Soochow: Domestically produced innovative drugs are highly competitive globally, and going abroad is still the main direction.

Soochow released a research report stating that the development of domestic new drugs in various stages of clinical trials and the participation of domestic new drugs in international multicenter clinical trials reflect a significant enhancement of China's research and development capabilities. Compared to the Chinese market, some developed countries overseas demonstrate higher payment capabilities for innovative drugs, providing a broader pricing space for innovative drugs and thereby bringing higher returns to drug development. China's various models for overseas expansion of innovative drugs are advancing side by side, fully demonstrating global competitiveness. With the potential launch of many major varieties of domestic innovative drugs, and by benchmarking against the situation of large single-product sales by overseas pharmaceutical giants, Soochow predicts that many pharmaceutical companies will achieve profitability between 2024 and 2026. With significantly enhanced research and development capabilities, domestic new drugs are entering a harvest period. The number of domestic new drugs in various stages of clinical trials has steadily increased since 2017, with a noticeable growth in the number of registration clinical trials conducted. In 2023, the number of registration clinical trials conducted by domestic pharmaceutical companies was 270, which is comparable to the 222 registration clinical trials conducted in the United States. The participation of domestic new drugs in international multicenter clinical trials has also shown a steady increase, rising from 207 in 2020 to 286 in 2023. Within this trend, the proportion of high-tech therapeutic methods and FIC products has significantly increased, with the proportion of clinical trials for antibody-drug conjugates (ADCs) increasing from 1.8% in 2018-2020 to 4.9% in 2021-2023. Other high-tech therapeutic methods represented by gene therapy and nucleic acid drugs have also increased in proportion. At the same time, due to the significant improvement in the efficiency of the new drug application (NDA) review process in China, the number of marketed drugs increased from 43 in 2017 to 79 in 2023, with a significant increase in the proportion of domestically produced drugs. There is great potential in overseas markets, and it is the right time for Chinese new drugs to go global. According to Frost & Sullivan analysis, the global pharmaceutical market as a whole is showing a growth trend, with the global pharmaceutical market reaching $1.4723 trillion in 2023 and expected to reach $1.7667 trillion and $2.0694 trillion by 2026 and 2030, respectively. Compared to the Chinese market, some developed countries overseas demonstrate higher payment capabilities for innovative drugs. According to OECD data, in 2022 China's per capita health expenditure was $979, while the top-ranked United States had a per capita health expenditure of $12,555, which is 13 times that of China. Taking into account various factors such as economic development level and healthcare system structure, developed countries often provide a broader pricing space for innovative drugs, leading to higher returns on drug development. China's various models for the overseas expansion of innovative drugs are advancing side by side, fully demonstrating global competitiveness. The current models for overseas expansion can be divided into self-built teams, NewCo, License-out, and mergers and acquisitions, each of which gives companies different degrees of authority in overseas market research and development, commercialization, and overall strategic decision-making. A typical representative of self-built overseas teams is BEIGENE, whose product zatinib became the first billion-dollar molecule in China in 2023. The NewCo model provides a new international path for domestic innovative drug companies, such as Shanghai Allist Pharmaceuticals Co., Ltd. trading vendetanib for equity in ArriVent company, and Jiangsu Hengrui Pharmaceuticals trading three GLP-1 products for a down payment of $100 million and a 19.9% stake in Hercules company. License-out is currently the most mainstream choice for Chinese pharmaceutical companies to explore overseas expansion. In recent years, the total amount and number of license-out transactions in China have been increasing year by year, with a total of 96 license-out transactions in 2023, with a disclosed total transaction amount of $42.1 billion, a 112% increase compared to the previous year. The total amount of down payments is also on the rise, with the total cross-border License-out down payment in 2023 amounting to $4.63 billion, a 305% increase compared to 2022. At the same time, the number and total amount of acquisitions of Chinese innovative drug companies by foreign companies have been increasing year by year, with the total amount of disclosed acquisitions in the first half of 2024 already achieving a 29.15% increase compared to the full year of 2023. Domestic innovative drugs are entering commercialization, and innovative drug companies are gradually becoming profitable. 1) The profitability of core biotech companies has improved year-on-year: Approximately one hundred domestic innovative drugs have been approved for listing from 2018 to 2023 (excluding vaccines, traditional Chinese medicine, and blood products), with 7 drugs achieving sales of over 1 billion in 2023 and 23 new drugs achieving sales of over 100 million in 2023, with significant room for future growth. 2) Breakthroughs in commercialization capabilities: Diversified business models including self-built marketing teams, commissioned sales, and collaborative sales have partially validated the business model. 3) Profitability is imminent: Benchmarking against the large single products of overseas pharmaceutical giants, Chinese innovative drug companies have nearly 800 abstracts at ASCO, with 35 oral abstracts. With the potential launch of many major varieties of domestic innovative drugs, and by benchmarking against the situation of large single-product sales by overseas pharmaceutical giants, Soochow predicts that many pharmaceutical companies will achieve profitability between 2024 and 2026. Domestic policies for innovative drugs are gradually warming up, providing multidimensional support for innovation. From a policy perspective, policies supporting the development of innovative drugs throughout the entire chain are gradually being implemented, with expectations for the constraints on valuation in research and development, approval, admission, and payment. On July 4, the State Council reviewed and passed the "Implementation Plan to Support the Development of Innovative Drugs throughout the Entire Chain," which provides comprehensive and multi-angle support for the development of innovative drugs in research and development, approval, admission, payment, and investment and financing, solving core pain points. In addition, new productive forces have become drivers for the development of the pharmaceutical industry, with reforms in medical insurance payment methods and medical insurance negotiations leaning towards innovative drugs, enabling medical insurance funds to "redeploy resources" and guiding more resources towards research and development innovation. It is recommended to focus on targets that have experience in registering overseas drugs and have strong expectations for overseas expansion. A combination portfolio allocation of leading and catalytic targets is recommended: In the A-share market, Jiangsu Hengrui Pharmaceuticals(600276.SH), BEIGENE(688235.SH), Haisco Pharmaceutical Group(002653.SZ), focus on Di Zhe Pharmaceutical(688192.SH), Sunshine Guojian Pharmaceutical(688336.SH), and Zejing Pharmaceutical(688266.SH); Recommended H shares are INNOVENT BIO(01801), HUTCHMED(00013), and Akeso Inc(06855).Risk warning: risks of innovative drugs not meeting expectations, delays in new drug research and development and approval progress, worsening competitive landscape risks, risks of medical insurance negotiation prices falling short of expectations, lower than expected drug sales, policy uncertainty, global business related risks, etc.