-cap healthcare providers. Valued at 56 times forward earnings, it’s outstripped only by South Korea’s Celltrion Inc., whose pipeline holds great potential as biologic drugs reach their patent cliffs.
For the time being, investors are unfazed. China wants to go big on biotech. The country is the site of about a third of global trials of chimeric antigen receptor T cell (CAR-T) therapy, a type of immune treatment in which cells are removed from a patient, armed with proteins that allow them to recognize cancer, and reinserted into the body.
As I wrote in January, the Center for Drug Evaluation — China’s equivalent of the US. Food and Drug Administration — placed the CAR-T drug developed by Nanjing Legend Biotechnology Co. on its priority review list, only one week after the firm applied. In addition, the securities regulator has essen- -tially removed the profitability requirement for listings, to ensure funding for innovative companies such as biotech drugmakers. In this light, it’s hard to imagine that China’s drug regulator will give Hengrui a hard time.
Still, it’s dangerous to presume. A case in point: Wuxi AppTech Co., which co-develops and manufactures biotech drugs, got approval for a fast-track IPO only 50 days after filing. However, the drugmaker drastically scaled back its IPO this week, promising to raise no more than 2.1 billion yuan. That’s a sign that regulators still have teeth.
To be sure, Hengrui’s valuation isn’t unusual by historical standards. Tier-one pharmace- uticals tend to demonstrate a U-shaped valuation trend, trading at sky-high earnings multiples in their early stages, and spiking up again when new drugs are developed or acquired. For instance, the valuation of Basel-based Roche declined in the early 2000s before rising again after it bought Genentech Inc. in 2008 in a $44 billion deal.
But this is a coin with two sides. Hengrui may justify its valuation if it brings China’s biotech ambitions to fruition. Fail to come up with a blockbuster drug, though, and its star power will dwindle.

—Bloomberg

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA charterholder