First responders: China VCs on a healthcare crisis

As of February 17, the coronavirus – or COVID-19 – had infected nearly 71,500 people and killed 1,772. The vast majority of cases are in mainland China. It invites comparisons to the outbreak of SARS in 2003, which took the lives of 774 out of the 8,098 infected. However, COVID-19 presents a tougher challenge in that it not only appears to be more virulent, but China is a larger and more globally connected economy compared to 17 years ago. 

And, from a private equity and venture capital perspective, the healthcare sector is virtually unrecognizable when set against the SARS period. The country is better equipped to handle crises and this was reflected in the public markets when they opened after the prolonged Lunar New Year break. The Shanghai-Shenzhen 300 Index suffered an accumulated 2.6% loss during the first week of trading, while healthcare stocks gained 11.4%.

“In 2003, China didn’t have a healthcare sector that was able to develop any drugs or diagnostic tests or vaccines for SARS. Now there are over 100 companies that have developed diagnostic tests and many drugs are under development or in clinical tests right now,” says Nisa Leung, a managing partner at Qiming Venture Partners.

The latest epidemic has sharpened investors’ views on future opportunities. Quan Li, a managing director of CDH investments, identifies three key areas that her team will be focusing on outside of innovative drug development: medical equipment for less sophisticated hospitals in lower-tier cities; medical information connectivity and digital services; and diagnostic reagents and third-party diagnostic services. 

Treatment time

As it stands, there is no cure for COVID-19, but China has 80 potential treatments in clinical trials or waiting to start them – from HIV drugs to stem cell-based therapies to 1,000-year-old traditional Chinese medicines. Four days after a US patient recovered with the help of Remdesivir, an Ebola drug developed by US-based Gilead, China launched phase-three trials with 760 patients enrolled in Wuhan, Hubei province, the epicenter of the outbreak.

Nine days after that, Suzhou-based BrightGene Bio-Medical Technology announced it had created an imitation of the drug that was ready for mass production. The company’s share price spiked 20% on the news, although BrightGene will need to license the intellectual property from Gilead, obtain domestic regulatory approval, and it has said there are no plans to make a meaningful profit.

“Why did its stock price increase so much? It’s not because this medicine can make money. It is because that the company has shown the capital markets its execution power, management quality, and efficiency,” Steven Wang, founder and managing partner of Highlight Capital, tells AVCJ. HighLight and Sequoia Capital China led a RMB550 million ($80 million) round for BrightGene in January 2019, 10 months before the company’s $74 million Star Market IPO.

According to Qiushi Li, a partner at Shenzhen-based GTJA Investment Group, the speed with which China readied Remdesivir for clinical trials is unusual and encouraging for the wider drug development industry. Domestic pharmaceutical companies will be encouraged to pioneer new treatments because the approvals process is being expedited. This will strengthen the entire supply chain from preclinical research through clinical trials.

“There is still a gap between China’s innovative pharmaceutical industry and the US or Europe,” says Li. “We’ve made great progress in the past three years, and it will accelerate.”

If new treatments represent a medium-term solution, at best, China’s more immediate needs in the wake of the virus outbreak involved insufficient medical supplies and hospital capacity. More than 100 businesses sent diagnostic testing kits to Wuhan, with Zhijiang Biotechnology, a GTJA portfolio company, among the first to get its diagnostics kits approved. Meanwhile, Qiming-backed Tisenc Medical has created immunoassay tests that deliver a result within 22 minutes.

The shortage of hospital beds in Wuhan, which resulted in patients being quarantined at home, risking the spread of infection, saw two new facilities constructed within a matter of weeks. Shenzhen Mindray Bio-Medical Electronics, China’s medical device manufacturer, offered to ship in 3,200 pieces of equipment, according to Wang of Highlight, a Mindray investor. Huatai Securities projects that Mindray’s revenue from Hubei will double this quarter from a year earlier, with nationwide sales increasing 30%.

The likes of CDH and GTJA also see huge potential in medical devices. “The deployment of medical equipment in local hospitals is seriously inadequate. Top-grade hospitals are overcrowded, but patients cannot be moved to smaller facilities due to insufficient medical equipment. In the future, we will see a lot more investment in equipment for lower-tier hospitals,” says Li from GTJA.

