As part of a study on venture capital in emerging markets published in the March 7^th, 2013, issue of Nature Biotechnology, my colleagues and I interviewed several life sciences venture capitalists operating in emerging markets. In the coming weeks, we will be sharing some of the insights from these investors here on Trade Secrets.

Our first interview is with Dr. Jonathan Wang, senior managing director at Orbimed Asia Advisory, the Asian off-shoot of OrbiMed, the world’s largest dedicated healthcare investment fund. OrbiMed Asia Advisory raised its first $185 million fund in 2008. It announced plans to launch a second healthcare-focused of $300 million in October 2012. In this interview, Dr. Wang describes OrbiMed Asia’s investment strategy and the state of early stage life sciences innovation in China.

What sorts of investments are you looking for?

I have been looking for early stage and innovation-focused biotechnology companies in China, but we have not invested in any [as of early 2012]. It’s not because of any lack of interest, because innovation-focused companies will be a very important portion of what people will invest into in the future. For now, they are still nascent, with very few companies doing high-quality innovation, and fewer still, receiving investment from venture capitalists.

Why are there so few early stage innovation deals?

If you ask me why there are such few deals focused on innovation and drug discovery, it is because of the comparative attractiveness of low-risk deals that already have products or revenues, and in some cases, are even profitable. Early stage development involves very long-term investment, high financing requirements, and talented people who can execute. It also involves development capabilities in China, and global standards such as GLP facilities, which are very young. There are many reasons why innovation deals are so few today.

Still, some early deals are happening today. Hua Medicine is one example. The scale comparatively is a lot smaller than more mundane types of revenue-stage investments. The key question is whether innovation and early stage deals are going to become mainstream investing. That’s anybody guess, as you can imagine that it is a very dynamic process. Both the question and the answer are quite fuzzy, but some of the major factors include:

1. Talent. We need the right people who can develop drugs – somebody who has developed drugs for 10 years at Merck and can take advantage of local resources. We need more talented peoples especially at the managerial level.
2. Standards. We are still learning about drug development and implementation of standards such as GLP and GCT are early, and need to become more robust.
3. Time. We need time to take a compound from the library to drug lead to drug candidate to preclinical studies. It takes years.
4. Cross-Border Licensing. We need partners to develop these compounds.

What is the role of government in the life sciences industry?

Government is playing a very positive role for supporting the life sciences industry. It’s doing a very good job. Essentially, for a deal to be invested in, we must have government support in most cases. I might still do the deal if the company by itself looks good, but typically in China, government provides support. This support comes in the form of cheap or free facilities, local tax benefits, and many grants (county-level, city-level, province-level and national-level).

Do you have interest from foreign venture capital funds?

We have huge interest from foreign funds, but there are some hurdles. Currency is the biggest hurdle. When you have a foreign currency, it is difficult to invest in local companies. Government is trying to establish policies to make it easier for foreign funds to exchange their currency into RMB, but that process has not happened in a robust way. To exchange local currency, the company might become a joint venture, but lose its status of being a purely domestic company and the accompanying government support, although that’s less the case now.

What do the limited partners in China look like?

For Western funds such as OrbiMed and KPCB, the limited partners look very similar to other funds in North America. They are endowment funds, pension funds, fund of funds and banks. Inside of China, the situation is quite different. There are many small mom and pop RMB funds, managing $50 million or less, with backing from high-net-worth individuals, local companies and governments. These LPs lack experience in understanding how a LP should support a fund. For example, in the West, you draw down money from limited partners over time as you need it, and don’t store it in your entire fund. Sometimes, LPs in China will not follow through, and answer draw-downs creating trouble for funds, so some funds will draw 100% of their fund down at the outset. The LPs also sometimes want to be the general partnership of the fund as well and play an active role in investing. In the West, the general partnership has investing autonomy.

What advice do you have for prospective investors in Chinese life sciences?

First, you need to have the right people who understand the local environment. Second, you need to understand that the decision-making process is different. In the United States or Canada, deals are clean, and you don’t have to worry about the government, assets or hand hold the company as much. In China, a lot of deals are dirtier, requiring more involved decision making, because they focus more on the local market needs and low cost, as opposed to being innovation focused. Third, developing a strong brand is key in order to attract the right deal flow.

Justin Chakma