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.2.2. The regulations are in line with international standards, and the review methods are flexible but the standards are improved.
National policies play a decisive role in my country's innovative drug research and development, including macroeconomic and industrial policies, science and technology policies, registration and supervision policies, medical insurance payment policies, fiscal and taxation and financial policies, and procurement policies. Among them, the review policies are the key factors affecting the speed of drug market. Since relevant departments solved the backlog of drug review, the country has issued a series of innovative policies to accelerate drug review and approval, such as MAH, drug packaging materials and drug related review and approval, drug R&D and technical review communication meeting, priority review, joining international ICH, and accelerating the establishment of eCTD System, etc.
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.2.3. The entry of foreign-invested varieties is accelerating, and domestic product varieties are facing head-to-head competition
Since 2018, the country has been continuously sending out signals of two major problems: lagging domestic new drugs on the market and high generic drug prices. The first step is to accelerate the launch of innovative drugs on the one hand, and accelerate the price reduction of generic drugs on the other hand, and solve the problem of accessibility of new drugs is entering a new climax in China. The country will give priority to supporting domestic pharmaceutical companies in the research and development of anti-cancer drugs in clinical urgent need, and encourage new targets and new mechanisms of anti-cancer drugs research and original innovation; on the other hand, in order to meet patients' demand for imported drugs, zero tariffs are imposed on imported anti-cancer drugs, and speed up the review and approval of imported innovative drugs, Encourage the market of imported innovative drugs.
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.2.4. The difficulty of some varieties is increasing, and the company's project establishment standards need to be improved. The country has accelerated drug review and approval, and imported innovative drugs are accelerating into the country. Faced with the above new policy environment, domestic enterprises are facing more challenges while ushering in development opportunities. Specifically, it is reflected in some popular targets. The phenomenon of repeated declaration is serious and the product pricing may be lower than the previous expectations of enterprises and investors.
.2. Pricing: The competitive landscape is an important consideration, taking into account the return on investment and the accessibility of patients' medications.
is approved to accelerate and repeat research and development, resulting in fierce competition in some areas
Historically, due to the loose review standards in the domestic generic drug field, less investment in R&D, and irregular clinical drug use, a relatively significant low-level repeated declaration. In recent years, under the guidance of policies, supervision and market, domestic enterprises have been constantly upgrading from generic drugs to innovative drugs. However, due to the rapid change in the policy environment and insufficient R&D capabilities, even in innovative drugs, etc. There is also a certain degree of "high-level duplication construction" in the field.
Take the biosimilar of blockbuster monoclonal antibodies as an example. Previously, due to the rapid increase in volume and high sales of some monoclonal antibodies overseas, the rapid increase in volume and high sales amounts of some monoclonal antibodies attracted the attention of many domestic R&D companies, and the development of biosimilars is more in line with the idea of domestic companies from generic to innovation, resulting in the extremely fierce competition in the research and development of blockbuster biosimilars of bevacizumab, adalimilumab, and rituximilars. For example, as of now, two manufacturers of bevacizumab biosimilars, Qilu Pharmaceuticals and Innovent Biologics are in the NDA market application stage. In the third phase of clinical stage, there are 8 companies including Baiaotai, Dongyao Pharmaceuticals, Fuhong Hanlin, Hengrui Medicine , Hualan Biologics , Jiahe Biologics, Tianguangshi, Zhengda Tianqing, etc., and are in I There are more than 7 R&D companies with the same target in the period and previous stages. Not only in China, Adalimumab has also encountered a similar situation in Europe. After the patent expired on October 31, 2018. As of the end of 2018, eight biosimilars developed by Amgen, Samsung, BI and others have been approved for marketing in Europe. As of the original research and development of , Abbvie (Abbvie), had to lower the drug price in Europe by 80% to further attract patients and prevent competitors from entering further.
Overall, since the competition in the fields of blockbuster monoclonal antibody biosimilars and the competition pattern in the first echelon has been relatively clear, the prices of products of companies that will be successfully listed in the future will also be lower than previous expectations; for companies that are not in the leading position, they may face a dilemma later. If the R&D of existing projects continues to be promoted, the construction of Phase III clinical and production facilities will bring about a sharp increase in R&D costs (especially for companies with poor financing capabilities). If R&D is stopped, they will face certain sunk costs. Therefore, under this situation, higher requirements are put forward for the company's R&D project establishment, and subsequent development of differentiated innovative drugs for different targets may not be a better choice.
Competition + medical insurance leads to the pricing of some varieties below expectations. Manufacturers need to consider multiple factors
Generally speaking, drug price pricing needs to cover the following aspects: R&D expenses, production costs, circulation expenses, national taxes and corporate profits. In addition, as a special commodity, the pricing of innovative drugs will also be affected by the clinical value of the drug itself, national policy factors (medical insurance), market competition and patient payment ability.
As an innovative drug similar to PD-1 monoclonal antibody, from the pricing theory, the pricing strategies of pharmaceutical companies are generally divided into the following types:
) Skimming pricing : that is, the high-price strategy. When new drugs are launched, they should adopt the method of setting the price as high as possible to obtain high profits in the short term, and then reduce prices in stages according to changes in the product's life cycle. Using this pricing rule generally requires meeting the requirements of their patients, such as sufficient rigidity and few other competitors. The advantages of this strategy are, first, conducive to rapid investment recovery and reduce risks, second, setting high prices are conducive to subsequent price reduction and grasping the initiative, and third, creating opportunities for the expansion of enterprise production capacity and market development. It is a more common strategy in areas such as Europe and the United States where patients have strong payment capabilities.
) Penetration pricing: refers to setting the price at a relatively low level at the beginning of the launch of the new drug (for price to volume). Generally speaking, it is necessary to meet the conditions that patients are sensitive to price and have a large enough patient base and low prices to expel competitors. Its advantages are firstly that it facilitates consumers to accept new products quickly, with a short market introduction period, and secondly, sales volume increases and market share expands, thereby reducing costs. But the initial profit margin is lower than the price of skimming. Some biosimilars and general generic drugs are more suitable for adopting this strategy.
