Venture capitalists from the U.S. and other countries have reduced investment in Chinese drugmakers, denting momentum in China’s developing biotechnology industry.
Their retreat reflects a global pullback in venture investment as well as China’s faltering economy and rising geopolitical tensions, analysts said.
“China biotech had as big or bigger of a biotech bubble than we had in the U.S., and that is in the process of deflating,” said Les Funtleyder, healthcare portfolio manager for E Squared Capital Management. The U.S.-based family office backed some Chinese biotechs last decade, but hasn’t made life-sciences deals in China recently, he added.
Biotech venture investment in China, as in the U.S., jumped in the years leading to 2021. Venture funding for Chinese biotechs rose from $1.2 billion in 2015 to $19.3 billion in 2021, then fell to $8.9 billion last year, according to market tracker PitchBook Data.
U.S. and other foreign investors helped fuel the rise, and their pullback has contributed to the fall. The value of biotech venture deals in China that included U.S. investors climbed from $54.6 million in 2015 to $1.01 billion in 2021, then slid to $102.6 million last year, according to PitchBook.
Biotech funding from investors in Europe and elsewhere also declined. The value of Chinese biotech venture deals including European investors, for example, fell from $874.3 million in 2021 to $523.4 million last year, according to PitchBook. Specific amounts that U.S. and European venture firms invested in Chinese biotechs those years weren’t available from PitchBook.
China’s biotech market has grown crowded and suffers from “too many companies doing the same thing,” said Pandy Song, a Beijing-based partner with NLVC, a global early-stage venture investor.
Cross-border investment, including from the U.S., has been an important source of capital for China’s biotech industry, said Scott Moore, a political scientist at the University of Pennsylvania and author of “China’s Next Act,” a book discussing the nation’s biotech sector.
“The Chinese VC landscape is maturing very rapidly, but access to financing, particularly for early-stage biotech startups, is not at the volume or the level of sophistication as it is in the U.S.,” he added.
In the 2000s, biotech emerged as a significant priority for Beijing, leading to increased investment and support for Chinese life-sciences companies, which developed expertise in areas such as cellular immunotherapy for cancer, Moore said.
That, and the size of China’s healthcare market, drew U.S. investors. Recently, however, China’s economic struggles and concern that biotech could be targeted for investment restrictions have weighed on venture funding in the sector, Moore said.
Last month, President Biden issued an executive order prohibiting new U.S. venture, private-equity and joint-venture investment in certain Chinese companies involved in advanced semiconductors and quantum computing starting next year.
Biotech wasn’t included, but the program calls for regulators to meet annually to review technology advances in countries of concern, leaving the door open for sectors such as biotech to be added, according to Rhodium Group, a research firm.
U.S. policy makers considering whether to screen outbound biotech deals will have to weigh issues such as what constitutes a biotech national security risk and how China might retaliate, said Reva Goujon, Rhodium’s director of China corporate advisory.
Venture funding is only one measure of interest in China’s biotech industry. Collaboration between U.S. and Chinese drugmakers continues. Some international life-sciences investors also remain committed to China.
Novo Holdings, which manages the assets and wealth of Denmark’s Novo Nordisk Foundation, views China as an important market because of its need to provide medical care to a large population, said Dr. Amit Kakar, senior partner and head of Novo Holdings Asia.
The firm, which seeks growth-stage companies in China, recently joined a $290 million investment in Sangon Biotech, a China-based provider of tools and services for life sciences research.
One of the strengths of China’s biotech industry is biomanufacturing, or the use of living systems to produce medications and other goods. In September 2022, President Biden issued an executive order to support the U.S. biotechnology and biomanufacturing sectors and reduce American reliance on China and other nations for production of biological drugs and vaccines.
That will inject capital into domestic biomanufacturing, creating additional opportunities for U.S. companies, said Heath Naquin, vice president, government and capital engagement for University City Science Center, a Philadelphia-based nonprofit.
Antheia, a U.S. biomanufacturing startup that makes pharmaceutical ingredients in yeast that are conventionally sourced from plants or animals, has contracted out large-scale manufacturing of its first product to a European partner because U.S. manufacturing capacity is insufficient, said co-founder and CEO Christina Smolke.
India and Europe have more large-scale biomanufacturing than the U.S.,
Smolke said, adding “This is a key area the U.S. needs to invest in.”