1、Asia Pacific Equity Research03 May 2019 China Healthcare SectorBiotech 101:Chinas PD1/PD-L1 SectorHealthcareLing Wang AC(852)2800 Bloomberg JPMA LWANG Leon Chik,CFA(852)2800-David XY Li(852)2800-Sherry Yin(852)2800-Christine Wang(852)2800-Alex Tso,CFA(852)2800-J.P.Morgan Securities(Asia Pacific)Limi
2、tedSee page 105 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the o
3、bjectivity of this report.Investors should consider this report as only a single factor in making their investment Within Chinas Pharmaceutical industry,we believe early signs of a shift from volume-driven to innovation-driven growth are emerging.We expect thistrend to intensify,driven by favorable
4、regulatory policies and improved patient access to innovative drugs.We believe leading this wave is the market for biologics oncology treatment/the emerging PD-1/PD-L1 monoclonal antibody(mAB)market.We see this space growing 28%p.a to Rmb79.9bn(or US$11.6bn)revenues by 2030;big enough for multiple w
5、inners riding this wave.We expand our coverage of the biologics space;initiating coverage on Shanghai Junshi(OW,HK$37)and CStone(OW,HK$18)and assumingcoverage on BeiGene(OW,HK$93(H)US$155(N)and Innovent(OW,HK$33).All have integrated platforms and broad pipeline,which we think are keys to success.Fas
6、t growing China biologics market offers significant opportunities.The China biologics market is at an early stage.Eight of the top 10 drugs in the USA are Biologics,versus two in China.With the market (excl.TCM)still dominated by generic products,we expect strong growth for the biologics market driv
7、en by a supportive regulatory environment,improved reimbursement,and increasing demand for novel drugs,including biologics and targeted therapies.Strong growth expected for Chinas PD-1/PD-L1 mAB market.The global PD-1/PD-L1 mAB market has grown rapidly since the launch of the first PD-1 inhibitor in
8、 2014(US$10bn revenues in 2018);while Chinas PD-1/PD-L1 mAB market has just begun to emerge.We project the Chinas PD-1/PD-L1 market to reach Rmb79.9bn(or US$11.6bn)revenue by 2030,a28%CAGR.Longer run,we expect domestic players to dominate market share given their pricing advantage over(MNCs)and incr
9、eased clinical data.Opportunity to buy into Pioneers early:BeiGene,CStone,Innovent and Shanghai Junshi are top players in the space.We view these stocks as compelling opportunities to access the fast growing China biologics market.The PD-1/PD-L1 mABs of these four companies are expected to be among
10、the first five to be introduced to the market among the domestic players.We project the combined market share of the top 5 companies(including Hengruis(OW,covered by Leon Chik)PD-1 mAB)at peak to be over 50%among the domestic players.These companies also have strong drug development platform for sus
11、tained growth and future innovations.Investment risks.A high growth rapidly evolving sector,like China biotechnology,comes with uncertainties.In the intermediate term,we believe execution risks,clinical,regulatory and marketing risks/pricing pressureare key risks.The space is also in the early stage
12、 of commercialization.News rather than earnings is the stock driver,downside risks are development setbacks potentially exacerbated without an earnings cushion.China Biotech CoverageNameTickerRecPTBeiGene(HK)6160 HKOWHK$93BeiGene(US)BGNE OWUS$155CStone2616 HKOWHK$18Innovent1801 HKOWHK$33Junshi1877 H
13、KOWHK$37Source:Bloomberg,J.P.Morgan estimates2Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 Table of ContentsExecutive Summary.3Four recent Hong Kong Biotech IPOs how do they stand among the international peers.6Overview of China oncology market.8China biologics market.8Biopharmaceutical
14、 market in China is still at an early stage and expects to have strong growth.9Strong industry tailwind for the biotechnology industry in China.10PD-1 and PD-L1 mAbs market overview.12Mechanism of action.12Key characteristics of PD-1/PD-L1 therapy.12Anti-PD-1 and PD-L1 mAbs are expected to become ba
15、ckbone therapy for cancer treatment.14Global anti PD-1/PD-L1 market landscape.14Competitive landscape in PD-1/PD-L1 mAB market in China.14Clinical trials under development for large indications.15Projections of PD-1/PD-L1 market size in China.16Investment risks.17Companies.20Beigene.21CStone Pharmac
16、euticals.39Innovent Biologics(1801).62Shanghai Junshi Biosciences.793Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 Executive SummaryWe are expanding our coverage of the China biologics industry.We are initiating coverage on Shanghai Junshi(1877 HK-OW)and CStone(2616HK-OW)and assuming cov
17、erage on BeiGene(6160 HK/BGNE US)and Innovent(1801 HK-OW).As pioneers in the Chinas biopharmaceutical industry,we believe these companies provide good exposure to the fast growing China biologics market.The PD-1/PD-L1 mABs of these four companies are expected to be among the first five to be introdu