) Intermediate pricing strategy: is a strategy between skimming pricing strategy and penetration pricing strategy. It comprehensively considers market demand and market competition, and formulates a pricing strategy that can obtain a certain profit margin. In terms of price
, in areas with fierce competition such as biosimilars, listed manufacturers may face price reductions from original manufacturers + price wars between other R&D companies, resulting in pricing often lower than previous expectations. But on the other hand, the lower pricing has greatly improved the accessibility of patients' medication, which is of great help to promote product volume. Therefore, manufacturers often need to consider all factors in a comprehensive way when pricing.
Because the high pricing factors of innovative drugs often restrict patients' penetration rate at the beginning of the launch of the market, once included in medical insurance, the price drop often leads to a significant increase in penetration rate. However, when facing a single buyer, the company often needs to make major concessions in price. Since 2016, the country has included nearly 20 innovative drug products in medical insurance after negotiating price cuts. Judging from the actual results, most negotiated products have significantly improved after being included in medical insurance, and some products have even experienced production capacity problems. Therefore, when setting prices for innovative drug market spending, it is often necessary to leave enough room for subsequent medical insurance negotiations. It is worth noting that since the drug-gift policy is often cancelled after negotiations, the actual price drop is often significantly reduced compared to the announced negotiation drop.
Overall, since domestic pharmaceutical companies are still lower in R&D costs, clinical trial costs and production costs at present than those in developed regions in Europe and the United States, we expect that in terms of pricing strategies, domestic innovative drug pricing will still refer to the domestic prices of similar foreign patented drugs, and will make different degrees of discounts based on production R&D costs and the huge domestic patient base, etc., and at the same time, it will also leave enough room for subsequent medical insurance negotiations. With the influence of factors such as the increase in similar competition products, the expiration of foreign drug patents, and medical insurance negotiations, it is not ruled out that the subsequent price of domestic innovative drugs will be adjusted significantly in order to expand patient penetration and improve drug accessibility. It is worth noting that due to the high gross profit margin of its innovative drugs and the subsequent increase in scale effects (production/sales, etc.) brought by the increase in product volume, within a certain range, price reduction is still expected to increase product revenue and net profit level.
.3. Market access and sales: The speed of volume increases is accelerated, and products must adapt to new medical insurance and drug use policies.
Medical insurance negotiations accelerate the increase in innovative drugs
0 Previously, it is often difficult to achieve the speed of volume increase after innovative drugs were approved in China, because my country has too long cycles in drug bidding, hospital procurement, medical insurance access and other links. During this period, pharmaceutical companies could only do bidding and medical insurance access based on hospitals and provinces, greatly suppressing the speed of increasing volume of innovative drugs. After the establishment of the Medical Insurance Bureau, the medical insurance negotiation varieties will be directly purchased online in various provinces, breaking through the previous restrictions on the long access period of medical insurance, and the entry of innovative drugs into medical insurance cycles has been greatly shortened. In turn, enterprises are willing to accept a larger drop in drug prices in exchange for a larger market, which improves the accessibility of drugs, reduces the burden on patients, and greatly accelerates the increase in innovative drugs. According to the data of the sample hospital, Xi'an Janssen's abiraterone, GSK's paroxetine, Kangyuan Pharmaceutical's ginkgo diterpene lactone gluamine injection, and Xinlitai's alisartan ester were all included in the national medical insurance in July 2017. From the first quarter of 2017 to the third quarter of 2018, the sales of these four products achieved a huge increase of dozens of times, and paroxetine was even more obvious, achieving a growth of more than 100 times, which greatly reflects that inclusion in medical insurance can help promote innovative drugs to accelerate the growth of volume. Because before medical insurance was included, the prices of these drugs were relatively high and the market penetration rate was low. After entering medical insurance, the clinical use rate of these drugs was rapidly increased.
Drug normative and compliance requirements have been gradually improved, and innovative drug sales have become a "dance with shackles"
On December 12, 2018, the National Health Commission issued the "Notice on Doing a Good Job in the Management of Clinical Application of Auxiliary Drugs", requiring strengthening the management of auxiliary drug use, making clear provisions on improving the level of reasonable drug use, and emphasizing that the national version of the auxiliary drug catalog will be formulated and published. The notice also clearly requires that medical institutions at or above the province at the second level need to place the auxiliary medicines of the institution in the common name and sort from more to less than 20 varieties according to the annual use amount, forming an auxiliary medicine catalog and submitting it to the provincial health administrative department. After the provincial health administrative departments summarized it, the information of the top 20 varieties will be reported to the National Health Commission by the common name and sorted from more to less according to the total amount used. The National Health Commission will formulate a national catalog of auxiliary medicines and publish it.
At the same time, the notice also stipulates that the proportion of auxiliary drug revenue is also listed as the assessment content of third-level public hospitals, which will further restrict the use of auxiliary drugs and improve the standardization of the use of drugs. Judging from the notice, the supervision of auxiliary drugs has formed a series of major actions from the state to the local government. In addition, the national and local medical insurance cost control efforts are becoming increasingly greater, and the supervision of auxiliary drugs will only become increasingly strict. Restricting auxiliary drugs does not affect normal clinical needs, and some auxiliary drugs that have no obvious treatment effect will definitely be gradually eliminated by hospitals. A large number of varieties that consume medical insurance amounts will also gradually withdraw from the medical market, thereby improving the standardization of drug use and achieving the purpose of national medical insurance cost control.
