Innovative drugs - Medium and long-term growth still has more room for improvement

Compared with the global average, the United States and Japan, the proportion of sales of innovative drugs in the overall drug market in China is still relatively low. The promotion of generic drug collection saves a lot of medical insurance costs and provides payment space for strategic medical insurance purchases of innovative drugs, so from a medium- to long-term perspective, we believe that the overall market size of innovative drugs in China still has more room for growth.

With the reform of the review and approval system of innovative drugs, on the one hand, the R&D of innovative drugs in China has become homogeneous, with indications mainly concentrated in a few areas such as oncology, and some mature targets such as EGFR, CD19, HER2, etc. have multiple drugs in various stages of development, which can improve the success rate of approval and listing, but the market competition is more intense after listing. On the other hand, thanks to the implementation of a series of accelerated measures such as priority review, conditional approval and accelerated approval based on trial data from other countries/regions, the gap of 43 new imported oncology drugs approved in China between 2010 and 2020 compared with the time to market in the U.S. has been significantly shortened. The lag time for oncology drugs approved in the U.S. from 2016-2020 is only 2.7 years, and Chinese innovative drugs will directly face global competition.

In November 2021, the CDE issued the "Clinical Value-Based Clinical Development Guidelines for Antineoplastic Drugs".

This regulation raises the bar for clinical studies of innovative drugs by requiring that "the best treatment/drug that is widely used in clinical practice should be offered to the subject to the extent possible, rather than choosing a treatment with uncertain safety or efficacy or that has been replaced by a superior drug in order to improve the success and efficiency of the clinical trial".

The regulation also requires that "when placebo or best support care (BSC) is planned as a control drug, it should be determined that there is no standard treatment available in the clinic for the indication. When BSC is available, BSC should be preferred over placebo as a control.

This aims to address the problems of target bunching, indication concentration and insufficient exploration of clinical value of innovative drugs, which will help China's innovative drug industry gradually shift from imitation to innovation.

In the short term the transformation is still difficult to change the status quo of homogeneous competition of innovative drugs. Therefore, we believe that the pricing space of products is limited under the background of strong buyers of Chinese medical insurance at this stage, so the competitive pattern of innovative drugs is more important.