Investments Outbound – Healthcare

Reprint of article published in the Line in the Sand 14th Jun, 2019 Subscribers’ Weekly

Increased scrutiny of tech investment by the US government is heightening geopolitical boundaries and shifting outbound healthcare investment pattern

Key Points ●●The US government’s increased scrutiny of foreign investment in its tech- based companies has drawn a line investors are wary of crossing. But healthcare assets in the US remain a draw to Asian-based investors, even though the transaction volume and largest deal size have dived – ◦◦ 1H 2018: US$3.7 bn, with US$900 m being the largest deal ◦◦ 2H 2018: US$1.3 bn, with US$230 being the largest deal ◦◦ Jan-May 2019: US$657 m, with US$100 m being the largest deal ●●Among the pool of investors from Asia, those from China have been most active. Of the 63 deals, they participated in 31

Declining Outbound Healthcare Contracted Outbound Healthcare Investment (2018 - May 2019) Deal Size (2018 - May 2019)

(US$ bn) (No.) (%) 27 17 14 4 30 100 28 1 4 25 11 3 80 20 20 7 60 5 2 3.7 15 15 5 40 10 5 5 1 4 1.3 5 20 0.7 6 3 2 0 1H 2018 2H 2018 Jan – May 0 0 1H 2018 2H 2018 Jan – May 2019 2019 NB: based on deals with known deal values Amount No. of Deals ≤US$19.9 m US$20 m - US$49.9 m US$50 m - US$99.9 m ≥US$100 m

38 Asia Private Equity Review July 2019 Investments Outbound – Healthcare Investments Outbound – Healthcare

Line in the Sand

●●Transaction volume in the US registers sharp fall, from US$3 bn in 1H 2018 to US$630 m in the first 5 months of 2019 ●●China investors are shying away from assets that could be blocked by CFIUS, in – ◦◦ diagnostic services, which could employ state-of-the-art technology: Chinese investors commit US$1.4 bn worth of deals during 2018, but investment in this sector has been absent since the beginning of 2019 ◦◦ Technology-based healthcare companies: Chinese investors participate only in 2 that represent US$98 m in commitment aggregate. Instead, India-based ChrysCapital clinches the largest deal, the US$142 m in GeBBS Healthcare Solutions ●●Israel is beckoning Asian investors. Since 2H 2018, it clocks 3 deals while Europe records none ●●Healthcare have been able to book positive return results for its investors during the tumultuous months following commencement of the trade war, a factor behind its ability to surpass IT & Telecom. In the 5 months from Jan to May – ◦◦ Healthcare: 15 deals ◦◦ IT &Telecom: 10 deals ●●China’s Decheng Capital, Sequoia Capital China and Singapore’s Temasek Holdings (Pte) Ltd are among the most active investors of healthcare assets outside of Asia

Sharp Dive of Commitments to Outbound Healthcare Assets - Healthcare Assets in US & Europe by Industry & Amount (2018 - May 2019) (2018 - May 2019) (US$ bn) 4 3.7 Hospital & Clinics Others 1.8% 0.5% 0.7 Technology 3 7.3% Pharmaceuticals Medical 43.1% 2 Equipment & Supplies 3 Amount 1.3 0.1 14.6% 1 0.4 Surveyed: 0.7 <0.1 US$5.6 bn 0.8 0.6 0 Diagnostic 1H 2018 2H 2018 Jan – May Services 2019 32.8%

USA Europe & UK Israel

July 2019 Asia Private Equity Review 39 Investments Outbound – Healthcare

ronically, in this era of digital in the semiconductor industry, with state-owned entities, sheds light on economy in which technology national security being the premise the difficulty foreign investors can Ihas erased geographic boundaries behind these aborted deals. Currently face when acquiring information and connects the world, the trade topping Washington’s growing list of technology assets in the US. Since then, dispute between China and the US has technologies, the sharing of which has Ant Financial Services Group, China’s inadvertently balkanised technology. been deemed to be a potential threat to leading online payments operator, It has been nearly a year since the the country’s national security, are fifth was rejected from taking ownership tectonic plate of the world’s geopolitics generation cellular network technology of MoneyGram International Inc, shifted. Trade imbalance is no longer (‘5G’) and facial recognition, both of further widening the chasm between the sole cause of their differences, but which China is competing fiercely with the trade policies of the world’s two also technology. the US for the leading position. largest economies. Ever since US President Donald As far back as September 2017, the Despite an overall fall of outbound Trump took office in 2017, the blocked US$1.3 billion privatisation transaction volume as investors wait Committee on Foreign Investment in of Lattice Semiconductor Corp, a for further clarity on the geopolitical the United States (‘CFIUS’) has blocked programmable chips company, by a tensions between China and the acquisitions of a number of companies private equity fund funded by China’s US, private equity investors from

