China epidemic highlights the need for more biotech investment
Biotech investments account for only 5.7 percent of the Chinese pharmaceutical market
The outbreak of a new coronavirus in Wuhan that is threatening to become a global epidemic highlights the greater need for more biotechnology investments particularly in China.
Without meaning to sound insensitive, this is a good time for investors to seriously consider investing in biotech and healthcare since these will help address issues that will prevent if not eliminate situations similar to the one in Wuhan in the future.
While healthcare in China remains relatively under-penetrated, biotech-driven treatments in particular account for only 12% of the country’s total drug market. At present, substantial research and development (R&D) is required and risk-averse firms are playing it safe with generic therapies, according to a report by Global X by Mirae Asset.
Outside of the private equity sector, opportunities for investment in China’s biotech industry are limited despite great demand with biotech investments accounting for only 5.7% of the Chinese pharmaceutical market.
Global X by Mirae Asset launched the Global X China Biotech ETF on July 25 2019, which has US$140.1 million in assets under management as of December 2019. In terms of asset allocation, this ETF is 56% in A-shares, 28% in Hong Kong listed companies, and 16% in US listed companies.
The demand for quality healthcare in China will continue to be driven by its ageing population where over 400 million will be 60 years or older by 2030 as well as a shift towards urbanization where over 56% of the population live in towns and cities, according to the report.
At the same time, Chinese people’s ability to fund healthcare costs is also increasing with the average disposable income of residents rising to 28,228 yuan (US$4,097), 54% higher than in 2013.
In terms of opportunities, the Chinese government is seriously supporting the development of the biotech sector with major reforms and encouraging investments in the sector. This is consistent with the general shift of the economy away from manufacturing to higher-value sectors.
Perhaps the most important reform is the revamp of the National Medical Products Administration, China’s counterpart of the US Food and Drug Administration (FDA), which paves the way for a more efficient and transparent drug approval system based on global standards.
In addition, the Hong Kong Stock Exchange has relaxed listing requirements for Chinese biotech companies in 2018 by allowing them to list before they can generate revenues as long as they have an approved product. This will make it easier for biotech companies to raise much-needed capital for funding their R&D and business development.
In terms of risk, the biotech sector requires substantial investment in R&D with no guarantee that a product will become commercially viable.
“But it should be noted that a significant number of Chinese biotech companies are seeking to mitigate research and development risks by developing so-called ‘me-too’ drugs, which are closely related to existing products, or ‘me-better’ offerings or drugs that improve on existing treatments but can’t be classified as new,” according to Global X by Mirae.
Another risk is that biotech companies are vulnerable to changes in the regulatory environment, intensifying competition, and rapidly evolving technology.
Also, intellectual property remains a concern for biotech companies, many of whom are dependent on the ability to retain intellectual property rights and patents.
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