Shanghai's State-Owned Capital Demonstrates Strong Commitment to Biopharma with Launch of RMB 21.5 Billion Mother Fund

In late July, Shanghai officially launched three major guiding funds for its leading industries, including a RMB 21.501 billion biopharmaceutical guiding fund registered in the Pudong New Area of Shanghai. In addition to underscoring the strategic importance of the biopharmaceutical industry to Shanghai and bolstering support from patient capital, this move also conveys a clear message: an emphasis on efficiency.

It is reported that Shanghai’s three major leading-industry fund-of-funds will “leverage market-based mechanisms to connect innovation resources,” “optimize the industrial ecosystem,” and “accelerate the emergence of globally competitive innovative enterprises in Shanghai, building world-class industrial clusters.”

Shanghai has always been at the forefront in terms of both financial policies and the development of the biopharmaceutical industry. This time, however, it demonstrates an even stronger momentum of “mobilizing resources to accomplish major tasks.”

“Anticipated future changes include a greater concentration of state-owned capital into large-scale fund-of-funds (FOFs) and a reduction in fragmented investments. Additionally, the authority of industrial groups to establish funds may be tightened, with only enterprises meeting specific criteria permitted to initiate fund formation. On one hand, FOFs are expected to play a more prominent role in industrial guidance and resource integration; on the other hand, this implies that the primary channel for market-based general partners (GPs) to secure state-owned support will shift toward state-owned FOFs, making it more difficult to obtain direct capital commitments from individual state-owned enterprises,” a professional told VCBeat.

The ties between state-owned capital and China’s biopharmaceutical industry are becoming increasingly close and complex. State-owned capital has gradually become the dominant investor in the biopharmaceutical sector, with state-owned funds directly participating in nearly 400 financing and investment deals in medicine and health in 2023. However, for most state-owned entities, it is challenging to reconcile the pursuit of investment profitability with the achievement of governmental strategic objectives, while also having a low tolerance for losses.

Both investors and enterprises are under pressure from the environment and market cycles. In the current biopharmaceutical development ecosystem, improving efficiency may be the best way for state-owned capital to demonstrate its commitment when investing in the biopharma sector.

Suzhou is clearly the benchmark in terms of local government and fund coordination, as well as building a biopharmaceutical industry from scratch.

On March 22, 2006, construction commenced on the Suzhou BioBAY (Suzhou Biopharmaceutical Industrial Park). That afternoon, CSSD Venture Capital—later known as Yuanhe Holdings—signed an agreement with China Development Bank to establish China’s first venture capital fund of funds, thereby initiating a path of mutual promotion and shared prosperity between Suzhou’s biopharmaceutical industry and venture capital. This fund of funds was China’s first RMB-denominated fund of funds operated on a market-oriented basis, with a size of RMB 1 billion. In July 2007, BioBAY officially opened, and the first ten companies to settle in the park all received angel investment from CSSD Venture Capital.

Nearly two decades of investment have established Suzhou’s biomedical industry as a defining city brand. In 2023, the industrial output value of Suzhou’s biomedical sector above designated size reached RMB 211.5 billion, doubling over five years and placing it in the top tier alongside Beijing, Shanghai, and Shenzhen.

Efficiency has been the key to Suzhou’s success. In the early stages, Suzhou made decisive investments in the biopharmaceutical industry, standing in stark contrast to the hesitation seen in other cities. During the development phase, resources were concentrated, and the sector was designated as the “No. 1 Industry” in 2020. Even during the biopharmaceutical downturn in 2022, Suzhou proposed establishing a special fund with a total scale of RMB 10 billion and specifically announced the creation of a dedicated M&A fund.

Another key factor is consistency in execution. An industrial park researcher once stated, “All commitments have been fulfilled one by one, upholding the Suzhou government’s consistent track record of good faith. A leader formerly in charge of investment promotion told me that the most effective way to attract investment is for the government to keep its word. This level of vision and credibility holds significant appeal for many enterprises that are not accustomed to working with first-tier city governments.”

