China healthcare: a growing force

Chinese health care companies
Key takeaways
Reforms stimulate innovation
Significant reforms in the Chinese health care system have led to a booming drug research and development ecosystem.
Chinese drug innovation going global
Chinese biotechs are now able to meet the innovation bar set by global regulators in the US and Europe, which will allow them to continue to gain overseas approvals for additional drugs.

Over the past few years, the Chinese health care system has undergone significant reform.

Initiatives to stimulate innovation, especially around drug research and development (R&D), have been the most impactful, in our view.

The result is a booming drug R&D ecosystem including quality biotechs and their R&D outsourcing partner companies.

We expect reforms to provide tremendous industry tailwinds for the next decade and, as long-term investors in this space, we are excited about the new opportunities that are being created.

Structural changes are boosting drug innovation

In 2015, the government implemented reforms in the drug R&D gatekeeping regulatory bureau, the legacy Chinese Food and Drug Administration (FDA), to make it as efficient and high-quality as global peers such as the US FDA.

China went a step further in 2017 when it committed to elevate and integrate its R&D quality to global standards by becoming a member of ICH,1 a global consortium of regulatory authorities from ten countries.

We believe that this move can do for the Chinese health care industry what China’s World Trade Organisation membership did for manufacturing when it joined that organisation in 2001.

Another significant action was the cancellation of the requirement for companies interested in doing drug innovation to own an in-house manufacturing facility.

This made it much easier for scientists to found biotech companies, more than 50 of which have been founded and grown to scale in China in the last three to four years.

These biotechs in turn provide strong demand to R&D outsourcing partner companies such as contract development manufacturing (CDMO) or contract research (CRO) companies.

Catalysed by these structural changes and combined with scientific breakthroughs, China’s abundant talent pool and health care private investment have been leading to a boom in high-quality biotech and CDMO/CRO companies.

The newly established Chapter 18A2 of the Hong Kong Exchange makes it possible to invest in many of these quality companies.

Chinese biotech and pharma landscape poised for divergent performance

The Chinese market is known for its vast patient pool and under-penetration of good therapies.

For example, 84% of the globe’s newly diagnosed oesophagus cancer patients are from China, as are 66% of global gastric cancer patients and 36% of global lung cancer patients.3

Meanwhile, standard of care therapies like monoclonal antibody cancer therapies were estimated to be prescribed to less than 15% of eligible patients in 2019.4

It is a market with a single public payer, the government, that is determined to improve patient affordability with faster reimbursements.

However, this does not mean an easy success for all drug companies in the market, which includes legacy large pharma companies mostly with generic business and newly emerged biotechs.

The public payer is rigorously focused on containing overall health care spending while paying more for effective new drugs.

We think the biotechs are better positioned to thrive under this market environment.

The government’s cost-containing initiatives have been creating a price cliff for patent-expired generic drugs and volume reduction for drugs with little efficacy.

These two categories are major revenue sources for legacy large pharmaceutical in China.

Thus, large pharmaceuticals are facing tremendous pressure on their existing business, and many of these companies are key parts of the MSCI Emerging Markets Index.

Chinese drug innovation going global

In addition to transforming the dynamic at home, we think the Chinese biotech companies and R&D outsourcing partners are going to play an increasing role globally.

Chinese biotechs are now able to meet the innovation bar set by global regulators such as the US FDA and the European Medicines Agency, which will allow them to continue to gain overseas approvals for additional drugs.

BeiGene’s US FDA approval for their Non-Hodgkin's Lymphoma drug in 2019 was the first example, and we expect more to come from BeiGene, Innovent Biologcis5 and others.

Importantly, Chinese biotechs are becoming important innovation partners for multinational pharmaceuticals and biotech companies looking to accelerate their R&D in China and globally.

This global presence is unprecedented.

For R&D outsourcing partner companies, we see global leaders rising from China such as Wuxi Biologics.3

This company is riding along the strong demand driven by scientific breakthroughs (especially for biologics drugs), and by outsourcing from multinational pharmaceuticals and biotechs who are looking for efficient R&D and quality manufacturing supply.

The top 10 largest CROs benefited from around 57% of outsourcing spend in 2018, which was 12% more than in 2011.6

Wuxi Biologics has a vast scientific talent pool, speed in delivery, and high-quality service that meets global regulators’ standards.

In our view, it is becoming the “go-to” R&D and manufacturing partner not only for rising Chinese biotechs but also for global drug innovators. 

Our approach to this space

As long-term emerging market investors, we are bullish about the drug innovation ecosystem in China.

We have been pioneers in this space, having been early investors in the public listings of Wuxi Biologics, Innovent, Hansoh, Samsung Biologics and a long-term investor in Jiangsu Hengrui.5

We are taking an active approach using our expertise in the space to look for quality biotechs with strong R&D and a competitive portfolio, as well as R&D outsourcing partner companies with global leadership.

This approach led us to an overweight position in high-quality Chinese health care companies with solid growth outlooks while they were small parts of emerging markets benchmarks.7

We believe this approach and our expertise in the space will allow us to keep taking advantage of the evolving landscape and to identify early more high-potential biotech and growth opportunities for R&D outsourcing leadership companies.

Shan He, senior research analyst for the Emerging Markets Equity team responsible for the health care sector, contributed to this piece. Dr. He earned a BS degree from Tsinghua University and a PhD in molecular biology and biochemistry from Johns Hopkins University School of Medicine. 


  • Source: International Council on Harmonisation of Technical Requirements for Pharmaceuticals for Human Use

    2 This Chapter sets out listing conditions, disclosure requirements and continuing obligations for Biotech Companies that seek to list on the Hong Kong Exchange.

    3 Source: China incidence data: Wanging Chen et al, A Cancer Journal for Clinicians, 2015; Global incidence data: GLOBOCAN

    4 Source: Invesco Emerging Markets Equity Team

    5 As of 31 December 2020, BeiGene, Innovent Biologics, Wuxi Biologics, Hansoh, Samsung Biologics and Jiangsu Hengrui were held in the Invesco Developing Markets strategy.

    6 Source: Tufts Centre for the Study of Drug Development, latest data available.

    7 The benchmark for Invesco Developing Markets Fund is the MSCI Emerging Markets Index. The benchmark for Invesco Emerging Markets Innovators Fund is the MSCI Emerging Markets Mid Cap Index. 

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Important information

  • Data as of 31 January 2021 unless stated otherwise.

    This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

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