Beyond borders 2017
Putting China's capital to work in the West
By Debra Yu, MD
China continues to pour investment into the life science sector. And that investment is increasingly happening outside its own borders, as the country’s investors pursue innovative ways to extract value from assets and technologies around the world.
The long-term potential and capacity for outbound investment from China is tremendous. The country's cash-rich financial institutions, high-tech and pharmaceutical sectors, together with its government-backed and privately held funds are eager to deploy capital in the West to access global innovation across numerous sectors such as technology and health care.
New funds are emerging rapidly. It took just a few years for China's domestic pharma companies to initiate corporate venture activities in contrast to the decades it took to socialize this activity in the US. New entrants move swiftly; most recently insurance companies have begun to make big moves. The insurance and financial giant Ping An this month announced its Global Voyager Fund, which will invest US$1 billion in worldwide FinTech and health care start-ups.
This colossal supply of capital is propelled to Western investments by a combination of often-overlapping drivers. Chinese investors may wish to access innovation and technology for the Chinese market, licensing or establishing joint ventures to secure strategic rights to key assets. Ping An will likely invest in opportunities that complement its US$3 billion health tech business Ping An Good Doctor, for example. Hong Kong-based Luye Pharma Group spent US$260 million to acquire Swiss drug delivery company Acino's transdermal patch and implant business in July 2016. That deal will give Luye formulation technology it can use as it seeks to develop products in and outside China.
Overseas acquisitions provide access to executive leadership, regulatory expertise, sales channels and manufacturing, giving Chinese companies a foothold in the West, opening up swaths of territory in the US or Europe or elsewhere. Shanghai's Humanwell Healthcare Group's US$550 million acquisition of the US generics manufacturer Epic Pharma in 2016 is a classic example of this phenomenon.
Pure financial arbitrage may also add momentum to the strategic rationales outlined above: The relatively high multiples enjoyed by companies trading on Chinese stock exchanges make for tempting valuation plays, and Western assets are likely to be less expensive than a similar Chinese opportunity. Finally, it must be noted that for Chinese investors - strategic or financial - there is pride in internationalization, in flipping on its head the Western view of China as a market to be accessed and monetized.
Awareness among Western life science companies of China's vast pool of capital is increasing. There are more Western companies seeking Chinese investment than ever before and more Chinese funds thinking about how to access innovation from overseas to then build in China. Firms like Ally Bridge have invested in US and European companies both because of their inherent value and the potentially move into the Chinese market. Qiming Venture Partners and Frontline BioVentures have also raised funds dedicated to investing in the West.
Western biotechs may seek out China for the wrong reasons: China is not a new source of "dumb money." Still others understand that their products or technologies may be applicable to the Chinese market and see the benefit of having Chinese investors at the table as they attempt to navigate the market.
The periodicity of change in China is astounding: it took only two years to transform the country's telecom infrastructure, wiring 1.4 billion people in the process. For a Chinese buyer, intellectual property in China has gone from a nice-to-have to absolutely essential in the eight years I have been doing cross-border deals. Complacency toward China's opportunities and growth from investors and companies in established health care ecosystems in well-heeled global markets is strategically misguided.
As China ramps up deployment of capital overseas in the life sciences sector in general and biotech in particular, it is quickly becoming a prominent and durable source of capital, and may leapfrog less innovative Western markets in the process.
- Pharma-digital DNA and why the term “digital health” will soon be obsolete by Lisa Suennen, GE Ventures
- Augmenting R&D with artificial intelligence by Jackie Hunter, BenevolentBio
- Streaming drug development — at scale by Matthew Gline, Roivant Sciences, Inc.
- Japan: leading the way in regenerative medicine by Yuzo Toda, Fujifilm Corporation