Over the past five years, biotech investment has experienced the fastest development in China. Pharmaceutical companies have become a rising force that has attracted increasing amount of capital.
Transcenta is a biotech company that is riding this momentum.
In an interview with Transcenta’s chief executive Xueming Qian and chairman Jonathan Zhao, the two founders share their vision and future plans for the young company. Transcenta was founded in January this year when HJB and MabSpace came together. HJB was focused on bioprocessing technology that accelerates manufacturing, while MabSpace provides discovery, clinical stage research for biologic medicines.
Before the merger, HJB and MabSpace had both completed their Series B fundraising - a combined $160 million - with investors such as Lilly Asia Ventures, Temasek, Sequoia China, ARCH Venture Partners, Teng Yue Partners and Taikang. The company is in the process of its at least $100 million Series C fundraising which should be completed by Q3.
The move helped Transcenta to focus on biopharmaceutical research and manufacturing. Qian and Zhao confirm that Transcenta will go public in the first half of next year, but the board is still deciding about where to list. For Transcenta, the more important issue is to use capital to develop first-in-class or fast follow-on medicines that improve on the original biologics.
Transcenta has witnessed the fast development of Chinese biotech companies, and still expects more healthy competition in the industry. To achieve that goal it may also require help from the government to advance the current healthcare system, they said.
The following is the conversation that Jonathan Zhao and Xueming Qian had with FinanceAsia. This interview has been edited for brevity and clarity.
Q What have been your priorities since the establishment of Transcenta?
A ZHAO It has been four months since our company’s merger. The actual cooperation started in September last year. We began to see the synergistic effect after our union in Q1. Firstly, we cooperated with Eli Lilly and Company to finish the largest orthopaedics deal in China, developing three products that treat hyperosteogeny and bone cancer. It is currently the only cooperative biologic treatment in China to target osteopathy.
QIAN And it is a potential market. Of the people who are 65 years or above with a high risk of developing the bone disease in China, there are 17% patients who suffer from bone diseases. That figure will increase to 25% as society ages. Most Chinese patients still need to raise awareness for bone disease. We are focusing on the development of antibody treatment in this area.
ZHAO The cooperation with Eli Lilly is a milestone for us because it requires a comprehensive industrial chain from antibody treatment development to production. Few companies in China can achieve that. Especially for biological medicine development, there are only a handful of Chinese companies that have the capacity to build a full industrial chain.
QIAN Another thing that differentiates us from other pharmaceutical companies is our global focus. Although we are a Chinese company, we are always focusing on global markets. This requires US or European patents, high-quality manufacturing processes and different clinical strategies in each region.
ZHAO One thing I want to add is that we still want to adapt to the Chinese market using our products. In the Chinese market, you have to manufacture to a high quality and quickly. We are confident that our cost control is top on the list of Chinese pharmaceutical companies. Thanks to our innovation, we can have a high production capacity within smaller spaces - sometimes one-tenth the cost of other pharmaceutical companies. And the cheaper cost makes it easier to sell on to the market.
QIAN Drug prices are very different in China compared to other countries. For example, the same kind of drug can sell for 10 times as much in the US. For US pharmaceutical companies, the cost is about 5% of its price. We can’t achieve that in China. Our focus is on how to use innovation to lower our cost when we can only sell at a lower price in China. That is an obvious advantage we have.
Q How does Transcenta gain an advantage on both biologics research and production?
A ZHAO We help each other. Dr Qian and I both worked in the US biotech company Amgen about 20 years ago. The atmosphere there inspired us to create a Chinese Amgen. What Amgen does is to use better technology to increase the entry barriers, we would like to do the same thing. An advantage we have is our huge Chinese market. It is easier for us to develop on the global market while having China as our home market.
QIAN Technology is our core competence. In pharmaceutical research, how many medicines you need depends on how effective your drugs are. What we provide is an antibody, and we can use technology to enhance the effect. When we achieve a good treatment, we can achieve it at a low cost with better production.
ZHAO We used to make a computer the size of a room, but nowadays we can make a much smaller smart computer like an iPad. What we are doing in Transcenta is to make the iPad of the pharmaceutical space. What people do with a factory the size of a football field, we can achieve with a basketball field sized factory. This technology is rare in China; probably only one or two companies can do that.
QIAN We have also adapted a very flexible production process. We use highly modularised components to assemble the production line, so it is easier for us to expand production in a short amount of time.
Q What is Transcenta’s strategy going to be over the next two years?
A ZHAO Transcenta is a company that manufactures innovative drugs, including self-developed ones and those co-developed with other companies. Our aim in the first two years is to have at least two new products enter the clinical stage annually. The products will include first-in-class ones as well as what we call fast follow-on products - those that improve the first-in-class drugs using the same mechanisms. Compared to some listed biotech companies, we are more comprehensive in biopharmaceutics. Our goal is to become a century-old company that has drug R&D, clinical trials, and production of our own.
QIAN We will continue to integrate our businesses until June this year, optimising production lines and increasing productivity. In the first half of 2019 we will send three products for approval and two in the second half of the year. We are also doing pivotal trials on some other research too.
Another focus is to introduce more capital into the company. We are doing our Series C fundraising currently and will finish it in Q3 this year. We are also aiming to IPO in H1 next year.
Q Where will you IPO?
