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As China builds biotech sector, cash floods U.S. startups

[September 24, 2018] By Robin Respaut and Julie Zhu

SAN FRANCISCO/HONG KONG (Reuters) - For three whirlwind days in June, U.S. scientist Zhi Hong went shopping at the Boston Bio Conference to find drugs to fill the pipeline of his two-week-old drug company.

Crammed in tight, four-person booths executives use for private conversations, the former GlaxoSmithKline PLC <GSK.L> executive pitched dozens of U.S. biotech companies to partner with his start-up, Brii Biosciences.

Months earlier, Hong had raised $260 million - much of it from Chinese and Asian investors - with a strategy to bring U.S. biotechnology drugs to China, the world’s second-largest prescription drug market and home to a rapidly growing biotech sector.

Brii is now discussing partnerships with about a dozen drugmakers, which it aims to help by conducting clinical trials in China, applying for governmental approval and eventually negotiating reimbursement in a bid to capitalize on China’s stated plan to become the next global player in biopharma.

“I didn’t see this coming,” Hong told Reuters. “They said, ‘If you start a company, you won’t have any problem raising money.’ I didn’t quite believe that at the beginning. But as we went through the process, it was incredible.”

Brii is one of many biotech startups riding a wave of money from Asia that so far this year has poured $4.2 billion into private U.S.-based biotech companies. That is over 43 percent of the total amount of venture funding invested in the biotech sector, according to PitchBook, up from just 11 percent in 2016.

These investors range from China’s 6 Dimensions Capital and Hillhouse Capital Group to Hong Kong-based Blue Pool Capital, the investment arm of Alibaba's executives. They are in search of better returns across the Pacific after China’s recent homegrown biotech push has driven sky-high valuations.

“There are companies in China that haven’t even started clinical trials, and they have received term sheets for $400 million,” said Nisa Leung, managing partner and leader of healthcare sector at China-based Qiming Venture Partners, referring to the agreements that describe the terms of an investment. “I think that’s crazy.”

China’s biotech craze stems in part from a government plan launched a few years ago as part of the Made In China 2025 campaign. The goal is to promote biotech as a strategic emerging industry, spawning rapid development and investment into the burgeoning sector.

A rule change at the Hong Kong stock exchange this spring is also providing an added incentive for investors. Biotechs without revenue or profit from around the world are now able to list on the exchange – which provides a faster way for investors to cash out.

Among the winners are Menlo Park, California’s GRAIL Inc, an early-stage cancer detection company that in May raised $300 million in a Series C round led by Chinese healthcare fund Ally Bridge Group. Immuno-oncology company TCR2 Therapeutics of Cambridge, Massachusetts, received $125 million in March in a Series B round co-led by Pacific-focused investor 6 Dimensions.

In the United States, the influx of cash from China has inflated the size of biotech funding rounds and quickening the pace that companies can raise money. (Graphic: https://tmsnrt.rs/2CG36Gb)

Companies that rely on licensing deals to develop innovative drugs in China - like Brii or Shanghai-based Zai Lab - are more often paying a premium. The interest from China has driven the upfront payments for licensing agreements for U.S. drugmakers to over $30 million currently from $1 million or $5 million three years ago, according to Leung.

Other headwinds for Chinese biotech investment persist - ranging from the nagging threat of the Trump administration broadening restrictions on Chinese investment to the lackluster stock performance to date of the first Hong Kong biotech IPO under the new listing regime, Ascletis Pharma <1672.HK>.

Still many investors interviewed by Reuters do not expect China’s biotech hunger to end overnight.

"It makes a lot of sense (for Chinese funds) to look at U.S. biotech firms especially as many Chinese biotechs still lag behind their U.S. peers in terms of the quality and the pipeline of products,” said Jonathan Wang, senior managing director and co-founder of the Asia fund at OrbiMed Advisors, a healthcare investment firm that continues to invest in young biotechs in both China and the United States.

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FORTUNATE TIMING

For some biotech companies, money from China has breathed new life into experimental drugs or devices that lost priority inside company pipelines for various reasons.

That was the thinking behind scientist Bing Yao’s move to strike out on his own, just as Asia investor interest in biotech was taking off.

Yao first had the idea to leave his position as the head of the respiratory, inflammation and autoimmunity disease unit at AstraZeneca MedImmune in March 2017. The pharmaceutical company was pruning its drug development to focus on priority areas like cancer, so he proposed spinning off some programs to a new start-up that he would create to develop the drugs.

One year later, Yao launched Viela Bio with AstraZeneca’s blessing and six of the pharmaceutical company’s experimental drugs. The furthest along is a medicine for neuromyelitis optica spectrum disorder, a rare disease affecting the optic nerve and spinal cord of around five in 100,000 people.

Yao raised $250 million from a consortium of investors led by China-focused funds, including Boyu Capital, 6 Dimensions and Hillhouse. AstraZeneca remains the largest minority shareholder.

Yao said he received interest from more investors than he wanted to manage, so he selected the firms that “came earlier and faster.”

“A few years ago, it would have been harder to raise large sums like this,” said Yao, who spent over 20 years focusing on immunology at companies like Amgen and Genentech before AstraZeneca.

But it may not be as easy for companies going forward.

HURDLES AHEAD?

Changes in Washington and the challenges of breaking into the Chinese healthcare sector are emerging on investor radars.

A new law passed in August expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign investments for potential national security concerns. The broader scope prioritizes the protection of emerging technologies, including genetic information.

Even those with funding could find the China market difficult to navigate. Launching new medicines in China is still relatively untested, and conducting clinical trials, getting government approval and selling medicines in China’s segregated healthcare marketplace present formidable hurdles.

“It’s a significant job,” said Moncef Slaoui, former head of global research and development and vaccines chairman at GSK and a Brii strategic advisor. “But this is a moment where there is an opportunity,” he said, because moves by the Chinese government, such as modernizing its version of the FDA, will have long-lasting impacts.

At Brii, the strategy calls for working with AliHealth, the healthcare arm of Alibaba Group Holding Ltd <BABA.N>, to find potential patients for its drugs. Another deal with WuXi AppTec Co Ltd <603259.SS> gives Brii access to WuXi’s extensive research and development capabilities in China.

Brii’s first U.S. biotech partnership is with San Francisco-based Vir Biotechnology, an infectious disease-focused startup headed by former Biogen CEO George Scangos. The deal grants Brii the rights to develop some of Vir’s future drugs in China. ARCH Venture Partners’ Robert Nelsen backed both companies.

“Other companies try to become global,” said Hong. “We’re doing the reverse. We are dedicated 100 percent to the Chinese market."

(Reporting by Robin Respaut in San Francisco and Julie Zhu in Hong Kong, additional reporting by Gui Qing Koh in New York; Editing by Elyse Tanouye and Edward Tobin)

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