Secular tailwinds in Chinese healthcare
Jiangsu Hengrui is one of China’s largest pharmaceutical companies. Its areas of focus include oncology and endocrinology, and it has multiple clinical-stage assets in its pipeline. We maintain a position in Jiangsu Hengrui as we believe that China’s increased focus on pharmaceutical and biotech innovation should bode well for the company as a successful drug innovator.
A tale of two risk ratings
In the course of our due diligence, we found that in December 2019, a third-party vendor had assigned Jiangsu Hengrui an overall Severe ESG risk rating, citing inconsistent marketing practices and quality and safety issues related to manufacturing irregularities, resulting in costly product recalls. While we do not invest based on third-party ESG risk ratings, we view them as a useful point of reference. Our analysis led us to form a less severe risk assessment due to our forward looking view, which anticipated that the changing composition of Hengrui’s drug pipeline would force improvements in product governance.
Jiangsu Hengrui is one of the first large cap pharma companies in China to shift its R&D pipeline focus to innovative drugs, which are subject to tighter regulatory scrutiny. As a result, the company must adhere to stricter government, clinical, commercialization, and marketing standards or risk losing its ability to commercialize its drug pipeline. Further, Jiangsu Hengrui is beginning to compete on a global stage and in order to succeed it must adhere to global standards, including disclosing clinical trial data which historically it has not done.
Engagement helps solidify our view
As of November 2020, the company is running a global trial for liver cancer therapeutics under U.S. Food and Drug Administration (FDA) oversight, which requires data disclosure and review of safety and efficacy. Additionally, in June 2020 the company’s head of R&D provided a pipeline update to investors. On this call the company reviewed its American Society of Clinical Oncology (ASCO) abstracts as well as pending negotiations with the Chinese government on central procurement (GPO) for injectible and generic drugs. We were encouraged by these signs of progress in Jiangsu’s ability to meet more stringent industry requirements. With respect to manufacturing irregularities, our analyst concluded that the company has manufacturing certifications that are closer to the industry standard than the one favored by the third-party ESG vendor. Moreover the company has had no recent product recalls.
Based on our analysis and regular company engagement that helps reinforce our research conviction, we concluded that the third-party ESG rating overstates the risk profile of Jiangsu Hengrui as the company is subject to increased oversight from both Chinese and global regulators.
We followed up with the company in September 2020 mainly to discuss how government negotiations were progressing for the National Reimbursed Drug List (NRDL) as well as updates on GPO for generics and injectibles. Inclusion in the NRDL for Hengrui’s PD-1 will decide the price the company can charge for government reimbursement, impacting how broadly the treatment can be distributed. While we maintained our favorable view on the company, we did not alter our position size as we believe it appropriately reflects Jiangsu Hengrui’s risk/reward profile.
The specific security identified and described does not represent all of the securities purchased, sold, or recommended for advisory clients, and it should not be assumed that investment in the security identified and discussed was or will be profitable. This security was selected as we believe it aptly illustrates how Jennison integrates ESG considerations as part of our investment process.