In recent years, governments in many regions have raced to establish funds to encourage the development of the biopharmaceutical industry and build biopharmaceutical clusters. However, waste occurs when too many localities include biopharmaceuticals in their industrial planning and key investment attraction sectors.

In response, a senior investor from an industrial fund questioned: “Currently, 45 first- and second-tier cities in China have designated biomedicine as a strategic emerging industry. This phenomenon reflects the blind follow-the-leader approach of local governments toward industrial development. In reality, there are only about 40 truly mature biomedical clusters worldwide. A successful biomedical cluster requires multiple conditions: strong government support, a complete industrial chain, an ample talent supply, abundant clinical resources, and a developed capital market. From these perspectives, not all regions in China are suitable for developing the biomedical industry.”

This situation sometimes puts biopharmaceutical companies in a difficult position, as not only provinces and cities compete to attract settling enterprises, but even districts engage in such competition, forcing founders to incur substantial decision-making costs.

The industry fund investor also pointed out to VCBeat, “Current policy orientations may lead to resource waste, redundant investment, and cutthroat competition. Local governments are engaged in a race to amass funding pools, often reaching tens or even hundreds of billions of yuan. While such competition may drive short-term GDP growth, it essentially constitutes internal friction from a national perspective. Industrial development should be planned through top-level design rather than by encouraging disorderly competition.”

Some regions lack the conditions necessary to retain enterprises over the long term. Forcing their way into the game results in government guidance funds making fragmented, piecemeal investments, which fails to foster industrial clusters or self-sustaining ecosystems, thereby leading to resource wastage. In particular, some local governments have offered excessive preferential policies and subsidies to attract businesses, only to draw in “migratory bird enterprises” that relocate as soon as they perceive a decline in local support.

Effective August 1, the Regulations on Fair Competition Review will come into force; without a basis in laws and regulations or approval by the State Council, it is prohibited to “grant tax incentives to specific operators.”Tax incentives, once a key tool for attracting investment, will fade into history. This shift will foster greater synergy among regional competitions, mitigate zero-sum games, and allow the “fund-based investment attraction” model to return to the essence of investing, becoming more innovative and refined.

As policies supporting the development of innovative drugs continue to be rolled out, and as local government guidance funds refine their industrial strategies, state-owned institutions are facing increasingly ambitious investment mandates in the biopharmaceutical sector.

However, at times, certain state-owned institutions find themselves in a position of “passive bailout,” continuously injecting capital into distressed enterprises.

The non-linear characteristics of biotechnology make its innovation process difficult to predict. The performance of biopharmaceutical companies is particularly binary, as clinical trial results often determine the success or failure of drug developers. Typically, due to its high complexity, lengthy R&D cycles, and stringent regulatory environment, biopharma is considered the most difficult asset class to manage and possesses one of the “worst” business models compared to other industries. This high-risk nature also means that many biopharmaceutical companies fail to survive.

However, because these projects are tied to local industrial development mandates, some initiatives that should have been gradually phased out by the market continue to be presented to state-owned asset institutions in the hope of securing a “lifeline.”

One investor stated bluntly: “The current biopharmaceutical market is undergoing a self-correction process, paying the price for and clearing out earlier irrational behavior. However, substantial government funding may have delayed the exit of projects that should have been cleared, thereby interfering with the market’s natural selection mechanism. Excessive intervention could hinder truly valuable companies from emerging and distort the allocation of market resources.”

“Continuous bailouts often yield limited results. Relying solely on funding to sustain business operations without addressing the lack of core competitiveness merely creates a bottomless pit of capital consumption. This approach not only squanders valuable state-owned assets but may also delay necessary corporate transformation and restructuring, ultimately failing to achieve the desired outcomes.”

