July 2019 – Page 4

VC/PE funding

VC/PE funds targeting China life science investments are growing fast in recent years. According to ChinaBio, in 2018 those VC/PE funds raised around $43 billion in total and invested around $17 billion in China life science companies, up 36% from 2017[1]^,.

The amount raised by VC/PE funds quickly ramped up during the past several years, with $10.9 billion in 2015, $20.2 billion in 2016, $39.8 billion in 2017[2].

Accordingly, the capital invested soared from $1-1.8 billion annually (2012-2015) to $5.4 billion in 2016, $11.7 billion in 2017 and $17.3 billion in 2018².

[One thing worth noting – many Chinese life sciences companies included/collected in ChinaBio’ research are not purely biotechnology/biopharma companies. For some VC/PE funds, for the purpose of diversification or due to other reasons, they might invest in areas other than biotechnologies.]

IPO and capital markets

Similar to more developed countries like US, IPO is the most common choice for biotech companies and the funds behind them. [Another common exit opportunity is M&A, which is less likely for Chines biotech companies due to the less matured industry and capital market]

However, historically China’s own capital markets won’t accept most biotech companies because they are in their R&D stage with no products. Listing on China’s A-share has many requirements including reaching certain revenue and profit targets, which is very different from listing on NASDAQ. The lack of exit opportunities also (partially) explains the lack of funding in previous years. With the rise of VC/PE investments in Chinese biotech companies, appropriate exit options are needed/expected.

Starting from April 30 2018, Hong Kong Stock Exchange got a much anticipated listing pathway official for pre-revenue biotech companies[3]^,[4].

Five Chinese biotech companies went on HKSE via the new rule in 2018, raising nearly US$2.4 billion – Ascletis Pharma $400 million, BeiGene $903 million, Hua Medicine $114 million, Innovent $485 million, Shanghai Junshi $453 million[5]^,[6].

[The first few biotech companies listed on HKSE using the new rule are those large and “first-tier” startups; I will expect smaller IPOs in the coming years]

Another new board “Kechuang”, or tech board by Shanghai Stock Exchange is also going to welcome pre-revenue biotech companies starting in 2019[7]. No such listing has happened yet.

The capital market in China for biotech companies is still at an early stage. IPO is only one of the techniques. For example, while Nasdaq-listed biotech firms have raised US$3.5 billion from 32 post-IPO “follow-on” share issuances in the period, none has been recorded in Hong Kong yet[8].

Public sector / state funding

Overall scale

Direct funding sources to innovations in life sciences and biotechnologies from Chinese government was said to be over ¥60 billion over the last 5 years, according to Yuanbin Wu, an officer at China’s Minister of Science and Technology, on a conference in October 2018[9].

Another research article published on NEJM in 2014 said China’s public sector R&D expenditure in biomedical was $2 billion in 2012[10].

Structure

A 2011 paper discussed the structure of state sponsored biotech R&D at that time[11].

NSFC = The National Natural Science Foundation of China 国家自然科学基金委员会

MOST = The Ministry of Science and Technology of the People’s Republic of China

There were some consolidations happening, especially for programs within MOST, which are now under one umbrella – National Key R&D Program of China (国家重点研发计划)[12].

And in 2018, China planned to merge NSFC under MOST[13].

NSFC

Direct supporting from NSFC totaled ~¥26 billion in 2018[14], including ¥11.2 billion available in its General Program (with ¥1.8 billion in life sciences and ¥2.5 billion in medical sciences)[15]. NSFC’s major programs are detailed below.

2018 National Natural Science Foundation of China (Jan 1, 2018 – Oct 24, 2018)

NSFC program names	Total (all disciplines) (¥, millions)	Life Sciences (¥, millions)	Medical Sciences (¥, millions)
General Program 面上项目	11,152.89	1,774.7	2,521.20
Young Scientists Fund 青年科学基金项目	4,176.44	582.40	886.80
Fund for Less Developed Regions 地区科学基金	1,103.33	292.60	312.00
Key Program 重点项目	2,054.42	323.00	352.70
National Science Fund for Distinguished Young Scholars杰出青年基金项目	682.85	87.50	84.00
Joint Research Fund for Overseas Chinese, Hong Kong and Macao Young Scholars海外及港澳学者合作研究基金项目	54.00	9.00	9.72
Excellent Young Scientists Fund 优秀青年基金项目	520.00	75.40	65.00
Total	19,743.93	3,144.60	4,231.42

In terms of acceptance rate, for example, NSFC General Program accepted ~20% of projects across all disciplines in 2018 (specifically, life sciences 24% and medical sciences 17%). A history analysis of the fund’s overall acceptance and support is discussed in this article[16].

MOST

According to MOST’s 2018 budget, National Key R&D Program of China (国家重点研发计划) receives a budget of ~¥27.7 billion in 2018. Another program under MOST is National Science and Technology Major Project (国家科技重大专项), which receives a budget of ~43.8 million[17]. (both numbers are for all disciplines; allocation for biotech related projects is not available)

There are other forms of supports from both central and local governments for biotech companies in China, including tax-cut, low-cost infrastructure, etc.[18]

Other corporate involvement

While China doesn’t have many big pharma companies that are financially strong, some giants in tech and insurance (Baidu, Tencent, Alibaba, PingAn, etc.) have provided certain funding to areas they are interested, usually involving digitalization, data or AI, such as genomics, diagnostics and telemedicine[19].

[1] http://www.chinabiotoday.com/articles/China-Life-Science-2018

[2] http://www.chinabiotoday.com/custom/ChinaBio_State_of_Life_Science_2019%20-%20Jan%202019%20-%20China%20Showcase%20-%20DIST(1)%20-%20Copy%201.pdf

[3] https://www.scmp.com/comment/insight-opinion/article/2143267/hkexs-new-listing-rules-will-bring-tech-economy-hong-kong

[4] https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Rules-and-Guidance/Listing-Rules-Contingency/Main-Board-Listing-Rules/Equity-Securities/chapter_18a.pdf?la=en

[5] https://www.hkex.com.hk/-/media/HKEX-Market/Listing/Getting-Started/HKEX-Biotech-Newsletter-Issue-1.pdf

[6] https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/finance/deloitte-cn-mna-medicine-and-biotechnology-industry-driven-by-innovative-drugs-zh-190412.pdf

[7] https://www.spglobal.com/marketintelligence/en/news-insights/trending/amoyKnMDGMXvpAJ-p0aiHA2

[8] https://www.scmp.com/business/investor-relations/ipo-quote-profile/article/3012766/shanghai-tech-board-unlikely

[9] http://www.gov.cn/xinwen/2018-10/29/content_5335500.htm

[10] http://rwjcsp.unc.edu/downloads/news/2014/20140102_NEJM.pdf

[11] https://hal.archives-ouvertes.fr/hal-00592303/document

[12] https://baike.baidu.com/item/%E5%9B%BD%E5%AE%B6%E9%87%8D%E7%82%B9%E7%A0%94%E5%8F%91%E8%AE%A1%E5%88%92/19395314