Capital Flooding Chinese AI Pharma Firms in Pre-B Round Funding

During the digital transformation of China's healthcare industry, a large number of institutional investors have jumped on the bandwagon of early-stage funding into pharmaceutical startups in the past two years. 

New technologies, including artificial intelligence and big data, continue to emerge, reshaping pharmaceutical research and development. If institutional investors want to seize future opportunities in the field, they need to invest in such startups as early as possible. For another thing, in the past two years, the secondary market has continuously undergone institutional innovations, which has opened a financing channel for unprofitable biomedical technology companies. It has altered the investment flow of the primary market to a certain extent, reducing the late-stage investment opportunities and heating up the early-stage investments.

In the innovation generated by the digital transformation of medical care, big data's application in the pharmaceutical field has helped solve the problems of high costs and long process during the research and development of new drugs by pharmaceutical companies, and Al Pharmaceutical has become a popular target of capital.

In China, AI pharmaceutical has enormous space for development.

According to the “2021-2026 AI Pharmaceutical Industry Venture Capital Dynamics and Financing Strategy Guidance Report” released by Newsijie Industry Research Center, there are about 245 AI pharmaceutical companies around the world, and most AI pharmaceutical companies are concentrated in developed countries, in which the United States ranks first with a share of 55%, followed by Britain with 15% and Canada with about 7%. China has fewer companies in the AI pharmaceutical sector at present, accounting for about 3% of the global market.

A few days ago, the Sixth China Great Health Industry Upgrading Summit released the “2021 China AI/ Computing Pharmaceutical Industry Report: Drug Discovery”. The report shows that AI/computing technology is in the verification period from concept to scale. The clinical research of a drug is an important milestone in the process of drug research and development, which means the drug molecule has been initially proved its vitro activity and safety through layers of screening and experiments. It has also achieved relatively good results in animal trials, and then entered clinical trials, the success rate has been greatly improved. After passing the clinical trial, a drug can be sold on the market.

So far, more than 30 candidate compounds involved in AI/computing technology in the world have entered the IND (clinical trial approval) stage, in which China has disclosed two. Although China’s AI pharmaceutical business accounts for a small proportion of the whole world, China market is not dull as the rest of the world is gaining momentum. 

The report also shows that the investment enthusiasm of Chinese AI/computing pharmaceutical companies has been mounting. It has reached a peak in the past two years, with most financing concentrated before series B funding.

Investment and financing in AI/computing pharmaceutical field in China (2015-2021)  (The data comes from “2021 China AI / Computing Pharmaceutical Industry Report: Drug Discovery”)

It is worth noting that in the field of AI Pharmaceuticals, a more segmented field has been particularly hot. It is the application of real-world data in Al pharmaceuticals.

“The difficulty of new drug research and development is the high cost. Only 20% to 30% of new drug research and development can really pass the test from phase I to phase III. Most of the costs of drug companies are in the early exploration and attempt, through mining the real-world data of tumors, to find more accurate patients for the early research and development of new drugs. That is to say, biomarker will pay attention to the screening of the target population of new drug research and development.” Zhao Ping, senior vice president of the Pharmaceutical Enterprise Cooperation Division of OrigiMed, said.

As a platform for building digital and accurate diagnosis and treatment in the field of tumor, OrigiMed has accumulated a large number of cancer patient data since its establishment, including the causes at the genetic level, changes at the molecular level, as well as the situation of each treatment and information in the process of disease management. These massive real-world data can not only be applied to the digitization of the whole process of cancer patients' diagnosis and treatment, but also provide customized solutions for the research and development of antitumor drugs.

Pharmaceutical enterprises have realized the importance of tumor real-world data to new drug research and development.

Roche, a pharmaceutical company, has taken a big step forward in mining real-world data on tumors. In February 2018, Roche acquired Flatiron Health, a big data medical company, and spent tens of billions of dollars in the same year to acquire Foundation Medicine, a company based on cancer genomics data. The former has data such as patients' daily treatment efficacy, and the latter has tumor genetic test data. People in the line say that only with the combination of both, the value of data could be brought into full play to the greatest extent.

The pace of early-stage investment is also accelerating. Taking OrigiMed as an example, it maintains the rhythm of “completing a round of financing every year”. In industrial innovation, the financing frequency in the medical and health competition has also increased rapidly.

In the view of Lu Gang, partner of Legend Star, “There is a tremendous change in the situation now, many medical companies can finance two or even three rounds a year. The financing rounds or time interval is really faster and faster, and the support for medical companies in this market will be greater and greater.”

Meanwhile, in the primary market of health care, another change is also taking place. “It is obvious that most institutions in the market are moving towards the early-stage investment, of which the valuation is also systematically improving,” Lu Gang said.

In the primary market of health care, capital continues to pay for innovation opportunities. At the same time, the changes in the Secondary Market system also affect the investment flow of the Primary Market. In 2018, Hong Kong stocks launched 18A system, opening the door to the listing of unprofitable biomedical technology companies; In 2019, STAR Market was opened, and the fifth set of listing standards was “tailored” for biomedical technology enterprises; This year, Beijing Stock Exchange is about to establish, adding financing channels for pharmaceutical enterprises with expertise and innovation once again.

Lu said that early, middle and late stage investments will face very large structural adjustments. "I think the investment institutions in the middle of the market have observed this aspect. In another word, the investment opportunities of round D and even round C investors have been covered by the markets of 18A or Beijing Stock Exchange, and their investment opportunities will disappear systematically,” he added.

In this regard, Huang Shengxuan, CEO of Taikang Investment, has a similar experience. He believes that the changes in the Secondary Market may have an impact on many investment institutions engaged in the Pre-IPO round. “We take the initiative to look forward and go forward. If you want to invest in innovative things, you must look forward.”

The capital that paid early attention to the early-stage investment received the policy dividends of 18A and STAR Market and obtained an ultra-high investment premium. However, as more and more investors “move forward”, the early valuation has been pushed up, and the interconnection between “early investment" and "high return” will also change.

For investors, investment strategy reform must be carried out. Lu Gang believes that we should pay more attention to long-term value. “If investors take long-term value creation as the foundation, they would hold a more calm attitude towards the time of listing and the level of short-term prices. As for the creation of long-term value for enterprises, they should not be destroyed by valuation or urgent listing. The future market will give more opportunities to investors and entrepreneurs who are more professional and focus on long-term value creation.”

Meanwhile, Huang Shengxuan pointed out that the change of system is also creating new opportunities, “In the future, as more and more listed companies appear in the Secondary Market, and the Secondary Market will also be divided. There will be a large number of financing needs of companies with a market value of 2.3 billion, which can not be fully covered, many M&A opportunities would emerge from it. Foreign PE and VC investments occupy the beginning and the end, either to support early innovation, science and innovation, or to do later M&A and integrate the Secondary Market.” In his opinion, these changes are also promoting the development of China’s capital market towards maturity.

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