China's Biopharmaceutical Investment: Bubble or Springtime?
The era when China was unable to produce “miracle drugs” is now a thing of the past. Today, we are witnessing an explosive growth in the biologics industry. However, no single player can bring about a renaissance on its own, nor can the availability of any individual factor alone drive the upgrading of the biopharmaceutical industry. Now, from the perspectives of policy support, talent pool, capital investment, and the maturity of upstream and downstream segments in the industrial chain, biomedicine has ushered in its golden age.
The “2018 China Biological Products Annual Conference and the 18th National Academic Symposium on Biological Products (CBioPC),” co-hosted by the China Association for the Promotion of Development of Pharmaceutical Enterprises, the Professional Committee on Biological Drugs and Quality Research of the Chinese Pharmaceutical Association, the Branch of Biological Products of the Chinese Preventive Medicine Association, the Vaccine Professional Committee of the China Medical Biotechnology Association, and the Professional Committee on Biological Products of the Chinese Society for Microbiology, was held in Kunming from November 14 to 16.
The "Chinese Biological Products Annual Conference" has been held for 18 consecutive years. This year, however, the conference added a sub-venue dedicated to biopharmaceutical investment and financing. Notably, the China Pharmaceutical Enterprise Development Promotion Association established an Investment Special Committee this year. The inaugural Investment and Financing Forum of the Biological Products Annual Conference was organized by this Investment Special Committee, featuring separate investment and financing forums that invited numerous renowned investors and successful entrepreneurs from the industry to share their insights.
Capital helps enterprises share risks and facilitates the transition of biopharmaceutical companies from early-stage development to maturity. While it serves as a catalyst for the growth of the biopharma industry, some argue that it fuels valuation bubbles and acts as a smokescreen disrupting the market. What role does capital play in the development of the biopharmaceutical sector? How can investors strike the right rhythm in their investment strategies? How can entrepreneurs attract capital favor? And in an increasingly open market, how should companies address international competition? These questions became hot topics at a recent investment and financing forum. VCBeat (WeChat ID: vcbeat) addressed these issues in an interview with Mr. Yuan Quanhong, President and Partner at CCB Capital.
Although the biopharmaceutical industry is characterized by long development cycles and high risks, it is a sunrise sector that grows counter-cyclically to the broader economy. However, in China, the domestic biopharmaceutical sector has consistently lagged behind its foreign counterparts. In 2017, Roche’s R&D investment approached $11.5 billion, whereas only two Chinese pharmaceutical companies had R&D expenditures exceeding RMB 1 billion.
To address this shortfall, biopharmaceuticals have been included among the ten strategic development areas in the “Made in China 2025” initiative. Policies on both the supply and payment sides are encouraging the development of the biopharmaceutical industry. Reforms in the review and approval process have reduced the backlog of clinical trial and marketing authorization applications at the Center for Drug Evaluation (CDE) from a peak of 22,000 in 2015 to fewer than 4,000 this year. In terms of medical insurance reimbursement, the 2018 edition of the National Essential Medicines List was released, incorporating several major new drugs approved by the state in recent years, while the dynamic adjustment mechanism has also begun to favor innovative drugs.
Mr. Yuan Quanhong stated, “As of today, we can consider that all institutional barriers to the market launch of innovative drugs have been completely eliminated.”
In terms of talent, the vast potential of the domestic market has attracted many pharmaceutical professionals to return to China, with approximately one-quarter to one-third of these returnees being from the pharmaceutical sector.
Mr. Yuan Quanhong stated to reporters, “We can sense that the biopharmaceutical industry is in its golden age, whether in terms of capital, talent, or the industrial chain. In particular, our industrial chain has seen remarkable development; many Chinese companies have built up their drug development capabilities and platforms while serving as partners for multinational corporations. The next wave will be driven by innovative drug developers. Over the next five to ten years, more innovative companies will emerge, enter the capital markets, and bring novel products to market, thereby providing innovative therapeutic options for clinical patients.”
A multitude of favorable resources are being leveraged to attract top talent and investment, with capital playing an indispensable role. Capital is also flooding into biopharmaceutical companies. Data provided by the Department of Consumer Goods Industry under the Ministry of Industry and Information Technology shows that in the first half of 2018, there were nearly 300 financing rounds in China’s pharmaceutical and health industry, involving approximately USD 5.46 billion. Among these, biomedicine, primary healthcare, and biotechnology ranked as the top three sectors in terms of financing amount.