In other words, the market-driven industry consolidation has slowed significantly, resulting in substantial “ineffective investment.”

From the perspective of rescuing biopharmaceutical enterprises, more effective investment under current circumstances may involve consolidating biopharmaceutical assets through mergers, acquisitions, and restructuring—a move that state-owned institutions have already begun to undertake. The primary investment strategies fall into three categories:

First, target established companies with strong growth potential for mergers and acquisitions. Second, restructure diverse biopharmaceutical assets to provide them with new valuation benchmarks and development opportunities. By introducing new investors and capital, this approach can help distressed companies regain momentum and navigate the current challenging cycle. Third, spin off valuable product pipelines from existing companies into independent entities to attract more targeted investment and accelerate product development and commercialization.

“Some star projects were initially reluctant to directly lower their valuations. However, after restructuring and rebranding, with their valuations discounted to a more reasonable range, new investors have become interested and willing to continue investing,” said a state-owned investor who is currently assisting in the restructuring of projects in his portfolio. “In particular, restructuring the product pipeline can at least salvage some promising pipelines or products.”

On July 30, the General Office of the Shanghai Municipal People’s Government released the “Several Opinions on Supporting Full-Chain Innovative Development of the Biopharmaceutical Industry,” proposing support for enterprises to strengthen and expand through mergers and acquisitions. A Shanghai Biopharmaceutical Industry M&A Fund will be established to actively guide qualified biopharmaceutical companies to initiate the establishment of M&A funds in line with industrial transformation and upgrading needs, thereby supporting enterprises in conducting merger and acquisition investments along the upstream and downstream segments of the industry chain.

Revitalizing existing assets can also inject vitality into the entire industry. Such mergers and acquisitions in the biopharmaceutical sector generate positive social impact and are likely to become an important and effective investment strategy in the foreseeable future.

Recently, an investment by the Shenzhen government has drawn attention. In July, Luye Pharma announced that it had secured up to RMB 1.6 billion in investment from Shenzhen Luye Private Equity Fund.

The initial investment involves Shenzhen State-owned Assets purchasing a 25% equity stake in Nanjing Luye for RMB 1 billion. The Topco investment entails investors injecting their 25% equity stake in Nanjing Luye into Shenzhen Luye in exchange for a newly issued 25% equity stake in Shenzhen Luye. Further investment refers to the subscribers’ additional subscription of new registered capital in Shenzhen Luye totaling RMB 600 million, to be completed in two tranches following the completion of the Topco investment.

State-owned capital support has provided Luye Pharma with stronger cash flow security. In particular, the initial tranche of RMB 1 billion in foreign exchange can be directly used to reduce the domestic and overseas debt of its parent company, Luye Pharma. Previously, Luye completed the acquisition of AstraZeneca’s CNS product, Seroquel, when U.S. dollar interest rates were relatively low. With this RMB 1 billion infusion, Luye can optimize its financial structure and enhance profitability.

Shenzhen Luye is primarily based on the assets of Nanjing Luye, focusing on oncology products. These include mature products such as Lipusu, Tiandixin, and Tiandida, as well as rubitecan (Zepzelca), which is in the stage of filing for production approval. The overall asset valuation is approximately RMB 4 billion.

The valuation adjustment mechanism (VAM) clauses primarily focus on profit targets, requiring an average annual net profit of RMB 300 million. This target is expected to be achieved mainly through lurbinectedin (Zepzelca), the first new molecular entity approved by the FDA in over two decades for the treatment of recurrent small cell lung cancer, with its U.S. sales projected to reach $1 billion in 2025.

Luye Pharma is one of the few Chinese pharmaceutical companies with a global presence, with its business spanning more than 80 countries and regions worldwide, including China, the United States, Europe, and Japan. The company is renowned for its improved innovative drugs, particularly boasting significant advantages in drug delivery technologies.

