October 14, 2004
| Having just returned from eight days in China, I have seen the future.
At least that's what I believe after spending time with the excited emerging entrepreneurial class there. IDG Ventures has a significant venture portfolio in China, and has invested in that country for nearly 15 years. That market has undergone numerous boom-and-bust cycles, but on my most recent trip it felt as if things were now fundamentally different.
Ge Li, CEO of Wuxi Pharmatech, a leading drug discovery company based in Shanghai, says that "business is great, and the government is strongly encouraging the local biotech industry." Li says Wuxi is doing business "with 15 of the top 20 global pharma companies, and revenues have nearly doubled over the past couple of years."
Fusheng Lee, founder of Lee Proteome Research Laboratories, a producer of biochips, is attempting to exploit the labor cost savings by doing all development work in China. "Our technicians are very good and are at 10 percent of the cost of U.S. chemists ... Our quality rivals that in the U.S. and Europe," he says. Lee also points to the extensive tax benefits being offered to entrepreneurs who choose to develop local companies.
Olivia Ho Cheng, CEO of Aurora Imaging, a Boston-based MRI company looking to sell systems in China, has traveled extensively throughout the region. "Biotech is the highest priority of policy makers," she says, "as they are genuinely committed to improving the quality of life." Cheng observes that the government is even seeking "innovators from overseas" because it recognizes "Chinese industry limitations today."
One of those limitations is the immaturity of the capital markets. While some very good local early-stage investment funds exist, much of the investment capital is for privatizing the large state enterprises. Furthermore, the path to liquidity is clouded; Goldman Sachs estimates that there may be 28 to 30 local "grey" market stock exchanges in addition to the increasingly important Shanghai and Hong Kong exchanges. Venture investors like to see deep, established, and liquid local public stock markets.
Property and Prosperity
Two of the concerns I've heard most often about investing in the Chinese biotech market are the lack of regard for intellectual property rights and the purchasing power of the Chinese populace. It may take many cases tried in the courts of the World Trade Organization before pharma is comfortable outsourcing proprietary drug discovery work. And income levels — official per-capita figures are around $1,000 per annum — will not provide the kinds of returns investors expect.
Venture capitalists also face a highly regulated pricing environment and capricious approval authorities. So, VCs investing today in Chinese biotech are focused on building high-value-added service companies, such as Wuxi, which does fundamental medicinal chemistry work on a "for-hire" basis for leading global pharma firms.
As local biotech companies look to evolve beyond service businesses and develop new compounds, opportunities should improve in the bio-IT sector. Lixing Zhang, president of Synerz, a drug discovery company based in Boston, and also a professor at the Chinese Academy of Sciences, says, "The stage is fantastic for the bio-IT industry in China."
But for now, that marketplace is in its infancy. Many products used in China are either imported or developed in-house because of inadequate third-party solutions. Li says, "Local market economics cannot yet support a local bio-IT industry," but he says that could be changing. "Today China may have 2,000 labs with tremendously well-trained chemists, but they are not creative medicinal chemists ... In five to 10 years it will all be very different," he predicts.
So, where does that leave the aspiring bio-IT entrepreneur? Many local biotech companies are not demanding advanced bio-IT tools because they are not yet doing novel discovery work, but, as Li says, that will change, and that has enormous consequences for bio-IT companies. So, to twist a famous quote from one of my ancestors, Horace: "Go East, young man."
Michael A. Greeley is managing general partner of IDG Ventures, a global family of funds operating in North America, Europe, and Asia, with approximately $600 million under management. E-mail: firstname.lastname@example.org.