Local VCs boostprospects of China’s life sciences sector

By Marie Powers,Staff Writer

MAY 9 , 2014

SUZHOU, China – Venture investing inChina’s life sciences industry continued a three-year upswing in 2013,according to speakers at the Chinabio Partnering Forum, with more than $1billion in publicly disclosed deals last year. Cynics might correctly argue theamount represents just a fraction of the annual R&D budget of a singlelarge pharma. Still, the steady rise in venture capital (VC) – much of ithomegrown – represents another key indicator that China is building asustainable life sciences ecosystem.

Capital is flowing to China’s lifesciences industry from a variety of sources, including government funds andoutside partners, Greg Scott, president and founder of Shanghai-based ChinabioLLC, said during a panel on investment activity. But domestic VCs play anincreasingly important role. For example, Qiming Venture Partners LLC, whichraised its first fund in 2006, now manages four funds exclusively focused onChina that collectively account for more than $1.6 billion in assets, accordingto Nisa Leung, managing partner for health care. Investments in life sciencescompanies – drug development, medical devices, health care informationtechnology and health care services – account for roughly one-third of thefirm’s 90 portfolio companies. For example, the Shanghai-based VC co-led lastyear’s $20 million series C for Shenogen Pharma Group, of Beijing. (See BioWorld Asia, Nov. 6, 2013.)

Cenova Ventures, a boutique lifesciences investment firm founded in 2010, has two funds under management, withMerck & Co. Inc. as lead investor in its Innovation Fund, established in2012. The Shanghai-based VC invests “very selectively” across China’s healthcare sector, said Jun Wu, chairman and managing partner. For example, thecompany holds stakes in immunotherapy developers Birdie Biotech and OriengeneBiotechnology.

Both Cenova funds also are based onChina’s yuan renminbi (RMB) currency, mirroring a larger movement in China toconduct business in RMB. Banking experts predict that, by next year, about 30percent of China’s trade, or about $2 trillion, will be settled in RMB ratherthan dollars or other currencies.

For small deals looking for an exit inChina, RMB can be deployed more quickly than U.S. dollars, VC panelists agreed,characterizing RMB transactions as “more mainstream” than in years past. Thedownside is that most life sciences limited partners, including big pharmas,are located outside China and don’t want to deal with the currency hassle, Wusaid.

SEEKING ‘REALLYSUCCESSFUL STORY IN DRUG DEVELOPMENT’

Some of China’s life sciences VCinvestments also are flowing from domestic success stories. For example, WuxiVenture Fund, the corporate VC fund of global contract research organizationWuxi App Tec, has made a $50 million commitment to the sector, includingtherapeutics, diagnostics, research tools and technology, said Sofie Qiao,managing director. Before joining the Wuxi fund late last year, Qiao washelping to guide U.S./China hybrid company Lead Therapeutics Inc. to apotential $100 million acquisition by Biomarin Pharmaceuticals Inc. less thanthree years after the company’s $17 million series A. (See BioWorld Today, Nov. 6, 2007, and Feb. 8, 2010.)

The Wuxi fund invests in companies bothin China and the States, “and the U.S.-China hybrid model is favored,” Qiaosaid, describing life science innovation developed in the U.S. for deploymentin China.

The fund is not afraid to invest inpromising preclinical assets, last year participating with Arch VenturePartners and Flagship Ventures in a $30 million series A for Watertown,Mass.-based Syros Pharmaceuticals Inc. The discovery-stage biotech is exploringthe use of gene control to develop cancer therapeutics. Syros was co-founded byprofessors Richard Young, of the Whitehead Institute at the MassachusettsInstitute of Technology, and Jay Bradner and Nathanael Gray, of the Dana FarberCancer Institute and Harvard Medical School.

For now, Wuxi is content to follow thelead of U.S. VCs such as Arch and Third Rock, Qiao said.

“As a young venture fund, one way tolearn is to work with the best in the field,” she observed. “We’re a balancesheet fund, so we’re definitely looking at leading deals in specific areas inChina, but outside China we’ll continue to follow U.S. venture firms.”

The list goes on. Last month,Shanghai-based BVCF (formerly Bioveda China) closed its third fund, raising$190 million for early and growth-stage companies in pharmaceuticals,biotechnology, traditional Chinese medicine, medical devices and health careconsumer products, according to Rachel Zhao, principal. Of the 20 portfoliocompanies based in China, half are in drug development, Zhao said.

Chinabio also is launching an ￥300 million (US$48.2 million) VC fund,Chinabio Life Sciences Ventures, with partners Da’an Gene and the Foshan citygovernment in Guangdong province. The fund is designed to help Westerncompanies with late-stage or commercial medical devices, diagnostics, servicesand therapeutics that represent a strong fit for China’s market, said Scott,who was a San Francisco-based life sciences angel investor before moving toShanghai in 2008 to start Chinabio.

The fund, which expects to back 15 to 20companies over the next three to four years, plans to be lead investor andfirst money in China for life sciences firms seeking to develop technologiesfor the Chinese market.

In general, the Chinabio panelistsagreed that VC funds invest on the basis of well-defined criteria, withcompelling science at the top of the list, followed by management prowess.Although Wu conceded that it’s “almost impossible” to find experiencedmanagement teams at Chinese life science start-ups, Qiming Venture’s Leungobserved that the skill sets needed in China are different than those in theU.S. For example, the ability to navigate multiple layers of government is muchmore important in China than in the U.S., Leung maintained.

Like other countries, VCs in Chinasometimes are willing to overlook their stated investment philosophies to backa serial entrepreneur who will “make things happen,” as Qiao observed. InChina, serial entrepreneurs in the life sciences are in short supply, butinvestors are hopeful about the future.

“China still hasn’t had a reallysuccessful story in drug development,” Wu said, defining such an accomplishmentas approval and commercialization of a novel drug, developed from originalresearch, that achieves $1 billion or more in annual sales.

“But we hope we can be part of this,” headded. Considering the rapid pulse of China’s life sciences industry, “we don’twant to miss it.”