Anti-tumor drugs are standardized to improve
After the large-scale entry of new tumor drugs into the medical insurance and basic drug catalog, the National Health Commission issued the "Guiding Principles for the Clinical Application of New Anti-tumor Drugs (2018 Edition)" at the end of September 2018, involving 33 anti-tumor drugs, including 26 small-molecule drugs and 7 biological products (including 6 monoclonal antibodies). In the future, as more new and high-quality anti-tumor drugs are accelerated, the guiding principles will be revised and updated regularly. This guiding principle emphasizes the pathological diagnosis, related gene testing and use according to indications, which will greatly standardize the clinical use of anti-cancer drugs, improve the efficiency of medical resource use, and accelerate the increase in the volume of anti-cancer drugs. First of all, drugs with clear targets must follow genetic testing before symptomatic use can be used. The accompanying diagnosis of tumors is determined from ignorant options as a necessary option, which will standardize the hospital's tumor gene detection and also enable the hospital to select drugs more accurately. In addition, the instruments, diagnostic reagents and testing methods used for tumor detection must be approved by the national drug supervision and administration department. These requirements will greatly improve the standardization of the clinical behavior of the hospital. At the same time, the guiding principle stipulates that varieties that are not included in the basic drugs, medical insurance catalogs and national negotiations will be classified as restricted use grades and require physicians with deputy senior or above to prescribe, further improving the standardization of the use of anti-cancer drugs.
DRGS policy affects drug use structure and treatment costs
Recently, the Medical Insurance Bureau issued a notice on the national pilot application for payment by disease diagnosis-related grouping (DRGS), and organized the application for DRGs national pilot. This pilot notice requires that each province can recommend 1-2 cities to participate in the pilot. DRG refers to the use of discharged patients as the basis, taking into account the patient's main diagnosis and treatment methods, and combining individual signs such as age, complications and concomitant diseases, cases with similar complexity and cost are divided into the same (DRG) group, so that there is an objective basis for comparison between medical services of different intensity and complexity. At the same time, determine the packaging price of each group and formulate the medical insurance payment level for all grouping standards, that is, the advance payment system. The Medical Insurance Bureau hopes to use DRGS to further optimize the operation efficiency of medical insurance funds, improve the level of refined medical insurance management, and achieve the effect of cost control. For hospitals, medical insurance is an income item and drugs are a cost item. Since DRGS is a way to package the total cost, in order to reduce costs and increase profits, the hospital has the motivation to optimize the drug use structure and improve drug use standardization, thereby further standardizing the hospital's medical service behavior and improving service efficiency and service quality. In the future, it will continue to affect the prescription behavior and standardized treatment process system of the medical end, and optimize the allocation of the entire medical resource. From the perspective of payment, on the one hand, the coverage of innovative drugs by domestic medical insurance policies has gradually increased, which has significantly improved the speed of increasing volume while improving patients' payment capabilities. On the other hand, since medical insurance will also face the pressure of revenue and expenditure in the future, refined management has also been gradually strengthened, which has put forward higher requirements for the clinical value of the product, the declaration strategy of indications and market promotion. How to maximize sales and profits under the framework of medical insurance and how to expand sales outside medical insurance will become an important issue facing enterprises.
Overall, with the gradual advancement of drug political review and approval policies since 2015, the situation of drug review backlog has been significantly improved, and the pilot of MAH and other systems has also greatly reduced the investment requirements of start-up R&D companies. The number of enterprises' application and the number of innovative drug varieties approved has increased significantly compared with previous ones. We expect that this trend will continue in the future, and innovative drug companies can continue to enjoy the continuous dividends brought by the policy; but on the other hand, as the review standards are improved and gradually in line with the international level, overseas innovative drugs will also accelerate their entry into the country. In the future, domestic innovative drug companies will also face more fierce competition in many aspects such as project establishment, application, research and development, and clinical practice, which will profoundly affect the development path and model of enterprises (see the Industry and Capital section in the following article).
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. Industry: After the volume-based procurement policy, look at the differentiation of the development paths of domestic pharmaceutical companies
.1. Generic pharmaceutical companies: Excess profits are gradually compressed, and the pricing and sales model are facing reshaping for a long time
In December 2018, the pre-winning results of 4+7 drug volume-based procurement that the industry has paid attention to was released. According to the results of the pre-winning procurement, the overall price fell by about 52% compared with the lowest price in 2017, and the drug price level was significantly lower. After discussion by the Deepening Reform Commission, this procurement plan is the "top-level design" for drug procurement by the highest level. The core of its policy includes: 1. Winning bids for a single source of goods; 2. Winning bids for the lowest price; 3. Cooperating with the promotion of consistency evaluation. From the price point of view, the enterprises with the lowest quotation of the same variety will be awarded the pre-selected qualification, and then enter the bargaining negotiation confirmation process. The qualification to be awarded shall be determined based on the number of different enterprises of the same variety (3 or more/no more/2 but not more than 2 but ranked among the top in the decline) or on the basis of the lowest quotation, a certain bargaining reduction (no more than 2 enterprises) will be conducted. Overall, 6 varieties lost their bids because they failed to determine the final price. 92% of the enterprises that intend to win the bid for this volume-based procurement accounted for 92% of the domestic enterprises (only gefitinib and fusinpril were won by foreign-funded enterprises, and the prices were more than 25% lower than those in neighboring countries and regions). The average decline in this volume-based procurement (relative to the lowest price with reference data in the pilot areas in 2017) was about 52%, with the largest decline reaching 96%. The average decline of the number of domestic enterprises participating in the bid was 3 or more varieties with an average decline of 57%, and the number of domestic enterprises participating in the bid was 2 and 1 company participating in the bid was 49% and 29% respectively. Overall, the drug price level of most varieties has been significantly lower than before, which is expected to further save patients' medication burden and medical insurance expenses.
This volume-based procurement has changed the impact of the separation of procurement and decoupling of quantity and price, which has been criticized by drug procurement. Under the background of the volume-price linkage, the prices of pilot varieties are expected to generally be lowered compared with the existing winning bid prices. In essence, it is to choose the lowest price among varieties with guaranteed quality (the varieties that may be evaluated in the future) and give it the largest market share. After volume-based procurement, the medical insurance department ensures the use of volume-based procurement products through medical insurance quotas, regular verification and other methods, thus saving a large amount of sales expenses generated by pharmaceutical companies in order to promote generic drug varieties. Of course, compared with the price drop, the reduction in sales expenses has a lag and will be a long-term process. In addition, the settlement of hospitals by the medical insurance/hospital department from months or even longer to early advance payment will also reduce the company's financial expense ratio.
