China life science investing hits new highs in 2018

Just before January's JPMorgan Healthcare Conference and Biotech Showcase® 2019 opened, the China Showcase spent a day examining the state of life science development in China, with speakers, panels and audience participation. Greg Scott started the day with an overview of 2018's investing in China life science using data compiled by ChinaBio®. The following is a summary of his remarks. Read it ahead of ChinaBio® Partnering Forum from May 8-9 in Shanghai. 

China life science investing hits new highs in 2018; Did second half signal a pause?

2018 was a very good year for China life science investing. Every metric—venture capital raising and investing, IPOs, M&A, partnering—ended the year higher. With large amounts of capital competing for deals, it was, as one venture capitalist said, a very good time to be a China life science entrepreneur.

In some ways, 2018 seemed like two years combined into one—the first six months were very strong, but during the second half, the sector started running off the rails, particularly in terms of US–China political relations. While the two halves of the year were different, each life science investing category had its own story to tell. In some, the first half was stronger; in others, it was the other way around.

In terms of 2018 exits—M&A and IPOs—the second half was better than the first. Perhaps that was investors cashing out, sensing a pause (or something worse) after several years of spectacular growth. On the other hand, fundraising in life science by VC and PE firms fell off considerably in the second half of the year, no doubt constrained by China's government restrictions aimed at tamping down a sector it considered "too hot."

2018 is our focus, but it must be said that, longer-term, China life science has had an incredible ten-year run, adding context to last year's results. Since ChinaBio® started keeping statistics in 2008, eleven years ago, the cumulative dollar amounts in the various investing categories have increased 20 to 50 times their 2008 levels. Eleven years ago, in 2008, venture capital/private equity investments totaled just $300 million. It was $17 billion last year —higher than US figures for the year. The same is true, more or less, for other comparisons. The following table is a summary of the results—for last year, and for the last ten years:

2018 China Life Science Investing

One of the forces driving China life science for the past 10 years (and longer) has been government investing. It is almost impossible to get real numbers for this metric, but it was probably around $10 billion per year ten years ago. Now, with biopharma development a national priority, government sources probably provide about $100 billion of support when national, provincial and city funds are added together. China is focused on creating a major strategic industry and helping to create several major China international life science companies. Where once the goal was "In China for China," it has become "China for the world."

2018 also saw phenomenal changes in biopharma regulatory affairs—acceptance of foreign clinical data, easier participation in global trials, faster responses from regulators—changes that facilitated bringing foreign assets into China and will take China products to global markets.

Life science investing categories

In terms of VC/PE funds raised, the second half of 2018 saw a significant fall off. That was probably caused by the aforementioned government intervention. There are, as Nisa Leung, Qiming's Managing Partner for Healthcare, said in the Plenary Session, 35,000 VC funds in China (all sectors, not just healthcare), versus 8,000 in the US. She expects that some funds may send limited partners' capital back to them, if they can't find deals.

Nevertheless, in terms of fund size, the average fund size rose to $764 million last year, a number that was positively affected by Hillhouse's $10 billion new fund, a particularly large raise.

VC/PC money invested into companies has been a "hockey stick" since 2017, exploding higher after a period of steady, but unspectacular growth. It doubled in 2017 and added on another 36% year-over-year in 2018, ending at $17.4 billion. At 53 times its total of ten years ago, VC/PE investing is the greatest gainer over the past decade. It was helped by such large deals as $500 million for Moderna Therapeutics, $300 million for diagnostics company Grail, and $260 million for already well-funded CStone Pharma.

Of course, back in 2008, these 2018 investments would have been unimaginable. A $10 million Series A round was impressive in 2008. Now, to get a mention in year-end reviews, a company has to announce at least $100 million in a Series A, and even that won't raise many eyebrows.

Similarly, M&A has been climbing since 2012. During the first half of 2018, M&A was slightly higher year-over-year, but there was a big uptick in the second half. One observer noted that when the consensus turns negative, investors want exits, and M&A offers quick and predictable exits. 63% of the activity was in pharma/biotech, followed by devices, diagnostics and iHealth.

In 2018, to be included in year-end charts, a deal had to be worth several hundreds of millions of dollars. Cross-border activity is strong with good deal size. Other data showed there were 18 China cross-border deals worth at least $1 billion in the last year.

IPOs have been more uneven, year-over-year, in their growth, a combination of investors' vacillating levels of enthusiasm/fear on the one hand and government intervention on the other. The first half of 2018 was a little slow, with just seven or nine IPOs. Then, about mid-year, the Hong Kong exchange fired up its pre-revenue biopharma IPO track, stimulating IPO activity, even though the first several Hong Kong listed companies declined significantly post-IPO. IPOs included Armo, iHealth, BeiGene, Ascletis and WuXi AppTec, who either made their global debut or added a Hong Kong listing. The average IPO transaction raised $256 million, almost double the previous year.

Partnering, like IPOs, saw a slow first half but a very strong later six months. Partnering ended the year with almost $14 billion in announced deal value (many deals did not disclose their value), an increase of 66%, the largest year-over-year gain of any category. Cross-border partnering deals climbed 73%, and about 75% of partnering deals in the pharma sector are cross-border.

Summary

The political wrangling between the US and China is an overhanging worry for all cross-border industries, life science included. However, the tensions have not, so far, caused great dislocations to life science. No proposed cross-border life science mergers, for example, have been forbidden, as has happened in other industries, though some contemplated transactions may been abandoned before they were announced. For both China and the US, life science is a growing, favored sector, with a public that may complain about the cost, but nevertheless demands continued investment. The two countries are moving toward interdependence, with benefits for each. And the China life science industry wants to equal the US in novel drug development.

For more information and partnering opportunities, gain exposure to the fastest-growing healthcare market in the world at ChinaBio® Partnering Forum.