When the "long drought" of Hong Kong stocks of innovative drugs meets the "dew" of new productive forces.

On March 14th, the stock prices of Hangzhou Tigermed Consulting (03347) and Joinn Laboratories (06127), two major Hong Kong-listed pharmaceutical companies, surged together with substantial trading volume. In the morning session, their maximum gains reached 30.08% and 17.40% respectively. The catalyst for this increase was just a 105MB PDF file. It was revealed that after the A-share market closed, news of a draft proposal on the "Implementation Plan for Fully Supporting the Development of Innovative Drugs Along the Whole Chain" suddenly circulated in the market. The core of this proposal is to comprehensively promote key aspects of innovative drug research and development, approval, usage, and payment through policy guidance and support. Although the authenticity of the document has not been officially confirmed, the emergence of this "sweet dew" of new productive forces has finally nourished the long-suffering innovative drug industry. In fact, CXO pharmaceutical companies were not the first to be "nourished." On the day the document was leaked, on March 13th, the Hong Kong stock market's innovative drug sector collectively soared in the afternoon, with companies like KEYMED BIO-B (02162) rising by over 17%, REMEGEN (09995) by over 15%, ABBISKO-B (02256) by over 10%, and others like AKESO-B (09926) and LAEKNA-B (02105) also experiencing significant increases. Subsequently, HUTCHMED (HCM.US) surged nearly 30% in pre-market trading, and BEIGENE (BGNE.US) also rose by almost 17%. After all, the "full-chain support" from the policy side is a comprehensive positive for the innovative drug sector. Creating new productive forces for innovative drugs in five dimensions In October 2017, the Communist Party of China Central Committee and the State Council's General Office issued the "Opinions on Deepening the Reform of the Drug Evaluation and Approval System to Encourage Drug and Medical Device Innovation," which has been referred to by the market as the "36 Measures of the State Council." This document has played a significant role in promoting the structural reform of the domestic innovative drug industry in recent years. However, from an objective perspective, the main focus of the State Council's 36 Measures was activating the regulatory functions for innovative drugs from the approval perspective. As the development of the domestic innovative drug industry continues to deepen in recent years, issues such as "weak original innovation capabilities," "apparent homogenization of research and development," "lower-than-expected returns on innovation," and "weakening investment and financing support, affecting industry innovation and sustainable development" have become increasingly prominent. The deepening reforms of medical insurance control and optimization of drug supervision and evaluation rules from top to bottom have also started to falter in addressing the deep-rooted problems in the innovative drug industry. In this context, it has become increasingly necessary and timely to provide top-level design support for the development of the innovative drug industry from a holistic perspective. The "draft proposal" disclosed this time takes a comprehensive approach to the key problems facing the development of innovative drugs from the perspectives of research and development, approval, hospital access, payment, and investment and financing, providing practical policy guidance. As for the secondary market, investors are more concerned about which targets will directly benefit from the policy implementation. Who will benefit from the "full-chain support"? It is understood that in recent years, China's investment in basic research has grown rapidly, with an average annual growth rate of 15%, but the intensity of investment in basic research remains relatively low. In 2019, China's investment in basic research accounted for more than 6% of research and development funding for the first time, increasing to 6.3% in 2022, but it has not yet reached the target of 8% set in the "14th Five-Year Plan." In contrast, some developed countries such as France, Italy, and Singapore have intensities of basic research exceeding 20%, while the United States and the United Kingdom are over 15%. Data shows that the National Institutes of Health in the United States had a budget of over $48.6 billion in 2023, accounting for more than 50% of federal government funding for basic research. Therefore, in response to issues such as "weak original innovation capabilities," the policy this time outlines key technology research and development directions that will be supported, such as engineering cell gene editing, intelligent exploration of new drug targets, targeted cell interventions, artificial intelligence drug discovery, new drug screening and evaluation models. The document also proposes to have more than 10 first-in-class innovative drugs listed by 2027 and have more than 10 innovative drugs registered overseas for marketing. It emphasizes support for new targets and mechanisms, as well as the selection and support of key research and development catalog of innovative drugs that can address unmet clinical needs and have clear clinical value. The core research and development directions directly benefiting from this policy include: multi-molecular coupling, targeted protein degradation, immunomodulation, gene intervention, stem cell regeneration, microbiome therapy, mRNA vaccines and nucleic acid drugs, as well as innovative drugs with distinctive Chinese medicine diagnostic and therapeutic advantages. In the Hong Kong stock market's innovative drug sector, there are many pharmaceutical companies pursuing hardcore innovation and original innovation, such as BEIGENE (06160), SKB BIO-B (06990), ASCANTAGE-B (06855), JACOBIO-B (01167), EVEREST MED-B (01952), ABBISKO-B, HUTCHMED, and AKESO, among others. For example, Yun Dingxin Yao, in 2024, marks a critical year for the company's transition to innovative self-developed products entering clinical stages, with therapeutic mRNA tumor vaccines being a key focus of the mRNA platform. Currently, Yun Dingxin Yao is actively exploring the potential of mRNA technology platforms, developing multiple new preventive and therapeutic vaccines for infectious diseases and tumors. Its self-developed mRNA rabies vaccine project has achieved