Why investors love China's loss-making health startups

No profit, no problem: a string of Chinese healthcare firms are riding momentum from strong policy support and a vast consumer market all the way to IPOs. But it's not too late to find a good deal.

Why would scores of investors from across the world want to pile into loss-making companies in a sector that is at the mercy of China's notoriously unpredictable regulators? There are 1.3 billion good reasons.

The world's most populous nation is pushing hard to revamp a health sector that has long struggled with an imbalance between growing patient numbers and limited resources. China's growing middle class is demanding better healthcare and the country's leadership, ever mindful of meeting public aspirations for better living standards, is reacting with policy changes that a range of startups are eager to take advantage of.

That's led to strong investments in companies in a range of sectors, from medical device makers to online health services providers. But nowhere has the interest been stronger than in biopharmaceuticals. And investors so far seem unconcerned that few of these companies turn a profit.

Take, for example, Ascletis Pharma. The Hangzhou-based biotechnology firm is expected to start trading on the Hong Kong Stock Exchange on August 1, yet recorded net losses of Rmb31.9 million ($4.7 million), Rmb86.9 million and Rmb0.9 million in 2016, 2017 and the first quarter of this year, respectively. The firm has attracted a $75 million of cornerstone investment from Singapore state fund GIC.

Another biotech firm, CanSino Biologics, disclosed in its Hong Kong IPO filing on July 17 that it recorded net losses over the past 27 months up to end-March. It has drawn attention from a well-known Chinese healthcare investor, Qiming Venture Partners, which has 68 portfolio companies in the sector.

Such is the potential of biotech that Hong Kong's stock exchange is changing its rules to allow pre-profit biotech firms to list, a key pillar of a wider shake-up intended to bring new economy companies to the bourse.

To be sure, the healthcare sector remains relatively highly-regulated. But the industry is evolving on the back of a series of beneficial national strategies.

Last July, the Food and Drug Administration issued an instruction on intensifying trial implementation of a new marketing authorisation holder policy that encourages medical research and development; three months later, President Xi Jinping repeatedly put the spotlight on his “Healthy China” initiative, including mentioning it in his keynote speech at October's Communist Party National Congress; in April, tariffs on some imported medicines were reduced or abolished.

Most remarkable of all, there was the rare sight of a top Chinese leader respond to an issue that rose to the top of the agenda as a result of public discourse.

On July 18, Premier Li Keqiang, China's second ranking leader, officially called for lower prices and better access to cancer drugs in response to a wide public debate triggered by a single Chinese movie – Dying to Survive — which told the story of a cancer patient.

“We can feel the regulatory turnaround, which is very beneficial for the health industry in a broad sense,” veteran healthcare investor Frank Yang, CEO of Chinese private equity fund Blue Ocean Capital, told FinanceAsia in a telephone interview.

“What’s even better is that the reform also takes place from inside of the regulatory system, in terms of both institutional restructuring and approval procedure.”


Among all the vertical fields, Yang highlighted the pharmaceutical sector, which he believes will maintain a growth rate very close to double digits despite the moderating macroeconomic growth.

This rate of growth will "strongly support the prosperity" of the healthcare industry, Yang said, adding: “It is the best time and the most innovative era ever.”

Yang’s confidence also reflects the strong capital support for healthcare in general and biopharmaceuticals in particular, and the growth of the market.

In the latest example of strong support for biopharmaceuticals, Suzhou-based Ascentage Pharma said on July 17 it had closed its $150 million series C financing. That takes the eight-year-old company's total fundraising to around $240 million.

Chinese research body Zhiyan.org, predicts the country’s pharmaceutical market, including biopharma, chemical pharma and traditional Chinese medicine, will be worth roughly $178 billion by 2021, up from last year’s $134 billion. Among the three sub-segments, it expects biopharmaceuticals to be the strongest driver of growth.

Click for full view. Source: Zhiyan.org

As the industry grows, so does investor appetite. According to Yang, at least $2.3 billion flooded into China's biopharma space last year, up from just $200 million in 2013. And that doesn't include deals for which no value was disclosed.

As well as improving public health, China's planners also see the development of the biopharmaceutical industry as part of the country's drive to build a more innovative economy.

“The country is very keen to transfer those me-too kinds of companies into innovators, and biotechnology is clearly in the space, which Xi Jinping will absolutely prioritise,” Raman Singh, Singapore-based CEO of multinational drug-maker Mundipharma, told FinanceAsia in another interview. The firm has been operating in China for more than two decades.

“We are very keen on working with Chinese biotech firms, either via acquisition or other types of partnership,” Singh said.


Overall renminbi fundraising has slowed down this year, as liquidity dries up given tighter monetary policy, regulatory tightening and a push to deleverage in China’s financial system. But the healthcare field is bucking the trend.

“As far as I can tell, liquidity in the pharmaceutical investment area remains relatively adequate,” Yang said, although he acknowledged this was partly down to a lag in allocating capital raised in previous years.

And, in line with other hot sectors in China, there are concerns that valuations are getting bloated.

Yang considers China’s healthcare space to be slightly overvalued, but generally within the extent his fund could stand.

He also believes there are bargains: “The valuation differs across vertical fields from medical device to medicine. For pharmaceutical startups, it differs across clinical research phases.”

According to Yang, the valuations of pharmaceutical and internet-driven segments are higher than medical devices; while pharmaceutical startups in clinical phase II are more expensive than those in phase I and III in terms of valuation.

Phase I usually assesses safety and side effects as dosage levels increase among a small number of patients; phase II tests the efficacy among up to several hundred patients; while phase III involves randomised and blind testing among up to several thousand patients.

Yang believes most of China’s phase I pharmaceutical startups are comparable in valuation to their US peers. However, risks notably increase as researches go on to phase II.

“Chinese regulators place very strict control over approval of phase II drugs, with only 1/3 getting the green light, but valuation could easily double or even triple if the firm reaches phase II,” Yang noted.


One key disruptive factor, as in so many sectors, is the ride of internet-based services.

“My vision for Mundi is that 10 years down the line, I want it to be known as a digital company [stepping] into healthcare, like Tesla is a digital company into automotive,” Raman Singh said.

And Mundi isn't alone.

E-commerce giant Alibaba has already built its own healthcare flagship, AliHealth. Hong Kong-listed Alihealth is an online-to-offline platform for healthcare services. Alibaba has also made a strategic investment into online parenting platform Babytree, which is valued at roughly Rmb14 billion and recently filed for a Hong Kong IPO of its own.

Tencent is no less active. One of its best-known portfolio companies is WeDoctor, which is now valued at $5.5 billion after seven rounds of funding. Tencent participated in three rounds, totalling over $500 million.

For internet companies seeking to venture into healthcare, the best prospects may lie with those segments than require strong technology credentials. That might include  online-to-offline healthcare service and medical-related artificial intelligence.

“When [the venture] goes deeper, it could be even more difficult, as know-how in both internet business model and the healthcare industry matter,” Frank Yang said.

Nevertheless, integration between advanced technology and healthcare is inevitable.

“Changes will take place sequentially; online-to-offline healthcare service comes first, probably followed by massive drone deployment for distribution, then would come developments like remote diagnostic technology,” Singh said.

“Eventually you need to connect them all,” he said, noting that is when Chinese tech giants have a really strong voice.

With innovation pivotal to the industry's future, Singh argues that traditional healthcare players simply must embrace China's internet development if they want to avoid losing ground.

“If we don’t change, companies like Alibaba and Tencent will come up with [business] models where they will provide [finished] healthcare [goods], while we’ll become [just] one supplier.”

¬ Haymarket Media Limited. All rights reserved.
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