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China Investment 2015: Raising the Bar

Analysis of VC investment, M&A, IPO and partnering activities in China

2009-2014


© Copyright 2015 ChinaBio LLC


ChinaBio® Group tracks the full value chain of China’s life science industry from new technology development to government funding programs, VC investment, IPO and M&A activity, as well as partnering deals, clinical trials and more. This paper presents a six-year analysis of the key financial trends of investment, IPO, M&A and partnership activities in China. For more information, please contact us ([email protected]).

2014 was a breakthrough year for investments in China's life science industry. Across

the board, metrics of the four types of deals tracked by ChinaBio’s research group --

VC investment, IPOs, M&A, partnering -- were higher, often astonishingly so. Three of

the categories set all-time records by the 3rd quarter -- VC, M&A and partnering. Only

IPOs, hampered by restrictive government regulation, failed to surpass previous years.

Area 2013 2014

Partnering *

VC Investment No change *

IPO

M&A *

* Records for the year set by Q3 2014

Figure 1. Financial trends in China life science (Source: ChinaBio)

China life science has been growing for several years, sometimes steadily, other times

fitfully. Nevertheless, in good years and disappointing ones, the case supporting a

bright future for the industry has remained strong. Prognosticators always pointed

toward a more prosperous future, invoking a powerful trilogy of forces that would

make China the world's largest healthcare market: a large population with lagging

healthcare delivery, increasingly sophisticated scientific capabilities, and large amounts

of government funding to support innovation.

In 2014, these forces seemed to coalesce to set several records in investment activity.

The collective increase in investment totals was also qualitatively different from prior

years. The quantitative differences are measured in magnitude, but, when considered

as a whole, they add up to something bigger than just the numbers. China’s life science

companies are growing rapidly and their innovative products will soon become part of

the everyday healthcare reality -- in China first, in the rest of the world soon after.

http://www.chinabio.com/contact

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VC Investment: Breakout year hits $1.7B

For the past four years, venture capital investments in China life science have been

relatively strong but stagnant, bouncing around the $1 billion mark. 2014 changed all

that. VC investment caught fire, rising 70% to $1.7 billion dollars in total announced

deal value, while the number of deals rose 57% to 69 and the average deal size climbed

29% to $31 million.

VC Life Science Investment Activity – 2009-2014

Average

Investment

2009: $11 M

2010: $21 M

2011: $25 M

2012: $41 M

2013: $24 M

2014: $31 M

Figure 2. 2014 VC investment shatters prior record (Source: ChinaBio)

Like most of the life science investment categories, VC activity was especially heavy

during the fourth quarter: 20 deals representing more than $700 million of capital were

announced in Q4.

The largest VC investment during the year was a $320 million infusion into Shenzhen's

BGI, the world's largest sequencing enterprise. The investment bought a 20% stake in

BGI's prenatal testing division, known as BGI Shenzhen. The pricing conferred a $1.6

billion valuation for the division. Later, rumors surfaced that this division would follow

up with an IPO in Hong Kong, which has yet to come to fruition.

The $320 million investment in BGI was large enough to have an effect on the sector

allocation of 2014 VC investment, giving diagnostics a 22% share of VC deal value ($376

million), even though it claimed only 6% of the number of deals (4). It's not surprising

that BGI's domination in genomic sequencing gives the company's future an aura of

inevitable success, which VCs seem to find attractive. (See Figure 3.)



VC Investment 2014 – by Sector

$ Amount # Deals

Figure 3. Service is fastest growing segment in 2014 (Source: ChinaBio)

During the years 2009-2013, the drug sector routinely claimed about 60% of deal value

in VC investing. But in 2014, Drugs came in second ($439 million) with only a 26% share,

while services claimed 34% of the announced deal value with $567 million. This

emphasized the continuing trend, since 2012, of decreasing emphasis on pharma and

biotech, and an increasing focus on services and medical devices.

VC Investment 2009-2014 – by Sector

Figure 4. VC investments shift toward services and devices (Source: ChinaBio)

There were still several notable deals in the drug sector, particularly for the new wave

of drug development companies in China founded by highly respected returnees or

expats that are in-licensing assets from global pharma for development.

For example, BeiGene, founded by John Oyler, former CEO of BioDuro, raised $70

million in a series A round to further their already advanced portfolio of drug



candidates, raising the question of how the company got so far without any VC help

(answer: smart partnering). ZAI Labs, founded by Samantha Du, former CEO of

Hutchison, also announced a $30 million investment to work on two respiratory

products in-licensed from Sanofi. JHL Biotech, headed by expat Racho Jordanov, raised

$35 million to develop biosimilars and novel biologics. And just to show this trend is

continuing, Innovent, headed by returnee Michael Yu, raised $100M in January of 2015.

In past years, these would have been standout transactions. But the bar has been

raised. During 2014, Guahoa.com captured $100 million for its online pharmaceutical

sales platform, boosting the service sector. Similarly, OrbiMed and Decheng

participated in the $120 million fundraising for a young US diagnostics company,

Invitae, an out-bound investment for the two VC firms.

Not to be left out, the medical device sector had a $100 million investment as well.

