Increasing Availability of Effective Vaccines and Treatments Imply A Gradually
Flexible COVID-19 Strategy
The effective COVID-19 measures bring hope for a reopening of Shanghai in the next
few weeks. We believe the increasing availability of effective therapeutics and
vaccines should help to combat the outbreak and imply a gradual loosening and
increased flexibility in China’s approach to dealing with COVID-19. We believe
companies with advanced anti-COVID-19 pipelines/products will outperform.
Maintain MARKET WEIGHT.
WHAT’S NEW
• The dynamic zero-COVID measures have been effective in China. Guangdong and Jilin
provinces in particular have seen a substantial drop in the number of new COVID-19 cases.
This brings hope for a reopening of Shanghai in the next few weeks.
ESSENTIALS
• Prefer companies with advanced product launches that can combat COVID-19. China’s
new wave of lockdowns caused by the highly contagious but less lethal Omicron variant
has disrupted supply chains and impacted stock markets. We note that the rigid lockdown
measures have reduced the number of positive cases in Guangdong and Jilin. We believe
Shanghai will also effectively contain the outbreak. Moreover, the increasingly availability
of effective therapeutics and vaccines should improve the situation and gradually prompt
a more flexible and loosening approach to dealing with COVID-19 in China in the
relatively longer term. We believe companies with good potentials of launching advanced
COVID-19 treatments and vaccines will benefit and are likely to outperform.
ACTION
• Vaccines. China has successfully launched seven COVID-19 vaccines including five
inactivated vaccines, one recombined protein vaccine, and one adenovirus-based viral factor
vaccine. There are also 26 more under preclinical studies or clinical trials covering different
type of vaccine technologies, such as mRNA vaccines, DNA vaccines, and virus-like particle
(VLP) vaccines, etc. We believe the recent outbreak in China provides tremendous market
opportunities for mRNA vaccine candidates against currently dominant strains. China
currently has a vaccination rate of 88.1% with 1.24b people having received total 3.29b
doses of vaccines. The government recommends a heterologous vaccination strategy for its
people to improve the effectiveness of the vaccination programme. We believe CSPC’s and
CanSino’s mRNA vaccines may become favourable booster alternatives for most people in
China who have received inactivated vaccines. The two companies have recently obtained
clinical trial approval. CSPC targets to complete the phase I and II trials in China by the end
of Jun 22 and conduct the phase III trial in both China and overseas. The company has its
vaccine production capacity of 500m doses in place and will expand the capacity to 1.5b by
the end of 2022.
• Therapeutics. China NMPA has recently granted conditional approval and emergency use
approval for Pfizer’s small molecule oral drug Paxlovid and Brii Biotech’s neutralisation mAb,
Amubarvimab+romlusevimab (BRII-196+BRII-198) for the treatment of COVID-19,
respectively. There are currently more than 15 small molecules and 11 NmAbs under
development. Some of them have already filed their NDA or are in their phase III/pivotal
studies. We expect to see an increasing number of therapeutics available for treating
COVID-19 in China in the next few months. Leading players, in particular the early movers,
that can offer effective antiviral treatments that may significantly reduce the relative risk of
death or hospitalisation for COVID-19 patients will benefit from the possible gradual
relaxation of COVID-19 strategies.
• CRO/CDMO services. As the number of COVID-19 cases are on the rise again driven by
new variants (eg, XE, and BA.2), CRO/CDMO service providers have seen strong demand
for new product R&D and API or finished drug manufacturing services. WuXi AppTec has
obtained a large COVID-19 projects which will significantly boost its revenue and earnings
growth in 2022. The company recently announced a positive profit alert with revenue and
adjusted net earnings increasing by 71.2% yoy and 85.5% yoy, respectively in 1Q22. WuXi
AppTec believes the COVID-19 measures in Shanghai will likely to have limited impact on
the company in 2Q22. The company continues to guide for revenue growth of 65-70% yoy in
2022 vs 38.5% yoy in 2021. The outbreak of the Omicron variant is also positive for the
revenue growth of WuXi Bio. The company currently has two phase III and six commercial
COVID-19 related projects, which are expected to bring about US$2b of revenue in 2022. It
expects to become increasingly globalised and experienced robust revenue expansion of
45% yoy in 2022.
• Medical devices. Among the Chinese medical device producers, we prefer medical
equipment producers to consumable providers. China is enhancing hospital service
capacities by increasing investment in the construction of new hospitals. We believe the
move will allow China to be well prepared for the gradual relaxation of COVID-19-combating
measures in the near future. Leading domestic medical equipment provider, Mindray, will
continue to benefit from the new hospital construction programme. Moreover, we believe
most of the medical consumable providers could experience slower revenue growth in 1Q22,
as result of the Omicron outbreak. Mindray, however, with its strong execution capabilities,
has secured sufficient manufacturing resources and saw no significant impact from the new
wave of lockdowns in 1Q22. The company continues to guide steady strong revenue and
earnings of over 20% in 2022.
RISKS
• Worse-than-expected impact from the new COVID-19 outbreak in China.
• Risks in intensifying competition.
• Policy risks, such as GPO tenders and unexpected changes in COVID-19 combatting
strategies.
VALUATION/RECOMMENDATION
• Maintain MARKET WEIGHT on China’s healthcare sector. We expect the strict
lockdown measures to effectively contain the new wave of COVID-19 outbreak in China. The
increasingly availability of effective therapeutics and vaccines should also improve the
situation and gradually prompt a more flexible and loosening approach to dealing with
COVID-19 in China in a relatively longer term. We believe companies with advanced R&D
capacity for COVID-19 vaccines and treatment pipelines will outperform. Our top picks are
WuXi AppTec (2359 HK), WuXi Bio (2269 HK), CSPC (1093 HK) and Mindray (300760
CH).