
EM spring: A brighter season for emerging market stocks may be ahead
Two longtime headwinds may be turning into tailwinds for emerging market stocks: The Chinese economy and the US dollar.
In the past five years China has leaped from fast follower to global pioneer in drug discovery and development.
We believe that Chinese companies have established large competitive advantages in costs and speed of discovery and development.
While it’s now a top source of biopharmaceutical innovation, we believe China’s biotech sector is still in its early stages.
China is unique among developing markets, not only for the sheer size of its economy1, but for its place at the forefront of global innovation in biotechnology. As long-term investors in China’s biotechnology innovation space, we are enormously encouraged by the dynamic progress of these leading Chinese companies. How did China’s biotech industry grow so big and so fast — and how much further can it grow?
The story started in 2015, when Chinese regulators eliminated the need for big upfront capital expenditures to build manufacturing plants, which allowed biotech startups to accelerate their development.
Then in 2017, China officially joined the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH), which allowed them to match global drug regulatory system and standards. ICH standards, along with China’s large patient pool, have enabled much faster patient recruitment for trials at a lower cost. Hence, pipeline drug assets can much more rapidly gain proof of concept data to help overcome any biological/clinical risks.2
China’s large talent pool has been the critical link between these factors and its rapid move to leadership position in the biotech innovation space.
To put this in perspective, in the past five years China has leaped from fast follower to global pioneer in drug discovery and development. It leap-frogged research and development of conventional chemical and biologic drugs into the forefront of new complex modalities, which can potentially be more efficacious against devastating diseases such as cancer.
Today, Chinese leaders in biotechnology innovation include both conventional biotech or pharma drug companies and CRDMO (Contract Research Development and Manufacturing Organization) companies. The CRDMO players partner with biotech/biopharma companies across all stages of drug research and development and commercialization such as discovering a new drug molecule, designing the manufacturing steps of these molecules, and manufacturing drug molecules for trials or commercialization post approvals.
Chinese companies have established global clinical and commercial leadership in hematology oncology therapeutics, including Carvykti (a treatment from Legend Biotech in partnership with Johnson & Johnson for adult patients who have cancer of the bone marrow called multiple myeloma) and Brukinsa (a treatment from BeiGene for non-Hodgkins lymphoma). As a result, China has become a rich hunting ground for global pharma and biotech leaders looking to enrich their clinical pipelines, including AstraZeneca, Merck, GlaxoSmithKline, Johnson & Johnson, BioNtech, and more.3 China went from contributing 4% of global biotech out-licensing deals to global pharma companies in 2019-2020 to 12% in 2023-2024, valued at $48 billion.4
In our opinion, China’s biotech sector is still in its early stages. While it’s already a top source of biopharmaceutical innovation globally, the value it captures is limited because it has yet to tap into a key area of value creation – late-stage global clinical development and commercialization. Evidence suggests that this could be the next stage in China’s emergence on the world biotech scene.
We believe that, over time, China biotech revenues and profits are likely to see a step-function expansion through milestone and royalty revenues tied to clinical development progress and commercialization. Much of the biotech hunt for China is about probability adjusting for such milestones/royalties by closely following clinical and commercial progress of assets in the China biotech and CDRMO space.
The CDRMO opportunity is, in our view, enormous and relatively low risk. These are service businesses with stable and growing cash flows and large optionality associated with intellectual property licensing.
We believe that Chinese companies have established large competitive advantages in costs and speed of discovery and development. For example:
The Invesco Developing Markets Fund is focused on structural growth companies with durable advantages and real options, which has led us to several interesting investments in health care companies in China and beyond.
As we said at the outset, China is now at the forefront of global innovation. It is still early days, and we are excited to have front row seats to what could be some of the most important – and life-changing – drug discoveries in history.
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Important Information
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All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 Emerging Markets (EM) countries. With 1,198 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization in each country.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile. The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The health care industry is subject to risks relating to government regulation, obsolescence caused by scientific advances and technological innovations.
Investments focused in a particular industry, such as pharmaceuticals and biotechnology, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.
Investing in securities of Chinese companies involves additional risks, including, but not limited to: the economy of China differs, often unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, allocation of resources and capital reinvestment, among others; the central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership; and actions of the Chinese central and local government authorities continue to have a substantial effect on economic conditions in China.
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