Nestled in a quiet industrial park in Redmond, Washington, not too far from the Microsoft headquarters, is a small biotech start-up with both an interesting technology they are bringing to market, as well as a capital partner that suggests some ways in which global biotech research, venture capital and commercialization are going to change.
The company is Cerevast Therapeutics, the manufacturer of a non-invasive medical device that treats acute ischemic stroke through the use of acoustic energy delivered from a device the patient wears on their head immediately after they get to a stroke center and begin the IV delivery of blood-clot dissolving medicine. The device utilizes sixteen ultrasound transducers that project localized energy into the brain to disrupt blood clots where acute ischemic strokes occur through a process known as sonothrombolysis.
Founded in 2009, Cerevast recently announced that they had successfully passed the first interim analysis of their global phase 3 trial. This was certainly an important milestone for the company, but as Cerevast CEO Brad Zakes shared with me, the story behind the company’s Series C venture capital funding is also an interesting story. While Brad was out raising money, he was contacted by Haiyin Capital, a Chinese venture capital firm, who expressed a strong interest in learning more about Cerevast. This interest translated into a $5 million investment by Haiyin. While the amount was important, the ease with which Haiyin and Cerevast were able to come to terms was a breath of fresh air.
As Brad put it, “during discussions with domestic venture capital firms, we were acutely aware that because of the industry environment, they were in a strong position to drive the terms, and likely depress valuations. When the discussion with Haiyin got serious, it was clear they were willing to accept the valuation under our Series C terms, and were engaged with us for very strategic reasons.”
What were these strategic reasons? First off, Haiyin wanted to broaden both the sectors they were investing in, at the same time they began to selectively put capital to work outside of China. Second, Haiyin sees medical devices whose treatment offerings address specific healthcare challenges in China as a great investment opportunity. Cerevast’s emphasis on stroke treatment is of particular relevancy given China’s high incidence of stroke and the fact that it is expected to grow exponentially over the next several decades. And, because Cerevast’s treatment is inherently cost-effective through the use of a re-usable medical device, the possibility to see Cerevast’s product successfully enter the Chinese market is another attraction.
Is Cerevast’s experience a one-off, or does it indicate something more significant happening? Qiming Venture Partners, a venture capital firm based in Shanghai, now has four funds with more than $1.1 billion of investments. One of their primary areas of focus is healthcare, with investments ranging from a dental service provider, to a ultrasound manufacturer, to a range of pharmaceutical companies.
My firm recently helped coordinate meetings between American biotech start-ups and a variety of Chinese stakeholders, including venture capital firms, and it is clear that both sides have an appetite for what each is offering. On the American side, there is a general frustration over the degree of difficulty related to raising capital from domestic sources. In addition, the promise of a new, large and growing market in China has made many biotech start-ups begin to believe they need to somehow feature China as part of their go-to-market strategy.
This interest is not limited to start-ups. Outbound investment by Chinese medical device companies into established foreign enterprises is clearly growing. Earlier this year, Microport spent $290 million to acquire OrthoRecon. Fosun Pharma bought Alma Lasers for $240 million. Mindray continued its aggressive expansion with a $110 million acquisition of Zonare. BGI acquired Complete Genomics for $120 million.
There are important considerations when a domestic American biotech start-up heads to China. The first is to know precisely what their intellectual property (IP) issues are likely to be in China, and not to assume they can table this question until they gather more market intelligence about potential partners and their expectations around technology transfer. By the time a company sits down with potential Chinese partners, a thorough analysis of their IP, rights, responsibilities and likely problems needs to be completed by a competent law firm specialized in these matters.
The second consideration is to have worked through what you are and are not willing to give away to get funding from a Chinese partner. It can be a surprise to many US biotech start-ups who engage a Chinese venture capital partner when they discover that the VC’s primary interest is not negotiating over financial terms; rather, the VC is more likely to want to talk through what you envision your company’s strategy will be to ultimately sell into the Chinese market.
Most Chinese partners will want to discuss in-licensing of your product for the Chinese market. This discussion has important strategic repercussions, especially if the product in question has the ability to cost-effectively address disease states common in emerging economies. To say this differently, if what makes your product interesting to China is also likely to make it interesting for India, Africa, Brazil and Russia, then your approach to a very probable in-licensing discussion with a Chinese capital partner is something you do not want to be doing on the fly.
Cynics will quickly point out that broadly speaking, Chinese venture capital is not as sophisticated as American venture capital. As such, it is entirely possible Chinese firms could be making investments that would not pass the due diligence of more established and experienced American firms. However, that interpretation may miss the mark. Venture capital for biotech in the US has been through a volatile period for a variety of reasons that range from the aftermath of the 2008 financial crisis, to the pressure on payers because of the Affordable Care Act and how this impacts biotech innovation, to the much-hated medical device tax. Because of this volatility, biotech companies in the US that would have otherwise been able to successfully raise capital domestically have encountered headwinds. These have in turn created opportunities for non-traditional sources of capital, of which China is one.
None of this is to say that Chinese venture capital will be to the American biotech sector what Chinese purchases of government debt has been for the American taxpayer. What it does point to is the increasing connectivity between biotech research, funding, clinical trials and commercialization that will continue to pull China and the United States more closely together. Whether or not either country’s regulatory systems are keeping pace with these changes is another matter entirely, and one that is likely going to need particular attention in the coming years.
