Is China ready for a pharmaceutical gold rush?

China has long been a leader in pharmaceutical manufacturing and export. But with the news that the country has approved its first immuno- oncology (I-O) treatment comes the hope that the world’s second biggest market is now opening up to the West.

Bristol-Myers Squibb’s (BMS)’s Opdivo (nivolumab) was approved for the treatment of non-small cell lung cancer (NSCLC) in June. The programmed cell death 1 (PD-1) immune checkpoint inhibitor works by restoring the immune system’s ability to fight cancer tumours. This is a good example of cutting-edge treatment that is badly needed in China, which has a rapidly ageing population and extremely high levels of tobacco consumption. In 2015 there were nearly 4.3 million new cancer patients, including 730,000 cases of lung cancer, accounting for 36% of the world’s total.

Professor Yi-Long Wu, a tenured director of Guangdong General Hospital and chair of the Chinese Thoracic Oncology Group, recently said that lung cancer is a major public health issue in China, representing the highest incidence and mortality rates among all cancers in the country. With most lung cancer patients already at an advanced stage when diagnosed, prolonging survival is an important goal. As such, Wu believes the approval of Opdivo is a significant therapeutic advance and great news for patients and clinicians alike.

Open market reforms

The newly formed China Drug Administration has replaced the China Federal Drug Agency and instated a new priority pathway.

This promises to reduce the time it takes to approve a drug from five years to just six months. This is also good news for the pharmaceutical industry, as it shows that the reforms undertaken since 2015 to open the Chinese market to the rest of the world may well be working.

What’s more, requirements to carry out local clinical trials before being granted access to the Chinese market have relaxed. These changes are all part of the country’s pledge to reform its healthcare system and are contributing to the rapid growth of its pharmaceutical sector.

Rapidly growing sector

The US alone holds over 45% of the global pharmaceutical market. In 2016, this share was valued at around $446bn. The Chinese market is second only to that of the United States and is the fastest growing in the world. It was worth $123.7bn in 2016, yet that figure is expected to be $573.5bn by 2022.

Many of the western pharma companies that have succeeded in this new world to date have done so, in part, by cutting prices to gain market share. 2016 saw GlaxoSmithKline (GSK) slash the price of its hepatitis drug Viread by two-thirds, and AstraZeneca halved the price of cancer drug Iressa, leading to a 16% decline in sales. Indeed, BMS will pitch Opdivo at half the US list price, determining the true value of market access.

I-O therapies have the potential to revolutionise cancer treatment and, as of the end of last year, more than 2,000 were in development. But cutting-edge, innovative treatments come with price tags to match – and experts say that is something China’s new universal healthcare system isn’t set up for.

Testing reimbursement

The list price of Opdivo is currently $150,000 per year in the United States, but estimates place the Chinese list price at around $84,000 per year. The country’s single-payer system hasn’t been tested at this price level, making reimbursement uncertain. However, recently announced provincial reimbursement drug lists (PRDLs) will provide possible new opportunities for US pharmaceutical companies seeking to expand market reach for their drugs in China.

China’s millions of tobacco smokers make for a large market, which may be why BMS filed for approval in lung cancer treatment, rather than melanoma, the leading indication in other markets and geographies. According to Chinese Government figures, there are about 781,000 new lung cancer diagnoses in the country every year. That compares to 234,000 in the US, based on the American Cancer Society’s estimate for 2018.

Competition time

At the same time, Merck’s PD-1 agent, Keytruda, is hot on Opdivo’s heels. In light of recent clinical data, Keytruda is widely regarded as the better of the two checkpoint inhibitors in lung cancer.

Earlier this year, data showed Keytruda combined with chemotherapy could cut the risk of death among previously untreated lung cancer patients by 51%. For patients with previously chemo-treated advanced non-small cell lung cancer, Opdivo reduced the risk of death in those patients by 32% compared to chemo.

On top of that, several local firms including Junshi Biosciences, Innovent Biologics and Hengrui Medicine, are developing their own PD-1 I-O treatments that are expected to hit the market soon. All this will influence the price of Opdivo and Keytruda which, in turn, will offer a window into the future of the Chinese market.

A lack of clear patent rules and regulatory transparency, as well as large-scale drug counterfeiting, gave rise to the perception that China’s market was difficult to navigate. As such, Opdivo’s failure or success will determine if policies aimed at tearing down market barriers and promoting hefty investment in healthcare and biotechnology have been worthwhile.

Public trading barometer

Another potential barometer of China’s free market access will be how the sector fares on the Hong Kong Stock exchange. Hong Kong is an attractive spot for Chinese biotech listings as firms from here and the wider region could benefit from the exchange’s relaxed listing rules. At least 16 biotechnology start-ups have applied for initial public offerings since a rule change in April allowed them to join the exchange, while their access is restricted on Chinese exchanges.

Since trading kicked off this summer, the stock performance of some biotech start-ups has investors worried. The first company to list, Ascletis Pharma Inc, was valued at $2bn when its IPO closed on 1 August. In less than three weeks, its share price plunged from HK$14.00 to HK$7.28; by the end of October, it had decreased even further to HK$6.11. While some might have seen Ascletis’ fate as a market correction to the biotech stock hype, further IPOs don’t seem to be falling into line. Innovent Biologics Inc raised HK$3.3bn ($421m) at a valuation of $2bn when its shares closed at the upper end of its pricing range on 24 October 2018.

High-ranking bankers and analysts have already been leaving their current roles to take up positions in this new breed of business. However, while some industry insiders have described it as a ‘gold rush’ akin to the 1990s internet boom, others have remained somewhat sceptical. At this early stage of recruitment, it’s hard to say either way.

All in all, the jury is still out on whether China’s pharmaceutical sector is a viable place for the West to do business. The sector is in its infancy and the government has committed to investing in innovation. All this offers a wealth of opportunities, but how they will pan out is still unknown. All we can do is wait for the market to take off.

Article by
Evelyn Warner

Evelyn Warner is a Senior Associate, Valuation Services at Duff & Phelps

17th December 2018