Korea healthcare: Quickening pulse

There are times when overheating a niche market in the short term is necessary for realizing long-term macro goals. This balancing act is currently on display in Korea’s emerging biotech space where a spate of government fundraising is intended to help the broader local economy evolve beyond its conventional IT and industrial roots.

In January, the finance and health ministries teamed up to create a KRW150 billion ($133 million) healthcare fund that will reportedly be managed by local venture capital firms KB Investment and Solidus Investment. This was followed last month by a pledge from the Ministry of Trade to establish a KRW113.5 billion fund to support life science start-ups through investments in industry and academia-linked R&D programs.

This activity has been interpreted by many as the latest example of capital overflow into a relatively thin field of entrepreneurs. The ultimate practical goal, however, runs deeper than mere start-up creation; it aims to transform an established network of hospitals and universities into a breeding ground of marketable product developers.

Our model was suitable for the time, but we would need a different investment strategy to emulate the kind of success we've had if we launched the fund last year – B. Christopher Kim

“The government is trying to encourage the build-up of the healthcare industry, but to be sustainable, the industry will need more commercialization infrastructure such as CROs [contract research organizations] and CMOs [contract manufacturing organizations], as well as enhanced communication between companies and hospitals,” explains Dr. Mik Park, a managing partner and head of the bio-healthcare team at Seoul-based STIC Investments. “There have to be global players that understand the global market demand and can provide training in sales.”

Some notable traction has been achieved on this front. Samsung – the country’s largest conglomerate and a stalwart of the old electronics and manufacturing-based economy – began making significant biotech investments in the early 2010s and is now said to be advancing 15 international pharmaceutical contracts. But in the meantime, the race to diversify Korea’s investment profile remains a work in progress that will result in bio innovation segments enduring their fair share of hiccups along the way.   

Upward trend

According to AVCJ Research, venture investment in Korean medical industries during the past 10 years hinges on a marked boost in momentum around 2013. Before this inflection point, annual deal values fluctuated across a range of $20-30 million and peaked at $60 million in 2012. The following year, VC deals in the country’s health sector were worth $124 million and began a confident climb to $138 million as of 2016.

The stirring of government support implied by this jump in activity has been essential to the establishment of Korea’s nascent biotech ecosystem, which had previously been too unproven to attract foreign VC funding. But concerns are mounting that the rapid inflow of capital is causing an oversaturation effect.

“The Korean early-stage biotech industry is very expensive now compared to just a few years ago because there is excess of funding,” says B. Christopher Kim, managing partner for the Korea-Seoul Life Science Fund (KSLSF), a fully deployed vehicle that closed at KRW75 million in 2011 and has so far exited six of 20 portfolio companies. “Our model was suitable for the time, but we would need a different investment strategy to emulate the kind of success we've had if we launched the fund last year."

KSLSF nevertheless sees upside in these growing pains, noting that the heightened interest has allowed risky projects to get off the ground and nurtured a new culture of entrepreneurialism. As a result, Korea’s health tech space is increasingly being shaped by repeat entrepreneurs and big pharma veterans who are willing to strike out on their own.

“The entrepreneurs are clearly more qualified than just five years ago and the science on which Korean biotech companies are founded today is more promising and advanced,” Kim adds. “There are definitely projects in Korea that could actually become something that would attract global attention.”

The export angle inherent in the internationalization of Korean biotech is an essential consideration for most VCs given the limited scope of the domestic market compared to Japan, its closest homologue. KSLSF, for example, was launched with a plan to bridge Korean health start-ups with the US and has since pivoted toward connecting companies with developing Asian markets, including China.

Meanwhile, Israel has emerged as a leading cross-border contributor in the domestic life sciences space, with Tel Aviv-based VC Yozma Group recently agreeing to invest KRW50 billion alongside Daesung Private Equity as part of a multi-manager vehicle led by Korea Development Bank. This follows on groundwork by Israel’s Agate Medical Investments, which launched a Korea-focused fund in 2011 that has so far invested 12 companies and exited three.

“The bottom line of our experience in Korea – with our partners and the companies we’ve invested in – has been very good,” says Ariel Moses, managing partner at Agate. “We set out with the fund of course looking for returns, but also to create a collaboration between Israeli and Korean technologies and bring them to the US market through our relationships there." 

Hardware to software

Segment targeting has largely focused on medical devices and drugs. STIC’s bio-healthcare unit, for example, has made most of its investments in the diagnostics space, while continuing to target what it sees as growth areas around vaccines and cell therapy products. “In Korea, recent investor interest has been driven by the appetite to fuel both the local and global ambitions of many of the emerging champions, focused primarily on the biopharma space,” says Vikram Kapur, a healthcare-focused partner at Bain & Co.

VCs that approach the sector from more of an IT angle – such as software-focused SEMA Translink Investment – are also projecting an increase in activity. Jin-Ho Hur, a managing director at SEMA Translink, says his firm’s biotech investments in 2016 accounted for KRW1 billion out of KRW9.5 billion in total deployments. This allocation is planned to grow to 20% and could result in the creation of a separate bio-focused fund.

The enthusiasm behind these outlooks highlights the Korea VC market’s ability to quickly mobilize money when the government sets a new investment agenda. This dynamism, however, is also known to be susceptible to cyclical swings that could hamper turnaround plans on the long road of sector development.

“There is already plenty of capital in the bio ecosystem, but there are still insufficiencies in track record and performance because there hasn’t been a long enough history in venture yet,” says STIC’s Park. “I believe the industry is still just getting started, so it will suffer from these problems for the next 10 years as it matures.”

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• Topics
• North Asia
• Early-stage
• Technology
• Healthcare
• South Korea
• Venture
• STIC Investments