The pharmaceutical industry enjoys a USD 1 trillion market in the world, where international pharmaceutical giants like Pfizer, J & J, and AstraZeneca were born. Upon the historical precipitation and strong capital strength, not only do giants produce drugs, they also constantly develop first-in-class drugs, to contribute much to conquering difficult and complicated diseases of humans and also obtain considerable economic returns.

There are also many pharmaceutical enterprises that pay attention to new drug R&D on China’s pharmaceutical market, however, for a long time, most Chinese pharmaceutical enterprises have been based on producing generic drugs, with low consciousness of R&D and weak innovation capacity. Now, all this is undergoing subtle and rapid changes as Chinese pharmaceutical enterprises transform from "generic drug strategy" to "innovative drug strategy", plus the series of preferential policies introduced by China.

There have been policies relating to pharmaceutical R&D intensively issued by many national departments of China including the State Council, National Health and Family Planning Commission (NHFPC), China Food and Drug Administration (CFDA), and National Development and Reform Commission (NDRC), etc. since 2015, mainly reflected in five aspects: clinical trial data checking, Marketing Authorization Holder system, acceleration of review and approval of innovative drugs, encouragement of quality innovative pharmaceutical products to be synonymous with international standards, and supporting policies that improve quality and promote innovation. This series of preferential policies to the innovative drugs has finally enabled China to enter the golden age of pharmaceutical R&D innovation.

Especially this year is even called the year starting the climax of Chinese innovative drug companies entering the capital market. The news that WuXi AppTec Co., Ltd. planned to be listed on Shanghai Stock Exchange to raise fund of about RMB 5.741 billion has drawn attention. Its high PE ratio is much envied by the industry.

Next on March 30, the General Office of the State Council of China forwarded the Several Opinions of China Securities Regulatory Commission on Undertaking Trials for Innovative Enterprises Issuing Shares or Depository Receipts Domestically (hereinafter referred to as the Opinions), meaning that the program of "innovative enterprise listing" program of China Securities Regulatory Commission (CSRC) is approved. In order to encourage innovation, China has started to modify IPO measures and break the profitability threshold, with the first pilot enterprises required to meet China’s national strategy, master core technology, and have high market recognition. Bio-medicine industry is listed therein, and others include high-tech industries and strategic emerging industries like internet, big data, cloud computing, AI, software and IC, and high-end equipment manufacturing.

The above good news has driven the capital to start to lay out the innovative pharmaceutical field, and seize high ground of bio-medicine innovation. China is at the early stage of transforming from generic drugs to innovative drugs, without many biotech enterprises, but they are gradually emerging, and "unicorns" will also successively sprout out.

To size the high ground of bio-medicine innovation of Shanghai

As the former managing director of the Research Department of China International Capital Corporation Limited (CICC), Qiang Jing was called the "brain" of the pharmaceutical team of CICC, and he led the team to visit almost all listed pharmaceutical companies of China in the past eight years, release research reports one after another, and help numerous investment institutions seize the investment trends of the pharmaceuticals industry to earn high returns.

Qiang Jing felt it was time to switch the "track" after sensing the flourishing of the new pharmaceutical enterprises. Qiang Jing left CICC after careful thought, to enter the investment fund—Apricot Capital that concentrates on the innovative bio-medicine field to start the bio-medicine equity investment business. This company is in Shanghai where there are clear geographic advantages.

 "Shanghai will usher in a new wave of innovative development after the new administration takes office. In particular, when we contact and exchange with and invite scientists who have made some achievements in the bio-medicine research field overseas, they often choose Shanghai as their first stop. Therefore, so long as factors like talent, fund, and incentive are rapidly implemented, Shanghai will undoubtedly lead in the big wave of bio-medicine industry development in the future," Qiang Jing also specially mentioned the regional innovation competition issue that the market pays close attention to when expounding his approach to investing in the bio-medicine field.

A detail Qiang Jing specially mentioned was that he visited many regions that mainly develop bio-medicine before he decided to leave office at beginning of this year, and concluded that Shanghai still had strong competitiveness in innovative development.

