Jean Hynes

In this series, we asked speakers at the Milken Institute Asia Summit to make one prediction for where Asia is headed in the next 20 years. Join the conversation by writing your own article here and including #MIGlobal . Follow the Milken Institute to get updates from the Asia Summit.

When we talk about investing in the Asian health care market, China is central to that conversation. The pace of growth and scientific advancement in China’s biotechnology, pharmaceutical, medical device, and health services industries is abounding. Health care spending, which is close to 6% of China’s GDP per year,1 is expected to rise faster than in most other large countries due to a growing middle class and the government’s long-term plans to improve health care for Chinese citizens. While the opportunity set is expanding, I think the key for investors will be to identify innovative companies and business models that can thrive in this very dynamic market.

Multiple growth drivers Demographic trends, including rising wealth, an aging population, and the increased prevalence of chronic diseases like diabetes have fueled health care demand growth in China. Capital investment from the US and Europe has been an important growth factor as well, with several multinational companies investing heavily in building Chinese infrastructure, partnering with or acquiring large stakes in Chinese healthcare companies, and more recently, signing deals in the nascent biotechnology industry.

Meanwhile, constructive government policies have improved access to health care, leveled the playing field for local private-sector companies, and accelerated the pace of innovation. In its 12th Five-Year Plan, the Chinese government articulated ambitious goals for health care reform, which are set to continue through 2020. Spending on health insurance has increased dramatically, with the vast majority of the Chinese population now having at least basic coverage. Under the Thousand Talents Program, skilled Chinese academics, researchers, and scientists have been incentivized with grants and tax credits to return to China; this highly educated cohort of experts and entrepreneurs is now working in local industries, mentoring younger generations of scientists. Finally, the government has focused on eradicating corruption and graft at all levels of government and the private sector. These tailwinds have formed a virtuous cycle that has the potential to drive growth — and create investment opportunities — in China’s health care sector for years to come.

Generics to biotechnology: Consolidation and rapid innovation There are two important shifts underway in China’s biopharmaceutical market. First, the Chinese government is establishing policies to reward investments in better business and drug development practices. Second, a burgeoning, highly innovative biotechnology industry appears to be taking shape that could rival the established markets in Boston, Massachusetts and San Francisco, California a decade from now.

China’s pharmaceutical companies, which number in the thousands, are known mainly for marketing off-patent drugs as a cheaper alternative to products from multinational companies. Many of these companies dominate their regions. Ten years ago, it was not clear which companies would emerge to become larger national players or whether these companies would consolidate into fewer, more efficient companies, as the pharmaceutical industries in the US, Europe, and Japan did in the 1990s and 2000s.

Over the past few years, however, the Chinese government has made a few important changes to pharmaceutical manufacturing and selling practices that have more clearly defined the rules of operation. These new policies typically favor companies with good manufacturing practices (GMP) and high-quality clinical development, as well as local companies investing in research and development (R&D). Conversely, the bar has risen significantly for companies that are unwilling to make these investments. I believe it will be a multiyear process that eliminates low-quality companies, but some results are already evident.

As an example, the China Food and Drug Administration (CFDA) recently required all Chinese pharmaceutical companies to resubmit new drug applications to verify the authenticity of clinical trial data. A substantial overhaul of new drug submissions ensued, a smaller number of companies received approvals, and the supply of higher-quality drugs increased.

Innovative R&D in China is taking off. Three ingredients are generally needed to establish innovation centers: financial capital, human capital, and communities. In terms of financial capital and communities, the Chinese government made a commitment to biology and science about a decade ago that enabled the growth of what is now a flourishing biotechnology industry. It did this by providing capital and establishing zones of innovation, such as the one in Pudong, near Shanghai. As for human capital, a large pool of Chinese talent has spent years at biopharmaceutical companies in the US and Europe gaining essential research, clinical, regulatory, and marketing experience typically necessary to form successful companies back in China. This new talent pool has enabled a number of Chinese companies that previously focused exclusively on off-patent generic drugs to pivot toward innovative R&D.

Interestingly, a number of small, startup biotechnology companies in China are emerging, with globally significant clinical trial programs. At the June 2017 meeting of the American Society of Clinical Oncology (ASCO) — the premier cancer conference — multiple presentations by Chinese companies were showcased. Importantly, these companies are not only focused on developing their inventions globally but are also committed to bring their highly innovative drugs to China’s citizens quickly and at affordable prices.

This is an exciting time for biopharmaceutical companies in China. The seeds for major change were planted by the Chinese government a decade ago, and today, those initiatives continue with policies that I believe have the potential to transform China into a higher-quality, innovative market offering significant value-creation opportunities.

1 World Bank, US Department of Commerce

This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities. Any views expressed herein are those of the author, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Certain data provided is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. This material and/or its contents are current at the time of writing.

Wellington Management Company LLP (WMC) is an independently owned investment adviser registered with the US Securities and Exchange Commission (SEC). WMC is also a commodity trading advisor (CTA) registered with the US Commodity Futures Trading Commission. In certain circumstances, WMC provides commodity trading advice to clients in reliance on exemptions from CTA registration. In the US for ERISA clients, WMC is providing this material solely for sales and marketing purposes and not as an investment advice fiduciary under ERISA or the Internal Revenue Code. WMC has a financial interest in offering its products and services and is not committing to provide impartial investment advice or give advice in a fiduciary capacity in connection with those sales and marketing activities. WMC, along with its affiliates (collectively, Wellington Management), provides investment management and investment advisory services to institutions around the world. Located in Boston, Massachusetts, Wellington Management also has offices in Chicago, Illinois; Radnor, Pennsylvania; San Francisco, California; Beijing; Frankfurt; Hong Kong; London; Luxembourg; Singapore; Sydney; Tokyo; and Zurich.

Jean Hynes

Boston, Massachusetts, United States 8K followers 500+ connections

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