INSIDE CHINA: How new tech transfer models could pave the way for China market access

Screen Shot 2013-10-18 at 11.30.07 AMChinese investors are looking to invest in companies with interesting technologies from abroad that they could bring into China and commercialize.  Michael Alper of NeuvoMedica discusses this emerging trend that could bring large potential upside for both investors, and the foreign companies that they invest in. 

May 2014: Inside China – How new tech transfer models could pave the way for China market access

Recently, there has been a lot of discussion about leveraging technology transfer in the China medical device space as part of an overall investment strategy by private equity and venture capital groups.  The typical idea behind this strategy is that the investor (typically China based) gains multiple potential exit strategies with different time horizons which helps mitigate the overall investment risk.   For the foreign medical device companies that participate in such a deal, the gain can be monetary and/or access to the China market.

Though different models exist, the general concept is that the investor invests in both a foreign company with technology that is commercialized or will be commercialized abroad and a Chinese entity that would commercialize the technology in China.  By doing this, the investor can make a return with the foreign company through a typical exit (ie acquisition or IPO in the foreign financial markets) or through IPO in the Chinese markets.  Since commercial market conditions are different, it is possible that a technology could be successful in one commercial market and not the other.  Likewise, similar companies with similar technologies get different valuations in different financial markets depending on timing of market conditions.  Thus, if market conditions such as after the recent financial crisis lead to poor valuations in the US, investors can choose first to have their China entity list in the China financial markets.  In recent times, China valuations have tended to be higher than their US counterparts in general.  By investing in technology in two very different commercial and financial markets, the investor thus is able to decrease its investment risk.

Many China based or affiliated investment companies are involved or interested in such transactions such as VIVO, Decheng, Oriental Fortune, Legend, SAIF Partners as well as many others.  Of the companies with this strategy, we noticed that there are three types of investors based on their investment philosophy, capabilities and aggressiveness for this type of investment.  The first type, the “Builders”, prefer to take a very aggressive approach to this type of strategy.  They look to find companies abroad that have interesting technologies that they themselves can commercialize in China.  Basically, their preference is to invest in a foreign company in exchange for equity and IP rights for the Chinese market.   They then look to build a Chinese medical device manufacturer based on the technology licensed from the foreign company that they invested in.  The second type, the “Brokers”, prefer to invest in foreign companies and Chinese companies independently and then try to add value on both sides by brokering some sort of technology transfer deal between each side.  The third type, the “Supporters”, prefer to support their Chinese portfolio companies’ technology transfer strategies.  Thus they will not proactively look for technology transfer deals but if a portfolio company is looking to license or acquire a foreign technology, the “Supporters” would be willing to support their portfolio companies through investment in a foreign company.

As the medical device market in China like other places in the world is very specialized by sector, evaluating and commercializing technologies successfully requires specialized sector-specific knowledge, relationships and capabilities.  For instance being able to successfully evaluate and commercialize a certain implantable product for cardiac surgery would require specialized market knowledge as well as manufacturing, regulatory, marketing and sales capability along with the appropriate sales channel and physician relationships.  Thus a manufacturer already in this space seems the best positioned to carry out such a task.   However, most Chinese manufacturers lack the appropriate relationships with foreign manufacturers to carry out such a deal.  Thus the “Brokers” who have relationships abroad or the “Supporters” working with others who have relationships would likely have the highest chance of success.  However, the “Builders” if successful would get the highest returns.

Such investor interest from China is good for small and medium sized foreign medical device companies as it gives them another option to evaluate in their own capital raising and China market entry strategies.  Obviously as part of any deal, medical device companies need to focus on their own interests and negotiate a deal that returns the most value to its own shareholders.  For such deals there are quite a number of models that can be used as a basis for such negotiation.  Outright sale of IP, China specific licensing, royalties, joint-ventures, equity swap, or equity stake in the Chinese entity are all ways to create and protect value for the foreign medical device company.  Obviously, gaining equity in the Chinese entity gives the foreign medical device company large potential upside if the Chinese entity can list in the Chinese financial markets.

Foreign medical device companies should have a clear understanding of their potential investment partners, their potential upside as well as their technology transfer target partners and evaluate all options and choose the strategy that works best for them.

On May 23, 2014, posted in: News by

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