China U.S. biopharma players look on the bright side for 2017

The networking was lively and the outlook optimistic as the Chinese-American Bio/Pharmaceutical Society (CABS) conducted its second Investor Forum in conjunction with the 35th Annual J.P. Morgan (JPM) Healthcare Conference in San Francisco. With Chinese investments in U.S. businesses topping $15 billion last year – a record – the question on everyone's mind was whether direct investment in U.S. biotech and life sciences will continue to grow in the face of China's inward-facing currency pressures. Despite obvious challenges, most participants expressed confidence that U.S.-Asia cross-border investment has gathered momentum that isn't likely to hit reverse in 2017.

With caveats, of course.

Greg Scott, founder of ChinaBio Group, kicked off the forum with statistics that hinted at the depth of investment opportunity in the life sciences, calling 2016 an "incredible" year. He cited $15.1 billion in venture capital (VC) and private equity funds raised in China, representing a 39 percent increase over the previous year, and $5.3 billion in Chinese VC investment in the sector – a 330 percent year-over-year increase. Health care services, such as information technology, led the life science investments in terms of dollars and deal flow, followed by therapeutics, diagnostics and medical devices.

BioWorld previously identified the rise of Chinese money in biopharma as one of the Top 10 newsmakers in 2016. (See BioWorld Today, Dec. 30, 2016.)

Although Chinese corporate and private investment in public equity, or PIPE, financings declined 24 percent in 2016, they were off by less than 1 percent over a two-year period. Approximately $4.3 billion was raised in IPOs, an increase of 16 percent over the previous year, while M&As hit $21.5 billion, an increase of 30 percent over 2015. Biopharma edged out services in M&A activity, according to Scott, followed by medical devices and diagnostics.

Partnering numbers were up, though dollars were down, with the average deal size falling to $83 million from a peak of $102 million in 2015. Nevertheless, cross-border transactions represented 85 percent of deal flow as Chinese companies increased their appetite for Western technology.

Currency concerns

Growing restrictions by the Chinese government on moving currency out of the country have raised some fears that cross-border partnering could be harmed. The topic was of keen interest to CABS participants, many of whom have operations or investments inside and outside the country.

Lianshan Zhang, senior vice president and global R&D president of Jiangsu Hengrui Medicine Co. Ltd., said his company intends to keep innovation and globalization at the core of its strategy. The company, headquartered in Lianyungang, Jiangsu Province, will continue to look for growth opportunities, both from out-licensing deals and, increasingly, by in-licensing assets for the Chinese market, where Jiangsu Hengrui can apply its internal expertise to advance assets quickly through development and commercialization.

Jiangsu Hengrui, which took in $1.4 billion in 2015 revenues, has stayed busy on the cross-border deal front. In 2015, the company struck a major immuno-oncology license and collaboration agreement with Incyte Corp., of Wilmington, Del., with a potential price tag of $795 million. Last year, the company co-invested $100 million with an undisclosed investment firm to create Hengrui Therapeutics Inc., a biopharma joint venture based in Princeton, N.J., with the goal of developing and commercializing cancer therapies. The company also has a research deal with M.D. Anderson Cancer Center. (See BioWorld Today, July 16, 2015, and June 30, 2016.)

Asked whether outright acquisitions also were on the company's wish list, Zhang acknowledged the seemingly M&A-averse Jiangsu Hengrui has taken some flak in that respect but insisted the dearth of deals was not for lack of trying.

"We haven't found a suitable partner," he said, but the company is still looking.

"That means expect to see a news report about Jiangsu Hengrui in a big acquisition," quipped Janet Xiao, partner and co-chair of the Global Life Sciences Group at Morrison & Foerster LLP, who moderated the session.

Partnering across borders

Cross-border partnering also remains a strategic goal for Shanghai Henlius Biotech Inc., which is advancing a pipeline of biosimilars for the Chinese market along with innovative drugs. Although biosimilars have gained a significant foothold in Europe and in 2016 entered the U.S. market, the cost structure precludes developers – mostly big pharma or their subsidiaries – from pricing biosimilars effectively for patients in China and most other Asian markets, where health insurance remains scarce, according to Scott Liu, co-founder and CEO. Shanghai Henlius is chipping away at that "niche" by seeking to advance high-quality biosimilars at a lower cost. (See BioWorld Today, May 28, 2014.)

Liu discounted the notion that cross-border investing and dealmaking will vanish under the tightened currency rules, suggesting "no significant impact" on global biopharma operations, provided companies can demonstrate the "legitimacy" of a transaction. "If you can show true value, true merit to a deal, the government will approve it," he said.

Zhang agreed, pointing out that Jiangsu Hengrui already has a "sizable" presence in the U.S., with multiple investigational new drug applications filed.

"We have to have the money to support our clinical development here," he said. "We need to come up with a method to address the situation."

Although deals may need to be structured more carefully, "that shouldn't affect our position going outside China," Zhang added.

Minqi Li, investment director at GF Securities-Bay City Capital, said her investment firm anticipated the restrictions on outbound payments, converting to dollars in mid-2016 after sensing that the "gates were closing." Still, the Chinese government is not insensitive to the fact that the country's health care market remains dependent on overseas technologies, Li said, suggesting that companies still can make a compelling case to justify cross-border investments.

U.S. biopharma could benefit from a China flush with investment capital for another reason. Inflated valuations of Chinese biopharma companies may help the pendulum swing back to the U.S. for cross-border investors, said Judith Li, partner at Lilly Asia Venture – perhaps one reason for the noticeable increase in Asian investors attending the 2017 JPM meeting.

Although many JPM participants voiced the expectation that U.S. tax barriers will be lowered under the incoming U.S. administration, speakers at CABS were more cautious. Michael Chang, managing director of Vivo Capital, called his outlook "a little mixed." Ongoing uncertainty regarding U.S. policy "increases the burden for due diligence" in U.S. investments, he said.

From an operational perspective, however, "I don't think any of the Trump initiatives will touch regulatory side," which could bode well for drug and device approvals, Judith Li added. She also cited as positive the interchange between the FDA and CFDA and the Chinese agency's dramatic steps to clear its backlog of applications. (See BioWorld Today, Oct. 27, 2016, and Nov. 16, 2016.)

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