GBA, Investor Q&A

The right chemistry

Guangzhou government and Israeli experts see success with biotech VC fund


Lushi: veteran healthcare investor

The first synagogue in China was built during the Northern Song Dynasty (960-1127) in the then imperial capital of Kaifeng (in today’s Henan province). It was central to a small community of Jews believed to have arrived in the city from Persia via the ancient Silk Road. Happy to integrate local elements into their culture, the Kaifeng Jews were known to be high performers in the exams for imperial office under the later Ming Dynasty.

Today, cross-cultural ties are embodied by linkages like the Guangzhou Sino-Israel Biotech Investment Fund (GIBF), which was launched in 2016 with financial backing from the Guangzhou government. The fund was established by luminaries including Dr Yehoshua (Shuki) Gleitman (former chief scientist of the State of Israel), Professor Shlomo Noy (former director general of Israel’s largest hospital, Sheba Medical Centre), Avner Lushi (who served in Israel’s prime minister’s office and is a veteran healthcare investor), and Carl Geng (formerly a senior official at the International Department of China’s Ministry of Foreign Affairs and a delegate to the UN). About to close its first investment vehicle sized at $100 million with 12 portfolio companies, GIBF is already raising its second fund with a target of $300 million.

WiC spoke to Lushi and Geng about how such the partnership is managed, its vision, as well as China’s growing importance in multicentre research trials for innovative drugs.

Can you give some background on the origins of GIBF? What was the Guangzhou government’s motivation in backing a cross-border life science fund?

Lushi: As you know, the Chinese economy is undergoing a historical transition from a manufacturing-based economy to a consumption-based one, which is reliant on innovation, technology and the internal consumption of more advanced products.

This is very evident in the healthcare field, where the percentage of GDP going to the sector in China is still much lower than in the West and expected to grow significantly in the coming years.

As part of this revolution, it is only natural that relations have flourished between China and Israel, a nation of start-ups. And indeed, there are lots of contacts between these two ancient nations, starting from the highest levels of government all the way down to the business sector.

Despite the strong support by the governments of both sides, many of the joint initiatives have not materialised to date for all kind of reasons. Our group first came to Guangzhou in 2012 and it took us four years of trust-building until we actually started working there. Now there is a broad consensus that it is the best Sino-Israeli project across China.

We believe the main reasons for this success are: the different model we presented, which focuses on the needs of both sides and creates a real win-win situation; the track record and honesty of our group, (part of our track record is based on Dr Shuki Gleitman’s background – as a former Chief Scientist of the State of Israel, he is a world leader on national R&D policies); the visionary approach by the Guangzhou government which agreed to deposit resources and decisionmaking power in the hands of a foreign group; and our willingness to work hard for the long-term without seeking quick profits.

This is all reflected, inter alia, by our ability to raise our second fund, as well as Dr Gleitman being named as an Honorary Citizen of Guangzhou.

Geng: Guangzhou has been a pioneer in reform and opening up. But with Shanghai and Beijing catching up fast, Guangzhou is always thinking of new ways to compete. More than just an investment yielding monetary returns, GIBF is tasked with bringing cutting-edge knowhow and inspiration to Guangzhou, so as to foster a virtuous cycle of advanced medical development.

One area that the Guangzhou government is looking to improve is its capabilities in organising clinical trials. By bringing 10-20 new drugs through the latest fund, which will all undergo international multicentre clinical trials in Guangzhou, GIBF is contributing to Guangzhou’s efforts to transform itself into a hub for novel drug clinical trial services and medical research.

GIBF focuses on Chinese and Israeli joint ventures in the fields of healthcare. Why Israel? Can you highlight some examples or trends regarding Sino-Israel partnerships in the said areas?

Lushi: As I mentioned, Israel is the “Start-Up Nation” with many examples to justify this title, such as the numbers of patents or scientific publications per capita; the numbers of engineers and other advance-degree holders in the labour force; or the numbers of start-up companies, or those listed on Nasdaq. However, Israel by itself is a very small market (with a total population of only eight million people). Hence, all of our Israeli innovation is always directed outside, to the larger markets, from day one.

As China has the need for this innovation and the resources of a superpower, including the huge size of its market, this combination is very natural to both sides. Also culturally, somewhat surprisingly, there are more common points between us than one could speculate. In addition the flexibility of the Israelis is very helpful as despite their long-term engagement with markets in the West they are always ready to explore new opportunities quickly.

Geng: China and Israel officially started building relations in 1992. But it wasn’t until recent years that China’s living standards and technological levels had advanced so much that harnessing Israel’s innovation could create real synergies for both parties.

Aside from providing a deep market, China’s vibrant corporate sector can help join the dots of Israel’s rather fragmented technological landscape too.

Quite a lot of local governments are interested in working on this project, but none have been as comfortable about ceding as much managerial control as Guangzhou. We could put this down to the city’s thousand years of history in international trade, making its people open-minded and practical!

GIBF is the only Chinese fund to be given a foreign management licence by the Asset Management Association of China. How does that benefit the fund and its portfolio companies?

Lushi: It has always been very important for us to work “by the book” and to insist on keeping to all the relevant laws and regulations. We believe that the licence gives comfort to the government, our investors, portfolio companies and other partners, especially as our group is controlled and managed by foreigners. Business is always based on trust and this licence contributes to the trust we have created with the different stakeholders.

How is GIBF’s Fund 1 performing, in regard to returns and company exits?

Lushi: Recently, GIBF has recorded its first significant exit (a 3.5 times return) following an IPO on Nasdaq for our very first investment, InMode [an Israeli developer of advanced equipment for skin repair and cosmetic enhancement with a market capitalisation of $3.6 billion]. In addition, we are in the advanced stages of two more exits.

