Hong Kong biotech IPOs: Capital injection

Brii Biosciences is barely a month old, but it has won $260 million in funding from the likes of Arch Venture Partners, Boyu Capital, Yunfeng Capital, and Sequoia Capital. The investment is essentially predicated on the combination of an experienced team, a partnership with Alibaba Group’s health unit, Greater China rights to four unproven products from US biotech player Vir, and a bold mission to accelerate infectious disease drug development in China. 

It is the joint largest commitment to a Chinese biotech company so far this year. And a time when capital is pouring into the industry – and retail investors are poised to get access to these businesses at an earlier stage following changes to Hong Kong’s listing rules – Brii also reflects the risks involved. It is impossible to say with any certainty whether the company can guide its drugs all the way to commercialization or how long this might take. 

PE and VC investment in Chinese biotech companies totaled $2 billion in the first five months of 2018, according to AVCJ Research. It reached a record $2.4 billion last year, more than eight times the 2013 figure. Growth deals used to be a relative rarity in the drug development space – between 2012 and 2015 there were only 23 – but they account for nearly half of the 65 transactions in 2017 and the 39 announced so far this year.

Investors have been encouraged by the emergence of a clearer path to liquidity. In May, the Hong Kong Stock Exchange opened its doors to biotech companies that have yet to generate any revenue or profit, effectively presenting an alternative to pursuing an IPO in the US. There are various safeguards designed to ensure only quality companies list and the first applicant is relatively advanced in its drug development: Ascletis has a hepatitis C treatment set to go on sale this year.

The same cannot be said of all the Chinese biotech companies that are attracting large amounts of funding. Hua Medicine and Innovent Biologics both raised over $100 million on the back of portfolios that have multiple products in phase-three clinical trials – and earlier this month Hua became the second biotech player to file for a Hong Kong IPO. But Brii’s drugs are presumably all in the pre-clinical stage, while CStone Pharmaceuticals – which received a $260 million Series B round – has only one drug in clinical trials out of the 10 in its pipeline. 

The likelihood of a drug making it from phase one to approval by the US Food & Drug Administration is about 10%. A study led by the Biotechnology Innovation Organization of 10,000 regulatory phase transitions involving 1,100 companies between 2006 and 2015 identified phase two as the biggest graveyard: the probability of progressing to stage three is 30.7%, compared to 63.2% for stage one and 58.1% for phase three to making a new drug application.

VC investors say that having at least one development program in phase three constitutes strong visibility on commercialization. They also warn that many companies, despite receiving significant capital, get stuck in phase one or two, usually due to weak data or the emergence of more compelling products.

However, assessments shouldn’t be based on the progression of clinical trials alone. First, the market potential of a drug is an important consideration. For example, Hua focuses on treatments for diabetes and China is home to more than one-quarter of the world’s type-two diabetes sufferers. Second, investors like to back teams with track records. The CEO of Brii used to head up GlaxoSmithKline’s infectious disease drug development unit.

In short, valuating biotech companies means making a call on the pedigree of a nascent portfolio and the people behind it, which is why this area of investment is traditionally the preserve of specialists. Indeed, the current trend among China healthcare VC firms is incubation programs, so they can put the assets and team in place from the beginning with a view to expediting the clinical trials process. They are also keen to avoid the later-stage space where valuations are elevated.

There are likely to be some huge success stories in China biotech, but not every company will deliver on investors’ lofty expectations. It will be interesting to see whether the blow-ups happen before or after these businesses make it to the Hong Kong Stock Exchange.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Healthcare
• IPO
• Venture
• Regulation
• China
• Pharmaceuticals
• Exit