4 Things You Need to Know About China and Biotech Investing

It's hard to tell what shape China's nascent biotechnology industry is going to take, but a population of around 1.4 billion suggests it will be big. In fact, you'll find more diabetics in China right now than angry soccer fans in Germany.

Even if you're not investing directly in Chinese biotech stocks, there isn't a drugmaker on the planet that won't be affected by ground-shifting changes happening right now. Here are a few things to look out for.

1. There's going to be a biotech IPO party in Hong Kong

Shares of new Chinese biotechnology companies are about to start flying around Hong Kong like bodies in a Jackie Chan movie. That's because the Hong Kong stock exchange loosened rules that Americans might find difficult to believe existed in the first place.

Biotech companies regularly burn through hundreds of millions of dollars before they can tell investors when to begin thinking about product sales, but Hong Kong required three years of profitability -- or a close approximation -- in order to list shares. The exchange will adjust its listing regulations specifically to allow for biotechnology start-ups, which should incite a deluge of innovators to seek capital.

Only a handful of larger Chinese drugmakers, such as Beigene, have successfully tapped the U.S. equity markets. Over the long run, though, I think you'll see a lot more. Hong Kong listings could become stepping stones for early stage companies on their way to a dual listing that includes the Nasdaq exchange.

2. There's a huge backlog

In 2014, the U.S. Food and Drug Administration (FDA) approved Opdivo, a cancer therapy from Bristol-Myers Squibb (NYSE: BMY) that takes the brakes off the immune system so it can fight cancer. Today in the U.S., Opdivo is one of five drugs that work in a similar manner, but it just won its first approval in China.

A four-year delay might seem lousy, but it's far better than average. Nearly two-thirds of drugs approved in the U.S. between 2010 and 2017 still aren't approved for anyone to use in China.

There are all sorts of reasons for the embarrassing lack of access to lifesaving therapies, but a negative stance on foreign trial data was a big one that won't be a problem much longer. The Chinese FDA recently rolled back rules that required that all data used to support new drug applications be collected within the country.

Recently, one of WuXi AppTec's biologics factories became the first Chinese facility to pass an FDA pre-approval inspection. Don't be surprised if it's the first of many to manufacture biologic drugs for foreign biotechs.

3. Reimbursement's a huge question mark

In China and just about any country outside of the U.S., approvals don't necessarily lead to access for most people who live there. Governments aren't under the same pressure as private insurers that compete for monthly premiums, which gives them tremendous negotiating power.

An estimated 700,000 Chinese patients will receive their first lung cancer diagnosis this year, but the government end payer probably won't agree to the same $13,100 per month list price that Opdivo commands here. If it does agree to a high price, a copay percentage could keep it out of reach for most patients.

A lot of blockbuster therapies could get a big boost in the years ahead, but don't expect fireworks until we can see the wheels of government reimbursement turning smoothly.

4. The money's flowing this way, too

Biopharmaceuticals are one of 10 strategic industries that will expand as part of the bold Chinese Dream initiative. This means a ton of investment in local and foreign biotechnology companies.

In all of 2016, around $200 million in Chinese venture capital flowed into private U.S. biotech start-ups. During the first three months of 2018 alone, that figure jumped to $1.4 billion, which was around 40% of the total raised industrywide during the period.

In the first half of 2018, a record-tying 32 new biotech stocks started trading on the Nasdaq exchange. A bevy of well-funded biotech start-ups now could lead to some record breaking in the years ahead.

Key takeaway

Initiatives tend to lose momentum, but great businesses don't. The Chinese Dream might push some biotech stocks higher, but an association alone shouldn't drive any buy or sell decisions. Stick with well-run companies that can succeed no matter how things shake out in China and you'll stand a much better chance of coming out ahead in the long run.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.