Chinese healthcare: innovative growth

Bottom Line

The Chinese biopharma market grows, driven by an aging population and increased R&D spending. However, significant gaps remain between China and developed countries, especially in mortality rates and prevalence of cancers, rare diseases, and infectious diseases. The government has made many efforts to improve access to innovative local medicines, and increase prevention and screening, resulting in higher growth rates compared to western markets, as China plays catch up.

Domestic companies will be able to meet the growing demand, assuming they apply the highest possible drug development standards. Outsourcing companies will be able to provide this expertise to sometimes inexperienced companies. Our biotech and bionics portfolios have exposure to Chinese biopharmaceutical and diagnostic companies that meet high industry standards and to outsourcing companies that support their growth.

China Plays Catch Up

The West/East healthcare divide

Although China is one of the world’s largest countries and most prosperous economies, it has lower survival rates and quality of care for many diseases compared to the western world. Much progress has been made in closing the gap through government incentives, but there remains plenty of room for improvement.

  • Given the still high mortality rates, cancers, rare diseases, and infectious diseases are the main priorities of the Chinese government.

Prevention, diagnosis, and treatment access

Poor prevention, late diagnosis, and a lack of innovative drugs reaching the market, contributed to opening the gap. China is in the early stages of enacting better prevention and diagnosis policies.

  • Recent healthcare measures, part of the Healthy China 2030 initiative, promote healthier living, increase public awareness, and invest in early detection.
  • Public health coverage is reluctant to include innovative foreign drugs given their high prices. But locally developed innovative drugs are seen with a favorable eye.

An ongoing transformation towards innovation

More locally developed innovative drugs are expected to reach the market in the next five years, notably in oncology. Improving the quality standards of clinical trials in China will also contribute to the global development of Chinese biotechs.

  • The contribution of innovative drugs to overall sales in China's pharmaceutical industry might reach 36% by 2025, up from 22% in 2017.
  • In oncology, chemotherapy remains the primary option.
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Unmet Needs In The Largest Therapeutic Areas

Oncology remains a domestic hunting ground

Oncology represents a large unmet medical need in China and remains a crucial area for domestic biotechs evolving from followers to innovators.

  • In 2022, there will be 4.8mn new cancer cases in China and 3.2mn death vs. 2.3mn cases in the U.S .for 640k deaths.
  • While 5-year survival rates improved in China over the past 20 years, the gap to U.S. levels is still significant (40.5% vs. 66%).

Rare diseases: an underserved condition

There are more than 7’000 rare diseases worldwide, but treatments are only available for 10% of patients. China is even more underserved than the U.S. and the E.U., with limited treatment options and an immature regulatory framework.

  • China has an important rare disease population of more than 100mn, 4x more than the U.S., yet the orphan drugs market represents only $1.3bn vs. ~$90bn in the U.S.
  • The Chinese rare disease segment is expected to reach $26bn (7% of the total market from 1% today) by 2030, showing a CAGR of >35%.

Infectious diseases continue to spread

The Chinese infectious disease market is dominated by imports of innovative drugs from abroad or generics. Domestic drug development is still in its infancy but will grow strongly due to high demand and likely curbs on U.S. imports.

  • HIV remains a significant problem, with over ~1.25mn cases. The first domestic long-acting drug was approved only in 2018 and has been reimbursed since 2021. China’s HIV market should grow at an 18,6% CAGR over four years, vs. 6% in developed countries.
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Poor Prevention, Diagnosis, Access: A Deadly Trio

An unhealthy lifestyle increases the need for prevention

The Chinese population is richer but not necessarily healthier. Rapid economic development has been coupled with a lifestyle change, with increased consumption of unhealthy food, alcohol, and cigarettes.

  • Most lung cancers are caused by smoking, and China is the largest tobacco producer (39% of global production) and consumer, with 54% of Chinese men smoking (vs. 17% of Americans).
  • Healthcare 2030’s focus is on disease prevention by controlling major risk factors. It aims to increase cancer overall survival by 15% by 2030.

Poor diagnosis leads to an increased likelihood of death

The disease burden is exacerbated by late diagnosis. The disparities in cancer survival rates between China and the U.S. are partly explained by the differences in diagnosis stage and reflect the need for earlier detection.

  • 55% of Chinese cancer patients are diagnosed with hepatocellular carcinoma in stages III/IV vs. 15% and 5% in the U.S. and Japan. Molecular profiling is only performed on ~5.4% of eligible patients vs. ~10.1% in the U.S.
  • The low screening rate in China is particularly true in rural areas, where people do not have the same health insurance as in urban areas and have fewer medical facilities.

High out-of-pocket costs for innovative medicines

Because public reimbursement for novel drugs is still restricted and the health insurance industry is still in its infancy, most patients must pay for their treatments.