That was the size of Blackstone’s investment in Suzhou Xinrong Best Medical

Instrument Co., a maker of orthopedic implants. Founded in 2000, Xinrong Best makes

trauma products, artificial joint replacements and spinal reconstruction devices.

Corporate Investment and PIPEs – 2010-2014

Average Deal Value

2010: $17 M

2011: $23 M

2012: $57 M

2013: $24 M

2014: $99 M

Figure 5. VC/PE investments shift toward services and devices (Source: ChinaBio)

This report has not covered corporate investments or PIPEs in prior years as the

amounts were not material. But in 2014, these areas exploded, contributing nearly

$3.9 billion in additional investment value. Corporate investment represented nearly

$1.5 billion in funding for 35 capital-hungry companies, while PIPEs contributed an

additional $2.4 billion to 9 public companies. Corporate investors included Legend

(Lenovo), Kelun Pharma, Sinopharm, Fosun, and China Medical Systems, among others.



IPOs: A slow start to a much anticipated comeback

IPOs were the only less-than-stellar sector in China's life science industry in 2014. The

sector offers two quite different ways of viewing the results. Compared to the recent

past (2012-2013), the sector improved considerably. In 2014, 16 life science IPOs raised

$2 billion, a 146% increase over 2013. However, because the IPO market was

essentially shut down for 2013, completing only $820 million in initial offerings, the

2013 low point made for an easy “success” in 2014.

IPO Activity – 2009 to 2014

Average IPO Value

2009: $266 M

2010: $177 M

2011: $174 M

2012: $112 M

2013: $137 M

2014: $126 M

Figure 6. IPOs restarted but still constrained in 2014 (Source: ChinaBio)

On the other hand, during the golden age of IPOs that stretched from 2009 to 2011,

total funds raised by life science IPOs peaked at nearly $6 billion annually. Compared to

that, 2014 IPOs generated only about one-third the value.

The problem with China's life science IPOs isn't the life science companies or their

offerings; it's China -- specifically, the market regulators. They continue to strangle the

flow of initial offerings in an effort to protect investors. There were over 600 IPOs

planned for 2014, anticipating the flood gates opening. Instead, the China Security

Regulatory Commission (CSRC) decided to limit this to about 100.

Ultimately, 16 Chinese life science companies IPOed in 2014, most on Chinese

exchanges. One notable exception was Luye Pharma Group, which set a new record for

a China pharma, raising $764 million on the Hong Kong exchange. iKang also validated

VC’s strong interest in healthcare services, raising $153 million on NASDAQ.



M&A Activity: A fifth straight record year

M&A transactions in China’s life science industry notched their fifth straight record

year in 2014. The total value of M&A transactions jumped 66% to $8.6 billion, with

number of deals rising 36% to 106, and average deal values up 16% to $99 million.

M&A Activity – 2009 to 2014

Average Deal Value

2009: $23 M

2010: $75 M

2011: $65 M

2012: $108 M

2013: $85 M

2014: $99 M

Figure 7. M&A sets another record year at $8.6B (Source: ChinaBio)

In terms of the number of deals, the perennial leader, drugs, slipped slightly last year as

a percentage of the whole, dropping from 62% to 57% (61 deals) in 2014. In one of the

largest deals in the drug sector, Luye turned around two months after its $764 million

IPO and acquired a majority stake in Beijing Jialin Pharma, a company focused on

cardiovascular and cancer treatments, putting $599 million of its cash back to work.

The services sector climbed 18% to 25% (27 deals), suggesting that the long-expected

consolidation in the sector may finally be taking place. The two largest services

acquisitions involved Fosun Pharma who put nearly $1 billion into hospitals. The

company paid $369 million to buy Chindex, a well-known China-based hospital chain in

which Fosun already held a stake. Fosun also paid $609 million to buy a controlling

interest in Portugal's Espirito Santo Saude, a small chain of hospitals, taking its

healthcare services holdings to Europe. Always an active M&A participant, Fosun

clearly senses the opportunity in healthcare delivery.

Of the 106 M&A transactions completed in 2014, there were seven out-bound deals

and six in-bound transactions. The outbound group included Fosun's hospital

transactions discussed above, but there were other interesting tie-ups, as well.



Going outbound, WuXi PharmaTech added to its laboratory testing offerings by

acquiring XenoBiotic Laboratories, a US-China pre-clinical CRO with specific expertise in

radio-labeled compound studies. And Unitao bought a manufacturing plant in Virginia

that Boehringer Ingelheim was about to idle. Unitao will use the US plant to make APIs.

Inbound to China, Beckman Coulter, a US lab equipment company, acquired Suzhou's

Xitogen Technologies, which makes flow cytometry equipment. And Germany's Bayer

AG paid $586 million to acquire Dihon Pharma, a China company that makes OTC

healthcare and TCM products.

Partnering Activity: A blowout year approaches $2B

Like most investment categories, partnering hit record levels in 2014, with total deal

value climbing 55% to $1.8 billion, continuing a three-year meteoric rise of 9-fold from

the 2011 low point. The number of deals have grown less quickly, from 84 in 2011 to

142 last year, reflecting the increase in deal quality and value rather than volume.