No. of Outbound Investments in Healthcare and IT & Telecom (2018 - May 2019) (No.) 35

30 Both Healthcare and IT & Telecom assets based 25 outside of Asia, being the 2 most-favoured sectors, record decline in commitments by Asia- 20 based private equity investors following the commencement of the trade war. But the drop 15 28 29 in the number of deals for the first 5 months of 23 the year for the IT & Telecom sector is much 10 20 higher than that for Healthcare, a development 15 that speaks volumes to the Healthcare assets’ 5 10 ability to draw investors’ interest 0 1H 2018 2H 2018 Jan – May 2019

Healthcare IT & Telecom Fig. 20 Source: Asia Private Equity Review

Asia remain staunchly interested in Performance Result of Selected Assets with Divestment Movements – healthcare assets outside of the region. by Industries (Jul 2018 - May 2019) Healthcare shares equal ranking Consumer with IT & Telecom as the most Healthcare IT & Telecom Goods favoured sectors for outbound assets investments since 2018. In fact, by Capital Invested(1) US$6.2 bn US$2.2 bn US$6.4 bn number of deals, healthcare managed to edge out IT & Telecom during the Capital Returned US$11 bn US$2.8 bn US$4.8 bn first five months of the year (Fig. 20). There are also compelling reasons Exit Rounds 93 91 191 for investors to brush aside the regulatory barriers imposed by the Average Holding Period 52 months 41.9 months 56.5 months US government to pursue healthcare assets. According to Asia PE Index, which tracks performance results of Gross MOC-Median 2.2x 2.1x 3.7x funds’ portfolio companies, in the 11 months from July 2018 to May 2019, Gross IRR-Median 27.3% 36.3% 46.1% against the backdrop of a turbulent NB: only assets with 50 and above exit rounds are being surveyed macro-economic environment, exit (1) capital invested that corresponds to rounds of exits, which include – • those that have attained a listed status with zero distribution performances of healthcare assets • those with investment value being written down or written off, and have been steady. It is the only sector • those with distribution records in which all of the divestitures executed recorded positive return results, on a Asia PE Index Fig. 21 Source: realised and unrealised basis (Fig. 21).

40 Asia Private Equity Review July 2019 Investments Outbound – Healthcare Investments Outbound – Healthcare

Declining Buys While there was no official list of the trade war. In the second half of Washington’s decisions not medical technologies that could be 2018, outbound transaction volume to approve the sale of a number barred by CFIUS from leaving US plunged to US$1.3 billion, less than semiconductor assets well before soil, investors have adopted caution one-third of the US$3.7 billion for the the commencement of the trade in deploying capital to healthcare preceding six months. In the first five war nonetheless helped give an assets abroad. months of 2019, the deal sum stood at inkling to Asian investors about Transaction volume for outbound US$657 million and was only around the hurdles they could face in healthcare assets registered sharp 50% of that for the second half of acquiring sensitive technologies. dives since the commencement of 2018 (Fig. 22).

Declining Buys (2018 – May 2019)

(US$ bn) (No.) 4 30 28 25 • With medical technologies possibly on the sensitive 3 list, 2H 2018 registers a sharp fall of capital deployed 20 20 to healthcare assets outside of Asia, suggesting Asian investors swiftly adopted a prudent approach 2 15 15 3.7 when committing to outbound healthcare assets • The US$657 m committed in the first 5 months of 10 the year is less than 20% of the US$3.7 bn for 1H 1 2018, a development that highlights the devastating 1.3 5 magnitude of the trade war in curbing flow of 0.7 capital 0 0 1H 2018 2H 2018 Jan – May 2019

Amount No. of Deals

Fig. 22 Source: Asia Private Equity Review

July 2019 Asia Private Equity Review 41 Investments Outbound – Healthcare

Deal Size Reduced the commencement of the trade war, size exceeded US$150 million. Since In tandem with the fall of the largest outbound healthcare deal the beginning of the year, based on transaction volume is the substantially participated by Asia-based investors the deals completed, it appears that smaller commitment size that investors during the six-month period was US$100 million became investors’ new from Asia were prepared to undertake. the US$230 million committed to psychological ceiling. In the first five In the seventeen months from January Gossamer Bio Inc, in which China’s months of the year, the largest deal 2018 to May 2019 (‘Surveyed Period’), home-grown Hillhouse Capital was consummated by Qiming Venture deal sizes fell precipitously. The five Management Ltd (‘Hillhouse’) joined Partners and CMB International largest deals during the Surveyed Abu Dhabi Investment Authority Capital, the investment arm of the state- Period, ranging from US$250 million to and a pool of US-based investors owned China Merchant Bank, which US$900 million, were all consummated for a stake in the biopharmaceutical teamed up with OrbiMed Advisors during the first six months of 2018. company. Yet this deal was completed LLC and Lilly Asia Ventures. The Tencent Holdings Ltd and Decheng in July and the commitment size would group invested US$100 million in Capital joined other investors from have been agreed during the first half Apollomics Inc, a US-based company the US in pledging US$900 million to of 2018. with a business model similar to the Silicon Valley-based GRAIL Inc, By the last quarter of 2018 when Gossamer Bio. For the remaining 14 which specialises in detecting early- the chill winds of trade war were deals recorded during this five-month stage cancer. blowing hard, it is noteworthy that none period, none exceeded US$66 million In the second half of 2018, at of the deals with known commitment (Fig. 23).

