CRO/CDMO RIDING THE CHINESE BIOTECH BOOM
China: The World's Fastest-Growing Biologics Market
Government spurring innovation BIOLOGICS MARKET CAGR (2016-2021) In our November 2019 issue, we highlighted the market potential of the Chinese 18 biopharma sector. Thanks to government reforms and key drivers, Chinese biotech 16 companies are no longer imitators but innovators. 14 • The Chinese biotech market, the second-largest drug market in the world, is 12
expected to grow at a CAGR of 16% by 2021. 10
• The Chinese FDA (CFDA) has implemented several changes to modernize the 8
clinical trial process and speed up the approval of innovative drugs. 6
CDMO/CRO to support strong growth in China R&D spending 4 2 R&D spending in the healthcare sector has risen sharply, pushing companies to 0 increase outsourcing, for better cost control and higher efficiency. China US Europe Japan • There are two types of outsourcing services: Contract Research Organizations (CRO) and Contract Development & Manufacturing Organizations (CDMO). • China’s domestic drugmakers are keen on using these services to remain competitive and to launch innovative drugs as quickly as possible. PLENTY OF ROOM TO GROW FOR CHINESE BIOLOGICS
Wuxi Biologics: our top pick 2021e Sales Biologics as % of total drug sales We believe that Wuxi Biologics is well positioned to benefit from the growth
opportunities in China, thanks to its leading market share, high quality and well U.S. $260bn ~30% differentiated services. • Wuxi has a 75% market share in CRO services for biologics. China $43bn ~12% • The COVID-19 pandemic has delayed many clinical programs, but CROs helped to ensure consistent and continuous trials.
SOURCE: HKEx Website, McKinsey, Evaluate Pharma, UBS research
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The Chinese Biotech Market Boom
Rising living standards bring health issues NUMBER OF CLINICAL TRIALS OF CAR-T CELL TREATMENTS (AS OF MARCH 2018) China is the second-largest drug market in the world, with a growing middle class whose living standards and related health issues are catching up with the western world. 150 25000 • The population is aging; by 2020, 200mn people will be over 65 in China. • The largest diabetic community in the world is in China with over 100mn patients. 20000 100 • Due to the high incidence of cancers, oncology remains the primary area of 15000 research: the number of CAR-T cells therapy trials surpassed those in the US due to lower cost of manufacturing and less stringent regulations. 10000 50 NUMBER NUMBER TRIALSOF NUMBER TRIALSOF New reforms to boost the development of the biopharma sector 5000
The Chinese government has been carrying out a series of policies to encourage 0 0
India China Africa Japan innovation in drug R&D. China Europe Canada Russia EuropeCanada Australia CaribbeanGreenland Middle East Middle East • The "Healthy China 2030" plan includes 15 reforms to improve healthcare access North America South America North America South East Asia Central America and mortality rates on major diseases. • Innovative drugs can now benefit from "priority review" status. More than 30% of total applications have received this status. IPOS:I PHK$39.7BNOS: HK$39.7BN (US$5.12BN) (US$5.12BN) R RAISEDAISED IN 2020IN 2020 (HKEX) (HKEX)
Access to capital markets has been simplified NONE 5 14 16 In 2018, the Hong Kong Exchange reviewed its listing rules, allowing pre-revenue and NO. OF 18A LISTED COS pre-profit biotech to be listed. Significant investment capital has flowed into the sector. Chinese companies also raised funds in the U.S. through IPOs on Nasdaq. 2017 2018 2019 2020 • In 2019, the average amount of funds raised was 4 to 5 times the U.S. average, TOTAL IPO FUND RAISED NONE 18.5 34.5 39.7 with the largest listing raising over $900mn. (HK$BN) • The IPO of Legend Biotech, which develops CAR-T cell-based therapies in partnership with J&J, raised more than $400 million last June.
SOURCE: HKEx Website
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Main Chinese Biotech IPOs (2019-2020)
Company Listing date
Cstone Pharmaceuticals Feb-19
CanSino Biologics Mar-19
Viva Biotech May-19
Frontage Holdings Corporation May-19
MabPharma May-19
Hansoh Pharmaceutical Jun-19
Jinxin Fertility Group Jun-19
IVD Medical Holding Jul-19
Shanghai Henlius Biotech Sep-19
Euroeyes International Eye Clinic Oct-19
Ascentage Pharma Group Oct-19
Tot Biopharma Nov-19
Shanghai Kindly Medical Instruments Nov-19
SinoMab Bioscience Nov-19
Pharmaron Bejing Nov-19
Venus Medtech Dec-19
Alphamab Dec-19
Legend Biotech Jun-20
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Why Be Exposed To The Chinese CRO/CDMO Market?
