Research published by Blue Lotus Research on October 24, 2022

 

(67 Pages, 70 graphs and tables)
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• Despite (1) persistent pricing pressure from China’s state healthcare complex and (2) US-China rivalry likely spreading from semiconductor to biotech, we believe global deflation force and generic substitution are valuation supports; 
• Three quarters of Chinese biotech industry may perish in the next two years yet it doesn’t conflict with its eventually turning into the world’s 2nd largest;
• We endorse BGNE for its global footprint and well-rounded competencies. We believe RemeGen is undervalued. We believe Akeso is becoming a biopharma.

Not all biotech’s can, or should and will turn into biopharma’s
As orchestrator of an inherently global industry, pharma/biopharma is desirable by many. But we believe the biotech-to-biopharma transformation is fraught with peril, more so now. After adopting loose approval policy for ~5 years, CDE/NMPA is showing signs of tightening up. NDRL price negotiation has permanently reset the market size expectation of Chinese innovative drugs. Yet many Chinese biotech’s are still embarking on the journey to biopharma by building out sales and manufacturing. We believe a lot will end badly as their cashes run out.
 
Global price deflator role is valid, but validity is not assured
China’s potential as a global drug price deflator is amply demonstrated in the development and pricing of PD-1/L1. More will come and come better. But the US innovative drug industry isn’t without recourse. Controlling the pace of generic substitution is its build-in adjustment mechanism. Chinese innovation must happen fast enough to defeat this mechanism to justify the raison d'être.
 
A demand choke vs. a supply choke
A critical weakness exists in the argument of buying Chinese biotech, which is China’s low cost of R&D must be low enough to offset its low drug price. Such modus operandi is inferior to the Western reverse model of selling drug at high price but outsourcing R&D to China or India. While biotech doesn’t have a single supply chain choke point like the EUV lithography, it does have a demand choke point in which US alone is >40% of the world market. Chinese biotech/biopharma’s must learn to deal with the US for a long time to come.

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