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Trade War Halves China Biotech VC Funding To US

The latest investment data have biotech executives in the world's two largest economies worrying.

Venture capital funding in the US biotech sector from China in the first six months of 2019 fell by nearly 60% compared to the same period of last year, due mainly to tightened investment security measures imposed by Washington, according to Pitchbook Data cited in the Financial Times. Actual VC funding from China in US biotechs was tallied at $725m, down from $1.65bn in the first half of 2018.

The US has so far been the single largest destination for such investment from China, where strong demand for novel therapies has sharply driven up licensing and collaboration deals in recent years. Biotech is one of 10 pillar industries identified by China in the ambitious national "Made in China 2025" strategic economic plan.

Since the beginning of 2018 however, China and the US have engaged in a prolonged trade and tit-for-tat tariff dispute, and Washington instigated security reviews of investment in key sectors including biotech, citing national security concerns. US president Donald Trump last August signed into law an expanded Committee on Foreign Investment to the United States (CFIUS), extending the review time from 75 days to a potential 105 days for such investment.  (Also see "Trade War Spreads: Trump Rains On China Biotech Investment Parade" - Pink Sheet, 14 Aug, 2018.)

In November, the US government then released its annual 301 trade report, which singled out several Chinese VC funds active in US biotech investment including 6Dimension Capital and Dahua Capital among others, alleging that they had received funding from Chinese government-affiliated entities.

Who Gains?

The dramatic decline in VC funding could signal a further cooling in sentiment, investors say. For one, US initial public offerings of Chinese biotechs have declined notably, given that Hong Kong is now positioning itself as an alternative for pre-revenue bioventures from the mainland. With the recent launch of the Shanghai Stock Exchange’s new STAR Board, designed for hi-tech companies, it's expected that fewer biotech companies will travel far to get a public listing in the US. 

Also, the tightening of US security reviews will likely temper China’s appetite and deal-making zeal for novel biopharma assets in the US. Instead, hungry Chinese firms will have to look elsewhere, potentially other Asian countries such as Japan and South Korea, given the demand for innovative compounds remains strong.

Deal making between China and neighboring Japan has been muted so far, but that is expected to change with the warming relationship between the two Asian giants and the complementary nature of their pharmaceutical R&D. Japan has been traditionally strong in formulation technology such as transdermal patches and oral films, which China’s drug makers are now hoping to develop for the local patient population.

Japanese pharma firms meanwhile are actively looking to expand their market shares in China. Trailing US and European peers in this market in the past, major companies including Takeda Pharmaceutical Co. Ltd. and Astellas Pharma Inc. are hoping to bring more novel treatments to the Chinese market. Takeda has stated it is planning to launch seven new drugs in China over the five years from 2018.  

Similarly, Chinese drug makers have reached collaborations with South Korean biotechs including GC Pharma to develop cancer and rare disease treatments in China.

US Remains Top Destination

Despite the drastic slowdown in biotech funding inflow from China, the US will remain the top investment destination for the foreseeable future, investors say. For one, many Chinese companies have already set up an R&D presence in the US, many centered on the Boston area, which will facilitate deal-making between the two countries. Many developers are also dual-filing INDs in both the US and China, hoping to speed up the global development process.

Chinese regulators meanwhile are allowing the use of clinical data obtained overseas in support of regulatory fillings in China, and the US has one of the shortest IND time frames globally, making it an ideal destination for early-stage studies.

A US IND is expected to particularly benefit rare disease treatments, not only through orphan drug designations and potential fast-track reviews, but as an FDA approval can now lead to a speedier approval process in China.

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