CRO/CDMO to support the fast-growing biotech sector in China BIOLOGICS OUTSOURCING – MARKET SHARE (CHINA) Biopharma companies in China have doubled their R&D spending over the past three years. Consequently they have also increased their outsourcing on clinical trials and manufacturing. 78.6% WuXi Biologics
• The Chinese CRO/CDMO market is expected to grow from $8.3bn in 2018 to 5.9% Chempartner
$29.9bn in 2023, at a 30% CAGR compared to only 11% in the U.S. 5.4% Others
• Biologics, made from living organisms, are much more complex to develop and 4.3% manufacture than small molecules and CRO/CDMO provide expertise at each step of the process. 3.2% GenScript 2.8% MabPlex A competitive pricing strategy Lower costs and better efficiency attract local players but also foreign companies to outsource in China. Here they also benefit from a large patient pool, allowing for faster. • China accounts for 22% of all newly diagnosed cancer cases, including 36% of all BIOLOGICS OUTSOURCING – MARKET SHARE (GLOBAL) newly diagnosed lung cancer cases worldwide.
• Preclinical and clinical trial costs in China can be as low as 30-60% of similar trials 69.4% Others
elsewhere. 7.1% Lonza
6.7% A primary focus on preclinical and discovery service Clinical and commercialization services will represent future growth areas as 5.1% WuXi Biologics Chinese biotechnology moves to later stages of development with more and more 4.6% Catalent approvals expected. 3.2% Samsung Biologics • Most CROs offer services in three areas: discovery biology (26%), preclinical (21%), 2.3% AGC Biologics
and pharmaceutical development (14%). 1.6% Thermo Fisher
SOURCE: Nomura, F&S, Contract Manufacturing Organization (CMO), PWC, Wiley Online Library
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CRO/CDMO At A Glance
CRO SERVICES CDMO SERVICES
Drug discovery Development API production Formulation
Target identification Drug development Extraction Solids S U
C Lead discovery Sourcing Synthesis Semi-solid O G F N I Cell line Fermentation: small
R Medical chemistry Non-sterile liquids
E development molecules
E OFF Preclinical studies: Fermentation: large
C Scale up Sterile liquids I in vitro molecules V ER
S Preclinical studies: Other finished dosage Tech transfer Other methods in vivo forms (FDF)
Formulation Process analytics development development
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CRO/CDMO: The Covid-19 Impact
Support for COVID-19 vaccine and treatments development
CRO/CDMO work alongside biopharma companies to provide the necessary TELEHEALTH AND ingredients and conduct trials more efficiently. M-HEALTH APPLICATIONS • Among the seven vaccines candidates already in Phase III, four are being developed by Chinese companies: CanSino, Sinopharm, Sinovac and Fosun Pharma (in partnership with BioNtech and Pfizer), • Two are approved for limited /emergency use: The Gamaleya Research Institute’s vaccine in Russia and CanSino’s vaccine for military use. Both have been approved based on small Phase II studies.
The importance of China’s supply chain APPLICATIONS USE FOR FOR WEARABLES MONITORING VIRTUAL FOR The COVID-19 epidemic has highlighted the importance of China as the world's ADHERENCE CONTINUOUS largest producer of active pharmaceutical ingredients (APIs) TRAITS DATA COLLECTION • It is estimated that 80% of the APIs used in the United States could come from China or India. • Despite the wish to re-located API manufacturing in Europe or the United States, costs will continue to drive the decision to outsource to China. • Besides, the complexity of estimating the exact number of Chinese APIs involved CLOUD-BASED E-CONSENT DATA in the supply chain could protect the industry from additional tariffs. COLLECTION
Virtual trials are the future of clinical trials ELECTRONIC PATIENT During the outbreak, many trials have been shut down or delayed. New types of REPORTED OUTCOMES clinical trials, more adaptive to patients and more digital have emerged. • The role of the CRO will grow and evolve, as the conduct of a full virtual clinical trial requires expertise in understanding technologies and healthcare regulations. • China has a significant competitive advantage: local players can rely on important Big Data and AI capabilities.
SOURCE: The 2020s Will be the Decade of Virtual Clinical Trials, NY Times
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Wuxi Biologics: Our Top Pick (1/2)
China's market leader in biologics outsourcing ONGOING WUXI BIOLOGICS PROJECTS
Wuxi Biologics provides CRO and CDMO services. Wuxi works on 250 integrated Number of projects: 121 in preclinical, 112 in Phase I/II, 16 in Phase III and 1 in commercial Biologics development on-going Typical Typical process stage integrated duration Revenue² manufacturing. projects¹ • As a result of market share gains, the company’s revenue increased from CNY Pre-IND 557mn in 2015 to CNY3.9bn in 2019, a CAGR of 63.5%. – Drug discovery – 2 years US$1.5-2.5 mm • Company’s revenue could reach CNY10.3bn by 2022, continuing to grow at 40% – Pre-clinical development 121 2 years US$4-6 mm annually. Post-IND
– Early-phase (phases I & II) Differentiating with Technology and Quality 112 3 years US$4-6 mm clinical development The company benefits from advanced technological platforms, which enable it to – Phase I clinical development (85) provide its customers with high-quality and well-differentiated services. – Phase II clinical development (27) • Wuxi Biologics has key technology platforms in the fastest growing areas of the – Late-phase (phase III) clinical 16 3-5 years US$20-50 mm biotech sector: ADC (Antibody Drug Conjugate) and CART-T cells, which markets development are expected to grow at 26% (‘19-’25) and 56% (‘18-’26), respectively. – Commercial manufacturing 1 Annually US$50-100 mm³ • Wuxi also plans to launch a vaccine manufacturing facility in Ireland, following Total 250 a $3bn manufacturing agreement signed with a world leader in vaccines.
