technology

Little Known China Biotech Firm Lures Top Global Stock Fund

Updated on
  • Top performing fund bought 3SBio shares few months back
  • Free cash flow growth accelerated in 8 out of last 10 years

3SBio Inc., a Chinese biotech company that’s seen its revenue double in past two years, recently caught the eye of one of the world’s best performing global funds.

Dynamic Power Global Growth Class -- the top performer among the 1,000 mutual funds investing globally in the past five years -- bought 17.4 million Hong Kong-listed shares of 3SBio a few months ago, making it the only Chinese healthcare stock in its $1.2 billion portfolio.

“I’m always looking for companies where there is not only growth, but the ability to sustain that growth,” Noah Blackstein, the 48-old Canadian fund manager said in an interview last month when asked why Dynamic Power allocated about one third of its capital to Chinese stocks including 3SBio.

3SBio, the Shenyang-based company with a market value of $5.7 billion, sells biopharmaceutical therapies for diseases including cancer. Thanks to government policy support and an influx of capital to the sector, the company has seen its free cash flow -- a key gauge of a company’s ability to generate cash and profit -- accelerate in eight out of the last 10 years. That’s the longest growth streak among Asia’s 10 largest biotech firms.

China has been ramping up spending on its healthcare sector amid a rapidly aging population. Having lagged behind the U.S. and other developed markets on drug innovation for decades, the Asian nation has been overhauling its drug approval and reimbursement policies, helping spur a rush of capital into medical innovation.

Spending on medicine in China topped $122 billion last year as the incidences of diseases such as diabetes and cancer have surged, according to a report from health-technology firm Iqvia. A growing middle class is demanding access to more sophisticated healthcare and is willing to pay for more expensive therapies such as biologic drugs.

The Toronto-based fund has produced a 171 percent total return since 2013, according to data compiled by Bloomberg. Blackstein noted the Chinese companies his fund owns are domestically focused technology, health care and retail companies, which also includes social media platform Weibo Corp. and Alibaba Group.

Earnings Outlook

3SBio’s earnings will likely climb about 26 percent this year, while revenue will increase 36 percent, according to analysts estimates compiled by Bloomberg. Shares of 3SBio were little changed at HK$17.68 as of 2:51 p.m. in Hong Kong following a more than 4 percent jump on Wednesday.

Even after a 72 percent rally in its share price in the past year, which outperformed an almost 50 percent gain in the MSCI China Health Care index, 3SBio still appears relatively cheap. Its price-to-free-cash flow ratio is the second lowest among its Asian peers. Analysts tracked by Bloomberg still give 18 buy recommendations and three holds, and expect the share price to grow by another 20 percent.

3SBio has long focused on biologic medicines made from living cells. Three of its products received a boost in 2017 from greater coverage by the government-run health insurance, the company said in a report in late March. 3SBio is moving into the field of diabetes treatment by obtaining the China rights of several products from multinational drug makers.

“They are important products for diabetes, which is a big market in China, so we think its diabetes business has big potential,” said Lilian Wan, a Hong Kong-based analyst at Bocom International Holdings Co. Another two antibody treatments for cancer 3SBio provides are expected to reach the market in the next two years and would add potential to the company’s future growth, according to a research note led by Wan.

The biggest risk to 3SBio’s growth will be stricter requirements by China’s drug watchdog on approvals, as well as competition from imported medicines as the Asian nation plans to lower entry barriers for cancer drugs from overseas, Wan said.

It can take up to 10 years to fully develop a new drug, and success can be elusive. In the U.S., the stocks of small biotech companies are often hammered over bad news from clinical trials. In a blog posted this week, Hong Kong Exchanges & Clearing Ltd.’s Chief Executive Officer Charles Li warned against high risks involved in biotech stock investment as the exchange lowers its barrier for initial public offerings by such companies.

“Biotech investment is not for the faint-hearted investor,” said Li. “Investors should be aware that one clinical test failure could be a major setback for a listed pharmaceutical firm and instantly evaporate much of its market capitalization.”

— With assistance by Shin Pei, Hui Li, Rui Song, and Chuan Shen

(Updates with stock performance in eighth paragraph.)
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