THIS MATERIAL IS A MARKETING COMMUNICATION.
Quarterly Outlook: China Biotech Down but Not Out
China’s biotech industry has undergone a downward trajectory over the last 18 months, with external news over 3Q22 adding to the general risk-off sentiment. Chinese biotech stocks dipped on news of the US Government’s Executive Order (EO) to bolster their domestic biotech and biomanufacturing industry. However, we believe the EO’s investment is relatively small and should not negatively impact China. Elsewhere, China continues its volume-based procurement (VBP) program to increase the accessibility of drugs for patients. Overall, we maintain an optimistic outlook for services outsourcing and biotech companies, where mid to longer-term fundamentals remain intact despite near-term price movements.
- The US Executive Order on Biotech and Biomanufacturing will see US$2.4 billion invested in expanding domestic biomanufacturing, fostering innovation in the US, and leveraging biotech to strengthen supply chains, among other initiatives.1 Although the funding plan is broad, we believe there is limited impact on China’s biomanufacturing industry as there are no specific restrictions on China or any particular restrictions on biological products, biotechnologies, supply chains, or critical raw materials.
- The 7th batch of volume-based procurement (VBP) concluded with 60 drugs listed at an average price cut of 48%.2 As VBP price cuts become the new normal, we prefer companies where no single product has a high risk of price cuts or a significantly high revenue contribution.
- Overall, we believe the outlook remains positive for services outsourcing companies as demand continues to be strong. For biotech companies, we’ve seen early signs of companies re-prioritising and have been agile in the evolving competitive landscape for their assets.
US Biotech Executive Order Has Limited Impact on Chinese Companies
On 12 September, the US Government passed an Executive Order (EO) with the aim of 1) growing its domestic biomanufacturing capacity and securing supply chains, 2) encouraging research and development (R&D) to drive medical breakthroughs, and 3) building and protecting the US biotechnology ecosystem, including data collection, data security, data sharing with partners, skilled workforce, etc.
The US White House hosted a biotech summit days later, releasing more details on the specific funding budget. Around US$2.4 billion will be allocated through the EO to advance biotech/biomanufacturing initiatives to lower prices, create jobs, and strengthen supply chains.3 In addition, the White House laid out specific agendas to be carried out by the Department of Health and Human Services (DHHS), Department of Energy (DoE), Department of Defense (DoD), and US Department of Agriculture (USDA), among others. The DoD and USDA will account for over 80% of the total budget.4
The largest agenda item is the expansion of domestic biomanufacturing, with a total of US$1.7 billion to be funded by the
The funding plan outlined by the US government will strengthen the US’ competitiveness in bio-alternatives such as bio-based chemicals and plastics for industrial processes. However, the EO is nowhere near as powerful when compared to the US$52 billion investment in the ‘CHIPS and Science Act’. Besides, the EO has limited impact on China’s biomanufacturing industry at this stage since it doesn’t have any specific restrictions on China, nor does it mention any specific restrictions on biological products, biotechnologies, supply chains, or key raw materials.
Latest Round of Volume Based Procurement Sees 48% Average Price Cut to 60 Drugs
In the 7th batch of volume-based procurement (VBP), 327 bids from 217 manufacturers made the list with an average selling price (ASP) cut of 48%.8 This is compared to -49% in the 6th batch (which consists largely of insulin) and an average price cut of 54% over the previous six rounds of VBP.9 Similar to previous batches, domestic players continued to dominate the 7th round, given they were the most flexible on pricing, trading margins with serious volume gain.
The 7th batch VBP marks the scale of RMB 87 billion in terms of 2021 public hospital sales. Based on contracted procurement volume, we estimate that RMB 18.5 billion will be saved each year from this round of VBP.10 The VBP prices will take effect from November 2022.
We note that the 320 drugs listed in the seven VBP batches combined cover around 35% of the chemical drugs and biologics sales from public hospitals.
Overall Outlook Remains Positive
With a high base in 2022 for CRO (contract research organisation) and CMO (contract manufacturing organisation) companies from COVID revenues, the market is likely to get more optimistic until there is more visibility of 2023 revenue delivery, in our view. Most companies see limited impact from inflation, which they can pass down to downstream clients, and the backlog visibility remains very high. Moreover, capacity expansion remains in progress, driven by robust client demand.
For biotech companies, we believe re-prioritising pipelines to optimise resource allocation and commercialisation becomes the next area of focus. We have seen early signs of companies re-prioritising and have been agile in the evolving competitive landscape for their assets. For more established companies, the sales recovery post-COVID lockdowns will be the focus post-opening up.
Staying Ahead with Mirae Asset’s Latest Insights
1. Source: Credit Suisse Research, September 2022
2. Source: Jefferies, July 2022
3. Source: Credit Suisse Research, September 2022
4. Source: Ibid.
5. Source: Ibid.
6. Source: US Department of Defense, September 2022
7. Source: US Department of Agriculture, September 2022
8. Source: Jefferies, July 2022
9. Source: Ibid.
10. Source: Ibid.
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature/ . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Copyright 2022. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.