China's pharmaceutical industry is in the midst of a transformation. China is one of the largest markets in the world for medicine – and it is poised to become a global hub of drug innovation/a global leader in drug development technology.
By Oliver Kubli, Lead Portfolio manager BB Adamant Asia Pacific Healthcare at Bellevue Asset Management
An increasing number of international investors have turned their attention to the healthcare sector as the corona crisis rages on. Weak spots in healthcare systems across the world have been exposed by the pandemic, and it has also triggered a fundamental reset in investor mindsets. One of the winners of these recent events will probably be the healthcare industry in emerging markets – which are also becoming increasingly important as a market for medicines.
At the center of these developments is Asia, where healthcare systems are facing the same challenges as healthcare systems in the West. Changes in lifestyles and diets associated with rising wealth are having a negative impact on people's health. For example, the rapidly growing number of overweight people worldwide is leading to a rapid increase in the number of diagnosed diabetes cases.
Efficient and Affordable Healthcare
A quarter of the estimated 400 million people worldwide who have diabetes live in China and almost a fifth live in ASEAN countries such as Malaysia or Thailand. At the same time, aging populations are leading to an increase in the number of patients diagnosed with cancer, neurological or circulatory diseases. This translates into steadily rising costs for national healthcare systems as more and more citizens require access to efficient and affordable healthcare.
Asia is forging ahead. This was once again evident as the coronavirus crisis unfolded and Asian companies led the way with their solutions. Meanwhile, a raft of positive data has been published in other areas and improved the corresponding pipeline visibility. Last but not least, the process of digitization has gained momentum, while disruptive technologies are steadily improving access to healthcare.
China’s Pharmaceutical Silicon Valley
China has one of the largest medicine markets in the world. Its overall spending on healthcare is still low compared to many of the industrialized countries. The country is making steady progress in expanding its domestic drug research and development capabilities and its domestic drug production, which helps the government to provide an increasing number of Chinese with access to affordable healthcare.
The Chinese government is offering tax and other financial incentives as part of a long-term plan to develop an internationally competitive homegrown biopharmaceutical industry. Beijing’s national health policy currently prioritizes efficiency and the establishment of innovation centers, which it is promoting through financial incentives. The main pillars of the government’s approach here are three vast centers of innovation – the Zhangjiang Hi-Tech Park near Shanghai, the BioBay in Suzhou and the Shenzhen innovation hub, which is often referred to as China's Silicon Valley for pharma companies because it is already home to global companies such as Huawei.
The Emergence of a Major Growth Market
Sales of innovative drugs in China are forecast to triple from 117 billion yuan this year to 375 billion yuan in 2025. Local biotech companies selected as “partners of choice” for global companies seeking to enter the Chinese market and advance the development, approval and commercialization of their drugs in China will play a critical role in achieving this growth. Innovative homegrown Chinese drugs are also creating excitement worldwide and these drugs are being in-licensed by Big Pharma in the West.
The current situation is comparable with the situation in the U.S. at the end of the 1980s when the biotech boom began, driven by scientific breakthroughs. We believe China’s medicine market is poised to become a major growth market and is currently transitioning from a «Me-Too» drug market to a «First-in-Class» or «Best-in-Class» market.
Excess Performance
Valuations in the Asian healthcare sector are currently very inexpensive and stock prices have shown a positive trend since the global coronavirus-induced crash last year. The BB Adamant Asia Pacific Healthcare Fund has outperformed the broader indexes throughout the various market cycles.
For example, it has delivered an excess performance of more than 50 percent relative to the MSCI Asia Pacific Index since its launch at the end of April 2017. The secular upward trend in Asian healthcare markets should continue going forward, thanks in particular to the growing innovation power of the region, where companies that stand to benefit from structural trends are already winning international acclaim.
