Chinese biotechnology companies that show promise but have yet to turn a profit are not for faint-hearted investors. Their share prices can be extremely volatile. Take Shanghai-based diabetes drug developer Hua Medicine. Its share price plunged by 40 per cent over three days recently after interim clinical trial results for its diabetes drug disappointed investors. Then it shot up 30 per cent over the following two days after reassurances by its executives. Companies like Hua Medicine are searching for the next breakthrough treatments for serious, sometimes fatal diseases. While few treatments ever make it through the regulatory approval process, those that do can produce huge rewards. Alan Auerbach, for example, became an overnight billionaire five years ago when his US-listed Puma Biotechnology’s breast cancer drug showed success in phase three clinical trials. But is it worth the risk to invest in such unproven but innovative drug companies? And how can investors without a deep science background understand results of clinical trials to know whether to wait, bail or jump into a stock? Some analysts reply that it is best to stick with big Chinese players like Sino Biopharmecutial and CSPC Pharma, both listed in Hong Kong. They have an edge because they already have approved medicines on the market and huge sales networks to promote them, they argue. But their smaller innovative rivals – such as Innovent Biologics, BeiGene, Hua Medicine and CK Life Sciences, all listed in Hong Kong – have their fans as well. For some investors, the potential moon-shot stock is worth adding to a portfolio, despite bouts of volatility. “[Emerging biotech leaders’] share price have already outperformed year-to-date, Bocom International analyst Kelvin Chen, who holds a PhD in chemical and bimolecular engineering from the Hong Kong University of Science and Technology. “As more product sales figures and clinical trial results are announced next year, we will see an even clearer lead of the winners from the rest of the pack.” Shares of Victor Li’s CK Life more than double to a multi-year high CK Life Sciences, for example, the health care and agriculture produce unit of tycoon Victor Li Tzar-kuoi’s conglomerate CK Hutchison, is up 92 per cent so far this year – all of it in the past four weeks over favourable interim results on a phase three clinical trial for a skin cancer drug. Meanwhile, BeiGene, which focuses on cancer treatments, has soared 45 per cent this year. Innovent Biologics has gained 13.4 per cent, less than BeiGene or CK Life Sciences but far better than the Hang Seng Index, which has risen a skimpy 1.9 per cent in 2019. Hua Medicine, in contrast, has fallen 38 per cent this year. As seen in the cases of CK Life Sciences and Hua Medicine, results from clinical trials can send stocks soaring or crashing. CK Life saw its share price triple in the two trading days after announcing clinical results on Seviprotimut-L, which it hopes will become the first vaccine-based immunotherapy for stage-two sufferers of melanoma. The initial euphoria has given way to profit-taking, although the stock at Friday’s market close was still 97 per cent higher than before the results. No timeline for the trial’s completion is available as the scope of further clinical work is subject to discussions with US drug regulators. When reading company announcements about treatment results, investors need to weigh the “response rate,” the key measurement benchmarks of a drug’s efficacy in clinical trials, analysts said. Unfortunately, there is no golden rule on what the response rate should be, though the higher the better. “For oncology drugs, the objective is to extend patients’ survival time, whereas for many non-critical diseases, the target for the clinical trial is to cure,” said Citi’s head of China health care research Cui Cui. “If you are treating a difficult oncology disease, a complete response is hard to achieve,” Cui said. “So sometimes a partial response rate of 20 per cent or above is already very good.” Why are investors offloading Hua Medicine stock? For oncology drugs – the main research and development focus of most newly listed biotech stocks in Hong Kong – a “partial” or “complete” response typically refers to the degree of shrinkage of tumours. These clinical trials are a critical yardstick analysts like Cui use to value biotech start-ups, since they have yet to produce profits and commercialised treatments. In looking at a company, the analyst assigns each drug in the pipeline a percentage chance of success in obtaining marketing approvals from regulators. From that, a value per share is calculated for each drug in a valuation model that applies a multiple of four over their forecast future peak annual sales, Cui said. Will an IPO by cancer drug developer be harbinger of more to come? Typically, each drug in phase 2 and 3 clinical trials – which focus on efficacy – has a roughly 50 per cent chance of eventually winning marketing approval in China, Cui noted. Drug candidates undergoing phase one trials – which test for safety – on average have a success rate of less than 10 per cent. Pre-clinical candidates are generally not included in analysts’ valuation model. “Most of the investors we serve are more comfortable investing in pharmaceutical firms with stable revenue and profit growth with a mature product portfolio,” said UOB Kay Hian senior health care analyst Carol Dou. “Some of them also have a proven track record capable of developing innovative drugs. “For pre-revenue biotech firms, in addition to proving their research and development capabilities, they also need to show that they can successfully market their drugs once they get approval to sell them, which is an additional challenge,” Dou said. Some Hong Kong-listed biotech start-ups have announced plans to set up marketing teams of a few hundred people. By contrast, Sino Biopharmaceutical and Jiangsu Hengrui Medicine each have over 10,000-strong sales teams, Cui said. “They know every doctor in the large hospitals,” she said of the big players’ marketing teams. “It is easier for them to educate the doctors about their innovative drugs and to recruit patients for clinical trials,” she said. “These big pharmas also have an advantage when it comes to doing trials on treatments that combine innovative drugs with traditional chemo or targeted therapies, which they have already been producing in-house,” she added. Hong Kong-listed Sino Biopharmaceutical and Shanghai-listed Hengrui – available through the Stock Connect trading link – have both around doubled in value year-to-date. “Many investors in Hong Kong, mainland China and Singapore seem to have assumed that most of the drugs in trials will be successful and will sell well after upon obtaining approval, but this is not easy,” she said. “While innovations by biotech start-ups in the long term will be welcomed by investors, in the near term, say for the next year, we still prefer the large pharmas for their lower risks,” Ciu said.