Why Chinese Investors Are Interested in U.S. Life Science Companies

14 May

By Mimi Liu, Research Analyst, LSN

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As China’s economy has grown over the past 10 years, Chinese investors have begun to allocate their capital to companies overseas, including those in the U.S. life science industry. Figure 1 shows that the annual value of Chinese direct investments in the U.S. biotech industry has increased most rapidly in the past two years.

Of the Greater China-based life science investors interviewed by LSN Research, a staggering 75% are interested in opportunities based in the U.S. [See Figure 2.]

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Figure 2 Source: LSN Investor Platform data as of May 12, 2015

Let’s take a look at the factors that make the U.S. life science industry an attractive opportunity for life science investors based in China.

Rising Chinese Wealth

China now has the world’s second largest millionaire population—over two million millionaires as of 2013.(1) Additionally, many Chinese companies have increased their resources and are interested in investing capital overseas for both financial and strategic purposes. Many of these companies and individuals are particularly interested in investing in the U.S., where patent and legal systems can provide better protection for their investment assets than in China.(2) These investors are often interested in diversifying their investments across U.S. industries, including the life science and healthcare fields.

Strong Life Science Industry and Innovation Ecosystem

The U.S. is the global leader in the life science industry, with a complete value chain from R&D to market and distribution. Some 46% of global life science R&D is carried out in the U.S., which is one of highest shares in any industry.(3) Solid financing supports the research successes in the U.S., with NIH funding supporting life science companies at a variety of stages of development via STTR and SBIR grants.

The U.S. has many other resources for early stage life science companies that are scarce in Greater China, such as incubators that provide financial assistance and expertise to life science start-ups. Since 2012, at least 12 new biotech incubators have been founded in North America to provide support to life science start-ups spinning out of academia.(4) The increasing numbers of biotech incubators launched by academic institutions, laboratories, medical centers, and top pharma companies are well placed to provide space, equipment, services, expertise, and other resources to early stage companies. These companies are developing innovative technologies and are prepared to move to the next stage of their development, and many are therefore attractive investment targets.

Talented Entrepreneurs and Access to Expertise

In the U.S., large bioclusters have formed in cities that boast top universities and research institutions. A large number of talented entrepreneurs have emerged from those universities, which provide access to expert scientific guidance. This talent pool provides early stage life science companies with leadership that supports companies in their development process. Investors generally put great emphasis on the quality and depth of a management team, and companies based in U.S. life science hubs are often able to satisfy this requirement.

Exits

For life science investors, return on investment is key, and exit opportunities are therefore an essential consideration. With the number of IPOs among U.S.-based companies up 66% in 2014 compared to 2013, the market for life science IPOs is hot.(5) The U.S. also sees significant M&A activity in the life science sector, thus providing multiple avenues to exit.

Challenges

For foreign investors seeking opportunities in the U.S., barriers and challenges are unavoidable. The time difference might make it difficult to set up a meeting, and cultural differences might cause misunderstandings between investors and entrepreneurs. Also, Chinese investors may not have expertise navigating the U.S. regulatory system, whether for financing or clinical development. All parties must be prepared to address these unique difficulties.

Over time, we have come across several China-based investors employing creative methods to overcome these challenges. A few larger institutions have set up outposts in major biotech hubs such as San Francisco and Boston. These overseas offices act either as scouts for new technologies or as bridges to expand the parent company’s business operations. A considerable number of consulting and broker agencies are emerging to provide services to China-based investors who are looking to increase exposure to U.S.-based companies.

However, as this article has outlined, there are compelling reasons that Chinese investors are interested in U.S. start-ups, and LSN Research has contacted many investors in that region who have expressed such interest. We expect that increased connections and communications will pull Chinese investors and U.S. companies more closely together in the future.

  1. http://blogs.wsj.com/chinarealtime/2014/06/10/china-now-has-more-millionaires-than-any-country-but-the-u-s/
  2. http://www.us-china-cerc.org/pdfs/Analysis_of_IPPolicy_WANGHANPO_ENGLISH.pdf
  3. http://www.rdmag.com/articles/2013/12/industry-breakout-life-sciences
  4. http://www.the-scientist.com/?articles.view/articleNo/39245/title/Incubator-Boom/
  5. https://www.fenwick.com/publications/pages/technology-and-life-sciences-ipo-survey-2014-full-year.aspx

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