Biotechnology in China is becoming a really big deal. The world's largest country is aggressively funding grants, building out life sciences facilities, and luring Western research leaders in order to make biotech 4% of its GDP by 2020. At the foundation of this biotech revolution is China's State Drug Administration (their version of the FDA), which recently overhauled its regulatory process to make it faster and easier for new drugs to get approved. The SDA now accepts clinical trial data from other countries and allows drugs to be licensed from others, and they claim to have increased new product approvals by sixfold over previous years.
But will China's recent biotech obsession prove to be an opportunity or a threat for investors? In the following video, Industry Focus: Healthcare host Shannon Jones and guest Simon Erickson discuss China's biotech revolution and the impact it will have on the rest of the world.
A full transcript follows the video.
This video was recorded on Dec. 13, 2018.
Shannon Jones: Something that's been on the minds of a lot of biotech investors, but it's one of the hottest areas of investment right now, and that is the Chinese biotech market. Simon, I'm excited to dig into this today with you. But let's set the stage. If you're like me, I look at the Chinese market in some ways like the emerging biotech market in the U.S. in the early 90s. It was rife with problems. It really wasn't efficient, and you can see how far we've come since then. What are your thoughts on what makes China such an attractive investment right now?
Simon Erickson: It's definitely the perfect storm right now for investors that are interested in this because there's a bunch of things that, the confluence of them all together are setting the scene for this to be a really big market. What I mean by that is, you've got the funding, you've got the policy, and you've got the people in place for biotechnology in China.
Regarding funding, five years ago, venture capitalists were putting about $1 billion a year into biotech in China. That's now $12 billion a year, so a 12-fold increase in venture capital funding from the private programs that we've seen. But the government, too, is pushing this as such a priority. They consider it a really big deal over there. The government's putting $1.5 billion into 20 different research parks around the country. They're really encouraging this. They're also encouraging, as part of their 13th Five-Year Plan, for biotechnology to account for 4% of GDP. That's off a huge base, and about double the percentage that America spends on biotech here at home.
You have that academic research, you have the government policy in place, it's also got the opportunity for the exits through biotech-listed companies on the stock exchanges there in Hong Kong and also here on the NASDAQ in the U.S. You've got the funding, you've got the policy.
Even more than that, the thing that I think I'm most excited about is the people aspect of this. China has always lagged the rest of the world because the most talented scientists were working with westernized pharmaceutical companies -- the Sanofis, the Roches, the Mercks of the world. But China, through their Thousand Talents Program, has been giving incredible incentives to lure those scientists that have clinical trial experience back to the country to work with Chinese-based companies to start progressing their own biotech industry within the country's sovereign walls.
It's really an interesting time. And for investors, there's a lot of opportunity in this industry, as well.
Jones: Diving more into the healthcare side, there's a huge market opportunity in China from a healthcare perspective. China has about 20% of the world's population. It has about 30% of the world's cancer patients, and the world's second largest pharmaceutical market. Right now, only four of 42 cancer drugs that have been approved globally in the past five years are actually available in China. That's astounding to me. The growth opportunity here is tremendous. You mentioned all the funding and all the money right now that's being poured into China.
What you've seen happen a lot is, a lot of these Chinese investors have been investing in U.S.-based biotech companies at an increasingly faster rate. On the U.S. side, now, Chinese and other Asian investors make up nearly half of all the deal flow into U.S. biotech companies, compared to just 11% in 2016. That was the 2017 stat. It'll be interesting to see what that looks like for 2018. I suspect it'll be even higher. But what a lot of these Chinese investors are doing is, they're pouring money into these U.S. biotechs, they're basically looking to generate returns to return back to China to really build up this Chinese biopharma hub, but at the same time, they're wanting to bring back the technology, as well. You see this sharing across the seas here.
Also, China has a rapidly aging population. You've got an emerging middle and upper class, so you've got some affluence. And the government is actually aiming to ensure all citizens have access to basic healthcare services by 2020. It's really no wonder why, not only is China an interesting investment opportunity, but even more so, healthcare in China specifically.
Erickson: Yeah. Every one of those statistics is a case in point. Let's look at lung cancer. China's got about 36% of the diagnoses of lung cancer in the world. But when you look at the five-year survivorship rates, in China, they're 17% lower than the global average. Forget about westernized economies, this is a country that's got big pollution problems, they've got higher smoking rates, they have regional issues that need to be addressed. And they're behind the rest of the world. They've got a lot of people and a lot of money, but historically, they've lagged more developed nations in healthcare. I think that's rapidly changing right now.
Jones: I totally agree. With that, let's turn the tables a little bit, Simon. Let's talk about, what are the risks involved with investing in China? What are some of the downsides? What are the things that make you pause when you're looking at Chinese biotech investments?
Erickson: The first, of course, for any Chinese company, is the corporate structure of these companies. You can't just go out and buy a Chinese direct equity ownership. You have to buy things called American depository shares, or American depository receipts. Those are sponsored by banks here in America that work with the brokerages to secure shares, but they're structured in a way that there's an inherent risk always that, if China's government just wants to say, "Hey, Shannon, we're pulling the plug. You no longer own any equity in this company," there's nothing to prevent them from doing that. These are variable interest entities. These are complex corporate structures that really don't give us the same say in corporate governance as we've gotten used to through proxy statements here in the United States. So, there's always a risk for Western investors of that long-tail losing a stake or having regulations discouraging Western investors.
Then, also, something that you and I have talked about in biotech, Shannon, especially in China, is regulations. This is a country that's overhauled their equivalent of the FDA in recent years. In the last two or three years, we've basically seen them overhaul the way that they reviewed new drugs that were coming to market. And there's a lot of uncertainty of how rigid that really is, and whether they're progressing the best drugs through trials through what some people would consider to be much more laxed regulations than in western countries.
Jones: Yeah, definitely. I think that's probably the No. 1 red flag when it comes to Chinese biotech, the uncertainty surrounding regulations. What I will say is, China is certainly trying to take steps to fix that. They are trying to take their version of the FDA, the CFDA, and modernize that entire agency so that it is up to international standards. That's certainly a work in progress. You also have a huge backlog of applications. Many of these Chinese biotech companies have been sitting, waiting for a response on approval or not, for years in some cases. Now, you see the government really starting to invest in staffing to help with the backlog. So, I will give them credit and say that they are making strides. But that's still a huge, huge, area of uncertainty. You want to know that when you're investing in the company, there's transparency, there's accountability, and you understand and can trust the data that comes out of these trials. That's still, I think, one of the biggest holes in the investment thesis for a lot of companies right now in China. Something to watch.
I think the regulatory framework is another one, in addition to, you always hear stories about Chinese insider trading, questionable financial statements. There's a lot to be desired, even on the financials side of things. Even on the IP side, their intellectual property protections aren't nearly as strong as they are here in the U.S. And, you have to build out a good insurance network to be able to cover a lot of these drugs, especially expensive immuno-oncology drugs. So, still a lot left to be desired there.
Erickson: Yeah, I absolutely agree.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.