positive results in preclinical research on immunogenicity, reaching a milestone in preclinical conceptual validation. In addition, Yun Dingxin Yao is one of the few domestic biotechnology companies with commercial-scale self-produced mRNA vaccine capabilities. Similarly, Yasheng Medicine's core product Naitlix is China's first and globally best-in-class third-generation BCR-ABL inhibitor. After being approved for marketing in November 2021, it quickly filled the gap for slow-progressing leukemia patients with the T315I mutation in China.Treatment gap after drug resistance. And the drug has been internationally recognized for its innovative properties with the best potential in the global market. Last year, related studies of Nalitrex received oral presentations at the American Society of Hematology (ASH) annual meeting, marking the sixth consecutive year the clinical progress of this drug has been selected for oral presentations at the ASH annual meeting.In addition to the research and development side, the document also points out that innovation in drug development is encouraged at the approval end. It emphasizes the one-stop processing of approval and filing information, strengthens the mutual recognition of international multi-center clinical trial results, shortens the review process; shortens the implied license for clinical trials from 60 days to 40 days, and shortens the waiting time for communication meetings to within 30 days. Commercialization difficulties have always been a major issue in the development cycle of innovative drug companies, and this document provides practical policy guidance on the entry and payment ends. It is understood that domestic innovative drug companies currently face difficulties in being included in the medical insurance reimbursement catalog and in hospital procurement. For the former, a considerable number of innovative drugs currently cannot enter the medical insurance reimbursement catalog because the price negotiation reduction does not reach the minimum price calculated by the medical insurance department. Unlike the scenario where 90% of drugs are sold in retail pharmacies abroad, 90% of drugs in China are sold in hospitals and rural clinics, which means that if drugs cannot be included in the medical insurance reimbursement catalog, sales of new drugs are very difficult. In addition, data shows that new drugs that have successfully negotiated prices for three consecutive years from 2021 to 2023 have an average price reduction of over 60%, showing advantages in price-volume exchange. In addition, the difficulty in hospital procurement has also long been a problem for domestic innovative drug companies. According to a report released by IQVIA at the end of 2022, only about 10% of the top Class 3 hospitals in the country purchased innovative drugs included in the medical insurance reimbursement catalog in the past five years, with only 5.4% of hospitals purchasing innovative drugs included in the medical insurance reimbursement catalog in 2021. Therefore, the document points out solutions to these problems, stating that on the entry and payment ends, it will develop encouragement directories, prioritize inclusion in medical institutions' drug directories, implement rapid listing, and establish a medical insurance payment policy bias to increase the use of innovative drugs. This significantly improves the efficiency of innovative drug admission and payment, effectively solving the commercialization difficulties of innovative drugs. In the Hong Kong stock market, innovative drug companies with commercialized varieties such as INNOVENT BIO (01801), ZAI LAB (09688) and HENLIUS (02696) will benefit from this policy. In addition to supporting the development of innovative drug companies at the business level, support at the investment and financing level is also increasing. It is understood that the global biopharmaceutical industry's financing expectations are rapidly falling along with the expectation of a rate cut by the Federal Reserve, and it is still unknown when the financing winter will improve. Data shows that against the backdrop of a tightening financing environment, about 30% of Hong Kong's 18A companies are expected to run out of cash in 2024 if their operational and financing conditions do not improve, based on the current market's publicly disclosed cash reserve information. The cooling of venture capital and the rising cost of financing are major reasons for this. Data shows that in 2023, there were a total of 1797 investment and financing events in the Chinese healthcare sector, a 16.11% decrease compared to the previous year. In terms of financing amount, the financing amount in the Chinese healthcare sector in 2023 was about 150.2 billion yuan, a 41.82% decrease from 257.87 billion yuan in 2022. The situation for innovative drug companies on the secondary market is equally bleak. If ranked by the increase from the issuance price, only 3 out of the top 10 pharmaceutical companies in the Hong Kong biopharmaceutical sector have positive fluctuations in their stock prices. Previously, REMEGEN's stock price plummeted 22% due to rumors of "shortage of cash flow", which is a typical case of lack of market confidence. It is worth noting that the significant decrease in venture capital investment will directly lead to a reduction in future innovative drug achievements, thereby enhancing market confidence, which is particularly important for attracting investment in innovative drug companies. The key solution proposed in this document at the investment and financing level is to retain capital market financing channels for non-profit innovative drug companies; promote the exploration of innovative drug investments by long-term investors such as social security funds, pension funds, and corporate pensions; and encourage state-owned venture capital companies to invest in new targets, mechanisms, structures, and technologies. It is worth mentioning that currently, non-profit biopharmaceutical companies listed on the Hong Kong stock market account for 50.8% of all biopharmaceutical listed companies on the Hong Kong stock market. In other words, if a company has a certain level of hardcore innovative strength, a lack of funds may no longer be a constraint on its development in the future. This positive development is expected to continuously boost market confidence and company valuations in the secondary market.