 "We are well prepared for global top bio-medicine scientists’ gathering in Shanghai for new development in the future," said Qiang Jing full of confidence at the partner meeting held by a top bio-medicine investment fund last weekend.

Lou Qi, the Person in Charge of Shanghai Zhangjiang Pharma Valley, a state-level bio-medicine industrial base, said in ZJ Life Sciences Salon held recently, "The release of a series favorable signals has proved the judgement of professional institutions—2018 will be a big year for the bio-medicine industry."

According to Lou Qi, the output value of ZJ bio-medicine industry last year grew by 30% year on year, and according to Zhangjiang Pharma Valley’s analysis of enterprises with good development potential and valuation of above RMB 500 million in the park at the beginning of this year, the results were thrilling: there were 60 unicorns including Henlius, etc. and quasi-unicorns.

Bio-medicine innovation met setback in China. The college student Wei Zexi aged only 21 passed away due to advanced synovial sarcoma on April 12, 2016, and his death shot down the cellular immunotherapy from climax to low ebb. The former NHFPC rapidly introduced measures, requiring Category III medical technologies including cellular immunotherapy to be conducted third-party examination and management, which caused companies with cellular immunotherapy to suffer losses. As a result, capital investment in this field started to hesitate and "avoidance" became the momentary market trend.

However, the market demand for biological drugs is growing. According to a report of Yiou Intelligence, from the perspective of overall sales of global pharmaceutical market, the compound annual growth rate (CAGR) was 4.6% during 2012-2016, and 5% growth is expected to be maintained during 2017-2021, wherein, chemical drugs will still be the market leader, however, the CAGR of biological drugs reached 7.7% from 2012-2017, higher than the 4% growth of chemical drugs.

Compared to the global pharmaceutical market, the CAGR of the Chinese pharmaceutical market reached 12.7% during 2012-2016, and is expected to keep 7.5% growth in the next five years, higher than the global growth, wherein, chemical drugs will be the market leader, followed by TCM and biological drugs, however, the CAGR of biological drugs reached 26.5% during 2012-2016, that of TCM was

There have been capital companies starting to conduct layout in a very low-profile manner in the face of this growing market. Established in 2015, Apricot Capital "went against the market trend" when the Chinese market was very depressed, and invested RMB 100 million in the high-tech company that is committed to cellular immunotherapy: Unicar.

Apricot Capital has pocketed 10 innovative drug R&D companies leading in the segments in just 3 years, including clinical CRO Fountain Medical, and Tissuebank that is a Chinese enterprise engaging in bone marrow transplant detection and serving as special clinical examination platform of immune system, etc.

In this regard, Liu Wenyi, the Founding Partner of Apricot Capital, said that it was a result of their long commitment to the ecosystem investment model and value investment selection, "It is closely linked with the investment philosophy of Apricot Capital."

Value choice: To break the "decade-billion law"

The bio-medicine field is the field with the most empty space, and it is because of such empty space in the unknown world that has unpredictable value to the humanity. CAR-T is one thereof.

CAR-T is Chimeric Antigen Receptor T-Cell Immunotherapy, and the cellular immunotherapies represented by CAR T-cell therapy are even called "living drug", with the treatment having more precision, multiple targets, and broad and lasting tumor killing scope. According to 2017 Chinese Cancer Registry Annual Report of the National Cancer Center of China, the new cancer cases reach 4.29 million and cancer death cases reach 2.81 million every year in China. Therefore, CAR-T has become the forefront and hottest research field of the medical community at present, and is even called the newest train expected to conquer diseases like cancers, after chemical drugs and biological drugs.

