In praise of slow and steady: Sea turtles and the growth of China’s economy

March 24, 2016 kmuller

It is said so often that it has become a financial markets cliché—when China sneezes, the rest of the world catches a cold.

After experiencing rapid growth for more than a decade, China’s economy has experienced a gradual slowdown in the last two years. The drama of the stock market crash in 2015 and at the start of 2016, and the new pace of China’s annual growth rate—6.9 percent in 2015, its lowest reading since the global financial crisis—has affected investor sentiment around the world. Seen as a driver of the global fiscal landscape, the state of the Chinese economy is a major trigger for ripple effects of either high hopes or acute concern across a global investor audience.

CHinaBIo Partnering Forum

In spite of lackluster indicators, world economic leaders remain unfazed when it comes to China’s position. “I remain very positive on China, and my position is unchanged,” James P. Gorman, chairman and CEO of Morgan Stanley, said to Chinese news source Xinhua, as reported by the Global Times. “The sheer size of the economy, after years of rapid 10-percent growth, means that it is the right time to shift gears to a lower but more sustainable growth rate. The slowdown has provided the space to focus on sustainability and the improvement of people’s livelihood.”

CNBC reported that IMF Managing Director Christine Lagarde downplayed the impact of the retreating growth rate as well. “China itself has embarked on an ambitious multi-year rebalancing of its economy, toward slower and more sustainable growth. This is a positive endeavor that, in the long run, will benefit everybody,” Lagarde said.

What does this mean for biotech?

For one thing, the pessimists can put away their ibuprofen and hot water bottles. China remains staunchly the world’s second-largest life science market, increasingly well-funded by government, VC and corporate investors. A slew of major deals, mergers and acquisitions in 2015 involving China-based R&D companies (e.g., Innovent Biotechnology, Hengrui Medicine, Kaifeng Pharmaceuticals) proves that China is emerging as a hotbed of partnering activity, especially for drug development. The positive trend in IPOs from Chinese companies since 2013, leading up to BeiGene’s USD 158 million US public offering to kick off 2016, indicates that Chinese biotech valuations remain strong, and has emboldened bullish investors waiting on a turnaround since the industry’s brief fizzle-out last fall. In addition, Chinese investment firms such as WuXi Healthcare Ventures’ and Ally Bridge’s high-profile investments in Western life science companies is one more manifestation of the pervasive cross-border nature of China’s investment strategy.

Dawn of a biotech revolution

Not only is China capitalizing on the Western macro-trend of pushing innovation for investment and licensing opportunities, the country is also feeding its own healthy appetite for leadership in early-stage innovation, prominent in China’s most recent Five Year Plan (2016-2020). The central government is injecting increased funds to spur biotech innovation, creating a national pharmaceutical market approaching USD 150 billion with roughly a third in biotech drug discovery, business intelligence source China Briefing reports. This is comparable to the United States’ and Europe’s pharmaceutical markets, demonstrating an impressive shift away from low-risk contract work in sales and generics (“biosimilars”) development—to novel therapeutic research.

A wave of biotech entrepreneurs, including Samantha Du, chief executive of Zai Lab, is unified in its aim to modernize China’s pharmaceutical industry and make the country a force in drug development. These entrepreneurs, nicknamed “sea turtles” by the Chinese industry, have been drawn home after training in the West to seek out opportunities in a rapidly improving business climate as Beijing pumps resources into its mission to create a more innovative, high-value economy.

Years prior, when Du was founding Chi-Med (now Hutchison China MediTech Limited), she recalls searching for assets and turning up with only “a domestic industry more interested in eking out margins from cheap generic drugs than investing in research and development. ‘The mindset was all about trading rather than innovation,’” she told the Financial Times. Gradually, however, the company began building its own R&D capabilities in partnership with Western companies like Eli Lilly and AstraZeneca. Chi-Med is now developing novel drugs for oncology and autoimmune diseases, with two drugs in late-stage trials and five other products in earlier studies. The company sold 7.5 million American depositary shares on the Nasdaq to raise USD 101.3 million in its IPO last week on March 17.

With soaring numbers of scientists, rising investment in R&D and growing demand for high-quality medicines from an aging population, China has all the pieces in place for explosive growth in its biotech sector, regardless of its economic growth rate. The Chinese innovation engine is gaining speed and well on its way towards becoming the world leader in pharmaceutical markets by 2020.

Meet many “sea turtles” and other Chinese entrepreneurs at ChinaBio® Partnering Forum, May 18–19, 2016 in Suzhou, China.

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