Overall Partnering Activity – 2008-2013

Average Deal Value

2009: $52 M

2010: $36 M

2011: $13 M

2012: $25 M

2013: $54 M

2014: $50 M

Figure 8. 2014 a record year, growing 55% and hitting $1.8B (Source: ChinaBio)

In terms of the partnering sectors, there was a large inversion between deal value and

number of deals in the drug and service sectors: Service represented 62% of deal value

($1.1 billion), but only 16% of the number of deals (13). On the other hand, the drugs

sector landed just 36% of the deal value ($660 million) but represented a 66% majority

in the number of deals (88).



Overall Partnering Activity by Sector – 2014

$ Amount # Deals

Figure 9. Service up in dollars, but drug deals still dominate count (Source: ChinaBio)

Not surprisingly, just three transactions accounted for $1.1 billion of service deals: the

Sinopharm-Fosun $500 million JV to construct a nationwide drug logistics network; and

a $486 million cancer hospital project in Shenzhen to be built by France's Curie Institute

and Zhongtian Kecheng Investments. Another was a $110 million JV between Fosun

and Taizhou Municipal Investment to build a hospital and rehabilitation center. Overall,

there weren't many service deals (13), but they were highly valuable transactions.

By contrast, the more numerous drug-centered partnerships had smaller announced

deal values -- if the financial details were disclosed at all. Most of the deals were

structured to defer risk, with small upfront payments and later profits (hopefully)

shared by both parties. As a result, the true value of the deals remains difficult to

quantify at the outset of the working relationship.

In terms of deal types in the pharma sector, licensing has dominated partnering activity,

and that trend accelerated in 2014, breaking 50% for the first time. A full 58% of all

deals were licensing, up from the usual mid-40% range. On the other hand, joint

ventures fell off considerably in 2014, with only two deals announced during the year.

Co-development pharma deals remained constant at about 23% over the 2012-2014

period.

Turning to indications for the drugs being partnered, oncology was once again the

leader, with 37% of the total, followed by infectious disease then cardiology and

immunology/inflammation. However, oncology slipped last year from its record high of

48% in 2013. While infectious disease is declining from its highs, most therapeutic

areas are holding steady overall.



Pharma Partnering Activity by Deal Type – 2009-2014

Figure 10. Trending toward licensing and away from JVs (Source: ChinaBio)

Examining partnering deals by stage, over the period 2009-2014, the three major

stages -- pre-clinical, clinical and marketed -- split the total number of pharma

partnerships into nearly equal thirds. That hasn't always been the case. In the past --

2009 and 2010 for example -- well over half of the partnerships were for marketed

drugs.

Pharma Partnering Activity by Indication – 2009-2014

Figure 11. Oncology still #1, infectious disease trending down (Source: ChinaBio)

Looking at more recent trends in stage of partnering deals, preclinical deals are gaining

in popularity again, after falling precipitously in 2013, reflecting an increase in activity

with universities and institutes for early stage assets. Phase III deals are also on the rise,

while Phase II partnerships declined from 25% to 16%.



Pharma Partnering Activity by Stage – 2009-2014

Figure 12. Pharma deals for preclinical and phase III trending up (Source: ChinaBio)

Cross-border partnering is continuing to grow both in numbers (up 20%), and as a

percent of total pharma deals. In 2014, cross-border pharma partnering deals

represent nearly 90% of all pharma partnering deals.

Pharma Partnering Cross-border Deals – 2009-2014

Figure 13. Cross-border pharma partnerships up 20% in 2014 (Source: ChinaBio)

Biologics deals exploded three-fold in 2014, and all but one were cross-border. Most

biologics deals have historically been cross-border, reflecting that China has been

bringing more innovative biologics assets in to China. This also reflects the increasing

trend toward biologics in general, which now represent 37% of all cross-border deals.



Conclusions: Continuing to raise the bar

China is committed to becoming the world's leader in life science innovation and has

been following a path to achieve that objective. That has meant implementing

extensive education programs in its universities and institutes to stimulate budding

scientists; providing significant financial support for startup companies; and

implementing and expanding key talent and other government funding programs to

attract and fund highly qualified returnees from around the world.

In 2014, the culmination of these efforts began to bear fruit in a very real financial

sense. Over $18 billion in total value was created through the commercial funding

provided by venture capital, M&A transactions, IPOs and partnering activities – this is

nearly double what it was only a few years ago. And add in well over $70 billion/year in

government funding, and this becomes funding sufficient to truly propel the China’s life

science industry forward to global prominence.

This, combined with China’s thirst for innovative healthcare solutions, no matter where

they were created, and the desire to significantly improve healthcare delivery to its

aging population while managing costs, make 2015 a very good time for western

companies to come to China. And the lowest risk, most time and capital efficient

method to come to China is with a partner.

# # #

Acknowledgements

The data for this report was developed by the ChinaBio Research team based in Shanghai utilizing ChinaBio’s proprietary data. Thanks to the authors and researchers for making this report possible. Executive Editor: Greg B. Scott Author: Richard Daverman, PhD

Research: Tracy Yeo, PhD Felix Li Henry Ye



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