2:15 PM
May 18, 2018
 |  BioCentury  |  Finance

China comes to Europe

Chinese investors are looking to Europe for innovation at attractive prices

The historically underfunded European biotech sector is in the early stages of tapping into a new stream of capital thanks to the explosion of biomedical innovation in China, which has spawned a wave of investors looking for high quality science at attractive prices.

The influx is not only welcome in a region that historically has struggled to gain the attention of U.S. investors, but could open the door to the fastest growing healthcare market in the world.

BioCentury’s annual review of the European financing environment finds that European biotechs continue to tread water in the competition for capital compared to their U.S. counterparts.

As the pie has grown over the last decade, Europe’s take has hovered at 20-30% of the total raised in the U.S. and Europe.

Last year, European biotechs raised $14.4 billion in public and private capital, less than one fourth of the $47.4 billion raised by U.S. companies (see “Competition for Capital”).

Figure: Competition for capital

In 2017, Europe’s share of the total of public and private capital raised in the U.S. and Europe was 23% , in line with the prior decade where Europe’s cut averaged about 21%. But the size of the capital pie has increased substantially. During the five year period 2013-17, the annual total amount averaged $54.9 billion, more than double the previous five years’ annual average of $26.8 billion from 2008-12. Data includes both public and private financings, including debt. Financings for companies that inverted are included in the region of domicile at the time of the offering. Source: BCIQ: BioCentury Online Intelligence

Chinese investors are seeing that as an opportunity. All nine Chinese investors contacted by BioCentury said they’re increasingly busy in Europe.

The quality of European science isn’t in doubt. But for Chinese investors, it often comes at a much lower price than they find either at home or in the U.S.

“High quality science is cheaper than in the U.S.,” said Sofinnova Partners’ Antoine Papiernik. “With Chinese investors right now, it is more about them investing in Europe because they can see the arbitrage with the U.S. and EU.”

He and other European investors said the Chinese presence is both noticeable and likely to grow.

Alex Pasteur of F-Prime Capital, the U.S. and European successor to Fidelity Biosciences, said his firm frequently fields incoming interest from Chinese investors, noting the level “has gone up threefold or so in the last two years.”

Chinese investors bring more than funding; they also have connections that can help European companies perform clinical trials and find partnering opportunities in China.

On the other hand, the path into Europe is challenging because it is fragmented and lacks the networks of Chinese that have provided access to deal flow in the U.S.

“If you’re willing to spend the time, learn the landscape, I think there’s less competition in Europe,” said Bosun Hau of Sailing Capital in Hong Kong. “There is a lot of innovation, but one of the challenges for Chinese investors generally is that Europe is so fragmented.”

“Most of our go-to contacts for industry and academia make it easier for us to tap into the U.S. network,” said Kewen Jin, managing partner at Serica Capital in Shanghai. “But we definitely know and want to do a lot more in Europe.”

Chinese investors have already participated in some of Europe’s largest venture rounds, including a $320 million series A for T cell receptor (TCR) therapy company Immunocore Ltd., a $100 million series C for mAb platform play Kymab Group Ltd., two £100 million ($135.3 million) rounds for sequencing play Oxford Nanopore Technologies Ltd., and a $110 million series B for gene therapy company Orchard Therapeutics Ltd.

For many, the arbitrage is only the start of the story. Chinese investors are scouring Europe for opportunities with potential to compete on global markets and management teams with the ambition to do so.

Arbitrage opportunity

According to Chinese investors who spoke with BioCentury, the move into Europe is directly related to the rapid expansion of the investor base in China, which has led to huge amounts of capital for investing in healthcare.

For example, according to McKinsey & Co., China-based venture or private equity funds raised $39.8 billion in 2017, nearly double the $20.2 billion raised in the prior year. Venture investments in Chinese healthcare also skyrocketed to $11.7 billion last year, more than double the $5.4 billion invested in 2016.

The flood of capital has outpaced the growth of China’s innovative biotech sector, causing investors to look beyond their own borders.

Darren Ji, founder and CEO of Elpiscience Biopharmaceuticals Co. Ltd. and venture partner of Lilly Asia Ventures, noted China’s appetite for deals has saturated places like Hong Kong and Shanghai with healthcare investors. “If you throw one rock in Shanghai you hit three people, and two are investors -- one of whom is in life sciences,” he told BioCentury.

According to Sailing’s Hau, that has escalated valuations of local biotechs.

“I think the Chinese valuations are just astronomical,” said Hau, whose firm invests in technology and consumer plays as well as healthcare. “That is forcing the Chinese investors who have the ability to invest overseas, who have outside capital -- they are looking for more attractively priced assets.”

ORI Capital’s Simone Song agreed, labeling as “two different animals” the valuations between Europe and China. “One is very sensible and the other is extremely not sensible. That explains why I don’t have one China-based company in our portfolio. I would love to be in a Chinese company, but I have just not found the right deal.”

“With Chinese investors right now, it is more about them investing in Europe because they can see the arbitrage with the U.S. and EU.”

Antoine Papiernik, Sofinnova Partners

Song, whose Hong Kong fund aims to find disruptive technologies spanning the healthcare space, including immuno-oncology and artificial intelligence, thinks there are three primary drivers for the disparity.

First, she said, “China has printed too much money, so there’s hot money chasing something they don’t understand.” Second, it is simple supply and demand. “There is not an ample supply of...

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