China: Patient capital

You might have thought Japan is the place for healthcare investment given its aging population. However, China’s biotech/healthcare sector in fact is attracting growing interest, recording $3.15 billion of private equity investment in the first three quarters this year, more than twice what the internet sector secured, according to China-focused private equity research body Zero2IPO.  

The amount is also significant compared to the $846.9 million invested in the sector during all of 2010, when it actually received the highest number of private equity investments – 55 deals were recorded compared to only 31 in runner-up sector cleantech. 

On the venture capital front, the biotech/healthcare sector attracted $373.8 million across 56 investments in the first three quarters, on track to reach the level recorded last year – $456.6 million across 77 deals, according to data from Zero2IPO.

Pharmaceuticals, medical devices and special healthcare services will provide private equity investors with tremendous opportunities

John Zhao

“Pharmaceuticals, medical devices and special healthcare services will provide private equity investors with tremendous opportunities at various stages of the deal spectrum, from a green-field biotechnology start-up to a mature and established organisation or industry restructure,” John Zhao, CEO and co-founder of Hony Capital, previously told PEI.

Among the domestic firms putting their money behind the healthcare play this year are CITIC Private Equity Funds Management, which invested RMB100 million in a Kunming-based healthcare products maker; New Horizon Capital, which invested HK$195 million in Hong Kong-listed Golden Meditech Holdings; and Qiming Venture Partners, which has made investments into at least five companies so far this year.

Investors’ confidence in the sector was also underscored by a number of firms’ expansion either on the manpower or investment strategy front.

Spring Capital earlier this year signalled its plans to push further into the industry with the appointment of ex-Shenzhen Capital executive Guosen He, adding the team covering the healthcare sector to three investment professionals. Northern Light Venture Capital, on the other hand, recently closed its $404 million third fund, which will target opportunities in the healthcare sector for the first time. 

In fact, the interest does not just come from domestic players. China’s healthcare sector in the first three quarters also pulled in global heavyweight investors such as Temasek Holdings, Kohlberg Kravis Roberts and Goldman Sachs. 

KKR made a large bet by agreeing to pay $2.38 billion for Pfizer’s drug delivery systems business Capsugel, which counts the Chinese subsidiary one of its largest capsule manufacturers. Temasek also poured in $300 million to a Shanghai-based pharmaceuticals company, while Goldman Sachs invested RMB95 million in a Beijing-based pharmaceuticals company.

However, obstacles remain. The foremost challenge is the uncertainty of government policy, as the healthcare sector in China is significantly influenced by policy,” says Zhao.

Although the Chinese government has already taken “many positive measures” to encourage the industry’s development, Zhao says he thinks it would be helpful if the government had a more clear-cut and longer-term healthcare policy. 

On the investors’ part, Zhao says some people lack expertise in the healthcare sector and he doubts the sustainability of this approach.

Good businesses in the sector will eventually find a place

John Zhao

“Quite a number of investments in the past few years were executed by PE professionals with limited industry knowledge or know-how – they’re more focused on the rhythms of the capital market and are to some extent using healthcare as a concept to speculate in the capital market,” he says.

“Good businesses in the sector will eventually find a place – and their deserved valuation – in the capital markets, but you can’t view the process the other way around.”