China’s drug pricing policy restricts biotech profits

Chinese biotech companies are struggling to stay profitable as Beijing’s pricing policy undermines efforts to build a domestic drug industry with capital markets.

China has allowed medical biotech startups such as BeiGene, Zai Lab and RemeGen to fuel the growth of its industry and help domestic companies develop innovative drugs.

As of 2018, 40 early stage companies have been floated in Hong Kong under a special listing regulation for pre-revenue biotech companies. But nearly five years later, none of them are profitable, according to an analysis of public data by the Financial Times.

While it is not unusual for biotech groups to take time to become profitable, Beijing’s reforms to drug pricing policy have raised questions about their chances of success.

In China, hospitals buy drugs from companies through prior negotiations with the government, which covers most of the cost.

Over the past five years, the government has expanded its range of products through the reimbursement program to include more new patented pharmaceuticals. Without the ability to charge high prices for innovative drugs, companies will struggle to recoup research costs.

The latest price negotiations in early January added a total of 111 new drugs to the reimbursement list, an average price reduction of 60 percent compared to previous years.

“The fee reforms since 2018 have affected the revenue and profits of pharmaceutical products,” said Zhao Bing, an analyst at Huajing Securities.

The average value of biotech companies in Hong Kong in 2018 was By 2022, it’s down 30 percent, and more than three-quarters are trading below their list. The rate of new listings has also been halved, from 9 in 2021 to 5 in 2022.

Zhu Pai, managing partner of Shenzhen-based Efung Capital, said it will sell some projects. [for] It will cost billions of yuan [bringing in] Only in the tens or hundreds of millions” and companies fail to cover their huge research and development costs or support ongoing research.

“China’s Biotech [sector] It was hit hard last year,” he said.

The pressures caused a wave of consolidation. Harbor Biomed, which focuses on immuno-oncology, has cut its drug pipeline by selling its Suzu plant to Wasi Vaccines. Cancer drug maker Cstone Pharmaceuticals shut down operations at its Suzhou facility in early November to cut costs.

“I think we’re going to get a lot more questions, and all of our peers around profitability,” said Josh Smiley, chief operating officer of ZYLab, a Nasdaq and HKEX-listed company valued at more than $8 billion.

“New money is very difficult today,” said Zay Lab, who believes he will be profitable in three or four years.

China’s zero-covid policy, with significant restrictions on activities across the country, has slowed the R&D approval process due to difficulties in recruiting patients and conducting clinical trials continuously.

According to a survey by Shenwan Hongyuan Securities, the number of newly approved drug licenses for domestic companies last year was just 11 as of mid-December, down from 31 products by 2021.

China has an established pharmaceutical industry in addition to its startups, which is expected to increase revenue by 19 percent by 2021. But most of its players produce generic drugs originally developed overseas rather than inventing their own.

New Chinese biotech companies have benefited from a series of reforms since 2015, which have promised to speed up the drug approval process and bring the regulatory framework in line with international standards.

But three years later, the authorities introduced new pricing regulations to reduce public health care budgets and private patient costs, disappointing investors.

“I think the market has shown us that you have to be more careful with the business perspective,” said Jordan Liu, associate partner at Bain.

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