Deal Size Range (2018 – May 2019)

(%) 27 17 14 100 1 • Since commencement of the trade war in 2H 4 2018, Asian investors have been cautious in their 80 11 commitments to healthcare assets outside of the region to prevent deals being blocked by CFIUS – 7 60 5 ◦◦ In 2H 2018, the largest deal, at US$230 m, is even smaller than the 6th largest deal completed during 5 1H. In Q4, the largest deal is US$142 m 40 ◦◦ Jan - May 2019: the US$100 m largest deal is one- 5 5 4 ninth of the largest deal for 1H 2018, with the 20 remaining 14 deals all falling below US$66 m each, 6 a development that highlights the level of caution 3 2 0 adopted by Asian investors for healthcare assets 1H 2018 2H 2018 Jan – May 2019 abroad

≤US$19.9 m US$20 m - US$49.9 m US$50 m - US$99.9 m ≥US$100 m

NB: based on deals with known deal values

Fig. 23 Source: Asia Private Equity Review

42 Asia Private Equity Review July 2019 Investments Outbound – Healthcare Investments Outbound – Healthcare

Discreet Investing assets in the US, at this juncture, are clinical studies, and state-of-the-art While the US has been the principal history. The market that has benefited computer and data science to enhance market for Asian investors seeking from the aversion to investing in the West the scientific understanding of cancer healthcare assets abroad, with the shadow is Israel, which recorded an increase in biology, raised an aggregate US$1.2 of CFIUS looming large, capital deployed number of deals, while Europe, seen as billion. In addition to Tencent, it to this market registered a sharp fall in the a staunch ally of the US, failed to attract also atrracted a long list of Chinese second half of 2018. The US$1.3 billion capital commitment from Asia’s private investors, including Hillhouse, in deal total was only about a third of equity investors since the beginning of Sequoia Capital China (‘Sequoia the US$3.7 billion for the preceding six the year. (Fig. 24). Capital’), 6 Dimensions Capital and months. In the firstfive months of 2019, In the first half of 2018, GRAIL, Wuxi NextCode. the transaction sum further slipped to a diagnostic technology developer in Chinese investors were not shy US$657 million. The days of investors the US that uses the power of high- about displaying their feverish interest committing sizeable sums to medical intensity sequencing, population-scale in diagnostic services providers. In the

Reduced Commitments to Outbound Assets (2018 - May 2019)

By Amount (US$ bn) 4 3.7

0.7 3

2 In this early phase of trade dispute between China and the US, in so far as healthcare assets 3 1.3 0.1 are concerned, Asian investors have become 1 0.4 0.7 more discerning. While US-based healthcare <0.1 assets continue to draw the largest percentage 0.8 0.6 of commitments, the amount deployed has 0 1H 2018 2H 2018 Jan – May 2019 significantly fallen since the commencement of the trade war.

By No. of Deals Israel has emerged as the market that is drawing capital from Asian investors. Since 2H 2018, (No.) 3 deals were completed there, while Europe, 30 28 largely seen as an ally to the US, fails to log one 6 commitment in the first 5 months of 2019. 20 20 1 5 15 2

10 22 14 13

0 1H 2018 2H 2018 Jan – May 2019

USA Europe & UK Israel

Fig. 24 Source: Asia Private Equity Review

July 2019 Asia Private Equity Review 43 Investments Outbound – Healthcare

Surveyed Period, there were nine deals technology as the backbone Capital Group as investors, while the in this segment and names of Chinese infrastructure of their operation. latter raised US$64 m from Trustbridge investors were in six. All six were TytoCare Ltd, which provides quick Partners and other investors from consummated during the 12 months in diagnosis through a patented device various markets. 2018. Since the beginning of 2019, in that is connected to its online platform, Instead, it is India’s ChrysCapital tandem with escalating tension between and PEAR Therapeutics Inc, a digital that deployed the largest sum to a China and US, there was no Asian treatment company, are the only technology healthcare play outside of private equity commitment recorded two that counted Chinese investors Asia. It committed US$142 million to to this segment. as among their shareholders. The GeBBS Healthcare Solutions Inc, an Another pool of healthcare assets former, which raised an aggregate IT solutions company for healthcare that Chinese investors have been less US$34 m in the Surveyed Period, operations. The deal underlines Chinese forthcoming in taking equity positions enlisted Ping An Insurance (Group) investors’ preference to shy away from are those that employ information Company of China and Shenzhen the limelight (Fig. 25).

