Can the Global X China Biotech Innovation ETF Overcome Industry Headwinds

The Global X China Biotech Innovation ETF is down nearly 20% year-to-date, but up 1.2% over the past week. The sector is key to government plans to industrialise, and the country’s ageing population and expanding middle class could make the market attractive to investors.

  • Private investment in Chinese biotech start-ups increased from $5.4bn in 2016 to $39.7bn in 2021, according to Bloomberg.
  • In July WuXi Biologics announced it would spin off its international business with an IPO in Hong Kong.
  • China’s healthcare market is forecast to expand from $900bn in 2019 to $2.3trn in 2030.

The Global X China Biotech Innovation ETF [CHB] is down 19.4% year-to-date but up 1.2% in the past week.

The sector has been identified by President Xi Jinping as one of the top 10 priority sectors under the Made in China 2025 industrialisation strategy. In late August the Chinese government issued a 24-point list of guidelines designed to boost the business climate and attract foreign direct investment, highlighting biotech as “an area of major focus”, reported Fierce Pharma.

The country is home to an ageing population and an expanding middle class, factors that could make the market attractive to investors. Made in China 2025 was introduced in 2015; private investment in Chinese biotech start-ups has increased from $5.4bn in 2016 to $39.7bn in 2021, with the combined market value for the sector surging from $3bn to $380bn over the same period.

The ETF’s muted performance could be a reflection of headwinds facing the industry, including June reports that China was raiding US companies; political tension between the US and China; and drug-pricing policies that have been making it difficult for China’s biotech firms to turn a profit.

Even so, some Chinese biotech firms have developed novel therapies unavailable in the West, attracting the attention of multinationals. In June, AstraZeneca [AZN.L] announced it signed an agreement with Shanghai-based biotech firm Cholesgen for an undisclosed sum to develop first-in-class treatments for high cholesterol.

Market Leaders

CHB’s holdings are concentrated in biotech firms, which account for 81.2% of the fund’s exposure as of 31 August. The next-largest exposures were to other pharmaceuticals (8.3%), generic pharmaceuticals (7.9%), medical specialties (1.5%) and major pharmaceuticals (1.1%).

The ETF’s top holding is leading open-access biologics company WuXi Biologics [2269.HK], which accounts for 9.2% of its portfolio as of 29 September. The firm’s share price is down 23.7% year-to-date, but up 4.5% in the past week.

In July the company announced it would spin off its international business with an initial public offering (IPO) in Hong Kong. WuXi plans to use the capital raised from the IPO to build manufacturing facilities in Singapore, bolster production capacity in China, and finance strategic investments and acquisitions. The following month, WuXi announced its revenue rose 17.8% year-over-year to RMB8.5bn, while gross profit increased by 4.3% to RMB3.6bn.

The fund’s second-largest holding, Chongqing Zhifei Biological Products [300122.SZ], announced in January that it extended its exclusive vaccine distribution contract with Merck [MRK.DE] through 2026, a deal valued at $14.8bn. Chongqing Zhifei is down 13.7% year-to-date and down 0.7% over the past week.

The CHB fund’s third-largest holding is Changchun High-Tech [000661.SZ], comprising 7.8% of total holdings. The company’s stock is down 20.5% year-to-date, but up 2.2% over the past week.

Leveraging Innovation

The Covid-19 pandemic caused several weaknesses of China’s biotech sector to come to light, including a weak culture of research and development (R&D), vaccine nationalism and a hesitancy with regard to new technologies.

“The public health crisis was a test for the biopharma sector and shows innovation doesn’t just pop up in a day, but comes from long-term accumulation, not just by one company, but by the whole industry under the auspices of the entire country,” Wang Jingsong, Founder of Shanghai-based drug developer HBM Holdings [2142.HK], told Bloomberg in May.

However, with China’s healthcare market forecast to expand from $900bn in 2019 to $2.3trn in 2030, according to Ping An Group [2318.HK] Co-CEO Jessica Tan, local biotech firms could stand to gain should the sector successfully transition from one focused on generics to one focused on R&D and innovation.

Out of 31 analysts providing ratings for WuXi Biologics stock, 15 rated the shares a ‘buy’, 15 rated them ‘outperform’ and one rated them ‘hold’. A median 12-month price target among 25 analysts represents upside of 68.5% from its most recent closing price.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

Latest articles