China's Biotech Boom Sees Capital Slowdown

China's Biotech Boom Sees Capital Slowdown

Weaker biotech funding reflects a wider slowdown in venture capital activity in China as Beijing slows credit growth to reduce debt levels.

SourceCorbis/Getty

Why you should care

The country’s booming biotech industry is seeing a sudden drop in investments.  

China’s biotech sector, which secured more than a $17 billion investment last year, is struggling to attract fresh funding as tightened domestic liquidity chills a once flourishing venture capital market. This venture capital invested in Chinese companies developing original medicines last year represented an annual increase of 50 percent, according to consultancy ChinaBio.

But most of the funding came in the first half of the year, with deals falling by a third in the following six months to $6.9 billion. China health care–focused funds raised $19.4 billion in the second half of the year, a third less than in the same period a year before, according to ChinaBio.

“The poor performance of global stock markets, the Sino-U.S. trade war and the depreciation of the renminbi led a lot of investors to change their attitude in the past few months,” says Wang Jian, a partner at OrbiMed, a health care fund.

Chinese biotechs have flourished in recent years, with more than 800 new molecules at clinical trial or in pretrial testing — up from 240 in 2012, according to McKinsey. In fields such as CAR-T therapy, an innovative procedure being used to treat cancer patients, Chinese companies eclipse U.S. peers by the number of trials.

If Trump prevents Chinese investors buying U.S. assets, then more capital will be available domestically

Scott Liu, CEO, Shanghai Henlius Biotech

They have lured executives from pharmaceutical multinationals with higher salaries and benefits, while last year Beijing approved several domestically developed innovative drugs for commercial sale.

Hong Kong’s stock exchange in April 2018 allowed listings by research-stage biotechs that are yet to generate profits, giving early investors a route to exit investments. Six Chinese biotechs listed last year, raising 25.4 billion Hong Kong dollars ($3.2 billion).

But the listings have had a lukewarm reception, with three — Ascletis, BeiGene, and Hua Medicine — trading below their debut prices, with secondary investors struggling to match high valuations before listing.

“In the past few years, there has been a bubble in pharmaceutical market valuations,” says Xiong Lei, founder of 3DMed, a cancer startup that received $120 million in a 2017 investment round.

Weaker biotech funding reflects a wider slowdown in venture capital activity in China as Beijing slows credit growth to reduce debt levels. Venture capital investment in China of $18.3 billion in the last quarter of 2018 was down 12 percent from the same period a year earlier, according to data company Preqin. The number of deals fell 25 percent to 713.

While renminbi funding has suffered, investors say Chinese dollar-denominated fundraising remains relatively healthy. Chinese company Qiming Venture Partners said last week it was raising $250 million for a second U.S.-targeted health care fund.

Investors cite new asset management regulations requiring stricter matching of the maturities of assets and liabilities, on capital flowing into startups from banks, trusts and listed companies.

“It’s a harsh wintertime for venture capital,” says Harry Wang, CEO of Linear Capital, a tech fund. He says it took just a few months to raise 90 percent of an RMB 120 million ($18 million) fund by March, but another six to raise the final 10 percent.

This year will be “the worst time for startups,” Wang predicts. Funds are asking companies to accept lower valuations, pare back operating costs and surrender 20 percent of ownership, rather than a previous norm of 10 percent.

The funding crunch is particularly acute for biotechs due to the high cost of research — up to RMB 10 million a year for companies with pretrial molecules, and more than RMB 100 million a year once trials begin, according to investors.

Mabspace Biosciences and Hangzhou Just Biotherapeutics, which focus on cancer treatments, merged last month having raised more than $160 million between them since 2013. Such deals will become more common as a way of reducing funding pressure, say investors.

Other biotechs are paring down the number of treatments they are investigating. Chinese biotech Dizal raised $133 million from AstraZeneca and a domestic fund last year. “Even with that funding there is not enough cash, so we have to be careful … how to prioritize is very important,” says CEO Xiaolin Zhang.

A Washington clampdown on Chinese venture capital investment into U.S. tech startups could offer some reprieve. China-based funds participated in investment rounds in U.S. biotech companies worth a record $5.1 billion in the first half of 2018.

“If Trump prevents Chinese investors buying U.S. assets, then more capital will be available domestically,” Scott Liu, CEO of Shanghai Henlius Biotech, told an industry conference late last year. Henlius, which raised $156 million in its latest funding round last year, in December filed for a Hong Kong initial public offering.

Some investors argue the funding crunch will make valuations more rational. “The cooling of the market is a good thing for the industry,” says OrbiMed’s Wang. “The previous bubble was very unfavorable for long-term investors.”

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By Tom Hancock and Wang Xueqiao

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