Segments of Outbound Healthcare Assets (2018 – May 2019)

By Amount By No. of Deals

Contract Hospital & Research Clinics Others Hospital & Organisations 1.8% 0.5% 1.6% Others Clinics 3.2% Technology 1.6% 7.3% Pharmaceuticals Pharmaceuticals 43.1% 49.2% Medical Technology Equipment & 12.7% Supplies 14.6% Diagnostic Amount Surveyed: Services No. of Deals US$5.6 bn 14.3% Surveyed: 63

Medical Diagnostic Equipment & Services Supplies 32.8% 17.5%

Fig. 25 Source: Asia Private Equity Review

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Staunchly Interested in Asia’s largest economy where its Decheng Capital participated in the Yet the magnetic pull of healthcare population is aging rapidly. Of the largest deal sum, which aggregated to assets outside of Asia is powerful, US$5.6 billion-worth via 63 deals being US$1.1 billion, followed by Hillhouse especially to investors from China. In committed by investors from Asia, which committed to US$933 million the Surveyed Period, of the 63 deals, Chinese investors accounted for US$4 worth of deals and Sequoia China to names of Chinese investors were billion, or 71.4%. US$879 million. present in 31. In particular, their names Among the most active investors By number of deals, however, it were conspicuous in the largest deals from China, the principal players are is Sequoia China that leads, logging even since the commencement of the Decheng Capital, which focuses on six, with both Hillhouse and Decheng trade war, suggesting the commanding early stage life science companies, Capital close on its heels, chalking value of healthcare assets to investors Hillhouse and Sequoia China. up five and four, respectively. In other parts of Asia, it is Temasek Holdings (Pte) Ltd that is by far most Five Most Active from Asia in Outbound Healthcare Assets active. The sovereign wealth fund of By Amount Singapore participated in nine deals that represented US$937 million in China Asia ex. China transaction aggregate (Fig. 26). Amount Amount Investor Investor Participated Participated Comments Investors remain staunchly Temasek Holdings (Pte) Decheng Capital 1,062 937 optimistic, believing that medical Ltd technology transfer between the US Hillhouse Capital and China will not be interrupted 933 EDBI Pte Ltd 614 Management by the most explosive disagreement between the two economic juggernauts Sequoia Capital China 879.1 Lilly Asia Ventures 503 in recent history. Vivo Capital, which focuses on healthcare assets in Greater Yunfeng Capital 651.9 Future Fund 286 China and the US, is currently raising 6 Dimensions Capital 610 Horizons Ventures 200.6 its ninth fund, with a target size of around US$1.5 billion. So far, the fund By No. of Deals has received enthusiastic respond and has already secured US$1.3 billion in China Asia ex. China commitments from an international No. of No. of pool of limited partners. Investor Deals Investor Deals For the first time since Asian Participated Participated investors began to pursue assets outside Temasek Holdings (Pte) of the region, assessing whether the Sequoia Capital China 6 9 Ltd acquired assets would be “blacklisted” by the US has become an integral part Hillhouse Capital 5 Horizons Ventures 6 of the due diligence process. Management

Decheng Capital 4 Lilly Asia Ventures 6 Editor’s Note – In this survey of non-Asia based healthcare 6 Dimensions Capital 3 EDBI Pte Ltd 3 assets invested by investors from the region – Korea Investment • Investors from Asia include those – Ping An Ventures 3 3 Partners ◦◦ Limited partners from Asia ◦◦ General partners managing Asia-focused Yunfeng Capital 3 funds All amounts in US$ m ◦◦ Asia-focused healthcare funds such NB: • Investors from China include those – as OrbidMed Asia and Lilly Asia ◦◦China-based investors, corporate, general/limited partners Ventures ◦◦China-focused funds that are managed by general partner firms that do not reside in China • Asia Investors include those – • Investors from China include those – ◦◦Limited partners from Asia ◦◦ China-based investors, corporate, general/ ◦◦General partners managing Asia-focused funds ◦◦Asia-focused healthcare funds such as OrbidMed Asia and Lilly Asia Ventures limited partners • no. of deals and amounts may have been double-counted in deals participated by multiple investors ◦◦ China-focused funds that are managed by general partner firms that do not reside in Fig. 26 Source: Asia Private Equity Review China n

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