From the price analysis, although the decline in the terminal price of generic drugs is an inevitable trend under the volume-based procurement policy, the change in the profit side will be much smaller than that of the revenue side, and the main reason is the buffering of sales expenses and financial expenses. Compared with foreign countries, due to its unique national conditions, the sales expense rate of domestic enterprises is significantly higher, which acts as a thicker "safety cushion" to alleviate the impact of price reduction on profits.
From the perspective of overseas generic drug companies' operations, since most generic drugs are priced lower than domestically, the profitability (gross profit margin/net profit margin) of most overseas generic drug companies is lower than that of domestic generic drug companies. The main businesses of overseas generic drug companies are basically divided into two parts. On the one hand, there are a large number of ordinary generic drug varieties. This type of business mainly uses the form of small profits but quick turnover. The sales revenue is often not large, and it faces certain competition and the profit margin is not high. However, the huge number of varieties can increase the bargaining power of enterprises in the face of downstream customers/buyers; on the other hand, the main types are the main varieties with strong profitability (including some difficult-to-imitate varieties and innovative drugs). Often a single variety can reach a scale of over US$100 million or even more than US$1 billion, which is the main source of profits for many generic drug companies (such as epipen under MYLAN and gratili under TEVA).
In the short term, volume-based procurement is beneficial to the import substitution of some varieties, but in the long run, the prices of generic drugs that were previously priced in China will gradually decline, moving closer to mature markets such as the United States and Japan.Volume-based procurement has had a great impact on the original development model of generic drug companies, and will have a significant impact on the company's R&D, production, sales and other links.
From the perspective of variety, the previous project establishment of generic drugs often focused on "big varieties", pursued the first-class generic/guarantee the top three, and emphasized "only fast and not break". Some high-quality typical generic drug companies in China have built three-dimensional moats by building "products (major illnesses), time (the time window brought by CFDA approval and first-class generic and recruitment standards), and sales (mostly self-operated)" to maintain the rapid development of "90% gross profit, 30% net profit, and 30% growth", and have also brought significant excess returns to investors in a specific historical environment. However, under the new volume-based procurement environment, the situation of "only fast but not breaking" in the research and development of generic drugs is changing, the product project standards are gradually changing, the requirements for "sales" and "time" will gradually decrease, but the requirements for enterprise costs and scale will be significantly increased. Costs will determine the profits of enterprises and the market size they can obtain in Chengdu, becoming an important part of the competition among major manufacturers.
Looking ahead, companies that have many subsequent reserve varieties and are capable of passing consistency evaluations, and are willing to exchange prices for the market for lowering prices are expected to become beneficiaries under the new procurement rules. In addition, leading industry companies with certain R&D capabilities and sales channels will still obtain certain absolute returns when their valuations are reasonable. In the long run, only companies that have a certain product pipeline and a research echelon and can continue to invest in R&D can win in fierce market competition, which will also force companies to increase R&D investment for transformation and upgrading.
.2. From generic to innovation: different paths, different paths are the same outcome
Overall, since the domestic pharmaceutical industry's policies in many links from R&D, application to sales are gradually undergoing significant changes, in the past, the business model of enterprises focusing on generic drugs will face increasing pressure, while the innovative drug field will gradually enjoy the dividends from accelerated review to strengthening medical insurance coverage. Therefore, starting from 2015, domestic generic drug companies have gradually increased their investment in R&D expenses, and domestic pharmaceutical companies have entered the "army competition" of the R&D stage. It is worth noting that with the help of the power of the capital market, some typical Biotech-type R&D companies often have the R&D investment ahead of traditional pharmaceutical companies by relying on the power of the capital market. In the future, as Hong Kong stocks and A-shares are more favorable to the listing policies of R&D companies, the listing process of the above-mentioned companies' products under development has also accelerated to a certain extent.
On the other hand, since some traditional pharmaceutical R&D companies do not have the technical level of developing innovative drugs from the source, and developing innovative drugs themselves often faces uncertainty with high investment intensity and high risks. For these companies, it is often more feasible to adopt the model of introduction from the outside or cooperative development. For leading companies in the domestic pharmaceutical industry, since they often have a large revenue volume and cash flow status, and have accumulated certain R&D capabilities through years of accumulation, this type of company often conducts independent R&D research and development in combination with existing advantageous therapeutic areas, and some companies have already had considerable technical level in some fields.
.3. Make good use of the division of labor in the industrial chain to improve R&D efficiency
At present, small and medium-sized biotechnology companies, virtual companies and individual entrepreneurs have become an important driving force for pharmaceutical innovation. According to the FrostSullivan report, in 2017, the number of small pharmaceutical companies worldwide reached 7,454, accounting for 76% of the total number of pharmaceutical companies; while 39% of the number of new drugs approved by the FDA came from small pharmaceutical companies. By 2022, the number of small pharmaceutical companies is expected to reach 13,523, accounting for 80% of the total pharmaceutical companies; 47% of the FDA approved new drugs will come from small pharmaceutical companies.
These small pharmaceutical companies do not have the time or sufficient capital to build the laboratories and production facilities required for R&D projects during their own period, but they need to obtain a number of different services required for R&D projects in a short period of time. Now some integrated R&D outsourcing platforms can meet their R&D service needs from proof of concept to product launch, and improve overall R&D efficiency through drug discovery, preclinical development, clinical research, and commercial production. For example, in 2018, WuXi AppTec helped Gorey Pharmaceutical's new hepatitis C drug, and Hutchison Whampoa's new colorectal cancer drug, Aiyoute®, were successfully approved in China, becoming the first entrusted manufacturer to support approved innovative drugs since the pilot of MAH in China.
.4. The clinical progress competition is fierce, and the importance of patient enrollment +KOL should not be underestimated
Judging from the current application situation of clinical trials, the R&D types of domestic pharmaceutical companies are mostly "Fast-follow" types or "Me-too/Me better" types, which makes some popular fields more repetitive in the clinical stage of R&D. In the case of more similar projects, the R&D progress of different companies is particularly important. How to speed up the enrollment of patients through some key researchers has become an important problem faced by many companies.
