A Changing China's Challenges
Greg Scott, co-founder and president of Life Sciences Angels, came to China in early 2007 seeking early-stage life-sciences
investments. He found 4,000 companies, but few met the typical US investment criteria. Most early-stage life-science companies
in China are founded by returnees who have R&D experience in the West, but are novices in the entrepreneurial realm, with
little experience raising capital or building companies that can compete in the global market. This can create a challenge
for Western investors accustomed to companies born in the more structured environs like Silicon Valley.
Scott founded ChinaBio Accelerator specifically to get China's biotech entrepreneurs up to speed. "Through our ChinaBio Investor
Forum, and by working directly with Chinese entrepreneurs, we have helped 11 companies secure funding," Scott says. "We also
created our first spinoff from Accelerator, ChinaBio Therapeutics, to develop novel drugs more quickly and at lower cost in
Scott has had a front row seat for the rapid increase in VC interest in China life-sciences. While the numbers are still small
relative to the US's, investment in biotech grew to $400 million in 2007, according to Zero2IPO, an organization that tracks
VC funding in China. Perhaps more importantly, the portion of VC funding going to healthcare doubled in 2007, while that
going to IT decreased by almost a third. Scott expects this trend to accelerate. "We just met with a new fund that has over
$700 million to invest in China, one-third of which will go to life-sciences companies," he says. "And now we're beginning
to see money come into drug development companies, which wasn't the case even a year ago."
Performing due diligence on China biotech companies can also present some interesting puzzles. One of the most challenging
is the intellectual property (IP) review. Patents are ultimately the key to the value locked in a promising molecule or novel
biomarker. "We have seen a few cases of very exciting technologies, but weak patents killed the deal," Scott says. "Chinese
companies and scientists are still learning how to build IP portfolios that provide global protection. The best patents are
still being filed and prosecuted by Western firms."
Another due diligence issue, according to Scott, is corporate structure. "It's standard practice in China to create relatively
complex, multilevel, off-shore companies to take advantage of potential tax benefits. But this can be a turnoff to investors,"
he says. "It's sometimes difficult to determine who owns what, and where the IP resides. This has caused us to pass on more
than one opportunity."
Wei Zhou, a Chinese native who did his postdoctoral research at Emory Medical School, and received a JD from Stanford University,
joined the law firm Wilson Sonsini Goodrich & Rosati (WSGR) to lead its efforts in corporate financing, M&A, licensing, and
intellectual property strategy for life-sciences entrepreneurs in China and the US. WSGR opened its first China office in
Shanghai in 2007. "It is exciting to see the tremendous interest from international venture capital investors in the emerging
life-sciences industry in China. However, they will need to quickly adapt to the business environment in China, where deals
will likely look different from what is typical in Silicon Valley or San Diego." Recent changes in regulations have, for example,
challenged the traditional model of investment and exit strategy. In some cases, new regulations make it more difficult to
obtain approval for investment and foreign listing via offshore special-purpose vehicles—the customary approach for investing
in China. But Zhou says he has found that China-based companies are fast learners on patent portfolio strategy. "With the
aggressive patent filing strategy of some Chinese companies, I think that freedom-to-operate issues will become more critical
for international companies, with long-lasting impact in the future," he says. "As Chinese firms become increasingly sophisticated
in their IP strategies, they will not hesitate to enforce their patents against competitors in China and overseas, and will
be more active in licensing transactions."