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The Chinese pharmaceutical industry, upset by the drastic price cuts due to the recent pilot launch in Beijing of open tenders in large quantities in public hospitals, will have to go through a difficult restructuring and release significant sums to finance innovation , according to the leaders.
As Beijing's pilot reform expands across the country to reduce drug prices and improve their efficiency and safety, companies are increasingly eager to invest in innovative drugs and reduce dependence on low-profit products, identical to the original drugs.
Indeed, the reform means that the manufacture of generic drugs – the cornerstone of the industry – has become much more competitive.
"The industry and investors need to get used to the new environment in China, where generic drugs are a tool to reduce medical costs," said Song Ruilin, president of the China Association for pharmaceutical innovation and research and development, in an interview on the sidelines of JP Morgan. Healthcare conference – the largest in the world – in San Francisco last week.
"To survive, companies need to innovate," he said.
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At the beginning of last month, the first round of price auctions in 11 cities had seen its prices fall by an average of 62 percent, according to Guoyuan Securities, which raised concerns about the profitability of the sector. Two drugs have seen prices fall by more than 95%.
The stock price of the mainland pharmaceutical companies listed on the Hong Kong Stock Exchange fell sharply, prolonging a sector correction that saw the Hang Seng Mainland Healthcare index halve in seven months compared to the record high in September. the end of May.
The stakes are high. The country's hospital drug market is expected to reach 800 billion yuan (US $ 118 billion) last year and exceed 1.2 trillion yuan in 2021, according to a research report by Credit Suisse.
The laureates will have 70% of the volume of purchases of the local hospital system. This will only increase as drugs become more affordable.
Most firms, with the exception of those in extreme price reductions, should outperform, with volume gains and unit cost savings more than offsetting lower prices.
Direct and centralized procurement will also reduce the costs of marketing and distributing medicines, resulting in additional savings.
The losers will not only be subject to the price caps set by the successful bids, they will also have to face the need to fight each other for the remaining 30% of the market which requires significant marketing and distribution costs.
The entire industry will benefit from lower profit margins than more than 30 percent in favor of price reform, Lin Xiaowei, an badyst at Everbright Securities, said in a report.
"Many generic drug companies will be eliminated if they can not achieve bioequivalence [efficacy and safety] tests, or be selected as a laureate in bulk tenders, "said Michael Yu Dechao, co-founder and chairman of Innovent Biologics, developer of cancer drugs. "The cleaning will leave more room for innovation."
To survive in the environment, drug manufacturers will need to focus on a smaller number of generic products for which they have a clear cost advantage, while investing in the development of new and innovative drugs that will benefit from the benefits. Patent protection of competition.
Although some of the price cuts seem excessive, Song believes that regulators will adjust their policies because too low prices increase the risk of compromising the quality of medicines.
"The reform must be done step by step. We have now started and the sky has not fallen. It only created fear, "he said. "I think the authorities are also thinking about the results … the price reduction is not its only goal."
For generic products for which some Chinese companies have reached Western or Japanese standards, others have not met the criteria defined by law, regulators grant winners a price increase of 10 to 15% superior to successful bids, in line with international standards, to encourage improvements in the quality of the sector.
As price reform spreads across the country, the best-endowed companies will spend billions of yuan each year trying to be the first to offer a new compound that is able to meet the demands of the world. act on a new biological target to treat a disease. They will be rewarded with multi-year legal protection against competition.
Others, who have not been able to do so, will try to find an alternative compound, called "me-too drugs", to act on the same objective and sell at a lower price to gain share of market.
Many will rely on their drug candidates who, if successfully developed before their rivals, will become flagship products and multi-year cash cows thanks to a burgeoning middle clbad that can afford more expensive drugs and best quality.
Chinese drug companies still have a lot to do to become a truly innovative industry.
Song pointed out that even among the country's most advanced pharmaceutical companies, about 80% of their business value came from generic products and the rest from the development of new drugs.
This proportion is reversed among the major US pharmaceutical companies, the largest and most innovative pharmaceutical market in the world, he added.
This evolution, combined with demographic and economic trends, offers great opportunities for growth and investment.
"China has entered a period of great prosperity for the development of the health care industry, especially biotechnology, thanks to the gradual maturation of the country's 300 million middle clbad. as consumers of health care, especially those born in the 1950s and 1960s, who are wealthy and soon begin to age. ", Said Houston Huang Guobin, head of the global investment bank for JP China Chase & Co.
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This is particularly the case of expensive treatments for cancer patients, whose number in China is estimated by Frost and Sullivan at 5.8 million in 2030, compared with 4.3 million last year.
The market for PD-1 and PD-L1 antibodies alone – a clbad of novel immuno-oncological therapies that drive the immune system to kill cancer cells and cost half a million yuan a year – is predicted by the council to jump to 56 billion yuan in 2023 from nothing last year.