According to data from the 2018 China Cancer Clinical Trial Blue Book, the total number of people in China's cancer clinical trials in 2018 reached 49,517, a significant increase from 2016 and 2017, and 3.2 times that of 15,253 in 2017 (the number of people tested here does not represent the number of people participating in the trial in 2018, but only the number of people registered in the trial).
In terms of treatment in specific fields such as tumors, the corresponding domestic medical resources are highly concentrated in front-tier and provincial capital cities, and the aggregation effect of tumor diagnosis and treatment to large cities and leading hospitals is very obvious. Therefore, whether it is clinical trials or sales after marketing, the concentration of regions/hospitals/experts is relatively high.
. With many projects at the same target, promoting/accelerating the enrollment of patient clinical trials requires the company's innovative drug projects to have differentiated advantages. On the other hand, it also requires the support of major academic experts such as key opinion leaders (KOLs) after clinical/marketing, which will help the company's products to enter various diagnostic and treatment guidelines and related academic promotions in the future. Judging from the clinical trial application data in recent years, due to the constraints of research capabilities, domestic clinical trials are still concentrated in a few large hospitals, and the leading experts in clinical trials are also concentrated. If we form close cooperation with the above-mentioned hospitals/experts in the clinical stage, it will also be of great help to the clinical promotion of the company after its listing.
In addition, for some companies that have previously had a strong sales network in related fields such as tumors, the help of their original sales network will also help accelerate the enrollment of patients and the increase in the volume of products after they are launched.
.5. How to successfully commercialize innovative drugs after they are launched has become an important topic facing domestic enterprises
With the continuous launch of domestic innovative drugs in recent years, how to successfully realize the successful commercialization of innovative drugs under the special domestic pharmaceutical environment has also become an important topic facing many R&D companies. Compared with overseas, the domestic pharmaceutical market varies greatly from region to region. The stratification is more obvious, and the patient's ability to pay and doctors' ability to accept innovative drugs is uneven. Compared with generic drugs, domestic innovative drugs may not necessarily obtain the "dividend" of foreign-funded original drug academic promotion. The traditional "cost-performance ratio" strategy with price as the core has gradually become ineffective. Therefore, from successful listing to successful commercialization, domestic R&D companies still face certain uncertainties, and need to balance short-term and long-term interests.
draws on the historical experience of overseas small and medium-sized new drug research and development companies. When the first innovative drug product is on the market, most companies have no previous product sales experience and no other source of income. The company may not be able to bear the costs of early academic promotion of the product, and the sales of the first product may be related to the life and death of the company, so every company will choose carefully.When its scale is small or the product is relatively single, choosing Bigpharma with strong sales capabilities to cooperate is a relatively conservative way of being in line with short-term interests. For example, Hutchison Whampoa cooperates with Eli Lilly to promote furquititinib, Cinda and Eli Lilly to cooperate with their channels and influence for commercial promotion.
However, with the increase in the number of innovative drugs on the market and the expansion of the scale, almost all companies will establish internal teams to be responsible for the academic promotion of products. Given that the early management of R&D companies is mostly from scientific research backgrounds, how to build their business and sales teams and how to incentivize them has become an important factor that management needs to consider. Judging from the few cases at present, foreign companies' sales experience + professional background + high education + expert resources at all levels + ability to conduct academic communication and promotion has become a favored background for domestic innovative pharmaceutical companies, and the methods of attracting are mostly high salaries + options poaching (taking Roche, who is good at oncology drug sales as an example, in the context of many new domestic anti-tumor drugs being launched one after another, its commercial team was robbed by domestic pharmaceutical companies).
However, how to maintain the stability and efficiency of the business team under the different cultural backgrounds and incentives of Chinese and foreign pharmaceutical companies has also become an urgent problem to be solved after the team is formed. Different basic salary/incentive strengths and different academic/market support strengths will test the adaptability and execution ability of the new team. In addition, compared with foreign-funded original drugs, domestic innovative drugs are still insufficient in clinical recognition in addition to their prices. How to find the differences in academic promotion from experimental data has also become a problem that innovative pharmaceutical companies need to closely cooperate from R&D to sales.
.6. In the future, China's innovative bigpharma needs to have more international project operation capabilities.
For a long time, due to differences in social environment, medical environment and R&D levels, domestic enterprises have always been at a low level in the field of drug R&D, and lag behind in the fields of devices and other fields. But in recent years, domestic enterprises have made great progress in terms of "bringing in" or "going out". In the field of generic drugs, companies such as Huahai and Puli have long achieved large-scale sales in standardized markets such as Europe and the United States.
Innovative drug field, some domestic pharmaceutical companies have long upgraded from simple variety introduction to patent/product authorization, and the cooperation method has also gradually transitioned from R&D to sales and other fields. As early as 2013, BeiGene licensed the global market development and sales rights of its small molecule drugs under development to Merck , with a price of up to US$233 million. In July 2017, BeiGene reached a product authorization cooperation with the United States Xinji, which once again set a new record for the transfer of single-variety equity of domestic pharmaceutical companies. Although the subsequent cooperation with Xinji was acquired was uncertain, it still shows the recognition of the multinational pharmaceutical giants for the company's products and R&D capabilities. After entering 2015, overseas authorization of local enterprise varieties has become more and more frequent. In addition to BeiGene , Xinda Bio also transferred three monoclonal antibody drugs to Eli Lilly, and Zhengda Tianqing transferred the international development license of anti-hepatitis B virus drugs outside mainland China to Johnson & Johnson. In addition, clinical trials such as Hengrui, Hutchison Whampoa, and Zaida have continued to be promoted overseas.
For domestic pure R&D companies, cooperation with foreign companies can achieve rapid growth in volume by using the other party's promotion experience in corresponding domestic fields. In addition, for the internationalization of innovative drugs, domestic companies lack certain experience in independently promoting overseas clinical and sales, so overseas authorization or cooperation can help accelerate the progress of product clinical trials and marketing, and reduce the risk of uncertainty in the R&D process.
