Yesterday I started digging in to Matt McCall’s tease about a huge opportunity in Chinese biotech… and, as promised, today I’m finishing the job.
The basic premise is that China is pushing to make biopharma a bigger part of its economy in both the current five-year plan and the “made in China 2025” plan, and that will keep pushing a lot of money into companies who are both licensing in drugs to treat serious health issues in China, and those who are doing their own R&D to try to build up a pipeline of China-created treatments. You can click here for part one and the “#1 Biotech” pitched by McCall, but today we’re digging in to try to identify the other three stocks he dangles.
Ready? OK, let’s just jump right in with the first clues…
“Biotech Firm #2
“This next opportunity is LITERALLY the first biotech company to go public 14 months ago under the new exchange laws….
“… they struck a deal with pharmaceutical giant Roche for exclusive rights to sell and market several drugs to mainland China.
“Why all the attention?
“Because this company’s area of expertise is developing groundbreaking treatments for hepatitis.”
And apparently Hepatitis is a huge problem in China…
“In 2018, just 3.5% of infected people in the country were treated, which means 96.5% of the entire population received NO medical attention for this completely manageable disease!
“That spells massive upside for this little-known stock…
“It has already successfully developed and launched innovative drugs that combat hepatitis B, hepatitis C and HIV.
“Right now, this company trades for just a few dollars per share.
“And you can bet all that will change if the Chinese government gets behind it to tackle this nationwide pandemic.
“Just a tiny stake today could mean massive upside potential over the next six to 12 months.”
That’s Ascletis Pharma (1672 in Hong Kong, there’s an OTC ticker at ASCLF OTC in the US but it does not actually have any trading volume, so it would be much better to buy in Hong Kong if you’re interested), which did indeed go public last August in Hong Kong, under the new guidelines that were put into place a few months earlier to encourage fundraising for earlier stage companies (before the new rules, the Hong Kong Stock Exchange didn’t list unprofitable companies who have no revenue — which would almost always mean “no biotechs”).
And yes, they do focus on liver diseases, with their initial drugs licensed in from Roche and a pipeline that also includes early stage clinical trials for NASH and liver cancer, almost all of which are also licensed in from other companies. The stock has not done well so far, it’s down about 60% from the IPO.
There was a good story on Ascletis’ ambitions (and challenges) in July from the FT, and the sharp drop in the share price immediately after the IPO last year caught some attention.
Their licensed-in drugs from Roche do not yet generate much revenue, I have no idea what the potential might be of those or their other drugs… but, thanks to the IPO last year, they are at least well-funded to move forward with their R&D (as of June, about CNY 2.70 per share in cash) — that makes it seem like a relatively low-risk bet, since the share price is about HK$4, which translates to CNY 3.59, though it’s dangerous to think about “book value” of biotech companies since they are, of course, going to be spending all that money and more before (if) they really become sustainably profitable. But well-funded is good, these Chinese biotechs do seem to trade at a discount to their US peers, perhaps partly because Asian investors aren’t used to putting a rich valuation on R&D companies, and you can make your own call on whether or not the pipeline and potential is appealing to you.
You can see the interim report for the first half of 2019 here for more detail (like many overseas firms, they report twice a year instead of quarterly). There was also a little insider buying from the founder last week, though it was a relatively small purchase and the executives already own more than 50% of the company.
“Biotech Firm #3
“The third company I’m excited about shares a lot of the same aspects as the first two…
“They have a world-class management team and the founder basically pioneered biopharmaceutical innovation in China for autoimmune and infectious diseases.
“And it too has signed exclusive partnerships with massive U.S. biotech companies like Bristol-Myers Squibb.
“It might have the most impressive pipeline out of the bunch and it currently has seven different drugs in phase 3 trials.”
OK, that’s probably not quite enough clues… anything else?
“But what makes this company truly unique is its focus on licensing drugs.
“Even though it creates its own innovative drugs, it has also secured license agreements and exclusive selling rights in China for some of the biggest household name drugs in the world….
“Big financial research firms are already calling this company the gateway to treating China’s massive 1.4 billion people.
“Again, this stock is another screaming buy as the government funnels BILLIONS towards tiny startups like this company.”
A focus on in-licensing drugs does not make a Chinese biotech unique, for sure, that seems to be the general strategy of most of these companies — license in “western” drugs that are either commercial or are near approval, to help with unmet needs in China and generate some revenue to keep early investors happy, and also develop your own drugs on a longer timeline.
And the Thinkolator doesn’t have a clean answer here, but I can tell you that the best candidate of the bunch I reviewed is Zai Labs (ZLAB), the only one of the bunch today that has an easy-to-trade US listing… they do indeed have seven different drugs in phase 3 trials right now, most in cancer (and a couple approved for marketing in Hong Kong or China). Brivanib is the drug they have licensed in from Bristol-Myers, and that one’s in Phase 2.
And yes, founder Samanthu Du is a big figure in Chinese biotech, there was a nice story about her last year at Forbes.com and she was instrumental in building Chi-Med, the earlier Chinese biotech funded by Li Ka-shing.