3.2% A follow-the-molecule strategy 7.8% The company follows a project from discovery to commercialization. Wuxi’s business model engages customers from the very beginning. • If a drug under their services is approved, the biotech company is more likely to NORTH AMERICA 53.7% continue to use Wuxi’s services for the following phases. PRC 35.3% REVENUE BY GEOGRAPHICAL EUROPE 7.8% • First mover advantage in CRO/CDMO market is key as it is costly and time AREA consuming to switch providers once the manufacturing process is established. REST OF THE WORLD 3.2%
35.3% 53.7%
SOURCE: BusinessWire, ResearchandMarkets, Grand View Research, Wuxi Biologics 2019 annual report
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Wuxi Biologics: Our Top Pick (2/2)
Driven by greater efficiency A TOTAL PLANNED CAPACITY OF BIOLOGICS PRODUCTION OF 280KL BY THE END OF 2022 Wuxi Biologics is very efficient and flexible facing its customers. The company spends a lot on quality control and training. Facility Designed facility Location Comments • At its latest earnings release, Wuxi announced a 12 months timeline (from 15 months last year) to file an Investigation New Drug (IND), needed to start human trials. This compares to a usual 18 to 24 months. MFG5 60,000L fed-batch Wuxi Commercial • Wuxi is also more flexible than peers, with significantly shorter waiting times to start a project (less than 1 month, compared to usual 6 months). MFG6 6,000L perfusion Ireland Commercial An aggressive capacity expansion strategy Thanks to high investments, Wuxi Biologics is increasing its capacity from 42kL in MFG7 48,000L fed_batch Ireland Commercial 2018 to 280kL in 2022E mainly through expansion in the US and Europe. • The company completed the acquisition of Bayer’s manufacturing facility in Germany. MFG8 48,000L fed_batch Shijiazhuang Commercial • The first US facility in Massachusetts is expected to be completed in 2022.
Wuxi turned COVID-19 challenges into opportunities Clinical / MFG9 6,000L fed-batch Wuxi Commercial Despite the negative impact due to FDA inspections delays, Wuxi Biologics has added new COVID-19 projects and has not missed any of the key milestones of its Clinical / MFG10 4,500L fed-batch/prefusion Singapore clients' projects . Commercial • On COVID, fifteen antibody programs have been signed for a contract size of $230mn and the company is also negotiating 4 vaccine programs and 27 more Clinical / MFG11 4,500L fed-batch/prefusion Worcester, US projects. Commercial • YTD, the company has gained 50 new customers, including Almirall, Aravive and Vir Biotechnology. MFG12 48,000L fed-batch Chengdu Commercial • The latest interim H1 2020 results showed a 21% revenue growth YoY (RMB 1.9bn), reflecting the company's great resilience during the pandemic.
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Catalysts Risks
• COVID-19 projects. CRO/CDMO are supporting the increased demand on the • China-US Trade War. The trade war may hurt US companies demand development and future manufacturing of COVID-19 vaccines and treatments. for Chinese outsourcing services. Some of the Chinese CRO/CDMO are For the 2H2020, many IND filings on COVID-19 are expected. expanding to the US and Europe to minimize the risk.
• IPOs. After a slowdown during the first semester, the recent wave of biotech • Financial Crisis. Biopharma companies may spend less on R&D due to the IPOs in June / July is an extremely positive sign for the sector, which regains potential financial crises post COVID-19. investor confidence. • COVID-19 delays. CRO/CDMO may suffer from less than expected projects • The reshaping of the industry. CRO/CDMO will help make the transition to moving from early phase to later stages. This risk could be mitigated by digital easier and faster. Chinese companies are benefiting from an important pipeline additions of COVID-19 projects. technological head-start on big data and AI.
Bottom Line
• China's pharmaceutical and biotech industry is undergoing a major transformation and is experiencing significant R&D growth due to government policies to encourage innovative medicines. We believe that the overall growth of the healthcare sector will be supported by outsourcing companies (CRO/CDMO).
• In our Biotech Certificate we currently have direct exposure to the Chinese biotech sector, mainly through Wuxi Biologics. We are closely monitoring this market and may add other Chinese companies in the future. We also increased during the COVID-19 pandemic our exposure to the global outsourcing market through positions in IQVIA, Siegfried, Catalent and Veeva Systems.
Companies mentioned in this article: Catalent (CTLT US), IQVIA (IQV US), Siegfried (SFZN SW), Veeva Systems (VEEV US), Wuxi Biologics (2269 HK)
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