Chinese innovative drug companies have both
R&D advantages and overseas prospects.
Innovative drugs are defined as products that have not been marketed at home or abroad, contain new compounds with clear structures, pharmacological effects, and have clinical value.
There is a significant gap in medical payment capabilities between China and the United States, and there is huge space in the overseas market. In 2021, the total medical expenditure in the United States is 3.9 times that of China, and the per capita medical expenditure is 16.6 times that of China. With the rapid improvement of domestic new drug research and development capabilities, the advantages of drug innovation and R&D efficiency have been recognized globally. Under the impact of volume procurement and medical insurance negotiations, domestic innovative drug companies are forced to find new ways out and development space. Going to sea is imperative.
At the same time, Chinese innovative drug companies also have the ability to go global. A number of Chinese innovative drugs have been approved in more than 50 countries and regions including the United States, China, the European Union, the United Kingdom, Canada, Australia and other international markets. Overseas sales have grown significantly.
China’s innovative drugs have both R&D advantages and overseas prospects, and have greater investment value in the context of domestic pharmaceutical centralized procurement. Under the
18A rules,
, a leading innovative drug company, has many options to list in Hong Kong.
In April 2018, the Hong Kong Stock Exchange’s new listing rule 18A was released. This rule allows unprofitable biotechnology companies to be listed in Hong Kong.. Innovative drug companies have a heavy burden of R&D expenditures, are unable to achieve profitability in a short period of time, and are highly dependent on capital market financing. The 18A rules are of great significance to innovative drug companies.
Affected by this rule, a large number of innovative drug companies that do not meet domestic listing requirements have listed in Hong Kong. According to Shenwan Securities research statistics, the number of unprofitable biotechnology companies listed on the Hong Kong Stock Exchange has exceeded 40, including many leading companies with large market capitalization; benefiting from the Hong Kong Stock Exchange’s 18A new listing regulations, the largest number of Hong Kong-listed pharmaceutical companies The sub-sector is biopharmaceuticals, and the sub-sectors with the highest market value are CDMO, biopharmaceuticals and chemical drugs; in 2021, the number of companies included in the Hong Kong stock trading and Hong Kong Stock Connect will reach 71, accounting for 42% of the total number of companies in the Hong Kong stock pharmaceutical sector. The number of listed biotechnology companies and companies with a market value of 100 billion in Hong Kong is growing rapidly.
The domestic innovative drug industry mainly includes three types of enterprises: biotech (biotechnology companies), biopharma (biopharmaceutical companies), and big pharma (big pharmaceutical companies). Because the historical listing conditions for A shares are too strict, most of the innovative drug companies listed in China are traditional large pharmaceutical companies that have transformed into innovative drugs, while most of the Hong Kong stocks are biotechnology or biopharmaceutical companies that are directly listed, so the performance elasticity of related companies is higher. Although some of these companies are not yet profitable, once new drugs are successfully developed, the returns will be huge.
Chart: The number of listed pharmaceutical companies in Hong Kong since 2000
Source: Wind, Shenwan Hongyuan Research, as of the end of 2021
Hong Kong stocks have experienced a sharp correction in innovative drugs
What should we do with the market outlook?
The CSI Hong Kong Innovative Drug Index (index abbreviation: Hong Kong Innovative Drug, Index Code: 931787) is an index that reflects the overall performance of Hong Kong innovative drug companies. The index selects no more than 50 companies in the Hong Kong market whose main business involves innovative drugs. Securities of listed companies developed as index samples.
According to wind data, in the Hong Kong Stock Innovative Drug Index, industries such as biological products, chemicals, and medical services contribute the majority of the weight. The top ten samples in the index are WuXi Biologics, CSPC Pharmaceutical Group, BeiGene , China Biopharmaceuticals , Innovent Biologics , WuXi AppTec , GenScript Biologics, Zai Lab , Typical innovative drug companies such as CMS and Hexion Pharmaceuticals have outstanding leadership concentration characteristics.
Figure: Industry weight distribution of Hong Kong Stock Innovative Drug Index
Data source: Wind, 2021.8.24
Table: Top ten sample stocks of Hong Kong Stock Innovative Drug Index
Data source: CSI, Wind , as of 2022.7.31
In the context of the Federal Reserve's interest rate hikes, emerging growth industries have fallen significantly. Coupled with the overall correction of the pharmaceutical industry and the drag of the overall environment of the Hong Kong stock market, the Hong Kong stock innovative drug index has fallen more since 2021, and the retracement range from the high has exceeded 55%, a retracement far exceeding that of other pharmaceutical indices.
Table: Pharmaceutical index retracement since 2021
Source: Wind, as of 2022.8.24
Looking to the future, we believe that the Hong Kong stock innovative drug sector may usher in several major benefits, and the long-term investment value is worthy of attention. First , domestic medical reform policies continue to be implemented, the scope of bulk procurement of drugs and high-value consumables continues to expand, innovative research and development capabilities have become the core driving force of enterprises, benefiting innovative pharmaceutical companies with high competition barriers; followed by , with BeiGene A large number of innovative drug companies listed in Hong Kong, represented by the Chinese government, are actively promoting overseas strategies, and many new drugs have been approved in many places, and may be Significantly improve the performance of related companies; and finally , historically, the Hong Kong stock innovative drug sector has been significantly affected by the US liquidity policy, and has the characteristics of rising and falling at the same time as the S&P biotechnology index. With the US inflation problem Ease, the Fed's interest rate hike expectations have weakened, and the S&P Biotechnology Index has stopped falling and rebounded, which may provide emotional catalysts for the valuation restoration of Hong Kong's innovative drug companies.
Picture: Hong Kong innovative drug companies and S&P Biotechnology
Source: Wind, as of 2022.8.24
Risk warning: The above content is for reference only and does not constitute any investment advice or guarantee by the company, nor does it serve as any legal document. The opinions and predictions only represent the analysis and judgment made based on the market at that time when the materials were produced. As market conditions and other factors change, the above judgments may change. Please do not quote or reproduce without permission. Funds have risks, so investment needs to be done with caution.
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