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 China."

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."