Overall, compared with the limited payment ability of domestic patients to restrict the increase in innovative drugs, developed regions such as Europe and the United States have a higher acceptance of highly priced innovative drugs, especially for some rare disease drugs and other varieties, the overseas market size is much higher than that of domestic ones.Therefore, for some domestic products that are under development that have the potential of first-in-class or best-in-class, the overseas launch of products through cooperation will greatly increase the sales and profits of the products after they are launched.
On the other hand, as more and more overseas talents have returned to China to start businesses or join domestic pharmaceutical companies in recent years, their familiarity with the research and development of new drugs and their understanding of overseas markets will also help domestic companies further accelerate the internationalization process and become more attractive to investors in the financing process.
Overall, the reform of the drug political review and approval system and the volume-based procurement model have had a profound impact on the development model of domestic pharmaceutical companies. Under the impact of volume-based procurement, the original "high pricing, high expenses, and high gross profit" sales model of generic drug companies has gradually changed, which in turn affects the original valuation center of generic drug companies. For most pharmaceutical companies, expanding new incremental varieties, including innovative drugs, has become an inevitable choice for companies to face policy impacts. With the help of the policy dividends of domestic drug review and approval in recent years and the help of the capital market (see the investment section below for details), the R&D types of domestic companies have gone from simple imitation/improvement (Me-too/Me-better) to fast follow-up (Fast-follow) and even gradually pursued First-in-class. How to sell and promote innovative drug products after they are launched has also become an important issue facing enterprises. With the improvement of innovation and clinical efficacy, it is expected that more domestic innovative drug companies will gradually gain international recognition in the future, accelerating their own internationalization process.
. Investment: From the listing of pharmaceutical unicorns in Hong Kong to the Science and Technology Innovation Board, capital investment in new drugs is still enthusiastic about research and development
Capital helps pharmaceutical companies to innovate R&D, and R&D results feed back to investors with high returns. In the field of biomedicine, take the sub-field of medicines with a large market share and currently widely carried out scientific and technological innovation as an example. The research and development of new drugs requires drug discovery, preclinical research, phase I, phase II, and phase III trials, and can only be put on the market after approval by regulatory authorities. The entire process is huge and takes several years. The failure rate of each step is also very high. According to third-party data, it takes more than 10 years from early drug discovery to commercialization, and the R&D cost exceeds US$1 billion, and the success rate from discovery to final approval is extremely low, even below 0.01%. Therefore, new drug research and development requires capital market assistance and blood transfusion.
However, early capital investment and risks are also equivalent to the high returns after the product is successfully listed, which is not uncommon in overseas capital markets. Positioned as a technology-oriented and innovative enterprise serving high growth potential, Nasdaq has repeatedly verified "capital-driven R&D, R&D creates value." Among the many high-tech enterprises, Biotech is undoubtedly the leader. Since 2000, the Nasdaq Biotech Index (NBI.GI) has almost steadily outperformed the Nasdaq Index (IXIC.GI). As of December 30, 2018, it was still 131 percentage points ahead after two large pullbacks.
specifically refers to individual stocks, taking Genentech, a major innovative biopharmaceutical company that has developed Melohua, Herceptin, and AVITIN as an example. In 1978, the company's third venture capital financing increased from US$400,000 to US$11 million; when it was listed on Nasdaq in 1980, its total revenue was only US$9 million, after-tax profit was US$300,000, and its total assets were US$5 million, but its market value reached US$35 million on the first day; in 1988, the company's total revenue reached US$340 million, total assets reached US$670 million, and its larger and more influential New York Stock Exchange, the company's market value increased from US$3.5 billion in 1990 to US$50 billion in 2004, and finally exceeded US$100 billion in 2008, surpassing the veteran pharmaceutical giants Pfizer and Merck; in 2009 3 In the month, the company's major shareholder Roche finally acquired Genentech for US$86.50 per share, with a total cost of US$43.7 billion, ending its stock price myth. Undoubtedly, Genentech's gradual rise in market value is closely related to the continuous maturity and harvest of its R&D pipeline.
From the Nasdaq to the Hong Kong stock biotech sector, and then to the current A-share Science and Technology Innovation Board, the concept of "capital-driven R&D" is consistent.The open and inclusive financing platform solves the capital flow problem for these biopharmaceutical companies with excellent quality, technological innovation attributes and strong R&D capabilities, and also increases the company's exposure to the market, indirectly promoting cooperation with large pharmaceutical companies. The best proof is that BeiGene is listed on the Nasdaq and Hong Kong Stock Exchange. In February 2016, BeiGene sold a total of 6.6 million American depositary shares (ADRs) on the Nasdaq IPO (stock code: BGNE.O), raising a total of approximately US$182 million. In the following three years, it completed subsequent public offerings of US$212 million, US$190 million and US$800 million respectively. In August 2018, the company was listed on the Hong Kong Stock Exchange (stock code: 6160.HK), and issued 65.6 million ordinary shares in Hong Kong and global issuance, raising a total of approximately US$903 million. BeiGene US stocks reached an all-time high of US$216.77 on June 8, 2018, up 665%. The rise in stock prices reflects the company's value and product line under development have been widely recognized by overseas investors. It not only directly enhances the company's international reputation and allows overseas investors to see the innovative R&D capabilities of Chinese pharmaceutical companies; it also indirectly promotes the company's cooperation with multinational pharmaceutical companies Merck and Xinji, etc., attracts commercial talents and scientific research talents with rich industry experience to join the company, and lays the preliminary preparation for the company's extensive global clinical trials. This has embarked on the "born innovation" path different from traditional Chinese large pharmaceutical companies "from imitation to innovation transformation". Such companies often have excellent R&D capabilities, with 1-2 core heavyweight "first-in-class" or "best-in-class" products coming soon. In the future, as the product pipeline matures one after another, they are expected to obtain good returns, and then continue to promote R&D to form a benign closed loop.
