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China Life Science Investment Hits Record Highs in 2018; What's Next?

publication date: Jan 4, 2019
author/source: Richard Daverman, PhD

Investments in China life science set new records in all categories during 2018, reflecting the increasing development of the industry. And these numbers are spectacular even in comparison to an already strong 2017. Here are the numbers for 2018:

  • $43 billion raised for new VC/PE funds targeting China life science investments, with average fund size increasing to $765 million;
  • $17 billion invested in China life science companies, up 36% from 2017, with another $8 billion in corporate investments;
  • $34 billion in value created in M&A deals, 53% higher than 2017, with average deal value exceeding $200 million;
  • $7 billion in IPO funding, an increase of 40%, with an average raise of over $250 million;
  • $14 billion in partnering activity, up 75% from $8 billion in 2017.

Note: This material will be explored further at the China Showcase, JP Morgan Healthcare Conference on Sunday, January 6, 2019.

With the story of China life science's success now well known, even more venture capital is pouring in, keeping the cycle going. Meanwhile, investment exits are improving and China's regulatory system has made giant leaps forward, speeding up reviews and approving many already-marketed foreign drugs, often without additional clinical trials.

With all the parts of China's life science sector operating in apparent overdrive, what's not to like?

First and foremost, US-China relations. The trade relationship between the US and China is dealing with considerable unknowns as President Trump seeks concessions from China and, especially, greater IP protection for high-tech US companies operating in, or operating with, China. The news dominates the headlines, and as a result, it comes up in year-end reviews.

This emphasis in year-end reviews may be misleading. So far, it must be said, no US-China cross-border biopharma deals have been rejected -- by either side. Still, during 2018, the Committee on Foreign Investment in the US (CFIUS) was given permission to examine minority investments by foreign entities in biotech and other sectors. To date, CIFUS has not disallowed any transactions.

The heady 2018 pace of biopharma deals did decline in the last quarter of the year, as the war of words over US-China trade increased. The decline could have been caused by some other combination of factors. But it is just as possible that the uncertainty itself threw a monkey wrench into the process. The underlying sentiment may be: Why invest the time, effort and money in working out a deal if a government agency will quash the agreement at the last minute on national security grounds?

This is no minor matter. As China's valuations have risen, China's biopharma VC industry has become more and more involved in US companies. According to Pitchbook and cited by Bloomberg, one Chinese investor has participated in 41 US biotech deals this year with a total value of $2.6 billion.

Losing China's investments could be a big blow to young US biopharma companies. It could also hurt large pharmas, who have been partnering sidelined drug candidates with China startups, to the advantage of both. The situation gives international pharmas a low-risk chance of developing income from their mothballed assets.

In the future, as this line of thinking goes, Europe may turn out to be the ultimate beneficiary of this situation. Europe has good science and lower valuations than either China or the US. If venture capital is leaving China because valuations are too high, the US is the obvious place to look. But if the US offers mixed political signals -- and it has higher valuations than Europe -- Europe may be the most attractive place to invest.

The US-China trade situation may dominate the headlines, but the larger problem for China's life science industry is more likely to be the supply/demand cycle of capitalism. Good economic times bring more money into an industry, breeding competition and lower margins, maybe even disappointments -- and 2018 was by all metrics a good economic time for China life science.

Disclosure: none.


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