China partnering grows

March 24, 2014 ctheodoropulos

The Year of the Horse recently began in China, symbolizing dramatic actions, a desire for success and a desire for freedom. Those desires are evidenced in the nation’s choice of reformers as leaders, and in its continued commitment to build an invigorating life sciences community.

Last year, 2013, was the prelude. As Greg Scott, President, ChinaBio®, pointed out,“We saw a doubling of partnering deals in 2013, measured by value. The USD 560 million raised through 100 deals in 2012 climbed to USD 1.2 billion and 135 deals in 2013.” That may be just the tip of the proverbial iceberg, as values aren’t announced for every deal.

 Greg Scott, President, ChinaBio

Greg Scott, President, ChinaBio® LLC

The increase in deals and their values is linked to the increasing maturity and sophistication of the Chinese market and the greater involvement of Western companies in China. While the percentages of cross-border deals remains the same, at about 88 percent, their numbers have increased from 40 deals in 2012 to 63 deals in 2013, according to a just-released ChinaBio®whitepaper, China Investment 2014: Reform and Transformation.

“Funding continues to be more readily available in China than in the West, particularly in the diagnostics and pharmaceuticals space. You still need good management and good science,” Scott cautioned, “but you can raise money more easily. It’s definitely one reason to look to China.

“We’re seeing more Western companies bring their assets to China to develop, as well as more in-licensing activity here in China,” Scott continued. That includes Chinese companies looking for Western technology as well as Western companies looking for Chinese innovations. Tech transfers are going both ways.

M&A trends

Scott said one of last year’s big trends was the acquisition of US biotech firms by Chinese companies. For example, Shanghai Fosun Pharmaceutical Group Ltd. acquired Israeli-based Alma Lasers Inc. one year ago for USD 221 million, and MicroPort Medical BV acquired Wright’s OrthorRecon for USD 290 million. Chinese life sciences companies Mindray, Hepalink and SinoPharm also made acquisitions.

Across the Pacific, Michigan-based Stryker Corporation acquired Trauson Holdings Company Limited for a record USD 764 million to expand its access to China’s orthopedic market. Stryker’s CEO called the acquisition compelling because of Trauson’s trauma and spinal portfolio as well as its position as the largest orthopedic product developer in the country. “That’s an indication Chinese companies have markets and product portfolios worth acquiring,” Scott said.

“Last year was a record year in terms of mergers and acquisitions,” Scott said. “The number of deals grew from 58 in 2012 to 76 in 2013, and their overall values increased roughly 24 percent, from USD 4.2 billion to USD 5.2 billion.” That was the fifth straight year of record growth. He suggests M&A activity may slow slightly in 2014, however, because of the opening of the IPO window in China.

“The first IPO in life sciences this year raised about USD 87 million. Its value went up 94 percent in the first week,” Scott recounted. “That’s a good indicator we’ll see a good IPO market this year.”

Innovation and challenges

The vibrancy of the Chinese life sciences market is gradually transforming the country from a manufacturing destination to a source of innovation. “It’s definitely moving in that direction,” Scott affirmed. “Pharmaceutical sales in China are increasing at about 20 percent per year, making it the number three pharmaceutical market globally.” It is widely expected to surpass Japan to become the number two market in 2015 and, by 2020, may claim the number one spot. “If you’re not in this market now, it’s fairly likely you’ll be left out,” Scott predicted.

This growth of Chinese life sciences is aided by the approximately 300,000 overseas Chinese who return each year. Consequently, “virtually all the major pharma companies and even the startups have English-speaking management, and many management teams are composed entirely of returnees. Companies are harnessing their international know-how, and also are increasing R&D budgets that still typically hover in the low single digits,” Scott said.

Last September, the Chinese government announced plans for a free trade zone in Shanghai. Although Scott envisions only minor effects on the life sciences industry, the free trade zone is a test bed for economic reform and, therefore, will affect financing by easing monetary conversion between renmenbi, dollars and other currencies.

As a result of one of the zone’s piloted projects, China began overhauling its business registration system in March to eliminate the thresholds for corporate registered capital. Additionally, the central bank is removing the interest rate ceiling for small foreign-currency deposits in the free trade zone.

“Some of the investment firms are thinking of opening offices in the free trade zone, as well as pharmaceutical companies with cross-border business, and some contract research organizations,” Scott said.

Despite these advances, the Chinese government acknowledges that much remains to be done. “Compliance and corruption concerns were among the most widely publicized issues of 2013, involving several multinational pharmaceutical firms as well as domestic pharmaceutical companies,” Scott said. The government is taking steps to improve the integrity of the industry. They include revamping sales and distribution strategies as well as crafting new securities and exchange regulations to make practices more transparent.

Additionally, Scott said, “It is still relatively difficult to get current market research here. IMS tracks pharmaceutical sales, but the information is not as complete as in Western markets. Clinical trials data also is very difficult to get because the China Food & Drug Administration is woefully understaffed.” ChinaBio® has an internal research group devoted to tracking that data.

New ChinaBio® funds

ChinaBio® created a new angel investment fund in 2013, focusing on early stage companies with products of interest to China. “Companies have interesting products, but lack the wherewithal to bring them to China,” Scott explained. The fund focuses on products that already are on the path to commercialization—“projects that have some clinical data.” For example, one company in which ChinaBio® is considering investing has Phase IIa data. “A small amount of funding could take it to the Phase II b stage, which could be pivotal.”

Venture capital funding is growing. Last year, investment in China life science reached nearly USD 1 billion, Scott said. “This year, ChinaBio® is launching a new venture fund in collaboration with a government group. It should be operational by mid-year.” While many of the details are confidential, he does reveal that USD 35 million already has been committed to what will be a USD 50 million fund. “It will be based in the southern Guangdong province and will be associated with a life sciences park.”

The Chinese government also makes significant financial investments in life sciences, Scott pointed out. Although funding is geared to Chinese companies, that trickles down to provincial and local funding opportunities. That trickle-down funding helped make ChinaBio’s new venture fund possible, he added.

Hear more about partnering opportunities in China at the VC Investment in China session during the ChinaBio® Partnering Forum May 7–8 in Suzhou, China.

 

 

 

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