It is the Golden Age for Investing in China Life Science with activity levels rising steadily for six years in a row. Greg Scott, Founder and CEO of ChinaBio®, talked with a panel of China investment fund managers about their plans for 2022. What adjustments do you make when the level of China life science activity is already high? The panel, whose comments are summarized in the article, was a featured event in the virtual China Showcase, part of Biotech Showcase™ (see website), co-sponsored by Demy Colton and EBD Group. The Showcase takes place January 10-12.
China Showcase Panel: Life Science Investing in China's Golden Age
Greg Scott, CEO and Founder, ChinaBio®, Moderator
Elizabeth Kelly, Asia Fund Manager, Pappas Capital
Victor Tong, Partner, Decheng Capital
Yuwen Liu, Founding Partner, BOHE Angel Fund, Bio2
Greg Scott: After reviewing the record levels of activity in 2021 life science investing, the last five years have seen steady increases in fundraising and deal making, with only a small slowdown in 2019. Outside of 2019, every year set new records of activity (see video). Over the last five years, investment funds interested in China's life science sector raised $250 billion, but they have invested less than $130 billion. This means investment firms are holding $120 billion of uninvested capital. In 2021, $40 billion was invested -- a record amount, but still far below the capital raises.
So, Victor, do you expect investing in China life science will continue to grow, or will there be a switch into other business sectors?
Victor Tong: It's been the Golden Age of China life science investing. In the coming year, we should address this Golden Age with balanced optimism. Although investment funds have had record years, some of the other metrics are beginning to slow down. For example, of all the companies that IPO'd on the Hong Kong exchange this year, only two are trading above their IPO prices.
This is not just a China life science problem. If you look at broader measures, the National Biotech Index is down 40% compared to the S&P 500. This is a global challenge. I don't think we will see a continuation of 2021's strong second half in the first half of 2022. I don't think we'll see the sky-high valuations of the last 18 months, which may turn out to be a bubble.
Greg Scott: Do you think we'll continue to see the investment funds continue to raise huge amounts, with more than a billion dollars becoming common?
Victor Tong: Limited Partners are still interested in China life science. So investment managers can still raise large amounts if they choose to do so. We will be more conservative, just because it is difficult to invest the funds. With larger funds you can do more, such as incubating new companies. You can stage a $100 million Series A and build a team and start a company from the ground up. But I think you'll see less of that.
Greg Scott: Pappas started off as a US fund but it has become increasingly involved in China. What is your strategy for the next few years?
Elizabeth Kelly: For 28 years, Pappas has been focused exclusively on life science. Last year it opened an Asia Innovation fund. Our strategy is to get involved in early stage disruptive companies, but also to be involved in areas such as AI and materials sciences that may be applicable to life science, but not exclusively. We will be announcing our first investments over the next few weeks.
Greg Scott: Yuwen, you've raised a lot of money for an Angel fund. Will you expand beyond Angel investments?
Yuwen Liu: We raised more than 200 million RMB for our fund because we want to make additional investments in companies after the initial Angel round. Victor is right about the Golden Age, and even though some IPOs are under water, the IPOs did provide liquidity. Investors and company founders don't have to wait through the long development times of new drugs to exit.
In China, we don't have a lot of seasoned investors who have founded and then sold life science companies. We do have investors in our fund who are heads of young companies and who want to help other startups. Many of our companies don't have CEOs. Running an incubator, you have to do everything for young companies. It's interesting to grow with them.
Greg Scott: Yuwen, you mentioned RMB. You are an exclusively RMB firm investing only in China companies.
Yuwen Liu: Originally, we planned to be more international, but we have more than enough opportunities in China.
Greg Scott: Elizabeth, you are in North Carolina and your funds are dollar-based. So you can invest only in Asia companies that can handle dollars. Is that right?
Elizabeth Kelly: We can invest in Hong Kong and Cayman entities. We are just starting but we have mechanisms to invest in China companies for when that opportunity arises.
Greg Scott: Victor, in 2020, you said Decheng had closed an RMB fund.
Victor Tong: This is breaking news at this event: We have raised 1.5 billion RMB for our second RMB fund and will complete a final closing before the China New Year. This is in addition to our $670 million US dollar fund, which we closed in late 2020.
It's great to have both vehicles. For companies that do not have a hybrid China-foreign corporate structure, it is easier for them to use RMB.
Greg Scott: This is interesting. China drug development companies have done a good job of raising money for their operations. But we noticed that, in 2021, device companies were the second largest sector in terms of raising money, taking over from iHealth companies. Dechang has done well with device companies; are you looking for medtech investments as well?
Victor Tong: MedTech is a very attractive sector. Right now, pharmaceuticals are a very crowded area with high valuations. I think medtech is very interesting with de-risked investments in areas that offer opportunities in China. Some of these companies are already producing revenues, making them more like growth situations. Device companies, which are not as plentiful on the Hong Kong and STAR exchanges, are sometimes trading at multiples of 50X to 100X revenues.
Greg Scott: Elizabeth, will Pappas do drug and medtech investments or are you more focused on the drug sector?
Elizabeth Kelly: We are interested in a broad selection of sectors, including Agriculture. But we are focused on disruptive, first-in-class transformative, groundbreaking products. Returnees to China are interested in developing increasingly innovative products.
Greg Scott: We have been aware of the effect of China returnees since 2006. Their number increased during the 2008-2009 financial collapse to 400,000 annually. Yuwen, do you see the effect of returnees in your startup companies?
Yuwen Liu: Returnees are not a major part of these startup companies. Returnees don't have platform technologies from their former companies. They have tended toward the China in-licensing companies that form large deals with big pharma companies. We are interested more in the innovative work that comes out of research institutes.
