Cui Cui
Healthcare analyst, China equities
Many are expecting a volatile year for global equities. We see some defensive plays within the China healthcare sector for the Year of the Tiger. We also see these as long-term winners riding on the tailwinds of policy changes.

1. China to continue doubling-down on healthcare spending 

China’s healthcare expenditure has had double-digit growth for the last 10 years. 

Cui Cui thinks that spending on health matters will grow as rising income levels translate to the Chinese individuals placing greater emphasis on well-being. 

The Chinese government will also continue to support the healthcare system as the country ages and also as it looks to make this public service more accessible to all under its Common Prosperity policies. 

Cui Cui points out that despite the strong growth, China’s spend on the sector is still lagging other major economies. As a percentage of gross domestic product, China is spending only 6%, compared to 17% in the US.

2. Chinese pharmaceuticals are coming out of the den

Cui Cui admits the last three years have not been fantastic for the pharmaceutical industry.

“As a whole, this sub-sector has underperformed in the healthcare space due to China’s plan to centralize the drug distribution,” the analyst says. This has put significant pressure on generic drug pricing as companies vie for market share.

Looking into the Year of the Tiger, Cui Cui believes that the worst of this price undercutting is behind us and prices have stabilized. 

“The risk-reward profile for the sector is actually pretty well-balanced now,” Cui Cui tells us.

She sees two other bright spots for China drug makers – industry consolidation and expansion overseas.

3. Bigger is better: consolidating forces in the pharmaceutical sector

Size and might matter in the Tiger kingdom and this is no different for Chinese pharmaceuticals. 

The sector is fragmented with over 5,000 firms now. The top four pharmaceutical manufacturers in China collectively have only 8% market share—a huge contrast to the US (25%) and Japan (36% market share)1.

Cui Cui believes that the market share for the top four Chinese pharmaceutical companies will grow, with inferior companies being eliminated by higher regulatory standards and active M&As.

“I see strong M&A activities as consolidation is needed for the smaller companies to survive. Many of these smaller firms do not have access and sufficient resources for research and commercialization. As a result, they are slow with clinical trials and weak in sales ramp-up which can then lead to cash flow issues. Partnering with the big guys is sort of a way out for them to beef up their R&D efficiency and commercialization capabilities”, she explains.

4. Drug makers leaping far into new territories

Chinese biotech and pharmaceutical companies are making the big leap overseas and this will not stop.

Cui Cui sees internationalization and overseas expansion as key corporate activities for many in these sub-sectors.

“COVID-19 has ironically given Chinese biotech firms a chance to gain international recognition by partnering with global counterparts,” she says. She gave the example of a leading Chinese biotech company which licensed their COVID-19 neutralizing antibody to Eli Lilly, a US peer. The former subsequently received emergency authorization from the Food and Drug Administration (FDA) in the US and this saw a quick ramp up of their revenue in the US.

The same Chinese biotech firm has also developed an in-human anti PD-1 antibody for multiple tumors. This antibody is used in the treatment of nasopharyngeal carcinoma (rare tumor of the head and neck) which has now been granted a “breakthrough therapy designation2” by US FDA.

Approvals like these help to pave the way for Chinese drug makers to branch out overseas. 

The overseas market will mean higher profit margins as companies have more pricing power. Chinese drug makers also have a cost advantage with lower labour cost, higher efficiency and strong innovation. These attributes keep global firms coming back for more collaboration.

5. CROs: earning their stripes in outsourcing from local and global clients

Outsourcing may not be intuitively associated with the healthcare industry but Cui Cui tells us that it is not uncommon.

These firms, known as Contract Research Organizations (CROs) provide a wide range of services to the healthcare clients from drug innovation to clinical trials.

Just like its peers in the biotech and pharmaceutical sectors, Chinese CROs are gaining international recognition in new, advanced drug therapies like cell and gene therapy and anti-body drug conjugate.

While Cui Cui believes overseas expansion is important for CROs, she thinks that the boost in revenues will come from stronger domestic demand in the Year of the Tiger.

“Many local biotech and pharmaceutical companies have started to use CROs for some time now. My conversations with both the CRO management and local clients tell me that domestic needs for CROs will become stronger,” says Cui Cui.

Why is this so?

The last few years has seen a flourish in local biotech companies. Under the ‘Made in China 2025’ policy announced in 2015, biotech was identified as one of the key sectors to build up China’s global competitiveness and innovation in healthcare. 

These new biotech companies do not have the resources to build their R&D capabilities immediately and so turn to outsourcing as an option to carry out drug research and trials.

Global pharmaceuticals with local operations also rely on these CROs for their services.

Top sector picks for the Year of the Tiger

Amongst the eight healthcare sub-sectors, Cui Cui favours China pharmaceuticals and CROs. Leading players here should benefit from consolidation, higher regulatory standards and expansion beyond China’s shores. These factors should support both the growth and valuation of the country’s healthcare sector.

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