Three of the five companies listed in Hong Kong according to the revised rules have completed clinical trials of their anti-PD-1 antibodies and have submitted the results to regulatory approval.
Hong Kong, a new overseas fundraising channel enabling Chinese companies to fund the discovery and development of expensive drugs, is expected to benefit from the transition of the industry, but not without its growth difficulties.
Hong Kong Exchanges and Clearing, which last April revised its registration rules to allow biotech companies that have not yet generated any profit or even revenue, has been very active in marketing the new registration regime.
Its leaders – led by General Manager Charles Li Xiaojia – have embarked this month on a roadshow in North America to meet potential candidates and investors covering Vancouver, San Francisco, New York and Boston. Michael Chan, Vice President of HKEX, Issuer Services Morning of South China by teleconference Wednesday from New York.
A year ago, the marketing in San Francisco was planned before the launch of the scheme in late April.
"This time, the US-based listed companies are more interested in the option to trade in Hong Kong to complement their strategy in China or Asia … it's not just Chinese listed companies that are planning to come back for a double listing or a spin-off company, he says.
His comment comes just two weeks after Stealth BioTherapeutics, a US-based biotechnology company backed by a Hong Kong investor, has signed up for Nasdaq and is letting listing on Hong Kong. expired six months earlier.
Chan stated that he thought it was an individual case, which did not suggest that Hong Kong had become a privileged place for biotechnology, adding that "it was a good place for biotechnology. he had not received many inquiries about this during his tour.
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Stephen Peepels, head of the Asia Pacific US Securities Division, Hong Kong's international law firm Hogan Lovells, agreed.
"As the first couple of companies to benefit from the new rules [in Hong Kong]has not been as successful as hoped, it might have prompted some companies to reconsider their choice of place of IPO, "he said. "It would be premature at the moment to look at individual examples and start to conclude that everyone will change their minds and focus on the Nasdaq again. It may take longer than many people to see a lot of business. "
Up to now, five companies have registered in Hong Kong under the new rules, while five others have still registered to sell their shares and their listing.
The first, Ascletis Pharma, developer of drugs for the treatment of hepatitis, listed on the stock market at the beginning of August, saw its share price halved a little more than two weeks after its launch on the market, which has provoked criticisms concerning too aggressive prices.
"This is an issue of supply and demand, but it also reflects a degree of investment bank immaturity and stock badysis that has allowed for this type of pricing," said Samantha Du, executive director of the firm. Zai Lab drug developer based in Shanghai. .
"In the United States, where there are 2,000 publicly traded biotechnology companies and where the stock price is determined by the performance of the companies, we rarely see this kind of volatility," added the former capital. investor who sits on a panel that badists the Hong Kong Stock Exchange. in its review of biotechnology applications under the new rules.
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"Everything must go from somewhere, it is difficult to have it perfect at first … it 'sa trial and error process … overall there are more positives than negatives, "she said.
Huang, of JP Morgan, said it would take time to create this ecosystem, as Hong Kong lacks bankers, lawyers, auditors and experienced investors in business ventures. biotechnology.
To seize growth opportunities and increase its market share in China, where it occupies a less important place as a leading investment bank, as in its US domestic market, in the health sector, it announced that the bank planned to "significantly increase" its bankroll. the broad category "health services and technologies" in China.
While noting Shanghai's plan to introduce a new science and technology innovation council this year, which could allow international investors to participate and present a more market-oriented and less tedious registration control process, he said that the benefits of Hong Kong as an open international market would remain present and viable. his role will not be removed in the near future.
PegBio, based in Shanghai, is a developer of drugs for the treatment of metabolic syndrome, such as diabetes, non-alcoholic fatty liver disease (NAFLD) and obesity, which seeks to go public this year. Hong Kong, Nasdaq and the proposed board of directors for Shanghai, said general manager Michael Xu Min.
Having raised about $ 60 million in private capital since its inception a decade ago, it aims to develop and market three to five products within five years.
According to a study from the Peking University and the Chinese Center for Disease Control and Prevention, about 10.9% of the Chinese adult population would be diabetic in 2013 and 35.7% pre-diabetic, with high blood sugar. and likely to become diabetic. 170,000 participants published in 2017.
About half of patients with non-alcoholic steatohepatitis (NASH) – a type of non-alcoholic fatty liver – are also diabetic, said Xu.
PegBio aims to successfully complete a Phase 2 clinical trial in the treatment of type 2 diabetes in 450 patients in China and the United States by the end of the year and market it. Here 2022.
"The rise in the standard of living and the change in eating habits have resulted in a significant increase in the incidence of metabolic diseases," he said. "Until now, there is no cure and the drugs can only help control the symptoms and slow down their development."
"We aim to develop drugs that are more effective than current drugs in terms of efficiency, safety, ease of use and affordability."
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