.1. Capital helps the R&D arms race, and innovative pharmaceutical companies gradually differentiate
R&D investment is an important driving force supporting the long-term prosperity of pharmaceutical companies. In the European and American regulatory markets, the "patent cliff" phenomenon is obvious. If large pharmaceutical companies want to maintain their long-term performance, relying solely on successful products in the past is far from enough. Innovative and product iteration are the driving force that drives the company's performance to continue to rise, and the launch of new products must rely on the investment of large R&D expenses in the early stage. Looking at overseas large pharmaceutical companies, the R&D expense rate is relatively stable, basically maintaining at the level of 10%-30%. However, the R&D investment volume of emerging large pharmaceutical companies represented by Xinji fluctuates relatively largely compared with the revenue side, which mainly depends on the R&D progress of the under-research pipeline, especially the clinical development, and the cost rate is higher than that of mature pharmaceutical companies, usually above 30%.
Multiple factors are beneficial to China's innovative drug research and development market and give birth to diverse innovative models. With the increase in overseas personnel returning to China to start businesses and the country provides all-round support from funds to policies, China's era of innovative drugs is gradually coming. Large generic drug companies represented by Hengrui Medicine and China Biopharma have successfully upgraded to innovative drug companies through independent research and development and mergers and acquisitions; while the innovative R&D-driven Biotech represented by BeiGene and Innovent Biotech has taken a different approach, gathered outstanding talents, seized policy opportunities, and continued to increase R&D investment with the help of venture capital, IPO and other financing. The gap between China's pharmaceutical industry's innovative R&D level and international development level is gradually narrowing, and China is undergoing a transformation and breakthrough in "generic drugs-hard-generic drugs-best-like first-class". At the same time, the R&D expenses of Chinese pharmaceutical companies are also increasing rapidly, gradually approaching the global industry average, especially innovative drug transformation companies. In 2018, the R&D investment of Hengrui Medicine was RMB 2.67 billion, and the R&D expense rate was 15.3%; Hong Kong-listed biotechnology companies paid more attention to R&D investment, and their absolute value even exceeded that of many large A-share listed companies with strong profitability. In 2018, the R&D investment of BeiGene was RMB 4.66 billion, and Innovent Biologics' R&D investment was RMB 1.222 billion.
The prosperity of the capital market provides the source of fresh water for innovative drug companies to continue to develop. The past improvement and prosperity of China's primary market has given birth to a large number of innovative drug companies with more than one product under development in the late stage of clinical research. After multiple rounds of market testing and financing, the market value has been rising like a snowball. It is urgent to enter the secondary market. While injecting fresh blood into the enterprise, it will expand its influence, collaborate in product sales, and build a bridge for future cooperation with large-scale mature requirements. Before the Science and Technology Innovation Board was put on the agenda, Nasdaq and the Hong Kong Stock Exchange became listing places where these small profitable and unprofitable science and technology innovation companies went abroad. With the continuous improvement and development of the first and second-level market mechanisms, the vast investment and financing platform provides sufficient impetus for China's new drug research and development and accelerates industrial innovation and upgrading.
R&D capabilities and product pipelines determine the company's market value . With the advancement of 4+7 volume-based procurement, investors have gradually formed long-term and stable expectations for the decline in generic drug prices; coupled with the approaching Science and Technology Innovation Board, technology-based innovative biopharmaceutical companies with excellent quality but not profitable or cumulative unrecovered losses will enter the secondary market in mainland China, which is expected to reshape the industry valuation system, and R&D capabilities and innovative drug pipelines will gain more favor from investors. Therefore, leading companies with innovation as the driving force for continuous growth and huge investment in R&D, such as Hengrui Medicine , Kelun Pharmaceutical, Fosun Pharmaceutical, Lepu Medical , Huadong Medicine , and Lizhu Group are expected to win in the long-term price reduction of generic drugs. The unprofitable companies listed on the Hong Kong Biotechnology Board further illustrate the relationship between R&D pipelines, product listing promotion and company market value. Companies with good pipelines will continue to strengthen as their products continue to be approved for listing. Grasping the market hot spots, after Junshi and Xinda's PD-1 monoclonal antibodies were approved one after another, it promoted the company's market value to rise steadily. On the contrary, against Gilead, the leading overseas hepatitis C drug company, although its product efficacy is excellent, and the cure rate of "Jilinian 3rd Generation" Bendonsha can be as high as more than 99%, because of this, the global patient base has shrunk year by year. In 2018, Gilead's "Jilinian 2nd Generation" Harvoni's revenue fell by 72.0% year-on-year, and the revenue of "Jilinian 3rd Generation" Bendonsha also fell by 44.0% year-on-year, while the revenue of Hepatitis C Franchise of competitor BMS fell by 98.0% year-on-year, and AbbViekira's revenue also fell by 77.2% year-on-year. The expected scale of hepatitis C drugs market has dropped sharply. At present, my country's innovative drug industry is characterized by low approvals for listing but active R&D. The product lines of most biomedical pharmaceutical innovation companies are still waiting for clinical testing, have not yet entered the market, and there are no major clinical data or transactions or cooperation announcements. Therefore, the stock price will be mediocre in the short term, but long-term growth is expected.
Outstanding talent team amplifies the company's market value. What promotes products is R&D, and behind them is "people". Looking at innovative pharmaceutical companies at home and abroad, they are inseparable from leading entrepreneurs, benchmark scientists and excellent R&D, management and commercialization teams. Overseas, Genentech was first established by venture capitalist Robert A. Swanson and Herbert W. Boyer, the father of bioengineering; Biogen, a global biotechnology company dedicated to challenging Alzheimer's disease, joined forces with many well-known scientists in the early days. Walter Gilbert won the Nobel Prize in Chemistry in 1980, and Phillip Allen Sharp won the Nobel Prize in Medicine in 1993. In China, the founder of BeiGene is an academician of the Chinese and American Academy of Sciences, and Ou Leiqiang, an entrepreneur. Later, he joined forces with Pfizer , former president of Greater China, Wu Xiaobin , to take charge of commercialization; Dr. Yu Dechao, founder of Innovent Biologics, is the inventor of the world's first anti-tumor virus drug Ankerui and the new monoclonal antibody drug Conborcept , which has global intellectual property rights; Dr. Junshi Biologics' Chenlaiping has also made great contributions in the field of tumor immunity. If R&D pipelines and scientific research strength determine most of the factors in the DCF valuation model of innovative drug companies, then the advantages of management and commercialization teams are reflected in the peak penetration rate after the product is launched, peak speed, and net profit margin, which will ultimately affect the company's cash flow and determine the success or failure of the company.