  • Although public insurance covers 95% of Chinese citizens, it does not cover all premium-priced, new drugs. Patients in China spend 30%–40% of their out-of-pocket healthcare costs on drugs, creating significant financial hurdles.
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Domestic Players Dominate

Local companies catching up in innovative fields

Next-gen biologics, such as cell or gene therapies developed by domestic companies, are making progress. Last November, the government released final guidelines to encourage true innovation over me-too drugs.

  • With 492 registered Car-T trials, China is conducting more research than any other country (362 in the US and 274 in Europe).
  • Lagging for a long time despite an early start, China’s genetic field is catching up: the first mRNA covid vaccine (Walvax Biotech) could be approved this year, while the first RNAi is expected for 2024 and the first gene therapy in 2025.

Approval is the first step, reimbursement the second

In December 2021, the reimbursement of innovative medicines was improved, supporting their commercialization and helping to reduce disparities with developed countries.

  • Out of 40 approvals last year, half were developed by national players, more than the average of the prior three years (27%).
  • Seven rare diseases drugs were included, and the first-ever local ADC drug (antibody-drug conjugate – an emerging anti-cancer drug) is now on the national list.

China is attracting major investments

Despite geopolitical tensions and concerns about the quality of some clinical trials conducted in China, western drugmakers want to get involved with local players, given their newly-acquired innovator status.

  • J&J is looking for further investments in oncology in China after recently gaining the first FDA approval of Chinese-made cell therapy in partnership with Legend Biotech.
  • The work of clinical trials harmonization will promote the high quality of Chinese drugs and attract new investments.

Chinese Healthcare: Innovative Growth

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A New Infrastructure To Support Innovation

Building hospitals capabilities

China plans over 750 national-level programs to build major disciplines in clinical medicine as part of the 14th Five-Year Plan period (2021–2025). It will promote the development of public hospitals and erase discrepancies between high and low 
GDP areas.

  • The need is high: public hospitals account for just 3.5% of medical institutions in China but handle 45 % of all outpatient visits.

Towards precision diagnosis

The main growth opportunity in diagnostic in China is molecular testing, especially in cancer, enabling precision medicine, early cancer detection, and innovative oncology drug development.

  • The majority of players are still foreigners as technical requirements and entry barriers are very high. In recent years, domestic companies have moved into this field.
  • Burning Rock, Genetron, and Amoy Diagnostics, which all went public in 2020, are well-positioned to capture the early cancer detection market (represented by early detection of liver, colon, and lung cancer), estimated to reach $36bn in 2023.

Outsourcing to support the growth

Biopharma companies in China have almost doubled their R&D spending over the past three years. Consequently, they have also increased their outsourcing of clinical trials and manufacturing. Biologics are much more complex to develop and manufacture than small molecules, and CRO/CDMO provide expertise at each step of the process.

  • Outsourcing services, including Wuxi Bio and Genscript, have accelerated the development of their DNA/RNA and cell therapy capabilities. Genscript is investing heavily in cell therapy, having increased its R&D activities in this new class by 52%.

Catalysts

  • Clinical data readout. The clinical validation of local drugs will bring greater confidence in the ability of Chinese biotechs to bring innovative drugs to market. 2022–2025 should see many new therapies approved, with data that could displace the western mastodons already in the country. 
  • Positive government regulations. Reductions in mortality rates associated with chronic diseases are key policy goals, with preventative measures and improved access to more effective treatment set to play a significant role.
  • R&D spending. The R&D expenditure is expected to reach 16.8% in 2025, up from 7.6% in 2016 and 12% in 2020. With the increase in R&D spending, new INDs (clinical entry) and approvals are expected to rise.
     

Risks

  • Clinical adverse events in novel therapeutics. Many hospitals do not yet have the standards required to conduct clinical trials of such complex therapies, which may hinder their development. 
  • U.S. scrutiny. The global expansion goals of Chinese companies have been undermined by the FDA's recent decision to require U.S. clinical trials for FDA approval. This increased scrutiny may also affect the attractiveness of China. 
  • Pricing pressure. The government could apply strict measures to lower the price of innovative medicines. A balance will need to be struck to expand access while avoiding interference with the development of advanced drugs.

Source:
IQVIA, Deutsche Bank, Chinese Medical Journal, China insights data, Frost & Sullivan, www.gov.ch, Nature Biotechnology, The Lancet Public Health, Genetron

Companies mentioned in this article:
Amoy Diagnostics (300685 SH), Burning Rock (BNR US), Frontier Biotech (688221 SH), Genetron (GTH US), Genscript (1548 HK), J&J (JNJ US), JW Therapeutics (2126.HK), Shanghai Fosun Pharmaceutical (2196.HK), Walvax Biotech (300142 SH), Wuxi Biologics (2269 HK)

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