A ZHAO We are considering the US and the Hong Kong stock market. The US has a comparatively mature market for IPOs. But the Hong Kong stock market has changed a lot in the past year and now welcomes biotech companies. But no matter where we list, the fundamental of Transcenta’s development is unchanged.
QIAN We have a global focus and a full industrial chain, but our Chinese background also caters to the Hong Kong market. Our board is still deciding where to go public.
Q What is Transcenta’s character as an international company?
A QIAN Unlike other small teams which sometimes outsource their work and focus on one aspect, we emphasise technology, products and, in the future, sales capability. Our products need to be innovative on a global scale. We still have one-third of our resources devoted to global market development for original products, this is rare in China. Our team is also very globalised. We meet two of the essential requirements that pharmaceutical companies need to go global. First, we have overseas patents. Second, our production process strictly follows US and European standards. Overseas partners can help us to speed up the expansion process, as our good quality products are complementary with their large sales teams.
ZHAO Because we deliver what we promise and with our strong execution, Transcenta already has a group of high-quality investors in both China and the US. Transcenta is like a student from a good background who has good grades and has sufficient support from his parents. But Transcenta is still an adolescent, about to go to college. Going public and entering the global market is like a student going to a college.
Q What led to the merger ot HJB and MabSpace?
A ZHAO During the development of my old company, which focused on drug production, I found out that there was something I wanted to achieve but that was beyond my reach. This feeling initiated our merger - to help both sides break through the bottleneck. HJB was primarily focused on biomedical processing while MabSpace focused on biologic medicine R&D. It’s very expensive to buy biologic medicine research and also to outsource it. That prompted our merger in the first place.
QIAN Both sides had just completed Series B fundraising when we merged. We are trying to keep an open mind as well. We can still outsource part of our production capacity to other companies but that won’t be our focus. We are gaining experience from different partnerships with others. We not only want to be a leader in the biopharmaceutical space, but also enable others to achieve high-level biologic treatment.
Q What is Transcenta’s goal in the on-going Series C fundraising?
A ZHAO I can give you a general idea of our Series C fundraising. We plan to have two products go into clinical stage each year and are launching pivotal trials. The fundraising this time will be at least $100 million to support our current development. We also want our new investors to stand along with our current investors and support our long-term development.
Transcenta will not be satisfied with just to go public, we want to be the Chinese version of Amgen. The revenue of drug sales in China is about one-tenth of the global revenue. If biopharmaceutical company Amgen can reach a $100 billion market cap, we are aiming for one-tenth of that which is $10 billion.
QIAN We can speed up our development if we grab the chance. My ambition is to have a market cap of $30 billion in the future, not in the near future, but to achieve this in one or two decades. If we keep improving our technology and pipeline, with the right team and the right investors, we can easily achieve that with a big Chinese market in front of us. Of course, it takes time and effort.
Q What’s your expectation for investors?
A ZHAO How the investors can help us with their unique resources is what concerns us. Money is the resource that matter the least. Our current investors can provide all kinds of resources, and we hope that our new investors can come from a diversified background while sharing our beliefs.
QIAN We hope to get value-added services from our investors, and become a think-tank in the future. A higher target motivates us to keep trying.
Q What are the challenges that face Transcenta?
A ZHAO The Chinese pharmaceutical industry has developed really quickly over the past five years, but we are still facing challenges ahead. There are two major ones. First, the amount of risk that the capital markets will tolerate is different in China and the US, especially for biotech innovations. Sometimes investors don’t understand what it takes to become a truly bio-innovative company, and it take a lot of time to explain.
Second, there is a decreasing trend on drug prices in China and that could affect the enthusiasm for innovation. There is a mature drug payment market in the US that helps drug innovation. China’s national health insurance system is still imperfect compared to the US. Companies may lose interest if they keep selling their product at a low price. The costs of drug R&D keep rising in China, but companies are unable to increase the price at the same time to adjust to the innovation cost. These are the two challenges we are facing right now.
QIAN Another challenge is the repetitiveness of drug development, not only in China, but all around the world. A lot of companies have developed similar treatments for the same illnesses. If China stops developing first-in-class treatment, it will be very hard for Chinese companies to take the lead in global drug development.
The government can invest more in fundamental research to help Chinese companies focus on high-risk and high-reward innovations. It could promote companies to innovate more high-quality drugs to take the market and make money. We need government support for fundamental research, which is essential to speed up the development process.
Meanwhile, we could introduce a more commercialised mechanism for drug payment. The current national health insurance meets the basic needs of patients by providing a cheap product, but an innovative product requires a higher selling price. China has just started to build commercial insurance.
Q Are you concerned that everybody appears to be rushing in to develop the same kind of drugs?
A QIAN Yes, sometimes we do have that concern. But it is also a developing process and we have to accept it. If we can keep the innovation, we can avoid redundancy in drug production.
ZHAO It is also part of the Chinese character because we have a huge population and most people have a herd mentality. I still believe in the mechanism of the market adjustment itself. People will become more rational in time.
Q How do you see future competition?
A ZHAO China still needs more pharmaceutical companies. We hope to see more quality players in China to create healthy competition. We don’t feel there are too many competitors, we want more comrades.
QIAN We hope Chinese drug development can start to imitate the process in the US, as everyone has its strength. That environment is what we hope for.