Over the past two decades, the development of government investment funds in China has increasingly shaped the landscape of private equity and venture capitalSince the establishment of the “Zhongguancun Venture Capital Guiding Fund” in January 2002, these funds have played a vital role in driving investment and innovation across various sectorsAccording to data from Helande Consulting, it is projected that government funding will maintain its dominance in the private equity space in 2024, with total contributions expected to reach approximately 547.8 billion yuan, accounting for 47% of total investments.

Within the biopharmaceutical industry, which is currently under the influence of what many are referring to as a “capital winter,” statistics from the Qingke Research Center indicate a notable decline in activityIn the first half of 2024, the biotechnology and healthcare sectors reported 579 investment cases, with total funding amounting to 31.493 billion yuan—representing declines of 37.4% and 47.9% on a year-over-year basis

However, the involvement of state-owned enterprises (SOEs) has become a critical driver for growth in this sector, especially amidst these challenges.

Despite the influx of government capital, there are voices of dissent within the industry concerned about potential inefficienciesThe proliferation of government-established funds aimed at supporting the biopharmaceutical industry raises questions about resource allocation and the risk of crowding out private investmentCritics ponder whether SOE intervention might disrupt the natural market selection processes that lead to innovation and project maturationFurthermore, there are ongoing debates regarding whether the existing operational mechanisms of state capital align with the unique characteristics and needs of the biopharmaceutical sector.

Liu Hong, deputy general manager of Shengli Investment, provided insights into the current landscape, noting that while the financing environment has not been favorable in recent years, government contributions—through both parent and subsidiary funds—are robust

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However, these funds require time to translate into tangible outcomes in the biopharmaceutical sector, given the long developmental cycles associated with drugs and medical technologies.

In talking about strategic allocations, Tong Yanhui, executive director of the Shanghai Guochuang Life Health Collaborative Innovation Center, emphasized the importance of targeting key strategic areas and addressing weaknesses where the market fails to perform effectivelyFor biopharmaceuticals, this means government investment will increasingly focus on cutting-edge technology development, innovations in drug formulation, and the production of high-end medical devices, as well as niche areas such as rare disease medications where market forces are weakest.

According to Tong, the government investment funds are expected to continue supporting various sectors, including innovational drug development, high-end medical equipment manufacturing, synthetic biology, contract research organizations (CROs), life science services, and international collaborations

He noted that strategic mergers and acquisitions play a significant role in optimizing and upgrading the biopharmaceutical industry’s value chain.

Observations from recent years show that SOE involvement in China’s biopharmaceutical industry has deepenedAn incomplete count from the Artery Orange database found that in 2023, there were 388 instances of direct investments in the healthcare sector by state capital, effectively doubling from 2022. By the end of March 2024, direct investments from state capital comprised 31% of all financing cases in the healthcare sphere.

Liu summarized the characteristics of state investments in the biopharmaceutical space into four main trendsFirstly, there is a clear regional focus, with first-tier cities harnessing their financial strength and long-term strategic planning to make significant strides in the biopharmaceutical sector

Areas such as Beijing’s Yizhuang and Shanghai’s Zhangjiang stand out as hotspots, while provinces with industrial clusters are also pushing for growth—like Jiangsu’s Taizhou, which has become a hub for vaccine production, and Hunan’s Changsha, which is attracting medical device companies due to streamlined regulatory processes.

Secondly, the range of investment directions is broadening, as funding is no longer solely concentrated on innovative drugsThe emergence of biomanufacturing and an expanding CRO network is creating new growth avenues, enabling numerous innovative teams to flourish and enhancing China’s pharmaceutical supply chain capabilities—further indicating a rebound in market activity that could benefit innovative drug enterprises.

Thirdly, the convergence of emerging technologies with biopharmaceuticals is arising as a new trend, particularly the integration of artificial intelligence in areas such as target selection and molecular design

While these technologies are still being validated, early applications suggest significant advantages, potentially drawing increased financial resources into these innovative endeavors.

Fourthly, traditional Chinese medicine, previously contentious, has emerged as a state capital investment focus, largely attributed to the demographic shifts towards an aging population yielding a vast market for such practicesAdditionally, the viability of converting traditional medicine into stable consumer products aligns well with the characteristics of state investment.

As governments pay closer attention to this vital industry, the formation of state capital funds tailored to the biopharmaceutical sector is surgingOnly in March 2024, Su Chuang Investment Group led the creation of a “Su Chuang Biotherapy and Health Fund” with an overall scale of 5 billion yuan; Xiamen Industrial Investment Co., classified as the municipal investment platform, was unveiled with registered capital of 20 billion yuan; and Beijing’s Pharmaceutical Health Industry Investment Fund formally signed a deal with a total scale also set to reach 20 billion yuan.

