SAN FRANCISCO - In spite of the generally gloomy forecasts for the venture industry, emerging markets in Asia reveal selective opportunities that could bring strong returns for VCs.

VCs investing in Asia share some troubling issues common to Western VCs, but academic and government-funded innovation in fast-growing countries are opening up new markets that internationally focused VCs have just begun to tap, providing cash lifelines from both Western and local sources for Asian entrepreneurs, according to an Oct. 26 panel at Elsevier Business Intelligence's PharmAsia Summit in San Francisco. Panelists didn't offer specific figures about amount of investment in innovation, however.

U.S. economic woes have kept VCs' attention on their existing portfolios while diverting focus from early-stage companies, have had the same effect in Asia, leaving innovators struggling to fill the funding gap in Asia just as they have in the U.S., noted moderator Ravi Kiron of strategic consultancy Adjuvant Global Advisors LLC.

In the big picture, however, even partial fulfillment of the rapid, high-growth projections for developing countries in Asia could lead to strong returns, panelists agreed. That's provoking Western VCs to deepen their involvement in Asia, attracting attention from local investors to startups, and generating a corporate VC industry that is "hungry for innovation," in the words of Takeda Research Investment's Graeme Martin (Also see "Takeda Research Investment’s Graeme Martin On Corporate Venture Capital’s Role in Developing Next-Generation Biologics: An Interview With PharmAsia News(Part 2 of 2)" - Scrip, 19 June, 2009. ). TRI started in 2001 with a $100 million commitment from Takeda.

Government Investment, VC Relationship Varies By Country

In each country, the relationship between government investment and the private capital community is different, the panelists said. In China, for example, massive infrastructure investment is expected to help new medicines to reach areas of the country previously underserved by high-quality care, OrbiMed Advisors' Jonathan Wang said.

In India, government-funded programs have promoted innovation in state laboratories as well as on college campuses, but the gap between innovation and commercialization is proving difficult to bridge, said Centrum Capital's Utkarsh Palnitkar.

And in Japan, nearly $1 billion dollars in public money is funding the Corporation Japan initiative to bring innovation back into the country to combat a perceived dearth of fledgling opportunities, said Martin, although he noted that the money is earmarked for many industries, not just life sciences.

Illustrating the degree to which the financing climate is changing, two-time entrepreneur Sofie Qiao, acting head of business development at the Shanghai-based startup Hua Medicine, said her previous company Lead Therapeutics struggled to find initial funding in 2007, yet achieved an exit within three years, as BioMarin Pharmaceutical Inc. of Novato, Calif., acquired it for $18 million up front plus a $79 million earnout in February 2010 ([See Deal]). Lead, which was based in San Francisco, but had research operations in Shanghai, relied on expertise of highly trained Chinese scientists to create compounds against targets that had already been well validated (Also see "Investing In China: Views From Windhover's PharmAsia Summit" - Scrip, 20 November, 2009.)

Hua, on the other hand, has not disclosed publicly how much money it has raised initially. But it was incubated by American VCs including Arch Venture Partners, Venrock and Fidelity Ventures, reflecting a sharp increase in both available capital and enthusiasm for Asian deals among Western investors despite the broader struggles of the VC industry during the interim. WuXi PharmaTech CEO Ge Li is also an investor.

Cost Advantages, Domestic Demand, International Integrations

OrbiMed is investing prolifically in Asia, with 10 new deals over the past 10 months, said Wang. Deals must fit into one of three categories. OrbiMed seeks companies that offer significant cost advantages in areas such as development and manufacturing, whether for pharmaceuticals or devices. Second, the firm looks for areas where domestic demand is changing rapidly, often as a result of infrastructure investment, higher purchasing power among certain populations, or newfound interest in therapeutic or even cosmetic areas. Lastly, companies that can offer integrations between Western and Asian expertise that generate efficiencies and optimize resources are proving attractive.

"The [Chinese] government is putting $120 billion by the end of 2011 to promote the [healthcare] industry, and a big part of it is to push the care from big cities to secondary and tertiary cities, and also to the countryside," he said. "Because of that kind of push, we're looking at over 20 percent growth in both pharmaceuticals and medical devices. That kind of domestic demand really drives a lot of our deals."

While some VCs have deep knowledge of Asian markets, Qiao said others are pursuing a "toe-dipper" strategy, as U.S.-based backers ProQuest Investments and Pappas Ventures did when they invested in Lead Therapeutics in 2007. Other firms such as OrbiMed with more experience can evaluate a variety of opportunities, from ambitious companies with global aspirations to locally-focused startups, she said.

Palnitkar agreed that infrastructure investment in India has come much more slowly, while the gulf remains wide between university research and the private sector. Thus, transforming innovations into commercial endeavors is difficult. Nonetheless, he said institutions such as Hyderabad University have set up incubators on their campuses, while a joint effort between the government's Council for Scientific and Industrial Research and Imperial College has established a pioneering program to fund innovative startups. Still, government labs in India are outpacing universities in creating new companies, he said.

- Paul Bonanos ( p.bonanos@elsevier.com )

At PharmAsia Summit, VCs Discuss Financing Innovation in Asia

More from Archive

More from Scrip