 "Before Wei Zexi Incident, the investment in the cell therapy field was very hot, and the investment community scrambled for it. Actually, everyone had the suspicion of exaggerated valuation of cell therapy enterprises at that time, and there was no standard charge, but this did not mean that this field was bad, and there were enterprises concentrating on research in this field. There was no Chinese company that obtained financing in the entire biological immunotherapy industry or CAR-T industry in 2016, as China halted it, cellular immunotherapy could not charge anymore, and we did not know when the new policy would come out. The market valuation at that time returned to the rational state, and scientists had the time to return to careful research. It was at such time node that we felt there might be chances, especially we knew that this enterprise (Unicar) was truly doing research with heart and the only Chinese CAR-T company that obtained the RMB 100 million-grade investment that year. This was the logic for us Apricot to invest Unicar at that time. The original inspiration of aiding the world and saving the people should not change and we should not invest merely for pursing profits. However, it is natural that you will earn when you well accomplish the matters," said Liu Wenyi to Yicai reporter

The fact has proved the correctness of the decision of Apricot Capital. China rectified and cleared its entire cell therapy market after Wei Zexi Incident, and continued to introduce corresponding policies in the wave of deepening drug review reform, to set green channel for CAR-T. Unicar favored by Apricot Capital is in the first echelon on this track, and is even deemed as the future unicorn by the pharmaceutical field.

The "decade-billion law": a decade of investment with USD one billion may eventually end in failure, in the pharmaceutical field investment has restricted the thinking of many capital companies.

The investment in innovative drug projects may face the situation of long R&D duration. How to see the projects clearly within a short time with minimal error? Qiang Jing explained the importance of values with own experiences.

According to Qiang Jing, at the time of selection of projects to invest, it’s very important to see whether founders of invested enterprises have the entrepreneurial spirit, besides whether the invested enterprises can be held for the long term and represent the future directions; excellent entrepreneurs need to be experienced in terms of product development, use of people, external coordination, and capital market, etc.; enterprises with entrepreneurial spirit, broad industrial space, and industry leading position are definitely worth holding for the long term.

Nonetheless, innovative pharmaceuticals are still the cake with the most generous profits in the pharmaceutical field, and the part that can best reflect the technical content. The unbreakable "spell" of the "decade-billion law" in the pharmaceutical field destines investors in the pharmaceutical field to endure more loneliness for anticipation of return.

Such professional eye and values choice have brought generous returns to Apricot Capital. According to introduction of Liu Wenyi, Fund I of Apricot Capital has successfully withdrawn from 2 projects, with the return on investment leading in the industry. The cultivation and persistence of Apricot Capital have successfully drawn 5 listed companies including Lepu Medical (300003.SH) and Hainan Haiyao (000566.SH), which successively contributed capital to become the limited partners (LP) of funds under it.

Innovative pharmaceutical investment requires specialization and concentration

The rising of the patent drug R&D cost is a problem the global new drug R&D enterprises are confronted with. According to the calculation of Deloitte, the R&D cost of single innovative drugs has soared from the USD 1.188 billion in 2010 to USD 1.992 billion in 2017. The R&D expenses for single new drugs have grown from USD 179 million in 1970s to the present USD 2.6 billion. Therefore, it is not a plain sailing process for many innovative drug investments.

The drug approval reform initiated by China is designed to comprehensively improve the pharmaceutical product quality standard, promote generic drugs to reach standards of original drugs, encourage pharmaceutical enterprises to develop innovative drugs that have not been marketed in China and abroad, and open green channel for innovative drug approval, and China has joined the ICH (International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use), bringing a new wave of drug innovation in China and attracting the capital.

A pharmaceutical researcher at a multinational company said, "There are risks in every step of a new drug from target determination, compound screening, preclinical toxicology study, clinical trial before marketing, to filing of new drug application. There are too few people who can really conduct pharmaceutical innovation in China, and there are problems with the talent teams: founders may have strong abilities, but the subordinate talents fail to keep up, which brings obstacles to pharmaceutical innovation and R&D."

There have been high barriers in the pharmaceutical industry, which are not only capital and time, more importantly, the expertise. In China’s pharmaceutical field, China’s national policies and international environment have opened up a new world for China’s pharmaceutical innovation, however, China’s pharmaceutical innovation is still at the preliminary stage, and new drug R&D has been weak, for which it is not only the policy reason to blame.

