Investors now have a way to buy into and track the up-and-coming Chinese biotechnology sector, through a new exchange-traded fund that launched on Wednesday.
The Loncar China BioPharma Index CHNA, +0.43% is the first ETF to track China’s biotech sector exclusively, according to its creator, biotech investor Brad Loncar.
The sector is at a unique, even revolutionary, moment in time: already developing world-class, cutting-edge therapeutics in areas like oncology and gene therapy, and getting a boost from a variety of new policies and regulatory factors, Loncar says.
“I always hear stories of people who invested in the U.S. biotech sector in the ’90s, when Genentech, Celgene and Gilead were interesting startups,” Loncar says. “I feel that’s where they are today” in China.
The ETF tracks 28 Chinese biotechnology companies, including CSPC Pharmaceutical Group Ltd. 1093, -4.76% , Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd. 0874, -1.54% and Sino Biopharmaceutical Ltd. 2922, -3.85% , which were its biggest components as of early August.
The index only includes companies based in China or focused on the China market that are listed on the Hong Kong stock exchange or on Nasdaq COMP, +0.42% and have market capitalizations above $200 million along with liquidity.
Like other ETFs that track an index, this one doesn’t pick favorites but rather is geared at tracking the Chinese biotech sector as it fluctuates over time. Another ETF, KraneShares MSCI All China Health Care Index ETF KURE, +0.40% , tracks large and midcap Chinese stocks across health care and includes several pharmaceutical companies.
But Loncar makes the case that conditions are ripe for “the birth of a true biotech sector there.” The industry has previously focused on manufacturing drugs or on copycat generic products, rather than developing new and innovative ones.
But that’s starting to change, Loncar says. The Hong Kong stock exchange has since late April allowed non-revenue-generating companies to list, and biotech companies have begun to trade on it, including Ascletis Pharma 1672, -4.59% and the buzzy biotech BeiGene BGNE, -0.35% , which was already Nasdaq listed.
The Chinese government has been prioritizing pharmaceuticals in the country’s economic development and reforming its version of the U.S.’s Food and Drug Administration, the China National Drug Administration, to try and align it with global drug-development standards.
Biotech entrepreneurs are also returning to China from stints at U.S. companies, bringing with them ambitions of becoming global pharmaceutical leaders, Loncar says.
Even so, he cautions that the sector is still taking its first steps.
“Again, this is Day 1. This is the beginning,” he says. “It’s not going to happen overnight.”
China has also been shaken by drug-safety scandals, including a recent one in which a manufacturer, Changsheng Biotechnology Co. 002680, -5.02% , was found to have made a useless vaccine for Chinese babies. That case caused it and other biotech companies’ shares to fall, and led to many questioning more broadly the safety of Chinese drugs.
Yet the sector has also attracted U.S. investment interest, with such promising biotech operations as BeiGene announcing partnerships with international pharmaceutical companies.
Loncar says the new ETF’s inclusion criteria, particularly the requirement that companies be listed on these global exchanges, are a “quality filter,” ensuring that companies are reputable and can hold up to investor scrutiny. Changsheng, for example, is listed in mainland China, he notes.
Moreover, he says, the Chinese pharmaceutical market is in transition.
“I view that as the old and view this new generation of companies, developing these cutting-edge drugs, as new,” he says.
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