At the recent 2008 BIO Convention, a panel of industry experts discussed their experience with making biomedical investments in China. The title of the sessions was: Building a ‘Life Sciences Bridge’: Opportunities and Challenges in Venture Capital Investment in Asia. The insights of the panel follow a list of the participants.

Chair: James Zhu, PhD MBA, JD, Partner, Perkins Coie LLP

Panelists:
James Li, MD, Partner, Kleiner, Perkins Caufield & Byers
Sean Zhang, PhD, Principal, BioVeda Capital
Frank Kung, Managing General Partner, Vivo Ventures, LLC
Greg Scott, President and Founder, ChinaBio® Accelerator
Christopher Fuglesang, PhD, JD, Attorney, Tavistock Life Sciences


James Zhu (Perkins Coie): To address the overall question -- Bridging cultural and business practice differences – why are you considering making biomedical investments in China?

Frank Kung (Vivo Ventures): We are looking at Asia because the US market is getting tough for venture capitalists. The traditional business model for biopharma is being questioned because of well-known problems: moderating growth, patent expirations, diminishing ROI on R&D; a safety conscious FDA. Growth in China is much higher. The cost efficiency of China is paramount, starting with the CRO business. The market in China is growing also. And the weaker dollar is also a factor, even though it will take away China’s cost advantage. The whole health care sector in China is more important than the CRO sector alone. Healthcare reform in China may make the service sector the best investment.

Christopher Fuglesang (Tavistock): There are challenges: understanding local markets, reimbursement, distribution and regulatory processes. Other factors include: familiarity with management teams, putting together deal syndicates, the cultural norms as they relate to venture investing and governance -- do they understand how VC investors/boards work? The last point is: distance distance distance. The greater the distance, the more difficult VC investing becomes.

The factors for success include: it is best to work with ex-pat management teams familiar with venture investing and governance, strong local partners who have relationships with local business/government leaders; small syndicates; and investors must have a long-term commitment. This is important because Asian investors are not as patient as their US counterparts.

Summary – the opportunities are big in Asia,

James Zhu (Perkins Coie): In the US, venture capital is very local. Why go all the way to China?

Greg Scott (ChinaBio® Accelerator): When I started going to China, I was the only person looking at early stage investment. Now, even though the number is bigger (in double digits), it’s still small.

Christopher Fuglesang (Tavistock): Opportunities are tremendous. The markets are growing and inefficient, creating opportunity to make money.

Frank Kung (Vivo Ventures): We were attracted by arbitrage opportunities four years ago. We spent 18 months working through paperwork. And we ended up not doing the deal, a very expensive experience. We learned that there are a lot of inefficiencies in the market, and the inefficiencies make for great opportunity. China is the place for 20 bagger deals.

Sean Zhang (BioVeda Capital): In China, we have looked at a company with 40% net and 50% growth. That sort of investment doesn’t exist in the US.


James Zhu (Perkins Coie): How should a US investment firm without an Asia presence get started?

James Li (Kleiner, Perkins): We selected a China-based VC firm and merged. VC is local and it must be managed locally. We have four partners in China running the China fund.

Frank Kung (Vivo Ventures): We will build a China team over three years. It will have same number of people in China as the US team. Because venture capital is a local business, we must have a local team. There are people in China, people in the US and go-betweens. The go-betweens will contribute a global point of view.

Greg Scott (ChinaBio® Accelerator): I spend half my time there and half in the US. Although China has a full-time manager, I must be connected by going there.

Christopher Fuglesang (Tavistock): It’s an operations challenge to run VC fund in another continent. To start, we will do small deal with a syndicate that has local representation.



James Zhu (Perkins Coie): What have you learned?

Frank Kung (Vivo Ventures): You must relearn everything you know. The cultural differences are great. You are not understood.

Christopher Fuglesang (Tavistock): It’s language, but not a matter of Chinese-English. People who do not have US venture capital experience will not have the same idea of what it means to have VC investors with board seats.

Greg Scott (ChinaBio® Accelerator): We are used to doing early stage investment. A company may not have management experience. IP may be a problem, because they may have done the IP themselves or with a government lawyer.