In measuring GIBF’s performance one should bear in mind the following main factors: first, the term of the fund was set in advance for nine years; second, this relatively long-term lifespan was not by coincidence, as we are talking about life sciences investments which typically take more time than other sectors, and specifically in our case we are taking on a new investment model and brand new portfolio companies are being established in China by the fund (the JVs); and third, although the fund started operating at the beginning of 2016, our first investment was made only in 2017 and some of our investments are very recent due to Covid-19 and other delays in investment activity.

So, bottom line, we are very satisfied with our performance to date and are confident that GIBF1 will be highly profitable and will also achieve its strategic goals as set by the Guangzhou government.

How is Fund 2 going to be different from Fund I? What is the duration of that fund?

Lushi: In terms of our investment model, GIBF2 will be very similar to GIBF1 – it will establish Chinese joint ventures (JVs) in partnership with foreign companies. These Chinese subsidiaries – established in cooperation with GIBF – will be managed and controlled by their foreign parent companies, with GIBF investing considerable sums in the JVs, holding minority equity positions and assisting in their Chinese operations.

We believe that this is in fact the only viable option existing today for foreign companies to create value in the Chinese market and not to give up this huge potential value at an early stage to a local partner. Subsequently, this added value will be reflected in the JV’s exit model.

The main difference in GIBF2 compared to GIBF1 is the investment focus. While GIBF1 focused on medical devices and digital health (with one biotech investment too), GIBF2 will focus on Israeli and European biotechnology companies, which are developing innovative drugs and are in phase 2-3 of clinical trials.

This is due to the current global harmonisation of clinical data in which the leading regulatory authorities are recognising clinical trials conducted in other countries as long as they are carried out in accordance with accepted standards.

It is our intention that the Chinese JVs we establish will conduct some of these global clinical trials in China, funded by our fund, and the results of the trials will be submitted as one package to the US, Chinese and European regulators alongside the results of the parent company’s trials in the West.

Another difference between the two funds is the size of the investments. We will increase our average investment from Rmb20-50 million per JV in GIBF1 to Rmb60-120 million per JV in GIBF2.

Geng: Investments in GIBF1 are mainly led by the Guangzhou government. For GIBF2, we are going to include more corporate investors. Our main LP for GIBF1, Guanghzou International Bio Island Company and its parent company, Guangzhou Hightech Group, both state-owned, and the Guangzhou government have already committed to our funds. We are also looking for overseas investors, ideally companies that also engage in innovative drug development and investment.

How do foreign biotech companies feel about conducting clinical research in China? Do they have concerns over their intellectual property (IP) rights?

Lushi: While in the past there was some hesitation about performing clinical trials in China, we believe that foreign companies now feel more and more comfortable with it. For example, according to the China Drug Trials Platform powered by NMPA/CDE, from 2013 to June 2021, there were 994 multi-centre clinical trials completed/ongoing in China. More than half of them (543) have been sponsored by the top 10 global pharmaceutical companies.

We are personally familiar with the hospital system in Guangzhou and believe it is a world-class one. Subsequently, we are establishing an entity that will coordinate clinical trials which will be conducted at Guangzhou’s advanced hospitals in collaboration with others, such as the hospitals, the local Health Ministry, the Chinese FDA etc – all while adhering to proper international standards.

Geng: China underwent a major change on IP protection and it has improved a lot. Specifically in our cases, if technologies developed by our portfolio companies are copied, we will ask the Guangzhou government to intervene, and it will no doubt do it. We can also protect our portfolio companies’ IP through administrative avenues in addition to legal means. Indeed, working with us means having a strong local team to help protect their IP in China.

What is the most important driving force behind the boom in China’s biomedicine industry?

Lushi: There are many factors of course, but I believe that it’s a combination of the government’s planning and the desire of the Chinese people to get access to the world’s most modern medicines, drugs and devices, as well as the ability of society and patients to afford these treatments.

Geng: Drugs regulations in China are getting more and more vigorous and are now increasingly in line with international standards. This has helped to weed out the bad players and encourage development of high-quality products. Schemes including the programme to attract global talent has also helped the sector a lot.

What might derail the industry’s progress?

Lushi: Drug development is always hard, costly and time consuming. Many things can go wrong, but the trajectory is clear.

How has the Covid-19 pandemic affected dealmaking, investor interest and company valuations?

Lushi: Like everyone else, and especially as we are a cross-border fund, travel restrictions have made our life much more difficult. On the other hand, Covid-19 had some positive effects: firstly, we learned how to manage our business online and became much more efficient; secondly, Covid-19 opened up business opportunities and illustrated the huge importance of the healthcare system; and third and most importantly our infrastructure in both countries meant that we were among the only cross-border funds that could continue doing business, despite the pandemic and travel restrictions. In fact, we closed four new investments and completed the first close of our second fund during this time!

Are you worried that Sino-US tensions will have a negative impact on GIBF and its prospects?

Lushi: They are not helpful. Nevertheless, we rely mainly on Israeli and European technologies and we focus on healthcare, which is more in consensus than problematic technologies like online security and next-generation communications technology.

Geng: The Covid-19 pandemic shows that medical endeavours require international collaboration. Worsening Sino-US relations might slow down such efforts, but they should not derail them completely. Bear in mind that when a new drug comes to China, the benefits don’t just go to the Chinese people.

Drugs that enjoy successful rollout in a huge market tend to see their overall costs lower too. That can benefit a lot of people in other countries.

I’m positive that international collaboration will continue.

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