18、ced to the market among the domestic players,and we expect these companies to gain meaningful market share in this market.These companies also have a strong drug development platform that enables sustained growth and future innovations,driven by both organic growth and external partnerships.Figure 1
19、:Stock relative performanceSource:Bloomberg.Fast growing China biologics market offers significant opportunities for domestic and multi-national playersWe expect strong growth for the China biologics market driven by a supportive regulatory environment for innovative products,improved patient access
20、/reimbursement and huge demand for novel therapies.Within a broader trend in Chinas Pharmaceutical industry towards therapeutic drugs from more traditional medications,we believe early signs of a shift from volume driven to innovation driven growth are emerging.As an important component of innovativ
21、e drugs,thebiologics market is still at a very early stage in China.Compared to the global level,China lags in biologics innovation,with the majority of the market share(excluding TCM)currently still dominated by generic products,thereby creating substantial and sustainable opportunities for players
22、 developing innovative biologics.7080901001101201301401501601702616 HK Equity1801 HK Equity6160 HK Equity1877 HK EquityBTK IndexKey glossarymAB monoclonal antibodiesNMPA National Medical Products Administration(former CFDA)NRDL-National Reimbursement Drug ListPD-1 Programmed death protein 1PD-L1 Pro
23、grammed death ligand 14Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 Figure 2:Market growth is shifting towards therapeutics-Trend by category Source:BeiGene Company Report&IQVIAOur model projects PD-1/PD-L1 mAB market in China to reach Rmb79.9bn(or US$11.6bn)revenue by 2030,big enough t
24、o support multiple winnersImmuno-oncology therapies(IOs)are expected to become the backbone therapies for a wide variety of tumors due to their distinctive characteristics(broad efficacy&good safety).While the global PD-1/PD-L1 inhibitors market has been growing rapidly since the launch of the first
25、 anti-PD-1 MAB in 2014,and has already reached over US$10bn revenues in 2018,Chinas PD-1/PD-L1 mAB market has just begun emerging.Our market model projects the China PD-1/PD-L1 mABs market,if successfully developed,to reach Rmb79.9bn(or US$11.6bn)revenue by 2030,driven by increasing new cancer cases
26、,improving national reimbursement(NRDL)of innovative drugs&commercial insurance coverage,and potentially improving efficacy by novel combinations.Over the long run,with the increased body of clinical data from domestic PD-1/PD-L1 mABs and pricing advantage,we expect the domestic players to take sign
27、ificant market share,while products from MNCs are likely to be reserved for high-end patients with premium ability to pay.Strong industry tailwind The growth of the China biopharmaceutical industry has been fueled by increased spending in the life sciences sector and the Chinese governments favorabl
28、e policies to attract talent from overseas.Recently Chinas regulatory environment has become increasingly favorable for innovative drugs that address unmet medical needs bysignificantly accelerating the new drug evaluation/approval process.Although currently the efforts in boosting the Chinese biote
29、ch industry by the government have not fully translated into biologics innovations(to the level of western countries),we believe the efforts have created a strong basis for future innovation in the region.In fact,we expect the four companies,although they are currently focused on fast follow-ons and
30、/or biosimilars,to rapidly develop and manufacture innovative biologics once their R&D platform is upgraded and novel pipelines are established.Investment risksGenerally speaking,the future of a high growth sector like China biotechnology,which is full of changing opportunities,is associated with ma
31、ny uncertainties.In the near to intermediate term,we believe execution risks,clinical,regulatory and marketing risks as the key risks in investing in biopharmaceutical companies in China.The China biopharmaceutical industry has,since inception,been driven by favorable policy support by the Chinese g
32、overnment,and hence along with huge 5Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 opportunities come significant risks.In our view,over the longer term,the main risk in investing in the China biopharmaceutical industry lies in the uncertainties surrounding the policies and macroeconomic
33、 factors.Additionally,the US/China trade war might also impact the sustainable growth of the industry since collaborations between Chinese companies and innovative biotech companies and top academic centers in the US are likely an important source of future innovations.The space is also in early sta
34、ge of commercialization.News rather than earnings are the key stock driver,with downside risks from development setbacks potentially exacerbated without an earnings cushion.Table 1:Stock performance(1M,3M,YTD)Stock performance1M3MYTDBeiGene-5%-4%-11%CStone-11%17%17%Innovent-16%20%4%Junshi5%49%32%MSC
