Lights are flashing green for biotech investment in China
How can investors in the West take advantage of what is happening in the life science sector in China, and what are its implications for the future of US VC funding? A featured panel at Biotech Showcase™ 2012 sought some answers.
Biotech Showcase™ 2012 panel on biotech investment in China
Panel moderator Greg Scott, President and Founder of ChinaBio® LLC, spoke on the demise of easy investment opportunities in the US compared to those in China. Scott noted that in China there is relatively easy funding from varied sources including VC, the Chinese government and M&A.
“In 2011, VC funding slowed from USD 1 billion to a little less than USD 600 million, while M&A activity increased to over USD 4 billion, a 30 percent increase from the previous year,” noted Scott.
Darren Ji, CEO of PharmaLegacy based in Shanghai, attributed this shift to changing government policies in China and investor reticence following the meltdown on Wall Street a few years ago. “Since 2005, VCs in the West were still holding a lot of money in management but were not willing to invest,” said Ji. “It was like people going shopping and looking at things and essentially looking for a reason not to buy. I found that in China a greater pool of investors who were looking for a reason to buy,” said Ji.
Ji added that the Chinese government acts as a big driving force behind growth in the life science sector, putting central government money into the Asian market and creating the infrastructure to attract other investors. This investment has acted as a catalyst that is driving the growth of the China life science industry. Combined with incentives for returning Chinese that boost the talent pool, the potential is there to pump several billion dollars into the industry and double the workforce to over 500,000 over the next few years.
“Investment in the life science sector will drive innovation in China,” stated Leon Chen, Partner with Fidelity Growth Partners Asia.
Chen attested to this pattern of returning Chinese. “In biotech, you need talent,” said Chen. In the past, if you went to the R&D bench at any big pharma, you would find that 25 percent of the workforce was Chinese. “Twenty-five percent of those people have now returned to China. So there is a huge talent pool,” said Chen.
After Deng Xiaoping sent people to be educated outside of China in hopes they would return, 640,000 have re-emigrated since 1978. This infusion of human capital combined with the growing financial and real infrastructure in China is resulting in a true transformation of the industry. “You are going to see a much bigger biotech industry in China,” stated Chen.
Yet, with recent rapid changes in the Chinese economy, valid questions about the reliability of the government and the sustainability of growth still nag at future investors. Part of the reassurance they seek lies in the development of intellectual property.
“Previously it was Western companies accusing Chinese companies of IP misappropriation,” said Victor Shi, President, Asia Pacific for QIAGEN. “But now you see more and more Chinese companies suing each other. This is a positive sign that more companies are seeing the value of IP. This is an improvement.”
Victor Shi, President, Asia Pacific at QIAGEN
Positive projections for the life science sector in China are also linked to the dynamic M&A landscape. “Every other day you see Western companies that have acquired Chinese companies,” said Shi. Recent early stage risk-sharing deals led by big pharma have seen a lot of activity. Shi elaborated that “we have acquired product companies as well as distributors in order to fast track and broaden our market presence.”
And yet, while valuations have gone up making acquisitions more difficult, the panelists felt the growth projections were still justified. The new trend appears to be companies increasingly seeking greater market share and bigger deals over small, early stage deals.
“I am cautiously optimistic,” said Ji.
With China’s investment continuing to be strong over the next five years, they are feeling confident that the power of Chinese companies, backed by government incentives, is not likely to diminish.
“I don’t see that the momentum will taper off in the next five to ten years. We are only scratching the surface,” said Shi. “Today, every company should have a global strategy that includes China,” added Ji.
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