China Health Stocks Continue to Outrun U.S. Peers Despite Virus

Chinese health-care stocks continue to dominate their U.S. peers, even as the novel coronavirus threatens to stunt global economic expansion.

A pair of indexes that track China-based health companies, MSCI China Health Care Index and CSI Health Care Index, have returned more than 5% since initial concerns emerged over the coronavirus in January. The Nasdaq Biotechnology Index and large-cap Health Care Select SPDR Fund are down more than 3% over the same stretch.

Though the outperformance is a trend that has held over the past year, the recent divergence has raised some eyebrows on Wall Street as the two countries’ broader markets continued to gyrate. The gap could even widen as China’s market returns to normal and the government stands to invest more heavily in the sector.

Given the virus has claimed more than 3,000 lives in China, “priorities will change, and the way to do it going forward may be to invest in the country’s health and well-being,” Brad Loncar, CEO of Loncar Investments and creator of the Loncar China BioPharma Index, said in an email.

The rush to build hospitals at the start of the outbreak has shown China’s desire to invest and upgrade its medical system. “This event should accelerate the country’s already existing plans to be at the forefront of medicine,” he said. “A lot of healthcare and biotech companies will benefit by helping to make it happen.”

The Loncar China Biopharma ETF, which holds 37 companies, has returned more than 4% so far this year and more than 10% over the past 12 months. That compares to a 7.4% gain in the Nasdaq Biotech Index over the past year.

The prior strength in China health stocks can be partially attributed to a rise in public stock offerings as well as more hands-on regulators, according to industry experts polled by Bloomberg.

“There’s been dramatic reform with Chinese regulators, and blockbuster drug launches in China are occurring right now,” said Piper Sandler analyst Tyler Van Buren by phone. Early study successes from the likes of Legend Biotech, a unit of China-based GenScript Biotech Corp., and partnerships with U.S. heavyweights like BeiGene Ltd.’s $2.7 billion pact with Amgen Inc. have “definitely increased the overall quality of Chinese biotech,” he said.

For companies that specialize in running drug trials, like North Carolina-based PPD Inc., China could account for a greater portion of business as well.

“China has always been important as a key Asian country for placement of clinical trials, but several things have changed in the last few years that have amped up the level of prioritization,” said PPD Chief Executive Officer David Simmons in an interview last month.

While China accounts for less than 10% of PPD’s business now, Simmons said he suspects more clinical studies taking place in China could shift that number. Over time, he said cities like Shanghai and Beijing could rival Boston in terms of spending.

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