New drug development is often referred to as the “Valley of Death,” characterized by long development cycles, high risks, substantial capital requirements, and the most stringent regulatory oversight worldwide. Internationally, the average investment in new drug development reaches $1 billion, with a timeline extending up to ten years. For biopharmaceutical companies in their early stages, growth without robust capital support makes them highly vulnerable to failure in a fiercely competitive market.
Mr. Yuan Quanhong stated, “Silicon Valley alone does not make Silicon Valley; it is Wall Street that has made Silicon Valley what it is and enabled the emergence of so many great American companies. Capital plays a crucial catalytic role, providing successive stages of support—from venture capital to listing on the NASDAQ. This is why Silicon Valley boasts numerous technology innovation enterprises alongside a highly developed venture capital industry. The development of the biopharmaceutical sector cannot thrive without a robust ecosystem.”
Now, in late April, the Hong Kong Stock Exchange has implemented new listing rules, giving the green light to initial public offerings (IPOs) in the biopharmaceutical sector. At the China International Import Expo, it was also announced that a Science and Technology Innovation Board would be established on the Shanghai Stock Exchange, with a pilot registration-based IPO system. As high-potential players in technological innovation, domestic biopharmaceutical companies are poised to seize more opportunities.
This means that in the capital market, China has already established the “infrastructure” of its capital ecosystem and is now simply awaiting the arrival of high-quality investors. However, capital capable of fostering a robust growth ecosystem for enterprises requires professional institutional investors, rather than hot money rushing in en masse. Particularly in an open market environment, domestic biopharmaceutical companies must directly face competition from multinational pharmaceutical corporations.
Mr. Yuan Quanhong pointed out, “China’s progress over the past two years has opened its doors to the world while also intensifying competition, significantly narrowing the time lag between new drug launches domestically and abroad. During the first wave of drug development, many players were still chasing targets already validated overseas. Over the past seven to eight years, many companies have exhausted the opportunities around these validated targets and have established their own platforms. The question now is how to move forward—this presents a new challenge.”
Pursuing novel targets requires greater capital investment and entails higher risks, which align precisely with the inherent nature of capital. Furthermore, professional investment institutions can provide superior value-added services in terms of sustained financial support and resource integration. Whether addressing immediate urgent needs or formulating high-level strategic plans, biopharmaceutical companies cannot do without professional institutional investors.
Once a biopharmaceutical company enters its Series A financing round, it needs to bring in professional institutional investors. These institutions possess deeper industry insights and have accumulated significant industry resources. Selecting an investment firm is not just about securing capital; it also provides value-added services such as guidance on R&D strategy, talent acquisition, and subsequent financing rounds, serving as both a strong backer and a strategic mentor.
Especially in the pharmaceutical industry, which is characterized by significant information asymmetry, investment institutions that truly understand corporate R&D projects and research data, can even verify such data, and are capable of endorsing companies are extremely rare.
The influx of capital is a positive development; however, the herd-like rush of investment into the biopharmaceutical industry may not be beneficial, with some voices suggesting that an investment bubble has emerged in China’s domestic biopharma sector. The consecutive instances of newly listed biopharma companies on the Hong Kong Stock Exchange trading below their IPO prices have also dampened market optimism. Although the biopharmaceutical industry is relatively counter-cyclical, will biopharma investment face a “capital winter” amid valuation bubbles?
During our interview with Mr. Yuan Quanhong, VCBeat noted that rather than describing a “winter” for biomedical investment, it is more accurate to characterize the current climate as the lingering chill before the arrival of spring. The performance of biomedical companies in the capital markets should be viewed rationally. This period also serves as a litmus test for investors, weeding out the less experienced: many such investors tend to underestimate risks and may exit the market due to a lack of resolve.
In an interview, Mr. Yuan Quanhong stated, “The biopharmaceutical sector is in its early market stage, with some investors and entrepreneurs still immature. An immature market inevitably experiences significant volatility, whereas it becomes more stable as it matures. The biopharmaceutical industry itself is characterized by severe information asymmetry; even companies listed on the NASDAQ through IPOs can experience dramatic ups and downs.”