35、I China index0.1%10%28%NYSE ARCA Biotech index(BTK)-10%-5%10%Source:Bloomberg.6Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 Four recent Hong Kong Biotech IPOs how do they stand among the international peersThe US biotech industry has a four-decade history behind it.It is considered the
36、most successful one in the world and remains the benchmark in international terms.All the four companies(Shanghai Junshi,CStone,BeiGene and Innovent)have been listed on the Hong Kong stock exchange within the last 12 months.The average HK IPO valuation of$4.05bn and the average gross proceeds raised
37、 of$508mn from these four companies have put them at the top tier compared to the US peers.For example,in 2018,the average market cap of the biotech IPOs is estimated to be$450mn and average gross proceeds about$96mn(Figure 4,according to MTS Partners).We believe this is mainly due to their broad pi
38、peline and multiple late stage assetstargeting sizable market opportunities at IPOs.Figure 3:IPO Status of the Four Recommended CompaniesSource:Company data.Figure 4:The 40 Years of US Biotech IPOsSource:MTS Partners(http:/ four companies under our coverage also have some common features that fit th
39、e demand in China,which we believe are quite unique for the current China biotech industry:Manufacturing capability:All the 4 companies have(or plan to build)a fully integrated platform from drug discovery to drug manufacturing(Junshi and Innovent have a built manufacturing facility and are expandin
40、g;BeiGene is building its manufacturing facility,and CStone is considering building a facility).Possessing their own manufacturing capability allows these companies to control production costs and have more control over their development and approval TickerHK IPO dateIPO valuation(US$mn)Net Proceeds
41、 (US$mn)Beigene8/8/201810,684 870 CStone2/26/20191,547 264 Innovent10/31/20182,054 464 Junshi12/24/20181,936 434 Average4,055 508 7Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 timeline.Also historically before 2016,domestic drug developers were prohibited from using contract manufacturi
42、ng organizations(CMOs)for manufacturing of biologic products.As a comparison,in the US outsourcing biologics manufacturing to CMOs has become a common strategy and the key trend as biopharmaceutical companies continue focusing on innovations and efficiency.Current drug portfolio is mostly fast follo
43、w-ons and thus lower risk.Currently the product portfolio of these companies are mostly fast follow-ons.Therefore the clinical risk profile is relatively low as compared to first-in-class compounds,which are inherently riskier.Although not first-in-class globally,these products are serving a large d
44、emand of unmet medical needs in China.Via the development of the current portfolio products,the companies are establishing their key capacities in R&D discovery,biologics manufacturing and clinical development,which we believe are the key foundations for future innovations once their novel pipeline
45、is established and the R&D platform is upgraded.Relatively late stage pipeline at IPOs.It is estimated that only about 1/3 of all the biotech IPOs in the US have Phase III or more advanced pipeline products at the time of their IPOs(Figure 5).As a comparison,the four names have on average 2.5+Phase
46、III assets at IPOs.Figure 5:MTS IPO Split by StagesSource:http:/ 2:Chinese biotech vs US biotech stock performanceStock performance1M3MYTDBeiGene-5%-4%-11%CStone-11%17%17%Innovent-16%20%4%Junshi5%49%32%MSCI China index0.1%10%28%NYSE ARCA Biotech index(BTK)-10%-5%10%Source:Bloomberg.The post IPO perf
47、ormance of each companies is different,with Junshi performing the strongest with almost 50%gain(likely driven by investor expectations on the new product launch)while BeiGene posted a 30%decline(partially driven by investor concerns over CELG/BMS merger news).We also see limited correlation between
48、the Chinese biotechnology companies with the US biotech market.8Asia Pacific Equity Research03 May 2019Ling Wang(852)2800 Overview of China oncology marketWithin the large Chinese pharmaceutical market,oncology is one of the large category,accounting for nearly 10%of the market in 2017 and is contin
49、uing to grow.We expect the medical unmet needs,regulatory reforms and the new reimbursement scheme for innovative oncology drugs to drive strong and long term growth of the oncology therapeutics market in China.There are currently over 4 mn new cancer patients in China each year,which is more than t
50、he combined total cancer incidents of US,EU-5 countries and Japan.According to the National Coalition of Cancer Research(NCCR)and Frost&Sullivan,the incidence of cancer is expected to increase at a 2.6%CAGR,from 4,195.2 thousand in 2017 to 4,781.2 thousand in 2022.China biologics market We expect st