DBS: The wave of domestically produced innovative drugs going overseas will continue for the short term or face pressure to adjust, and the medium- to long-term prospects are positive

The Zhitong Finance App learned that the “15th Five-Year Plan” for the development of the pharmaceutical industry in mainland China is aimed at increasing the share of China's first innovative drug (FIC) to more than 25% in the world by 2030. Jiang Weiming, executive director of DBS Hong Kong Equities Research, believes that due to the continued emergence of pioneering drugs, the sales CAGR (compound annual growth rate) of China's innovative pharmaceutical industry will accelerate to 20% over the next five years, and he has a positive view on the medium- to long-term prospects. However, due to the new pharmaceutical representative regulations and the interest rate hike environment, the industry may face adjustment pressure in the fourth quarter. BeiGene (06160) is the bank's preferred stock.

Overseas licensing transactions for innovative drugs from mainland China have increased. Jiang Weiming pointed out that, benefiting from the “patent cliff” and policy support from mainland China, the trend of domestic innovative drugs going overseas will continue. However, in the short term, the sector may adjust in the fourth quarter due to interest rate hikes and the impact of new regulations on mainland pharmaceutical sales representatives affecting the performance of pharmaceutical companies.

Jiang Weiming mentioned that in the past, the biotechnology industry was negatively correlated with interest rates. These companies needed financing to advance research and development, and high interest rates increased their financial pressure. If the Federal Reserve raised interest rates further, it might continue to put pressure on the sector. On the other hand, the new pharmaceutical sales representative regulations that came into effect in August caused companies to adjust their marketing strategies, which may slow down sales performance in the third quarter. Investors are advised to pay attention to the third quarter results announced by pharmaceutical companies, as well as the fourth quarter guidelines.

However, in the long run, he believes that China's innovative drug industry is ushering in structural benefits. External licensing of mainland innovative drugs has become an irreversible trend. The share of first-time innovative drugs will rise in the future, and they will continue to provide drug candidates for overseas licenses, and the profit margin on related transactions exceeds 90%, which is expected to drive the industry's valuation to be re-evaluated.

With strong R&D support, the amount of overseas authorized transactions for mainland innovative drugs in the first half of this year was almost equal to that of last year. He explained that major international pharmaceutical companies are facing a patent end crisis due to patent expiration. They need to supplement their product portfolio through purchase authorization. The imbalance between supply and demand gives domestic high-quality targeted drugs the right to price and bargain.

At the same time, the Mainland government has introduced a series of policies to address the “pain points” of the industry, including allowing the price of innovative drugs to remain stable over a period of time (free from price reduction pressure), facilitating inclusion in the National Medical Insurance Drug Catalogue (NRDL), and providing financial support to SMEs to encourage the development of innovative drugs.

In terms of stock selection strategies, DBS chose BeiGene. Jiang Weiming pointed out that BeiGene has a self-built factory and a huge sales team in the US, which can effectively avoid tariff risks, and the US market accounts for a very high share of its revenue.

In the past biotech stock boom, as soon as a pharmaceutical company announced an overseas licensing transaction with a high total amount, including down payment, milestone amount, and sales share, the stock price skyrocketed. However, Jiang Weiming said bluntly that institutional investors have become smarter and are no longer easily swayed by the amount of money.

He admits that the current capital market's valuation attitude towards innovative drugs is “strict.” In the past, the market would calculate unimplemented milestones and shares into the valuation, but now buyers only look at the amount of the actual down payment, that is, how much cash they receive.

Furthermore, with regard to the “whether pre-clinical licensing deals will become mainstream,” Jiang Mingwei believes that since pre-clinical drugs are still “on mice and white rabbits,” they are far from human testing and commercialization, unless they are extremely rare and popular targets with very little competition, the mainstream market will still target projects that have already entered the clinical stage and have higher certainty.