Greg Scott: Elizabeth, you also mentioned the effect of regulatory reform in China. I remember in 2015 when regulators said they would accept foreign trial data and multinational trials in China. We said, "Sure, that will be great when it happens, if it happens." But it did, and the changes have become part of the structure. Are those changes one of the reasons Pappas has become interested in China more recently? Why now in China?
Elizabeth Kelly: There are a lot of reasons including regulatory reform. There's a lot of momentum in China for oncology, for example, with the large number of China smokers. China participation in clinical trials has given local directors experience in trial management. And leveraging the huge data set in China gives local companies a leg up in developing new therapies. These things take China from fast follower status to leading the way to novel drugs.
Greg Scott: That's right. Things move quickly in China, things like funding, trial enrollment, treatment-naive patients, can be sped up. A company can find it helpful to be active in China, even if they aren't a China company.
In 2020, partnering deals in China were 10 times their 2016 levels, a lot of them cross-border agreements. Victor, is there still an opportunity in cross-border partnering?
Victor Tong: There is still a lot of interest in cross-border partnering, though the structure of the deals is changing. Up through 2019, most cross-border deals were traditional in-licensings with upfront, milestone and royalty payments. More recently, companies have looked at the capital markets, seeing potential and then forming relationships that are JVs or close to them. We have seen 20 of these deals in the last four months where the US company will own up to 49% of the JV, especially for cell and gene therapy.
Greg Scott: As most readers know, cell and gene therapy companies with a China conncection must be based in China because China strictly prohibits any shipping of genetic information outside of China. Are you active in the gene therapy area, Victor?
Victor Tong: Over the past 12 months, Decheng has made several investments in cell and gene therapy. Over 50% of cell therapy trials are taking place in China. It's a tremendous opportunity. One of the bottlenecks is manufacturing to supply the clinical material. We invested in a South San Francisco company called Cellares, which makes an end-to-end manufacturing system for cell therapies.
Greg Scott: In cross-border partnerships, most deals are in pharma with oncology the most represented target area. Oncology will probably hold the lead for a long time, but do you see any kind of switch into CNS or metabolic disease therapies?
Yuwen Liu: Most China biopharmas stress oncology drugs and most companies have the same kind of pipeline. This has created a bottleneck for drug companies in hospitals that support clinic trials and also for MDs to run trials. It will also be difficult to differentiate a specific drug. CNS is currently a hot alternative, especially if it is tied in to AI-based data.
Greg Scott: AI is an important development. Elizabeth, you mentioned AI in your introduction. Are you investing in China AI companies that have an interest in life science?
Elizabeth Kelly: We are. In CNS, the aging population in China with neurodegeneration is a huge unmet need. The problem is its binary endpoint. If you can use an AI computational biology program to predict the effect of a molecule, even before you begin human trials, you increase the probability of a successful outcome.
Greg Scott: CNS is an area in which China has been playing catch-up, but China is capable of leap-frogging in these situations. Victor, you've been active in CNS as well, right?
Victor Tong: We are interested in AI but more to the genetic side. In cancer we have very large databases and AI is a great way to analyze that data. It's one of the reasons we started Decheng in 2016. We invested in a Hong Kong company that was developing an early detection test for cancer. Eventually, that company became part of Grail, which was bought by Illumina for $10 billion.
Greg Scott: That's a perfect segue into my next topic -- exits. With IPOs being priced at 50 times revenue, M&A has a hard time competing. What do you see, Victor, as the best exit strategy?
Victor Tong: In China, the best exit is an IPO because of valuation levels. But in the US, M&A is the better alternative.
Greg Scott: Do you see other exchanges for China companies?
Victor Tong: Hong Kong has a backlog of about 50 filings from pre-revenue life science companies. That's too long. Some of them won't complete their IPOs during the first six months of 2022. And because only two companies from last year are trading above their IPO prices, demand will drop and valuations will also decline. IPOs in Hong Kong have become a liquidity event rather than an exit event.
Yuwen Liu: I had an interesting conversation with someone who asked, "Why don't you buy a China biopharma company?" I told him that we could probably develop a drug faster than the company and sell at a lower cost. It doesn't make sense to buy. We think market valuations will decline to more realistic levels, which will encourage more M&A transactions.
Greg Scott: Elizabeth, you are planning to invest your Innovation fund in China/Asia companies. What will you be looking for in terms of exits?
Elizabeth Kelly: For the last year, no company we've talked to has mentioned M&A -- they are completely focused on the IPO. A year ago, it was NASDAQ or Hong Kong or a China exchange. But in the last six months, the focus has been on a China exchange. As Victor says, we'll see whether M&A becomes more popular.
Greg Scott: It's time for a final statement from each of you. I assume most of the audience is Western with maybe an interest in becoming involved in China and you might give some advice about how to do that.
Yuwen Liu: As investors, we are acting locally, but we have to be aware of the global situation. If we consider only the local situation, we may find ourselves with global competition we did not anticipate. An investor has to add value to a company, like coaching, providing background, etc. A company looking for a China partner must find one that has a global awareness.
Greg Scott: Elizabeth, what sage wisdom you have for us?
Elizabeth Kelly: In China, there is so much data available. So we are interested what you are doing with the data, how you are using it, how it helps you develop new drugs. I think Yuwen is right about looking to see what an investor brings to the deal beyond money. We work to use our expertise and network to push the local company's products forward.
Greg Scott: Victor, tie this all together for us.
Victor Tong: I'm sure the audience is tuned in to find out about China. Three things: First, people, you need a partner you trust; Second, you want to find out a company that your objectives similar to yours, and Third, you have to assess risks and benefits. The opportunity is tremendous and this is the golden age of China life science.
Greg Scott: Thanks to all the participants. It was a great panel and I certainly learned a lot and expect that most of you did as well.
Disclosure: none.
