In the last 3 years there has been a flurry of investment interest by the Chinese into UK biotech. Many such investments fail to materialise due to the underlying complexities of cross-border M&A but there is also the additional issue of the inexperience of Chinese biotech investors to understand the UK market and take the necessary advice when it is offered.

However this is changing as new, highly professional Chinese biotech and pharma investment funds are reaching into the UK to simplify and accelerate the investment process for Chinese investors. We will be addressing some of these issues during our Chinese investment into biotech round-table discussion on 22nd February but we have outlined some of the points below.

RCB – filtering the demand

The biggest challenge for the UK biotech firms and intermediaries is qualifying the flow of Chinese investor interest. As covered in an earlier blog, managing the RCB (Random Chinese Buyer) process is time consuming and inefficient as many potentially valid bids are halted early on due to simple misunderstandings. The first and most common misunderstanding is the target deal size when the Chinese buyer or intermediary states that "money is no object". While the Eur1bn acquisition by Creat of Products Laboratory Holdings was at the top of the range, the rough deal size range in 2016 for Chinese investors to UK biotech was £5-15million. Assessing the actual appetite at the early stage helped the whole process build trust and understanding.

Start-up conundrum – balancing risk with return

Biotech investment is inherently risky and while unicorn-style performance is possible, it is more likely that the research fails and the investment lost. For Chinese investors who have limited access to foreign exchange transfer limits, knowing that their GBP, EUR or USD are safe is of significant importance. As such, pre-revenue biotech firms with large cash-burn rates do not naturally fit with Chinese investor profiles. But as China seeks to develop its domestic biotech capabilities, appetite continues to grow to acquire the latest technology so the Chinese are adapting their investment approach.

Direct vs fund investing

An increasing number of biotech and pharma investment funds are being established in China. Whether the senior sponsor is a wealthy property developer seeking to diversify risk or a State Owned Entity taking a strategic view on behalf of the Chinese Government, these funds are now reaching into the UK biotech space.

The main advantage for working with such funds are:

1. Professional investment team: analysts and investment managers are able to swiftly and accurately assess the investment prospects using a transparent and replicable process. If a deal fails it will not be because of misunderstanding but rather a fundamental risk assessment based on established criteria
2. Available funding: knowing that investment funds will be forthcoming through a KYC-approved vehicle is a real benefit. This is especially the case for the UK intermediaries that source investment opportunities as they only have to address this hurdle once rather than for each potential Chinese investor
3. Diversifying risk: this is most of benefit to the individual Chinese investor in the fund. They do not have to find the target company and then analyse it - rather they can rely on a team of industry experts to do the work for them. In addition, taking a pooled investment approach to biotech significantly reduces the investment risk while increasing the potential for finding an ultra-successful company.
4. Taking advice: individual Chinese investors into the fund are more willing to take advice from the fund manager rather than a UK professional advisor. Similarly, the Chinese fund will be more willing to take advice from the professional community thereby bridging the gap between the end investor and the UK firm