Digital dreams

The third healthcare opportunity set – digital health – is already apparent in the surge in new registrations on Ping An Good Doctor, which is operated by Ping An Healthcare & Technology, and Alibaba Group’s healthcare information platform. Rather than visit a surgery, hospital or pharmacy, people want online consultations with doctors and e-commerce for drugs. 

The phenomenon is compared to the rise of Alibaba’s Taobao platform in the wake of SARS as consumers gravitated towards online shopping. “The epidemic has changed the habits of patients, especially the elderly,” says Li.

Qiming’s Leung observes that the trend was clear even before the novel coronavirus outbreak, noting that WeDoctor, which offers a similar set of services to Ping An Good Doctor and Alibaba Health, was already servicing 80,000-90,000 patients a day. That maybe so, but uptake has increased exponentially in recent weeks. Ping An Good Doctor reported a tenfold increase in average daily new registered users between January 22 and February 6 compared to the first 21 days of January. Over the same period, daily online consultations increased ninefold. 

For investors looking to leverage the longer-term trend towards digital health, there is potential for online consultation in niche areas such as traditional Chinese medicine and pediatrics. Finally, healthcare data remains a relatively untapped segment, with scope for start-ups that offer cloud-based data collection and artificial intelligence-enabled analytics.

“Even in the US, a lot of the patient data only resides within each hospital. It’s very difficult even for Washington DC to really know what’s going on. In this information age, especially since most of the hospitals are public hospitals, the government can perhaps build something like a national patient database to track future outbreaks of infectious disease,” says Leung. 

 

SIDEBAR: Old drug, new application

Zadaxin, a drug developed by Sciclone Pharmaceuticals, played a significant role in combatting China’s SARS outbreak in 2003 and it is being used again to tackle COVID-19. 

Launched in 1996 and originally used to treat chronic hepatitis B, Zadaxin was commandeered by healthcare professionals during SARS after they recognized its potential in regulating human immune functions. The drug helped strengthen patients’ immune systems and helped prevent infection. President Hu Jintao and his entire delegation received Zadaxin injections ahead of a G8 meeting in France at the height of SARS.

A retrospective study found significantly less cases of lung fibrosis – where tissue in the lungs becomes stiff and scarred, reducing oxygen supply to the blood and causing perpetual shortness of breath – among patients who used the drug. 

Hong Zhao, CEO of Sciclone, tells AVCJ that Zadaxin is now used by more than 2,000 hospitals in China. In 2016, Sun Yat-sen University of Medical Sciences in Guangzhou launched clinical trials of the drug with critically-ill patients, especially those with cancer. The results are expected in about a year. If successful, the same trials will probably be conducted in the US and Europe.

“As a drug launched more than 20 years ago, intellectual property protection is long expired, but if we can prove new use cases, we will have a data protection for a further six years. No generic drugs can be launched in this area during that period,” says Zhao.

Sciclone was listed in the US until 2017 when a consortium of investors – led by healthcare-focused GL Capital and featuring CDH Investments, Ascendent Capital Partners, and a Bank of China investment unit – privatized the business at a valuation of $605 million. 

Now Zadaxin is being included in clinical trials of antivirus drugs seen as potential treatments for COVID-19. Shirley Lin, a managing director at GL, adds that many doctors have been dispatched to Wuhan, where the outbreak is most severe, equipped with two weeks’ supply of Zadaxin. The drug has also been included in COVID-19 treatment guidelines prepared by health authorities in Sichuan and Jiangsu provinces as well as in Shanghai and Tianjin.

Sciclone’s next goal is to bring new cancer drugs in China, leveraging a network of oncology departments in some of the country’s largest hospitals. “Our business development team will look for small and mid-sized labs overseas,” says Zhao. “Most large foreign pharmaceutical companies still focus on the US market, which means we can target drugs for specific cancers with high incidence in China. That will be our niche market.”

 

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• Topics
• Greater China
• Healthcare
• Technology
• China
• Pharmaceuticals
• Qiming Venture Partners
• GTJA Investment Group
• HighLight Capital
• GL Capital