New Drug Development Going Global
The authors are analysts of NH Investment & Securities. They can be reached at william.ku@nhqv.com and weihan@nhqv.com, respectively. – Ed.
1. Domestic market conditions remain sound
Major pharmas sustain growth
Up until 2012, Korea’s pharma industry players mainly focused on generic drug sales, targeting domestic consumers. We note that national health insurance spending showed around 10% y-y growth for several years in the period before 2010. However, the business landscape changed in the wake of drug price cuts in 2012, which were undertaken amid concerns towards the national health insurance system’s financial situation. Against this backdrop, major pharmas shifted their focus from selling generics to developing new drugs. Since Hanmi’s announcement of a licensing-out deal in 2015, major Korean pharmas have rushed to beef up their R&D budgets. At present, Korean pharmas enjoy robust earnings growth thanks to: 1) greater demand stemming from population aging; 2) an increase in national health insurance spending thanks to the introduction of Moon Jae-in Care (expansion of national healthcare coverage); and 3) market reshaping, led by major pharmas.
2. New drug development going global
Number of FDA approvals began to exceed that of MFDS approvals in 2018
In beefing up their R&D fundamentals, Korean biotech players have been greater targeting overseas markets in recent years, as evidenced by a rise in US and EU approvals for drugs from major domestic biosimilar players (such as Celltrion and Samsung Bioepis), and FDA approvals for SK Biopharm’s two new drugs. Turning to Korea, however, the number of approvals by the Ministry of Food and Drug Safety (MFDS) peaked out in 2015, before falling to zero in 2019. In fact, not only major firms but also newly-created startups have increasingly chosen to either conduct clinical trials abroad rather than in Korea, or opt for multi-country clinical trials that include research sites in Korea. Moving forward, we expect domestic players’ R&D efforts to further go global. Also worth noting, the combined value of licensing-out deals at domestic biotechs/pharmas arrived at a record high level in 2019, a development that proves that domestic bio startups boast R&D capabilities on par with those of global players. Overall, we believe that domestic firms now stand on equal footing with their DM peers in terms of: 1) factory management knowhow; 2) clinical data expertise; and 3) approval process acumen.
3. Domestic VC’s investment remains active
VC investment remains active amid steady IPO demand
In 2H19, weighed upon by news of failed phase III trials by major domestic pharmas (Sillajen, Helixsmith, and HLB), investor sentiment in the bio/pharma sector weakened. Furthermore, the eruption of the Lime Asset Management scandal drove down mezzanine investment, leading to a tough funding environment for bio/pharma players. With the IPO market having also turned sluggish, AptaBio (aptamer) and OliPass (RNA) suffered weak share performances following their public offerings. But, from end-October, domestic investor sentiment began improving in line with a rebound in the Nasdaq Biotechnology Index, resulting in the listing of a number of new drug developers, including Raphas, TiUM Bio, Med Pacto, and Bridge Biotherapeutics (that said, track records for licensing-out deals were somewhat unclear for companies other than Bridge Biotherapeutics). Even amid a somewhat turbulent industry landscape in 2019, domestic VCs actively invested in nascent unlisted companies. Of note, unless market conditions significantly worsen, demand for IPO deals tends to remain steady, rendering a favorable investment environment for VCs (which often choose IPOs as an exit strategy). All in all, we believe that the screening of promising nascent players and steady efforts to publicly list them will continue to boost the bio industry.