Fledgling biotechs and medical-technology startups in the U.S. and Europe have found a new source of cash to fund costly research: China.
Foreign health-care investments by Chinese venture-capital and private-equity firms reached a record $3.5 billion last year, up from $500 million four years earlier, according to Bain & Co. Much of the new money has gone to buying stakes in U.S. and European firms.
For some Western life-sciences firms, such funding is becoming a significant source of cash. All nine named investors in blood-testing startup Grail Inc.’s $300 million financing round last month are from Hong Kong or mainland China.
A Grail spokeswoman described its new investors as a “natural fit” with the Menlo Park, Calif., company’s planned Asia expansion, starting with the launch in Hong Kong later this year of a test for early detection of a rare head-and-neck cancer common in southern China.
These investments are fueling a flush funding market for drug, device and diagnostic firms in the West. So far this year, follow-on financings for such companies have raised $13.6 billion and IPOs have added $1.9 billion, according to Dealogic—more than in any similar period during the past 20 years except in 2015.
Chinese investors have been taking stakes in health-care companies outside their home country, especially in U.S. and European biotechs, medical-device and testing firms.
Dollar amounts raised and invested overseas in health care by Chinese VCs and PEs
$1.8 billion in North America and Europe
Source: ChinaBio (raised); Bain & Co. (invested)
Yet the influx has raised concerns among industry officials and advisers that some valuations are getting excessive and inexperienced investors from China may underestimate the risks and flee in a downturn.
“The risk is the market gets overheated, valuations get too stretched, and in some parts of the market, there is some froth,” said Les Funtleyder, health-care portfolio manager at E Squared Capital Management in New York who has partnered with Chinese private-equity firms on investments in the past few years. “But for the time being, health care is a good place to be.”
The sector’s strong performance in recent years is a major draw for money managers in China, who have been running out of places there to invest rapidly growing funds. China’s venture-capital and private-equity funds focused on health care raised $40 billion last year, double the $20 billion raised a year earlier, according to Shanghai-based consultancy ChinaBio.
QMIS Financial Group, a 13-year-old Hong Kong investment bank and asset-management firm, plans to invest as much as $300 million in privately held health-care companies in the U.S. that are on track to be publicly traded, said President Dato’Sri Chin, who recently visited with several potential targets.
Though such investments are risky, the U.S. market “has the ability to incubate and help these companies grow,” Dr. Chin said through a translator.“Biotech can bring very quick returns.”
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The companies are glad for the funding to further their costly research. “It was crucial to get the financing done” to advance study of experimental bladder treatments, said
chief business officer at Lexington, Mass.-based TARIS Biomedical LLC, whose $25 million Series B round in December was led partly by Shanghai-based fund-management firm Yonghua Capital. Yonghua didn’t respond to a request for comment.
Potential profits have prompted some Chinese venture and money-management firms to raise funds dedicated to investing in U.S. and European life-sciences companies.
Qiming Venture Partners, a 13-year-old Shanghai firm, raised more than $100 million to invest in the U.S. last year, according to Managing Partner Gary Rieschel. It has invested about 40% of its funds in companies such as cancer-drug biotech
of Redwood City, Calif.
Chinese fund managers and investors see the moneymaking potential in bringing the Western drugs, devices and diagnostics they have invested in to their home country. The Chinese government has been encouraging the development of a life-sciences sector in the country.
Venture fund 3E Bioventures Capital of Beijing has taken stakes in a dozen U.S. health-care startups including Rockville, Md.-based OncoImmune Inc. The firm is seeking to help OncoImmune test an experimental drug in China this year to treat acute graft versus host disease, which can arise after stem-cell transplants, according to
3E’s founding partner.
Beijing’s YuanMing Capital, which is expected to close another investment round into Mevion Medical Systems Inc. of Littleton, Mass., this week after leading a $200 million round in 2015, wants not only to help the company bring its proton-based radiation devices to China but also to move manufacturing there, YuanMing Managing Partner Tina Yu said.
Ms. Yu, who says she will become Mevion’s new chief executive, believes Mevion would benefit from both the limited competition for the devices in China, as well as the lower production costs.