In this regard, data provides supporting evidence. VCBeat once tracked the post-IPO performance of 26 U.S. healthcare companies that completed their initial public offerings between January 2012 and August 2018. The analysis revealed that trading below the offering price was the norm: only three companies never fell below their IPO price throughout the period, while nearly 90% of the companies experienced shares trading below the offering price at some point, with over 70% seeing a pullback in their stock prices.
Market volatility is inevitable; however, for investment firms, the ability to identify their own investment path and maintain their own investment rhythm serves as a stabilizing anchor in navigating market fluctuations.
Moreover, for startups, gaining favor from professional investment institutions in a cluttered market is no longer as simple as being a “pig lifted by the wind.” At the financing and investment forum, investors from Sinopharm Capital, Tonghe Yucheng, SDIC Innovation, and Yuanhe Capital, all specializing in biomedicine, shared their perspectives on what makes a qualified entrepreneur.
Lü Dazhong, Managing Director at SDIC Innovation, stated, “Following China’s accession to the ICH, new drugs can be launched almost simultaneously in both domestic and international markets. In an environment of intensifying global competition, a mere ‘me-better’ strategy has no room for survival. Therefore, our investments primarily target highly experienced and innovative teams.”
Experience and capability are necessary conditions, but they are far from sufficient for entrepreneurs. Ni Lin, Managing Director of Tonghe Yucheng, pointed out: “In addition to strong professional expertise, many entrepreneurs who come from large pharmaceutical companies may have been excellent employees there, but that does not necessarily make them good entrepreneurs. Entrepreneurs need stronger execution and leadership skills.”
Entrepreneurs differ from scientific researchers in that they must achieve clinical implementation and commercialization of their products. Yang Jin, Business Partner at Sinoway Capital, added, “All innovations ultimately converge on the goal of solving problems, which means achieving clinical implementation. Therefore, the recruitment of a Chief Medical Officer (CMO) is crucial. For instance, when a company has three or four indications simultaneously or multiple product pipelines, there is a risk of missteps without substantial involvement from clinicians. This could lead to significant loss of market share after launch. During pre-investment discussions, we provide companies with advice in this regard and also connect them with clinical resources to address these challenges.”
Amid a more rational investment climate, several outstanding biopharmaceutical entrepreneurs offered advice on how to win investor favor at the financing forum.
Wu Chenbing, CEO of Shanghai Mabwell Bioscience, stated that during the Series A financing round, the company secured industry recognition and enhanced the value of its technology platform by entering into technical collaborations with Innovent Biologics and another U.S. company, despite having no products but only a technology platform at the time. Regarding the Series B financing round, Wu Chenbing remarked, “During our Series A fundraising, the intrinsic value of the platform accounted for a significant portion of our valuation. Now, as we pursue Series B funding, investors place greater emphasis on our products. On one hand, the products must feature innovations; on the other, they must demonstrate clear differentiation.”
In a market with intensifying competition, domestic biopharmaceutical companies pursuing “global-first” innovations must have the confidence to vie for discourse power and market share in the international arena.
Yu Xuefeng, Chairman of CanSino Biologics, stated, “We aim to build a global vaccine company rooted in China. Different regions require different strategies. For instance, the European and American markets are tightly dominated by four major vaccine manufacturers, making direct competition unfeasible. However, we can adopt an indirect approach by supplying our bulk drug substances to European companies for further processing. For any enterprise, it is essential not to focus solely on the Chinese market but to embrace the international market.”
Dr. Fu Daotian from Livzon Pharmaceutical Group also stated, “We must have confidence and conviction. In the past, we were merely wrestling with our neighbors in our own backyard; now, we are competing against major international players. It is only through pressure and challenges that our industry can become stronger, and this process will inevitably entail sacrifices. Over the past two decades, we have seen numerous companies eliminated during the transition from non-GMP to GMP standards, and again during the shift from GMP to cGMP. Now, we are facing an international battle. Therefore, our primary consideration must be survival, followed by how to thrive.”
Perhaps this is the best era for biopharmaceutical investment, marked by less frenzy and more rationality. As the poem goes, “The chilly spring breeze sobers one from wine, yet the slanting sunlight on the hilltop greets you.” With all core elements of industrial development in place, the biopharmaceutical sector can emerge as a leader in both the rapidly growing domestic and international markets.