However, there remain concerns within the industry

With only about 40 globally mature biopharmaceutical clusters identified, the establishment of over 40 cities in China labeling this sector as a strategic emerging industry raises the risk of inefficient duplication of effortsMarket experts openly ask if excessive state capital involvement might interfere with natural selection mechanisms crucial for market health.

Liu believes that while China's biopharmaceutical sector lags internationally, its significance cannot be overstated; it delves into critical areas such as genomics and brain-computer interfaces, both of which hold tremendous implications for national securityHe contends that SOE backing is essential for long-term sector development, albeit with potential short-term inefficiencies that should not detract from the overall strategic goals of upgrading the biopharmaceutical industry.

An analysis of past industrial shifts in China reveals that macroeconomic fluctuations often correlate with concentrated local government investments, mirroring scenarios seen in the 1990s in the home appliance sector

Currently, the robust support for the biopharmaceutical sector remains consistent with China’s commitment to bolstering economic growth and innovation.

In tackling the issue of overcrowding in popular industry tracks, Tong proposed optimizing functions of investment funds and enhancing collaboration between national and local initiativesThis approach could guard against uniformity and spur tailored investments that leverage local industry strengths, supporting projects characterized by genuine competitive edges while simultaneously maximizing funding efficacy.

Given the lengthy product development cycle intrinsic to the biopharmaceutical realm—often requiring upwards of ten years and substantial investment—Liu argues for structuring funds to match this protracted timelineIn July 2024, three leading industrial funds in Shanghai with a biopharmaceutical mother fund of 21.501 billion yuan, established a fund duration of 15 years, putting that principle into practice.

Capital that adopts a patient approach can empower biopharmaceutical entities with consistent monetary support, allowing them to concentrate on long-term technical advancements, thus improving the success rates of innovative research and efficient deployment of results

Tong highlighted that recent policy directions advocate for a sensible determination of government fund lifespans, emphasizing their role as long-term and patient capital, which helps smooth cycles of investment.

Additionally, the high risk associated with biopharmaceutical development often leads fund managers to exercise caution, fearing repercussions that stifle potential support for promising projectsA longstanding call for a more established error tolerance mechanism made its way into recent regulatory advisoriesBy promoting an environment favoring long-term evaluations and comprehensive assessments, this mechanism could bolster fund managers' willingness to actively pursue biopharmaceutical innovations.

Furthermore, both Liu and Tong reiterated the necessity of implementing supportive systems for the error tolerance mechanism, ensuring balance between encouraging innovation and safeguarding state assets from mismanagement

As China forges ahead, with the development of these supportive frameworks, the landscape for state capital and guiding funds will likely unveil tremendous potential for leapfrogging innovation within the domestic economy.

Ultimately, the rise of Corporate Venture Capital (CVC) among domestic pharmaceutical firms reflects an evolving trendAs companies increasingly reap the benefits of integrating CVC strategies to enhance both regional development and technological innovation, instances of collaborative investments continue to emerge in response to high-value opportunities across the biopharmaceutical spectrum.

For example, in January 2024, the establishment of a General Technology Health Industry Equity Fund was announced, focusing on high-growth private companies within the healthcare sphereIn March, Fosun Pharma declared a collaborative investment plan to form a biopharmaceutical fund in Shenzhen, aiming to raise 5 billion yuan alongside other partners.

In July of the same year, Baiyang Pharmaceutical Group entered into a strategic cooperation with several entities including Suzhou Innovative Investment Group, laying the groundwork for an industrial fund dedicated to the life sciences and health sector

Another noteworthy development was Yunnan Baiyao reaching an agreement for a 5-billion-yuan joint investment to establish an innovation fund targeting traditional Chinese medicine.

Tong views the combination of state capital with CVC investments landscapes as an unfolding opportunityUnlike traditional venture capital measures that primarily seek financial returns, CVC engagements tend to align investments closely with overarching corporate strategies—allowing for a diversified approach to growth through nurturing ventures that solidify positions within the sector.

Pharmaceutical companies entering the CVC sphere leverage their experience to deepen knowledge in industry trends, ensuring a well-rounded understanding that shapes effective investment decisions post-acquisitionEnhanced collaborations that facilitate talent development, foster operational efficiencies, and streamline regulatory navigation are essential in the context of biopharmaceutical evolutions.

However, Tong cautioned that the legitimacy of these ventures remains paramount, particularly for listed companies and private equity firms, both of which must adhere to stringent regulations