The excellent series of articles by Clive Cookson in the Financial Times ( June 9-10, 2005 ) draw attention to some of the developments in Asian innovation in life sciences, particularly focusing in terms of China on www.lifesciencepark.com.cn/en and www.capitalbiochip.com/en This refocuses the venture capital community on the chances to commercialize life sciences. These issues will be addressed in a series of case studies being prepared for use. .
The following is a first draft of a case study on playing Chinese herbal medicine and indigenous Chinese science as an investment strategy. It is being developed further for teaching on venture capital strategies:
HD BIOSCIENCES CASE - DRAFT
Decision-maker (XXXX) is a North American venture capitalist trying to figure out:
(a) What the nature of the Chinese herbal medicine market looks like (industry-structure);
(b) The extent to which it can penetrate global markets given regulatory obstacles to penetration of the U.S. and European markets;
(c) Whether investors can access the Chinese market by shrewd strategic investments;
(d) What opportunities exist for commercializing Chinese medical sciences in the existing venture capital community?
(e) What alliances can be struck in the global medical research marketplace?
There were developing a number of programmes at medical schools http://www.osher.hms.harvard.edu/r_general.asp . There was increasing awareness of the scale of the market in China and globally for new "alternative" forms of therapy involving traditional Chinese medicines, but little research had been done until recently in traditional medical research on Chinese remedies. A web-search revealed some work in Europe (http://www.worldscinet.com/ajcm/30/3001/S0192415X0200017X.html ). It also revealed a Taiwan-based cluster of commercial capabilities (e.g. http://www.b2b-herbal-medicine-manufacturer.com/) that were developing a substantial B2B market for the distribution of herbal manufactures products in the Asian market.
XXXX knew that the trend in pharmaceutical research was moving toward plant-based innovation and that nutraceuticals was developing as a major strategic initiative at several of the major global pharmaceutical companies, particularly, the Swiss company Novartis (http://www.venturefund.novartis.com/portfolio/portfolio_cat.htm). The challenge was to find an investment strategy to access real opportunities within the Chinese marketplace.
1. Nature of the Chinese herbal medicine market: A global industry in herbal medicines, and plant-based nutritional supplements has been developing as a serious medical innovation in the past decade. The development of Artemisia annua (sweet wormwood) as a harvestable crop in east Africa is a case study of this trend. Sweet wormwood is used in China as a malaria treatment, and the demand for the product has gone beyond the supply capabilities of arable land. African Artemisia in Tanzania and East African Botanicals (EAB) in Kenya are examples of entrepreneurial companies designed to supply this kind of herbal product for the Chinese market. This has become a major part of the development of a traditional science for the global marketplace, putting not only Chinese but Indian medical science into the global marketplace (http://www.techno-preneur.net/timeis/technology/SciTechJuly03/globalising_ayurveda.html ). The harmonization of acceptable standards of "medical safety" and protecting markets from literally "snake oil salesmen". The clash between the economics of traditional medicines and the regulatory environment within which North American medical practices takes place directly affects the shape of the market.
2. HD Biosciences - an exportable business model? HD biosciences (www.hdbiosciences.com) provides an opportunity to see if there is an viable business model in integrating Chinese science, using North American educated Chinese medical researches and commercializing their capacity to intermediate between the two approaches to medical science. Exporting Chinese herbal medicines (http://www.steaknlobster.com/ZHNjZDBnXzU2ODQ5.aspx ) produces a number of intermediary business models (e.g. www.grandick.com). These, however, were only of interest to XXXX insofar as they demonstrated the nature of the market which right now was operating as a specialized spices business model. The distribution model for Chinese herbal medicines and the distribution model for cinnamon or curry were essentially the same and, as such, unchanged for a couple of centuries. One of the questions that XXXX had to answer to his satisfaction in structuring the deal was whether a company created by venture investing, like HD or in partnership with HD would be able to penetration the much more lucrative health-care market, given the nature of the regulatory process and the extent to which that had historically precluded the introduction of new products.
3. The search for the "new silk" has taken many forms. (See New Silk, J. de Wilde 2004). The asset class of Asian private equity remains of great interest in portfolio management (http://www.crimsonventures.com/pdf/crimson_avcj_nov_2003.pdf and http://www.crimsonventures.com/pdf/corporate_board_member_article.pdf ). XXXX wondered whether creating a single-success company (artemisinin?) was a way to "cultivate a pearl" in the Chinese science base. Or was the correct approach to be a tag-along investor with HD as a brand leader in the Chinese technology commercialization scene?
4. The portfolio of investments is rather limited in the Chinese context. As part of his due diligence on this file, XXXX assessed what the major pharmaceutical companies were doing in China. Novartis is looking at where to locate new research centers with the 2004 debate ( India versus China ) key http://www.thehindubusinessline.com/2004/11/24/stories/2004112403560100.htm .
XXXX assessed the market..
The search for new sources of Chinese innovation which can be commercialized for global market application remains the cornerstone of a "New Silk" strategy for investing in China. Over the next few decade, there will be a number of extremely interesting opportunities that develop from the commercialization of Chinese inventive sources. Business 2.0 (www.business2.com) has a brief article in its June 2005 issue on www.chaliyuan.com/english . Chaliyuan is a company which has commercialized technology for recharging mobile phones. This is the kind of case study of innovation and invention in the Chinese marketplace which focus investor interest in the next generation of wealth-creation in China .