Riding the Wave of Regulatory Reforms in China’s Pharmaceuticals & Biotechnology Industries

by Reggie Cheung

  • 18 Apr 2019
  • PE

In anticipation of the launch of our factsheet on private equity investments in Chinese healthcare, we investigate the positive effects of recent regulatory changes on the growth of the pharmaceutical and biotechnology industries in China.

Private equity investments in the Chinese healthcare industry have grown significantly in recent years; as at June 2018, global industry assets amount to a record $34bn, representing a five-fold increase from levels seen just three years ago. As seen in the chart below, pharmaceuticals and biotechnology are the sub-sectors of healthcare that have recorded the largest increase in venture capital investment over a five-year period;  together these sectors accounted for 54% of aggregate deal value in the industry in 2018. Regulatory changes are major driving forces behind this growth and we examine three such cases.


Policy Reforms

In August 2015, the State Council in China promulgated the ‘Opinions on Reforming Review and Approval Process for Drugs and Medical Devices’ which paved the way for subsequent reforms to be introduced, such as shortening the clinical trial authorization process to a 60-day waiting period (similar to the US), ensuring generics achieve bioequivalence with brand-name drugs and a new price negotiation process for the National Reimbursement Drug List. These have led to a more efficient regulatory system, a boost in the quality and efficacy of generics and a rise in the number of drug launches in the market, demonstrating positive developments in the industry that could encourage an influx of private capital investment.

More cross-border investments are also expected after China became a member of the International Council for Harmonization in June 2017 and began accepting foreign clinical trial data; in 2018, the combined aggregate value of China-backed venture capital deals in US biotechnology and pharmaceutical companies and vice versa more than doubled to $5.1bn in comparison to 2017.

Industrial Parks

Industrial parks in China are designated areas outlined by the government to promote the development of certain industries by attracting external capital through legal or economic incentives, such as cheap financings, land and accompanying government investments. Couple this with the reform policies mentioned above and it makes for appealing investment propositions in the biotechnology and pharmaceutical sectors. US-based GE Healthcare and Beijing-headquartered BeiGene are constructing bio-factories in the recently established Sino-Singapore Guangzhou Knowledge City, which is one of 67 biopharmaceutical industrial parks in China.

The majority (65%) of the portfolio companies that received venture capital funding in China in 2018 are in Beijing, Shanghai, Shenzhen and Suzhou, where most of these industrial parks are also located.

New Exit Channel in Hong Kong

From 2009 to 2018, IPOs accounted for the majority (69%) of venture capital exits for pharmaceutical and biotechnology companies in China – and this trend is set to continue. In April 2018, the Hong Kong Stock Exchange (SEHK) announced new rules that allow listings of pre-revenue biotechnology firms on the main board, thereby offering a new exit destination for private equity investors. Backed by C-Bridge Capital and Pavilion Capital, Ascletis Pharma – a Chinese biotechnology company focusing on developing drugs for the treatment of cancer and infectious diseases – was the first to list on SEHK, three months after the rule change.

Looking ahead, the prospects for China’s biotechnology and pharmaceutical industries appear promising. In addition to the sector-specific tailwinds described above, ongoing developments elsewhere in the healthcare industry and the broader Chinese economy could lead to ample opportunities for investors and fund managers in the foreseeable future.

For more data and analysis on the Chinese private equity healthcare sector, look out for our factsheet coming soon.

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