Sean Zhang (BioVeda Capital): The legal structure [in China] is very difficult. We want to have international standards, even though we are working with local companies. We must have a good deal structure.

James Li (Kleiner, Perkins): Most companies do not have a good concept of tech transfer.

Greg Scott (ChinaBio® Accelerator): Tech transfer was easy for us. It was only one page, saying “You own all of the molecule,” but that is unusual.

Christopher Fuglesang (Tavistock): We tried three times to do tech transfer out. The agreements ran only half a page. We ran it by buy-side firms, but they did not think it was good enough.


Audience member: The China market is highly regulated and political. There are very few good entrepreneurs in China. What do you look for in an entrepreneur?

Greg Scott (ChinaBio® Accelerator): Look for returnees, people with US experience. It is difficult to make deals with people who have not been outside of China.

Frank Kung (Vivo Ventures) – SFDA is changing; the new director is very forward looking. Still, China will be careful. It does not want to endanger its operating businesses. Change will be gradual.

James Li (Kleiner, Perkins): From the government’s point of view, they welcome US VCs. There is a tremendous gap in research. The government has funded well, spending a lot of money. They need help in nurturing science into product; that expertise is lacking; they welcome help. How do you structure a deal? They are learning. The regulations will follow.

Christopher Fuglesang (Tavistock): China presents challenges for NMEs (new molecular entities). SFDA will not accept same package as the rest of the world. For a middling size drug (a couple hundred of million dollars in sales per year), it must have worldwide sales, so it is easier to develop drug here and bring it there.


Audience member: how do you see innovation in China? So far, the activity in China has been manufacturing and services. Will it become innovative at some point?

Greg Scott (ChinaBio® Accelerator): We are looking for global opportunities in compounds. Many VCs are interested in service opportunities. There are 300 compounds in development, by our count, and most of them are in a very early stage of development. It’s not a huge universe, but it exists.

Sean Zhang (BioVeda Capital): There is a lot of demand for private hospitals, which will drive new equipment sales. It is a big area in the future.

Christopher Fuglesang (Tavistock): Medtech and diagnostics are very innovative.

Greg Scott (ChinaBio® Accelerator): 18 months ago, companies were focused on finding drugs for China. Now they are interested in global market.

James Zhu (Perkins Coie): The government is putting a lot of money into innovation, not CROs or service companies.


Audience member: Is there a land grab among bio pharmas as they establish research centers? Is big pharma a friend or a foe?

James Li (Kleiner, Perkins): Big pharma is setting up shops in Shanghai and Beijing. These centers could be several hundred or several thousand people. It has helped local habits and established an ecosystem. Five years from now, these people will be the talent for entrepreneurs.

Frank Kung (Vivo Ventures):There are different land grabs. At the moment, it is people. When a lot of players are coming in, the situation creates many inefficiencies. You must determine if you can make money in your time frame.

Greg Scott (ChinaBio® Accelerator): We talked with big pharma to see if there was a market for the molecules. Big pharma is driving up costs in terms of personnel. It will drive up costs of doing business in China.

Sean Zhang (BioVeda Capital): For the industry to be modernized, multi-national pharmas will be helpful, especially their R&D operations.

Christopher Fuglesang (Tavistock): – Big pharma is essential: the best management comes from pharma, they learn the business there. VCs only rent devices, drugs. People coming from big pharma know what big pharma want. They are essential.


James Zhu (Perkins Coie): What is the future in the next five to 10 years?

James Li (Kleiner, Perkins): Venture capital will become more professional, I hope. Now, there are too many VCs are chasing too few deals.

Frank Kung (Vivo Ventures): Just watch. The China market will become more rational.

Greg Scott (ChinaBio® Accelerator): We believe there will be more irrationality before the rationality sets in. A China futurist said every one of his China predictions came true, but more quickly than he expected.

Christopher Fuglesang (Tavistock): We can’t predict future, we can only hedge. China is superheated. It’s a momentum style of investing. The VC industry will have to make money in the future, which means that the downstream processes must mature in time so that exits and next steps can take place.


Disclosure: Greg Scott is Executive Editor of ChinaBio® Today.