SHANGHAI – In 2013, venture capital (VC) activity in China’s life sciences sector remained strong, dipping only slightly below the year previous. Investor enthusiasm did not diminish even when China barred companies from holding initial public offerings (IPO) here, the exit of choice for VCs.

This was the assessment of Chinabio LLC, a China based consulting firm that tracks deals in China’s life sciences, in its recent report China Investment 2014: Reform and Transformation.

“Depending on how you measure VC or private equity [PE] investment performance, 2013 was a solid year, but did not surprise,” said the report’s authors.

Greg Scott, president of Chinabio, told BioWorld Asia there are still a few eye openers lurking behind the numbers.

The number of VC life sciences deals increased from 33 in 2012 to 42 in 2013 even though the total deal value went down 10 percent, from $986 billion to $901 billion.

But Scott cautioned that those numbers only reveal the publicly available VC investments, and in China he estimates a fraction are announced, with or without deal terms. By his estimate, there are some 150-200 VC/PE deals a year in total.

Scott said this situation is the inverse of the U.S. where more information is made publicly available on VC deals.

“To some extent in the U.S., everyone is used to doing press releases,” he explains. “There are unannounced deals but percentage wise it is a much smaller number. It is probably reversed. Here [in China] we are saying only about 25 percent of the deals are announced, where in the U.S. it is probably 60 percent to 70 percent, but not always with the amount.”

Deals terms that are made public tend to be by the newer VCs or younger companies looking to gain a reputation. “Some people release them because they want to make some noise for the companies or maybe it comes from the funds’ perspective funds are always raising new funds.”

The more established funds, with the greatest pools of capital to invest, are not surprisingly the most active ones. These companies tend to be much more hush-hush about their deals. He said it is not unheard for major funds to take the approach of only announcing a deal after they have had a major liquidity event and achieve success.

Some of the top-tier firms active in China include Orbimed, Lilly Asia Ventures, Sequoia and Warburg Pincus.

So what sector is the biggest recipient of VC funding? Again, it is an inverse situation to the U.S. – pharma companies received the lion’s share (and pharma companies located in the Shanghai-Jiangsu province region claim 30 percent of the overall total).

DRUGMAKERS TOOK 59% OF VC IN HEALTH CARE

Drug companies nabbed 55 percent of the deals and 59 percent of the overall dollar amount, according to Chinabio.

However, the biggest deal last year by dollar amount was for devices: the $100 million investment in iKang Guobin Healthcare, which is expected to announce an IPO in New York soon.

Scott called last year’s biggest VC deal in the devices sector an outlier. Even though VC for medical devices is gaining it’s still not close to the investment made in pharma.

“The general trend has been up and drugs are a large portion. This is so foreign to those used to investing in the U.S. because drugs are the highest risk. At best you have a one in 250 chance, so those are not very good odds. It goes back to the stage of investment [we see in China] – this is not the preclinical lab rat investment, this is already in human and might have a drug already on the market type investment in drugs.”

He said, “commercialization is the opportunity to exit” whether the Chinese companies go to markets in Hong Kong, Taiwan or the U.S. or stay on the Mainland now that IPOs are back on track.

So how much VC money is available for life science companies?

“We work fairly close with 25 to 30 VCs in the life science space. There are always news ones cropping up, but if we take just those – the smallest tend to run at $50 million, the largest around $500 million. To be conservative if we average them at $100 million – we are looking at a lot of money (at least $2.5 billion to $3 billion).”

Last year China had a major stoppage in its capital markets for all companies but this was no more than a small blip in VC’s plans.

“The stop in IPOs was largely seen as temporary so we didn’t hear that affected VCs or other plans that much,” Scott said.

In fact the average deal size of VC investments in China is substantially greater than the average in the U.S. The average VC/PE deal size was $27 million in 2013. While the highest average deal size in the past seven years was in 2012, when it reached $41 million.

These high averages, Scott said, have much to do with the timing of the deals coming at a less-riskier point in the companies’ life cycle.

“The VC deal size is quite a bit larger than the U.S. It is an interesting anomaly; VC in China often invested at a later stage. The tendency is for companies to receive non-diluted funding for many years. When the VCs come in, the companies are reasonably close to commercialization, so the valuations are higher. It first surprised me when we noticed that trend three or four years ago, when it was running roughly the same as the U.S.: $8 million to 10 million per deal.”

That may not be the intention of VC investors who are known to say they are looking for early stage opportunities. Yet if asked to name some of their early stage deals, which happens from time to time on the conference circuit here, they often have a hard time naming any.

One source of non-diluted funding is the Chinese government. This can come in the form of cash or the many ways the Chinese government offers support that doesn’t show up in the official numbers – from research grants to offering helpful subsidies like salaries for top researchers and dramatically reduced office rent and taxes at life science parks.

Scott said government funding provided by VC funds is rare, but does exist. Shanghai-based Cenova Ventures is one example where the government is a substantial limited partner.

By his assessment most VC has been on the whole successful in China – but it is still early days. Many companies only started to invest a few years ago with the exit window still a few years into the future.

Editor’s note: Much of the data reported in this article focuses on all of life sciences. Next week, BioWorld Asia drills down to biopharmaceutical VC-specific data.