.2. Join MSCI After the weight increases, foreign capital will strengthen the allocation of leading and mid-cap stock targets
MSCI inclusion factor is increased to A-share traffic, and the pharmaceutical sector is favored. The MSC (I MorganStanley Capital International) index is an index compiled by Morgan Stanley Capital International (MSCI), which is the most commonly used benchmark index by global portfolio managers. Starting from June 1, 2018, China's A-shares have been officially included in the MSCI Emerging Markets Index and Global Index. As MSCI gradually increases the inclusion factor of A-shares, the A-share market is expected to introduce incremental funds. It is particularly worth noting that it is expected that after November 2019, all 168 mid-cap stocks in A-shares may be included in the MSCI index, while the pharmaceutical sector accounts for about 15%, which is the largest weight among all first-level industries.
Foreign capital has gradually become an important marginal pricing force in the A-share market, and innovative leading targets may be selected for . With the expansion of the inclusion factor of the MSCI index, foreign capital has gradually become an important participant in the A-share market. Due to different investment philosophy and market awareness, the stock selection criteria for foreign capital tend to consider the industry status of the company, the liquidity of stocks and the sustainability of the company's performance. Performance must be the first criterion for measuring the company; secondly, companies with high performance certainty and able to maintain stable growth should be better than companies with fast growth and slow growth, and with large fluctuations; the systemic importance of the company from a global perspective is matched with its leading position, and has a large market value and good liquidity, which is undoubtedly one of the stock selection factors that foreign capital attaches great importance to; reputation and easy-to-understand business models are also important factors. Therefore, some overseas market capitalization benchmarks and leading domestic segments with outstanding domestic industry status are expected to become new hot spots for overseas investors' layout. For example, Aier Eye Hospital, the largest ophthalmic medical institution in my country, is highly praised by foreign capital due to its obvious leading position in the industry, high-certainty performance growth, and easy-to-understand private specialty chain medical format. As of the third quarter report of 2018, among the top ten circulating shareholders of Aier Eye Hospital, Mainland Stock Connect ranked second, accounting for 4.35% of the total share capital, exceeding the sum of the top four public equity holdings.
China's gradually rising innovative pharmaceutical industry has also attracted much attention from foreign capital. takes Hengrui, the leader in A-shares as an example. Although compared with international leaders, Roche, , Pfizer, etc., Hengrui has a relatively high PE of nearly 70 times, and it is difficult to achieve explosive growth in the short term, as the leader of the Chinese pharmaceutical industry, its advantages are obvious, representing different valuation centers in the Chinese market and are deeply favored by foreign capital. Since the Shanghai Stock Connect was launched on June 29, 2016, Hengrui Medicine has three large-scale capital inflows in , Hengrui Medicine , respectively, in the first week of the launch of the Shanghai-Hong Kong Stock Connect, ex-rights and ex-dividend date on May 31, 2017, and A shares before the inclusion of A shares in MSCI, May 30, 2018; and before mid-2018, the shareholding ratio of the Shanghai-Hong Kong Stock Connect has steadily increased with the company's stock price, and has a correction in the second half of 2018, and has begun to improve overall with the market after 2019. As of the 2018 annual report, there are no public funds among the top ten circulating shareholders of Hengrui Medicine. In addition to major shareholders, industrial capital, securities capital, and Huijin, there are Lukoutong (accounting for 11.52% of the total share capital) and a QFII Oppenheimer Fund (1.50%). Foreign capital has deeply affected the company's securities pricing.
Overall, the new policies that have been launched by the Hong Kong stock market and the A-share Science and Technology Innovation Board that benefit R&D enterprises’ financing have become an important driving force for the accelerated development of innovative pharmaceutical companies, and to a certain extent has also changed the valuation system of pharmaceutical companies in the secondary market. R&D pipelines have gradually become an important consideration for investor valuation and determining the trend of corporate stock prices. Under the influence of industrial and capital market policies, domestic pharmaceutical companies, especially listed companies, have gradually entered the "arms race mode" at the R&D investment level, and the growth rate of R&D investment has increased significantly. On the other hand, with the improvement of the internationalization level of A-shares, foreign capital has gradually become an important marginal force affecting the pricing of some leading A-share pharmaceutical companies.
, a list of pipelines under development for key innovative drug companies
In this section, we systematically sorted out the key varieties under development for some domestic innovative drug companies in terms of molecular mechanism, R&D progress, clinical data, competitive landscape, etc., and conducted a preliminary quantitative evaluation of the value of innovative drugs through the DCF model. As explained in the report "A Preliminary Exploration on the Value Assessment of Innovative Drugs - In-depth Research on the Innovative Drug Industry", the value assessment of innovative drugs requires scientific and artistic work, including clinical data, R&D stage, pricing, competitive landscape, patient population and penetration rate, which will affect the final evaluation results. The calculation method based on the future increase in innovative drugs after they are launched on the market will itself be quite uncertain. Nevertheless, the DCF model can still provide a preliminary reference for innovative drug investment. It should also be pointed out that the data calculated by the DCF model is not the only determinant of the valuation of innovative pharmaceutical companies. The company's earlier R&D pipeline, current performance and growth, management background and future internationalization potential will all become influencing factors in the valuation of innovative pharmaceutical companies. For some companies that have a certain scale of mature pharmaceutical business and a certain scale of R&D pipelines, how to combine the two aspects of business and make a reasonable assessment of the overall value of the company will also be a common challenge for pharmaceutical investors in the future.
The remaining 220 pages are available, please refer to the original report.
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(Report source: Industrial Securities)
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