The Shenzhen Luye Private Equity Investment Fund, which is making this investment, is an industry-leading cooperative fund with a total scale of RMB 12 billion. It was officially announced in September 2023 by the Shenzhen Government Guidance Fund and established in partnership with Luye Pharma, CATL, Sinopharm Group, and others. This marks the fund’s first completed investment. As a result, Shenzhen has secured a scarce biopharmaceutical company and the associated influence, while Luye has gained a new foothold in the Greater Bay Area, bolstering its capacity for advancing its oncology pipeline or pursuing external acquisitions.

Guangdong’s state-owned assets have always been adept at demonstrating their support for innovative drugs through concrete actions. Previously, Guangzhou’s support for Akeso was also provided on a “point-to-point” basis.

In December 2022, Akeso Pharma, a subsidiary of Akeso Inc., secured RMB 500 million in funding from Guangzhou High-Tech Industrial Development Zone Investment Group to support the commercialization of Akeso’s tislelizumab and its launch for broader indications.

Previously, the construction and commissioning of Akeso’s Phase I biopharmaceutical production base received strong support from Guangzhou’s state-owned assets and enterprises. With the subsequent completion and commissioning of the Phase II and Phase III projects, Akeso Biopharma will become one of the largest biopharmaceutical production bases in the Guangdong-Hong Kong-Macao Greater Bay Area.

Guangzhou’s robust support has provided Akeso with strong confidence, paving the way for a broader global expansion. In late 2022, Akeso entered into an exclusive licensing agreement with Summit Therapeutics, granting it overseas rights to ivonescimab. This year, Akeso announced the clinical results of the HARMONi-2 trial, demonstrating that ivonescimab is the first and only product worldwide to show significantly superior efficacy compared to Keytruda in a head-to-head Phase III monotherapy study. Moving forward, Akeso will collaborate with Summit Therapeutics to conduct global Phase III clinical trials of ivonescimab.

As Akeso further transforms into a biopharma company, Guangzhou’s technological capabilities and industrial standing in the field of biomedical innovation, as well as the global prominence of the Greater Bay Area’s biomedical industry cluster, will be enhanced.

However, given that Luye Pharma and Akeso are already standout biopharmaceutical companies, not all local governments possess the capability to identify and invest in such opportunities. Therefore, an alternative perspective suggests that state-owned capital investing in the biopharmaceutical sector requires “large-scale funds” rather than targeted investments. Overall, while government funds in the biopharmaceutical field exhibit a certain level of activity and diversity, their scale and number remain relatively limited, resulting in constrained impact. The entry of large-scale funds can bolster market confidence; in particular, there is a strong case for establishing large-scale fund-of-funds.

“Many direct investment funds are fundamentally mismatched with the genetic requirements of biopharmaceutical investing, which explains why state-owned institutions are treading on thin ice. Many state-owned entities hide behind others to co-invest, thereby meeting so-called regulatory requirements and fulfilling their mandate to support projects, while avoiding taking the lead.” As one investor pointed out, “The fund-of-funds model may better leverage market mechanisms, reduce duplicate investments, and mitigate the potential impact of excessive local government intervention in specific projects.”

Perhaps Shanghai’s RMB 21.501 billion biopharmaceutical fund of funds marks a new, promising, and highly anticipated beginning.

References

1. “Full-Chain” Support for Innovative Drugs: Shenzhen Takes Action - Zhao Cai Xiao Huang Ya,https://mp.weixin.qq.com/s/vykHVbxKsuUC4vlj9LrdkQ

2. How to Build Strategic Emerging Industries from Scratch? Lessons from the “Suzhou Model” for Local Governments to Adopt and Learn From! - Maizhe Industrial Research Institute,https://mp.weixin.qq.com/s/n9emgaYizd_G5_s6aHWk-g

3. Starting Today, Local Investment Promotion Has Changed - Investment Circle,https://mp.weixin.qq.com/s/Nb0ykhvNFt0lNiyx9AMYBw