Zai Labs pretty quickly jumped to a billion+ valuation and went public pretty early on, largely on the strength of Du’s reputation and their portfolio of in-licensed drugs, and now it’s a $2.5 billion company. They don’t have much in the way of revenue just yet, but there is some analyst coverage and they anticipate a big jump in sales next year and in 2021 — the company still won’t be profitable, particularly with their heavy spending on clinical trials, but it is widely expected to grow.
And that’s about all I know about this one — you can see their pipeline here, and they do have a slightly out of date (from August) investor presentation here if you’d like a quick overview.
And one more for you…
“Biotech Firm #4
“The fourth opportunity is nothing like the other three….
“You see, the other three companies are directly involved with creating new, innovative medicines, but this company innovates in a different way.
“It provides the vital infrastructure for these small companies to quickly grow and flourish while allowing them to focus on their drugs.
“This leads to a better and cheaper way to research and develop new drugs.
“This model has already proved lucrative in America, with similar companies already up 280%, 480% and even 5,662%.
“The only difference is that this company is the only one tailored to meet China’s biotech massive-growth needs.”
OK, so some kind of service provider for biotech companies — maybe a contract research organization? What other clues do we get?
“It just IPO’ed this year and it was one of the most in-demand stocks in recent history.
“It is truly a one-of-a-kind company and this stock alone could soar thousands of percent over the years.”
There have been quite a few Chinese biotechs going public this year, so that narrows it down a bit — but, again, I can’t be 100% certain of this one given the limited clues… the Thinkolator’s best answer here is Viva Biotech (1873 in Hong Kong, also has an OTC ticker at VBIZF but, again, no actual trading so don’t count on that), which had a massively oversubscribed IPO in Hong Kong about six months ago. The best piece I’ve seen explaining this one is a South China Morning Post article titled “Investors pile into Viva Biotech’s Hong Kong IPO as they are confident of the R&D services provider’s business model.”
Here’s how the company describes itself:
“Viva Biotech ‘s mission is to become a cradle for innovative biotechnology companies around the world. Viva Biotech has developed a scalable business model combing the conventional cash-for-service (CFS) model and its unique equity-for-service (EFS) model. Under the CFS model, the Group provides structure-based drug discovery services to its biotechnology and pharmaceutical customers worldwide for their pre-clinical stage innovative drug development, covering the full spectrum of the customers’ needs for early stage drug discovery, including target protein expression and structure research, hit screening, lead optimization and drug candidate determination. Viva Biotech also provides drug discovery and incubation services to biotechnology start-up companies with high potential under its EFS model. As of June 30, 2019, Viva Biotech had provided drug discovery services to 388 biotechnology and pharmaceutical customers worldwide, worked on over 1,000 independent drug targets, delivered over 11,000 independent protein structures, and incubated a total of 37 early stage R&D projects.”
The “home run” potential is that Viva provides its services to biotech developers both on a cash for service basis and, sometimes, in exchange for equity in their drug developers, that “Equity for service” model … so they do have cash flow and are actually profitable, and they also have that portfolio of “just maybe” investments in (usually extremely early stage) drug developers, though you’ll have to decide whether the business is growing fast enough to justify the current valuation. As of the latest interim results, they have a PE ratio of about 50 and do have order flow growth in their core business of about 59%, and they also paid a small dividend in this first period since going public (half a HK cent, so don’t get too excited — if annualized to a penny a year, that would be a little less than a quarter of a percent dividend yield). They probably won’t report again for three or four months.
There has been some early indication that the business is scalable, they roughly doubled their revenue from 2016 to 2018 and that led to a quadrupling of net income… so that’s interesting, and the fact that they’re holding equity in lots of little startups provides some hope of future growth, but I can’t say that I know enough about this one to get excited just yet, and their website is down at the moment so I’m a bit stunted in my efforts to dig deeper… if you want to dig in a bit, their Hong Kong Stock Exchange page is here,
So, as I was thinking yesterday when I looked at BeiGene, the first stock of the four teased by McCall, I still think it’s an interesting area… though it’s not really a “new” notion that Chinese biotech has a lot of potential over the next few years. Hedge funds and venture capitalists have been spending heavily in this area for several years, and it’s definitely a mainstream topic in the Chinese press (there was a piece in the South China Morning Post about a year ago that gives some pretty good background).
That doesn’t mean you can’t invest, we’re almost never really discovering brand new ideas as individual investors, and you don’t have to be first… but it does mean you probably have time to think it over and can push that FOMO generated by the newsletter teasers to the back of your mind. This is not a sector that’s going to double in a week, most of these companies are pretty new to the public markets and have had their ups and downs this year so far, and none of them seem to be on the verge of releasing earthshaking news (other than BeiGene, whose big news came out a few weeks ago on that Amgen investment)… so I’d just suggest that you take your time, do your research, see which stocks seem appealing, and, since these are pre-revenue biotechs, keep your bets small and try to listen to that devil’s advocate in your head who’s telling you that many (or most) of these companies fail.
And, of course, come back and let us know where you’re putting your money, so we can all get a wee bit wiser. Thanks for reading!