Zai Lab’s U.S. IPO marks another white-hot Chinese offering that begs the question: why are these Asian offerings so special?

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The News:

Shang­hai-based biotech Zai Lab Ltd. raised $150 mil­lion from its up­sized IPO last Wednes­day (September 20, 2017), sell­ing 8.3 mil­lion shares at $18 each. After trad­ing began, the stock soared more than 50%, build­ing on a mar­ket cap that started out at a nifty $1 bil­lion.

And un­der­writ­ers are likely to add to its money trove, with the opportunity of ac­quir­ing 1.25 mil­lion additional shares at the IPO price, according to Endpoints. The IPO is being managed by JPMorgan, Citigroup and Leerink Partners.

The big tally last week un­der­scores two key trends in the in­dus­try. Biotech IPOs are heating up again. Com­pany founder and CEO Samantha Du–a fa­mil­iar fig­ure in the Chi­nese biotech scene–had ini­tially aimed at about $115 mil­lion from the IPO.

And the pow­er­house China biotech in­dus­try is steam­ing along, with the most promi­nent com­pa­nies like Zai Lab and BeiGene benefitting from some big-time deals as they po­si­tion them­selves in the mammoth Asian health­care mar­ket.

Zai Lab was founded and based on the idea that there was pent-up demand in China for newer drug treatments for major diseases.

Ms. Du was previously co-founder and Chief Scientific Officer of Hutchison Chi-Med and is Adjunct Professor at School of Pharmacy at Fudan University. She received her PhD in Biochemistry from the University of Cincinnati. Ms. Du owns about 21% of the eq­uity in Zai Lab, earn­ing an enor­mous wind­fall for her efforts. Du is also the for­mer man­ag­ing di­rec­tor for Se­quoia Cap­i­tal China.

The strat­egy at Zai Lab fo­cused early on capturing Chi­nese rights to some ad­vanced drugs. They obtained ni­ra­parib from Tesaro Inc. (Waltham MA) in the fall of 2016, not long be­fore the FDA’s ap­proval came through for the PARP drug. (PARP stands for Poly ADP ribose polymerase, an enzyme.) Zai’s first Phase 3 gets un­der­way later this year, with an­other to start in 2018. Tesaro re­tains co-pro­mo­tion rights in China.

Zai snatched its num­ber two pro­gram, the an­tibi­otic omada­cy­cline, from Paratek Pharmaceuticals Inc. (Boston) four months ago. And more deals fol­lowed for drugs from GlaxoSmithKline PLC (London), Sanofi SA (Paris) and oth­ers as Zai Lab developed its own labs and charted its own pipeline.

As John Carroll at Endpoints has been shouting from the rooftops, Asia and China, in par­tic­u­lar, epitomize an explosive market in bio­pharma, and the com­pa­nies po­si­tion­ing them­selves to take the lead on the drug front stand to gain tremendously. Shares closed the week up 54% at $27.73.

Steve’s Take:

Zai Labs may be the best deal yet for risk-tolerant investors to gain a piece of the action providing next-generation treatments to an aging Chinese population across a range of indications.

Steve's Take: Zai Labs may be best deal to get into treatments for aging Chinese population Click To Tweet

The firm has an extensive pipeline of later-stage meds that it has in-licensed from major western drug companies. Most of its candidates are in Phase 2 or Phase 3 trials and taken together have the potential to treat nine different diseases, Donovan Jones at Seeking Alpha notes.

The market size for each of the diseases on a China-only basis is difficult to ascertain, given the paucity of market research and the unknown degree of demand for these next generation treatments. However, a recent GlobalData market research report on the size of the ovarian cancer market in the seven major countries of America, Italy, Germany, France, Spain, the UK and Japan expects it to reach $5.2 billion by 2025, representing a 15.5% compound annual growth rate (CAGR) from 2015.

So, for its lead candidate alone it is reasonable to assume that Zai Lab is looking at billion-dollar markets within China for each of the three cancer indications that its lead candidate ZL-2306 (niraparib) may address.

Boiling it down to its investment essence, what does Zai Labs have as its strongest positives? First, the large size of China’s market and the aging trend of its population means that there will be a huge and growing demand for treatment options. Secondly, management has adopted the sound strategy of in-licensing approved, next-generation drugs from western firms, which reduces approval risk.

As to Zai Lab’s proposed post-IPO valuation, $800 million is no trivial amount of money for a firm without a product in any market. However, given the relatively late stage that most of its previously approved drugs are currently in, for investors that want to generate exposure to a growing Chinese healthcare market through a company with an interesting and lower-risk approach to drug development, Zai Lab is an attractive play.

Finally, let’s address concerns of risk-averse investors who frown at foreign involvement in US bioscience, let alone participation in US financial markets. Worthy of contemplation within such contexts are comments from experts like Bernard Munos, senior fellow at the Milken Institute’s FasterCures, who says that,

“science is a global endeavor that would wither if confined within national borders. The US Human Genome Project, for instance, would have taken far longer without help from the UK, Germany, France, Japan and China.” And roughly 40% of the biomedical scientists in the US hail from China or India, according to Mr. Munos. “US biomedical research could hardly function today without this contingent of people,” he says. “The collaboration is an essential part.”

That’s why cross-border deals with China so far have faced few objections. In 2013, for example, the US government’s committee on foreign investment (Cfius) approved BGI-Shenzhen’s purchase of Complete Genomics in California, which has sequenced more than 20,000 human genomes.

Bottom Line:

For risk-tolerant investors willing to pay a full valuation for the IPO, Zai Lab’s business approach constitutes an appealing play on providing next-generation treatments to an aging Chinese population.

In addition to having no meds approved for any market, another obvious downside risk is an out-of-the-blue shift by the Chinese government from its currently favorable attitude of fostering US-Chinese collaboration in the field of biopharma. I don’t see that as very likely, but it is a risk.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.