China’s biotech sector saw a 78% increase in 1H deal value year-on-year with deal activity thriving amid the COVID-19 pandemic. Investments and IPOs in the healthcare sector are expected to gain momentum and pick up going forward, according to industry experts speaking at a webinar hosted by Datasite and Mergermarket in September.
The pandemic has directly stimulated the therapeutic, diagnostic devices and medical consumables sectors. On the other hand, excess liquidity in the market has driven up valuations overall, according to Michael Fu, head of Everbright Healthcare Fund and managing director of China Everbright.
Josh Shin, partner at Fangda Partners added that new drug R&D investment continues to be concentrated on conventional oncology drugs, including small molecule targeted drugs and macromolecular antibody drugs. One interesting thing worth mentioning is that since 2Q, there have been significantly more early-stage financing activities, suggesting that biotech investors remain passionate about opportunities in the biotech space.
Datasite's Head of Greater China Toto Ku confirmed that the total number of healthcare projects that they assisted with this year has doubled. Both the USD funds and RMB funds have been very active in all kinds of PE projects. In addition to pre-listing financing, these funds have been engaged more actively in opportunities in early R&D projects. He predicted that this year the hotspots in the biomedicine industry are IPO and financing.
The newly introduced centralized drug purchase program, meanwhile, will hit some pharmaceutical companies harder than others, according to Frank Liu, executive director of CITIC Securities. However, pharmaceutical companies should generally seek new marketing approaches and brand-driven strategies to offset possible implications. The A-share Science and Technology Innovation Board (STAR Board) and ChiNext board have issued many incentive policies to support listings of innovation-driven companies. High valuations offered by the A-share market is the dominant reason why companies choose to list here, he said.
Jielun Zhu, chief financial officer of I-Mab [NSDQ:IMAB] predicted that 2020 would be a fantastic year for biotech companies looking to fundraise. The pandemic has urged many investment funds previously engaged in other areas to shift their focus to the healthcare sector. Innovative biopharmaceutical companies in China need to grasp opportunities to be better-funded to create world-leading innovation-driven pharmaceutical companies, he said.
Aaron Yu, co-general manager of the investment department at Shanghai Fosun Pharmaceutical Group pointed out that even under the current Sino-US relationship, high-tech asset investment and exchanges between China and the US have not fully ceased. Meanwhile, Singapore, Japan, South Korea, and the EU all make good investment destinations for drug development outside of the US, he continued. China's foreign exchange controls and outbound direct investment (ODI) as well as the US’ CFIUS review are the major regulatory risks for China outbound investment.
Below is a transcript of select questions from the audience Q&A session that were addressed by our expert panelists.
"I personally believe China’s centralized purchase program will have some impact on the biomedicine business, but overall the trend is positive in the long run. It will gradually force out companies with poor R&D capabilities, simple product offerings, and low quality products. For those that have survived the game and those managed by great executives and with forward-looking visions, it is good news. Generics drug sellers will also need to shift towards innovative drug development. Along with accelerated admission of innovative drugs into the medical insurance scheme, this sector will embrace booming development." - Jielun Zhu, chief financial officer of I-Mab
"There sure will be impact, and it is just a matter of time, especially the large-dosage, high-priced biomedicines."- Michael Fu, head of Everbright Healthcare Fund and managing director, China Everbright
"I believe there will be impact. Adalimumab is an example." - Josh Shin, partner of Fangda Partners
"I think the impact is moderate. There are alternative markets such as non-hospital drug sales for foreign pharmaceutical companies to achieve higher profitability; or to gain market share with lower pricing through the medical insurance scheme so as to seize opportunities. Either way, you need to have access to the China market, and then you can decide on the pricing and marketing strategies in view of your product features." - Frank Liu, executive director of CITIC Securities
"I think it depends. The ultimate goal of price negotiations for drug companies is to achieve larger sales by sacrificing prices. If the sales are big enough, new drug makers will have the incentive to enter the huge China market." - Josh Shin, partner of Fangda Partners
"In the long run, it won't. First, MNCs have no reason to give up on the China market. It's just that they will seek the right opportunities in the short run. Second, China is catching up in innovation; MNCs should really make full use of their 'early mover' advantage." - Michael Fu, head of Everbright Healthcare Fund and managing director, China Everbright
"What might change the industrial landscape are two things -- cost and technology, not the Sino-US relationship. Drugs are meant to save people's lives, for everyone." - Frank Liu, executive director of CITIC Securities
"Theoretically, it might be. But I think it's more of a business consideration, because in terms of API, India indeed has advantages in cost, language and compliance." - Michael Fu, head of Everbright Healthcare Fund and managing director, China Everbright
"The biggest issue faced by genetic intervention technology is regulatory uncertainty, ban of foreign investments, and tightened regulation on human genetic resources." - Josh Shin, partner of Fangda Partners
The healthcare sector is a hot area for China's overseas investment. For inbound investors, deals that can give them access to the China market are falling gradually. Technical cooperation is starting to take shape." - Michael Fu, head of Everbright Healthcare Fund and managing director, China Everbright
"From the current global macro outlook, the momentum in overseas medical M&A activities has not continued as anticipated. First, in response to the deepening global economic slowdown, investors stay away from overseas deals in consideration of geopolitical and financial risks and high costs. With the help of the capital markets, if Chinese companies can properly conduct risk assessments, they may be able to seize the 'corner-overtaking' opportunities by utilizing M&A to improve their product offering, technicality and global presence." - Jielun Zhu, chief financial officer of I-Mab
"I am optimistic. Even if US investment is out of the picture, we can look elsewhere such as European countries and Israel, etc." - Josh Shin, partner of Fangda Partners
"With regards to overseas M&A, if it involves human genetics and medical data this may affect deal flow. But this issue is not related to the current global political tensions." - Frank Liu, executive director of CITIC Securities
"Of course, they can continue to be involved. In fact, quite a few US funds are very active in the China market."-Josh Shin, partner of Fangda Partners
"Currently, it seems that US funds are not impacted in any form with regards to their investments in China."- Frank Liu, executive director of CITIC Securities
This webinar coverage article was originally published by Mergermarket on September 30, 2020; it has been republished with permission.