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More IPOs, mergers expected in China's drug contract research industry

With soaring investor interest in vaccine makers and the biotechnology sector due to the pandemic, China's medical contract research organizations are poised for a bout of mergers and public offerings, industry experts told S&P Global Market Intelligence.

As the frenzy over finding treatments for the coronavirus gathered pace in 2020, clinical trials and the role played by contract research organizations, or CROs, have come under the global spotlight.

CROs provide research and testing services to healthcare companies. Their services are typically divided into molecule research, preclinical and clinical trials.

In 2020, China's largest clinical CRO, Shenzhen-listed Hangzhou Tigermed Consulting Co. Ltd., debuted on the Hong Kong stock exchange, becoming one of Asia's largest healthcare offerings for the year, while another Hong Kong-listed CRO, Pharmaron Beijing Co. Ltd., acquired Exton, Pa.-based Absorption Systems LLC for $137.5 million.

Meanwhile, a privately owned Shanghai-based CRO, PPC Group, decided in October to merge with Australian clinical services provider Novotech to widen the scale of the combined entity's operations in Asia.

"CROs are a growing and increasingly specialized industry in China. They are the main elements in the pharmaceutical and biotech ecosystem and provide critical foundational support," Daniel Tu, founder of technology and biosciences-focused venture capital company Active Creation Capital, told Market Intelligence. He is based both in Hong Kong and the U.S.

As China attempts to encourage novel drug development, expenditure on drug research and clinical trials is expected to soar in coming years. Spending on trials in the country is expected to more than double to $40.6 billion by 2024 from $18 billion in 2019, according to data provided by Tigermed.

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Supporting biotech

CROs play a key role in helping the growth of biotechnology startups as they provide resources that young companies lack, said Wilfred Yuen, a Hong Kong-based analyst at Bank of China International.

Their development also dovetails with Hong Kong's drive to encourage biotechnology startups to list on the stock exchange. These startups range from cancer and rare disease drug developers to medical-device and vaccine makers.

Diabetes treatment developer Hua Medicine (Shanghai) Ltd. is one example of a Hong-Kong listed biotech company that uses CROs to carry out clinical trials and drug manufacturing.

"Our entire business is built on outsourcing. The CROs have the resources such as clinical trial sites and investigators along with other networks that do not make sense for us to build on our own," Hua Medicine's CFO George Lin told Market Intelligence.

With supportive government policies in place, experts such as Tu believe China's CRO industry is poised to grow bigger and better.

In addition, investor interest has soared in listed CROs.

Shares of WuXi AppTec Co. Ltd., one of China's largest CROs, have jumped 83% since listing in Hong Kong in December 2018, while Tigermed shares gained about 58% since their debut in August. Pharmaron stocks have also soared 174% since listing in November 2019.

Industry observers believe more Chinese CROs are likely to go public or seek secondary listings as they attempt to expand overseas and attract global investors. "Naturally, we should see a few of these CROs list in China's bourses," said Tu of Active Creation Capital.

Further consolidation also seems likely, said Bank of China International's Yuen, noting that for more established players, target companies could be overseas entities as buyers eye a more global footprint.

Listing in Hong Kong can also be a plus for overseas expansion as corporate disclosure and accounting norms follow global standards broadly and can help companies attract potential global partners, according to Yuen.

Overseas interest

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Many of China's CROs are in expansion mode, according to experts.
Source: Pixabay

Tigermed CFO Gao Jun said in a September interview with Market Intelligence that the company plans to use about 40% of proceeds from its public offering on overseas acquisitions.

North America and western Europe are the priority regions for such acquisitions, Gao said, noting that the company is keen to ramp up clinical trial capabilities there.

Tigermed will also consider buying assets that can help shift at least a portion of the clinical trial process online, especially in light of the disruptions that have occurred globally due to the COVID-19 pandemic, Gao added.

Novotech's merger with the PPC Group, meanwhile, aims to deliver a full suite of scaled clinical services — from the first study on humans to late-stage large population studies across Asia-Pacific.

John Moller, CEO of the combined entity Novotech Health Holdings, said that while PPC Group has a strong presence in China, South Korea and Taiwan, Novotech is strong in Australia and New Zealand.

Novotech Health Holdings is majority-owned by TPG Capital Asia funds.

Moller told Market Intelligence that more Chinese companies have been looking to conduct early-stage clinical trials in Australia in recent years.

"We are seeing an absolute explosion in that trend, which has been remarkable," Moller said, adding that he expects the trend to continue.