CAR-T becomes another hotspot after PD-1. "Two CAR T-cell therapies have so far been approved in the U.S., but few patients have used them. There are about 20 CAR T-cell therapies in development in China. Is this normal? According to the past experience, the global original drug market can accommodate 5 at the most if there are no significant differences among products of the same type. Now the overall investment way is very rough, and practitioners don’t have high levels. The capital is now very enthusiastic, but there are not many investors who really know pharmaceuticals, and many capital companies look for projects from WeChat. So, we can only wait for the sorting-out process," said the above researcher.

However, those characteristics of the industry still cannot stop capital’s enthusiasm. After the competition of the internet group buying websites, market fragmentation by bicycle-sharing companies, the frantic investments in the pharmaceutical plate are entering the "ebb tide" stage. All capital companies do not want to be beaten on the "beach". Then according to Pareto principle, how can capital companies screen out enterprises with only 20% success rate? The specialization and concentration of capital companies are particularly important.

Qiang Jing said to Yicai, "We proactively explore every project and seldom make bandwagon investment. Firstly, there is an investment map for the new 2-3 years inside Apricot Capital. We will select the fields planned to be conducted key layout in the future in advance. Then, centering on the selected fields, we will exchange with the most excellent entrepreneur teams of the fields, communicate with the most excellent scientists of the fields, and even visit relevant famous doctors and back-end market experts. We will ask ourselves after determining the potential targets for investment cooperation what our platform can help them with and whether it can help the invested enterprises to accelerate realization of industrialization and commercialization. Only projects that meet the investment framework of Apricot Capital and Apricot Capital can offer some ‘enablement’ are the ideal investment targets."

Professionals depend on the construction of the industry ecosystem. "Our initial investment logic was to build an ecosystem investment. Pharmaceutical industry involves a complex process, and the entire process from early scientific discovery to drug marketing is very long. There is no all-rounder on this chain. The technology and endowment needed for early discovery, drug development, clinical trial, and production and sales are different. We can only hope that everyone can achieve the ultimate on own post, but can't expect to have both professionals and all-rounders. So, we have laid out the ecosystem for pharmaceutical investment, and have enterprises mutually collaborate for joint development by conducting investment distribution upstream and downstream," said Liu Wenyi.

Which aspects will emerge with unicorns in the medical field?

Chinese pharmaceutical enterprises have low investment in pharmaceutical R&D and weak consciousness of innovation compared to the world. As disclosed by Yiou Intelligence in the Research Report on China’s Pharmaceutical R&D Innovation in 2018 in combination with China’s relevant policies for encouraging innovative drug R&D, China’s pharmaceutical R&D investment will rapidly grow in the future, and is expected to reach 22.1% compound average growth rate in 2016-2021; the R&D costs of global single patent drugs will continue to rise, and the average time for the launch of new drugs will be extended; the average clinical study time of new drugs in China is slightly shorten than that in the U.S., with R&D success rate far higher than that of the Europe and America, mainly influenced by factors like the follow-on innovation of the Chinese pharmaceutical enterprises, political leanings adopted by regulator to support national innovation pharmaceutical enterprises, and small approval pressure and relative fast approval speed from CFDA.

Biotech enterprises have been developing fast as new force of pharmaceutical R&D. The amount of financing and number of IPO of global biotech enterprises have risen clearly since 2013; in 2014, the amount of financing reached the peak of previous years, exceeding USD 6.3 billion, and the number of IPO also was the highest in history, reaching 87.

Which aspects will emerge with unicorns in the medical field of China in the next years? Regarding this, according to Qiang Jing, innovative drugs represent very broad fields, with each field to emerge with one or several unicorns. Whether they can be the real unicorn lies in whether the enterprises have excellent products. The final products decide everything in the innovative pharmaceutical industry.

Seen from the current situation of China, the field that will first emerge with unicorn will be the tumor immunology field, such as BeiGene, Junshi Biosciences, and Innovent Biologics; the second field will be the biosimilar field, such as Henlius and Guangzhou Bio-Thera. When there are technical breakthroughs in a segment, there will be one or a batch of unicorns, according to Qiang Jing.

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