AVCJ Awards 2019: Deal of the Year - Small Cap: AffaMed Therapeutics

Producing drugs that address the maladies of populations in Asia’s emerging markets that are becoming older and wealthier is a prominent investment theme for private equity. However, success is not guaranteed. New treatments spend a long time in development, and many don’t make it all the way to commercialization. CBC Group – previously C-Bridge Capital – has identified biosimilars as a de-risked route into China’s innovative drug market.

Biosimilars are generic versions of existing biologic drugs, introduced at lower price points once the patent for the original drug expires. Biologic treatments are easily outpacing their chemical-based counterparts in terms of growth; seven out of the top 10 best-selling drugs globally are biologics. But replication is much harder. Chemical drugs comprise groups of identical small molecules. Biologic treatments rely on complex molecules produced in living organisms highly sensitive to minor changes.

“Biologics are processed through fermentation, and each of the molecules is different. Even after the patent expires, you won’t be able to make identical blocks, that’s why it’s called a biosimilar. The entry barriers are actually quite high,” says Wei Fu, founding partner at CBC.

In-licensing biosimilars from global players for development and distribution in China is CBC’s chosen route. On one hand, many critical biologics patents will expire in the coming years. EvaluatePharma estimates that $65 billion worth of drugs will come off patent between 2015 and 2020, and another $38 billion by 2030. On the other, with none of the global biosimilars players present in China, the local market is underdeveloped and lacks high-quality products.

With valuations for strong pharmaceutical companies soaring, CBC opted for incubation rather than growth capital investment to realize its vision. “Identifying a good biotech company required specialist know-how five or six years ago. Today it doesn’t – that’s why valuations are very high for good companies,” Fu explains. “Our biggest differentiator is our strong operational capabilities.”

Inception point

The private equity firm established AffaMed Therapeutics in February 2019 in conjunction with Samsung Bioepis, committing $49 million in capital and promising to help its Korean partner crack the China market. AffaMed has initially identified four biosimilar drug candidates to be in-licensed from Samsung. Two have received approval for clinical trials in China, with SB12 – a biosimilar candidate that references Soliris, a treatment for blood diseases – getting the green light last week. It is the only candidate of its type to be granted investigational new drug (IND) approval in China.

The initial team was recruited by CBC, including CEO Nathan Pang, who was formerly general manager of Sanofi Pasteur China. AffaMed, which now has 30 staff in total, is located in the same office building as CBC, which facilitates resource sharing.

While it is common practice for pharmaceutical companies to obtain regulatory approvals in different jurisdictions by partnering with local drug developers that can handle clinical trials, Fu claims that CBC is often chosen as the preferred partner by virtue of its operational skills and knowledge. The GP had discussions with several global biosimilar players – getting as far as drawing up a term sheet – before choosing to work with Samsung. Speed was a consideration. Samsung has achieved a time-to-market of 25 months in one of its plants compared to an average of 48 months for its competitors.

CBC has also demonstrated an ability to move quickly on in-licensing opportunities, sometimes building entire platforms around intellectual property and raising more capital as they scale. I-Mab Biopharma, for example, is the product of a CBC-engineered merger of two Chinese drug developers – Third Venture Biopharma and Tianshizhen Biotechnology – that were in part incubated by I-Bridge Capital, the private equity firm’s early-stage affiliate.

CBC and traditional Chinese medicine producer Tasly Holding invested $150 million on engineering the merger in 2017. This was followed by a $220 million round, at a valuation of $1 billion, led by Hony Capital. The company, which claims to have raised $400 million in private funding, has a treatment for plasma cell cancer and autoimmune diseases in phase-three clinical trials. Five more drugs are in phase-one trials. I-Mab filed for a US IPO last October. CBC remains the largest shareholder with a 38.9% stake.

“It’s like we build a business to do buyouts. We only have four portfolio companies but our AUM [assets under management] are over $2 billion. In every company, we are the largest shareholder. Either we build companies from scratch or we put lots of resources [into existing businesses] to help them excel,” says Fu.

Everest Medicines is now on a similar development path to I-Mab, looking to in-license treatments across oncology, immunology, and cardio-renal disease. CBC incorporated the business in 2017 and seconded four managing directors to the management team. It has contributed $170 million in capital over the past two years, with $70 million more coming from external investors. Everest collaborated with I-Mab and another CBC portfolio company when evaluating its first in-licensing drug candidate.   

A matter of price

Biosimilars are on average 30% cheaper than the original drugs they reference, which makes them a good fit for China’s policy to make treatments more affordable. The question is how cheap do they need to become.

China is using its huge population as a bargaining chip to negotiate lower prices with pharmaceutical companies, effectively saying that market access is conditional on discounts. Global manufacturers agreed an average 61% price drop for 70 innovative drugs in December. They will be added to the list of drugs eligible for reimbursement under government-backed insurance plans. The largest of these is the RMB2.34 trillion ($339 billion) national medical insurance fund, which covers 95% of the population.

Another initiative targets generic and innovative drug developers alike. Tender processes are being launched to supply certain types of drugs to all public hospitals, on a city-by-city basis, in the hope that manufacturers will race each other to the bottom in terms of price. This pilot bulk-buying program, currently operational in 11 cities, has brought average prices down by 52% since September.

As a result, drug developers’ margins have contracted. Fu accepts that prices might be lower than many investors had expected, which will in turn undermine valuations, but he is optimistic about the prospects for AffaMed.

“If you look at global leading drug makers, their valuations are $3 billion or more. Samsung is the largest biosimilar producer in the world and our entry valuation is less than $100 million. There is a lot of space for growth,” he says. “Passive investors have to pay a big premium, but with our operating capabilities, we can invest at book value.”

Pictured: James Cen Bonsor of CBC Capital accepts the Deal of the Year - Small Cap award

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• Topics
• Greater China
• Healthcare
• Expansion
• China
• Pharmaceuticals
• C-Bridge Capital
• CBC Group
• AVCJ Awards