Full article reprinted from Start Up - October/November 2009
A recap of the first annual PharmAsia Summit, outlining current views on the opportunities and risks associated with investing in China. Read more...
Investing In China: Views from Windhover's PharmAsia Summit
Full article reprinted from Start Up - October/November 2009
It's common wisdom within the halls of Big Pharma to look East--especially to China--for future revenue growth as increasing regulatory oversight and reimbursement hurdles in the US and Europe create commercial challenges. With a booming economy that slowed but didn't stall during the most recent global recession, China has 1.3 billion people who are increasingly able to afford new medicines, even as that country's government crafts health care legislation that would mandate universal coverage by 2020. Changes in patent law to closely mirror Western standards make doing business in China considerably less risky than just a few years ago, while the significantly lower labor costs offer the opportunity of arbitrage.
For all these potential benefits, however, venture capitalists haven't rushed to invest in China-based start-ups. Nor have biotechs necessarily thought about creative deal structures that would allow them to market their products in that country. Up until now, the perception has been that geographic and cultural challenges accompanying China-based deals outweigh potential future advantages. (See "China: The Asian Dragon Lures Foreign Investors," START-UP, February 2008.) But in Windhover's first ever PharmAsia Summit, held October 26–28, 2009 in San Francisco, experts from Big Pharma, venture, and China's homegrown biotech and contract research communities argued forcefully that the rapid maturation of China's life science sector and reforms on the health care front provide compelling reasons for life science companies and investors to reexamine their China strategy.
Six or seven years ago, the concept of putting "China" and "R&D" in the same sentence was preposterous, claims Kewen Jin, general manager of China for the CRO Charles River Laboratories International Inc. "But the ecosystem has gradually formed. One or two companies will get proof-of-concept data and execute a major deal with pharma and the floodgate will open," he predicts. In a panel discussion that explored the evolution of China R&D, Li Chen, CSO of Roche's Roche R&D Center (China) Ltd. agreed. Noting that it "is hard to give a time frame" for such scientific advances, Chen predicted within five years several compounds developed de novo in China would make it onto the market.
Aside from the practical concerns of how to conduct business in a country half a world away, venture investors have had legitimate questions about recouping money put into Chinese-based organizations given the historic difficulties garnering a public listing on either of the major Chinese exchanges in Shanghai and Shenzhen. The creation in late October of a new Nasdaq-style exchange in China called the Growth Enterprise Market (GEM) as well as precedent-setting listings on US- and Hong Kong-based boards by companies such as WuXi Apptec Co. Ltd. and Sinopharm Group C. help clarify the potential exit strategies for young Chinese-based life science companies. Sinopharm's oversubscribed initial public offering in September, which raised more than $1.1 billion, alongside the creation of the GEM board, are "healthy signs of investor interest," says Chen.
Moreover, venture investors such as Jonathan Wang, PhD, of OrbiMed Advisors and Charles Hsu, of Bay City Capital, say there are smart ways to hedge risk while simultaneously riding the China wave. In 2008, OrbiMed created a $200 million venture fund focused on opportunities in Asia. That September, the fund made its first investment in ForteBio Inc., a drug development tool company with manufacturing facilities in both China and California. Since then the company has also invested in the $6 million Series A of PharmAbcine, a South Korean company developing monoclonal antibody technology, and anticipates closing two or three deals in China and India in the coming months.
OrbiMed's decision to invest in ForteBio is particularly telling: the start-up falls into the category of East/West hybrid. With a management team trained in the West and incorporated internationally, the company and its investors can leverage China's current strengths, especially its lower labor costs and access to local patient populations, while simultaneously avoiding potential risks, such as uncertain patent protection, which come with a China incorporation. That's the outlook Hsu adopted when in 2007 he co-founded LEAD Therapeutics Inc., a company with California headquarters and a research group in Shanghai that is taking a fast-follower approach to drug development. "The investment opportunities are primarily points of arbitrage, where there is a mismatch in the way things are done now and the way they could be done in the future," says Hsu. In the case of LEAD, it made simple economic sense to take advantage of China's highly skilled chemists to create novel compounds against already well-validated targets. "This fits into the sweet spot of what China is already good at. We weren't going to make sacrifices by shifting the work" to that country, he says. And there could be real advantages. Given the lower labor costs, the Shanghai group can afford to develop up to four projects to the preclinical IND stage for the same amount of money required by a US-based crew to advance just one molecule. Since LEAD's intent is to partner its compounds pre proof-of-concept, this approach gives them many more programs to shop around with potential collaborators.
Beyond lower cost, manufacturing-type plays, Wang and Hsu both believe changes to China's insurance and drug distribution industries will spark new investment opportunities in the coming year. And both are steadfast in their belief that the time is rapidly approaching when VCs will invest in Chinese life science companies because of their ability to innovate. An estimated 40,000 people are returning to China from top-tier health care firms, says Hsu. "These people will provide critical substrate," says Hsu. "Just because they've left IBM or Merck [to go back to China] doesn't mean they go brain dead and stop inventing stuff," he says.
So, the focus now is on tapping that entrepreneurial spirit, while simultaneously helping homegrown Chinese life science companies deepen their managerial talent to create businesses with experienced people who understand they are working for shareholders. To assist in these efforts, OrbiMed has teamed up with Roche and the consultancy firm McKinsey and Company to run five one-day meetings in various cities in China starting this November. In addition to seminars on intellectual property and governance, attendees will have the opportunity to participate in a business plan competition that offers the promise of seed-stage funding to the top three to five presenters. Wang anticipates the majority of participants will come from Chinese universities. "We've been broadcasting [the event] at over 50 universities, saying if you want to commercialize your technology we would love to work with you," he told the audience at the PharmAsia Summit.
These kind of education opportunities are critical as the Chinese life science ecosystem evolves says Hsu. The biggest challenge to making successful investments in China remains the dearth of experienced mid-level managers who can turn an entrepreneur's vision into a reality. But that will come—and probably sooner than people have predicted. Companies such as WuXi and Hutchison China Meditech Ltd.'s Hutchison MediPharma Ltd., which are led respectively by Western-trained returnees Ge Li, PhD, and Samantha Du, PhD, are providing the managerial experience that will be crucial to the blooming Chinese life science sector. Hsu points out that ex-Genentech managers have helped create more than 400 life science companies in Northern California since that big biotech's inception in the 1970s. In China "we need a first generation of entrepreneurial companies to go through their life cycle, producing a cadre of experienced managers," he says.
—Ellen Foster Licking
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Companies mentioned in this article:
Charles River Laboratories International Inc.
WuXi AppTec Co. Ltd.
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No publication reviews leading edge companies and technology better than START-UP. Each issue of START-UP profiles the most important new product companies, identifies the hottest technology areas, reviews funds flowing into private companies and investment trends, and reports on university tech transfer licensing. Industries covered: pharmaceuticals, biotechnology, medical equipment & devices, and in vitro diagnostics.
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