China Investment 2015: Raising the Bar
Analysis of VC investment, M&A, IPO and partnering activities in China
2009-2014
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
China Investment 2015: Raising the Bar
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.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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.)
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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).
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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%.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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.
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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
China Investment 2015: Raising the Bar
© Copyright 2015 ChinaBio LLC
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