The Great China Biotech Quest

biotechTony Daltorio:  The Chinese economic “miracle” is far from dead, as some are proclaiming.

But as I’ve told readers before, the “miracle” is moving from those semi-skilled old economy sectors to the higher-skilled services and new economy sectors.

Take biotech, for example. This sector is being favored by the government with lots of incentives to lure back skilled Chinese scientists from overseas, called “sea turtles.” The Chinese are also using preferential regulations and so-called biotech zones to stimulate growth. These zones offer a variety of incentives from municipal, provincial and central governments.

This move makes sense. China now trails only the U.S. as the world’s largest pharmaceuticals market. It is forecast to be a $200 billion pharma market by 2020.

China Biotech R&D Heats Up

China is smart enough to realize research and development will be key.

It surpassed the United States as an investment destination for greenfield research and development projects from 2010 through 2014. Leading the way in this R&D boom was the pharmaceuticals sector, which attracted $1.6 billion in that 2010-2014 time frame.

Adding to this trend are local Chinese companies raising their R&D spending. In 2015, domestic R&D spending rose by 46%, versus single digits in the U.S. Overall, by 2019, China is forecast to be the world’s No. 1 R&D spender.

‘Smart Money’ Flowing Into Chinese Startups

There is an incredible amount of drug research going on right now in the country. China is not interested in those cheap copycat drugs. It wants to move the sector into higher-value real drugs that can be sold globally. China has decided to become an innovator.

That’s a fascinating development to me in a country that hasn’t produced a new medicine for the global markets since the 1970s (Artemisinin for malaria).

China’s zeal for pharmaceuticals research has attracted the big pharma companies such as GlaxoSmithKline (NYSE: GSK), AstraZeneca (NYSE: AZN) and Novartis (NYSE: NVS) to set up major R&D facilities in the country.

But the real story is in the vast number of biotechnology and pharmaceutical startups conducting research in China right now. Some “smart money” venture capital firms are investing in a number of these startups. These VC firms include the likes of Sequoia Capital, Advantech Capital Partners, TF Capital and OrbiMed.

China MediTech

The good news is that you don’t have be a venture capital fund to invest into Chinese biotech. Several companies have now listed on U.S. exchanges.

My favorite is the recently listed Hutchinson China MediTech (NASDAQ: HCM). It used to be listed solely on London’s junior Aim market.

China MediTech is 65%-owned by CK Hutchinson Holdings (OTC: CKHUY), which is owned by one of Asia’s richest men and most successful investors, Li Ka-shing.

This company may be the one to end China’s new drug drought. Clinical data is due later this year on its kidney cancer therapy drug, Savolitinib. It developed the drug in conjunction with AstraZeneca.

Another drug for colorectal cancer, Fruquintinib, is also in late-stage development. China MediTech is working with Eli Lilly (NYSE: LLY) on this one.

China MediTech also has another five drugs in early stage development. Perhaps the most promising of these is a treatment called HMPL-523 for blood cancers and rheumatoid arthritis. It could potentially challenge the blockbuster drugs Humira and Imbruvica from AbbVie (NYSE: ABBV).

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