Vivo Capital, fresh off raising $750 million for its eight fund, has effectively straddled the Pacific, investing in life sciences in US and China. Managing Partner Chen Yu, MD, shares Vivo’s story and explains how US Medtech start-ups stand to benefit from China’s soaring health care sector.
Tom Salemi: Hi, welcome back to the Medtech Talk Podcast. My name is Tom Salemi and I’m your host. We’re one month away from the Medtech Investing Conference that will take place on May 6 on Minneapolis. Please go to medtechconference.com for information about registration and to review our agenda. On that agenda you’ll see the details of our investor panel, and you’ll notice that it’s heavy on international investors this year. That’s because we’re seeing an increase of investors from outside the US looking for medtech deals inside the US. So we’ll discuss that at the panel. Dennis Wahr, our co-chair will moderate that, and no doubt he’ll do a great job. Today we’re going to touch upon that subject, but with an entity that’s not on our panel, but that’s because they’ve been busy. Vivo Capital just closed on its eighth fund, and it raised $750 million. Vivo is an interesting group in that it started off as a US-based investor, investing dollars from Chinese investors. That was 20 years ago. Today, Vivo has built a real balanced approach to investing, both in US and China’s healthcare market. And they’re doing so in a way that encourages cooperation between medtech companies here and the healthcare market in China. And conversely, they’re starting to find Chinese investors who are looking for deals, opportunities to invest in US medtech companies. So Vivo brings a great point of view to this issue or this opportunity of international investors investing in the US. We hope you enjoy this conversation.
TS: Chen, welcome to the Podcast.
Chen Yu: Thank you for having me, Tom.
TS: Great. We’ve been talking for several years now, and I’ve always enjoyed our conversations, and Vivo always seems to find something interesting to write about or do something interesting to write about. And your latest news, of course, is the raising of your eighth fund, $750 million gives you 1.7 billion under management. So it’s hard to contemplate that someone might not know who Vivo Capital is, but for the sake of our listeners, let’s give a little background. I suspect people might think that Vivo came on the scene just a few years ago when things really started to heat up in China and China’s healthcare economy and a lot of interest in the US medtech going that direction. But Vivo actually has a longer history than that. It’s been going on for close to 20 years.
CY: Yeah, that’s right. So the irony is our history has been a bit of a full circle. So we started in 1997 as you pointed out. And the original name of our find was called BioAsia. And the reason for that was, ironically, we had an initial LP base primarily from Southeast Asia because these institutions wanted to get a view onto US healthcare. And at the time, we thought there might be some if you want to call bridging opportunities between US and Asia based companies. But we were, frankly, just a little bit of our time. And so those first funds were essentially invested entirely in North America. So with that, we changed our name in 2005 in our fifth fund to Vivo, which how most folks know us today. And it was actually, ironically enough, at that time that we began to recognize that the China opportunities were actually maturing and becoming interesting. So when we changed our name from BioAsia to Vivo, it was actually the same time we began our direct investment experience in China. And so we opened up an office in Shanghai, in Beijing ultimately, about a year or two ago, as well as an office in Chengdu. So we have a full investment staff now in China. So if you fast forward from 2005 till, as you point out, today, with our most recent close of fund eight, now our fund is about 50-50 deployed between the US and China. So we really have kind of come full circle from our original roots.
TS: What dictates where the capital goes? If you’re spanning the Pacific, you’re investing on two continents, you’ve got a lot of money to invest, I suspect that you’re seeing every opportunity that’s worth to see. How do you make a decision as to where the capital will go on either continent? Do you look at macroeconomic issues and invest based on that? Is there still, even at this global scale, still a company to company measure?
CY: You know, to be honest, I think it’s still the latter. That is we’re opportunistic, and if we see an interesting opportunity in either region we’d like to do it. For us, the 50-50 is really more of a guidepost. It’s not a line in the sand. And I think to the extent that we see greater opportunities in one region or the other, we’ll take it. I would say if you look at the markets broadly, the US market is actually pretty attractive. You’ve got valuations which I think are still fairly reasonable, but the exits/liquidity environment has improved dramatically. And I think if you look at the Chinese market as a contrast, there the market’s actually a little bit tougher in the sense that you’ve got a ton of equity capital that’s moved in, so the competition for deals is intense, and so valuations have frankly increased dramatically. And at the same time, on the exit/liquidity front, you have a little bit more of a challenge. You know, the IPO market in China was effectively frozen for about 3 years, and I think M&A is just a little bit of a higher bar there because multinationals have a couple extra checkboxes that they have to check off before they can do a deal. So interestingly enough, I would say right now the US market is, of all markets, I think for us at least, looking like the most attractive.
TS: Well, that creates then an interesting opportunity for medtech companies, I would think, if there’s capital over there that’s operating in a market where there’s high valuations, and this is a more attractive investment opportunity for you, is it also a more attractive investment opportunity for other firms with China ties?
CY: Yeah, absolutely. And I think you and I have talked about this over the last year or so. And this is an emerging trend that frankly has been a bit of a surprise to us, which is, just as you said, given the highly competitive environment in China, these funds look at US companies and say, Gosh, these are cheap relative to what we see in China. And so we have begun to see a lot of Chinese based firms doing direct investments in the US. So there are many companies: MitraLine, SentreHEART, ZipLine, there’s a long list actually of companies that I’ve seen in the last 6 months that have raised money from Chinese institutions. And I think as we look at the US funding environment, we know that it’s obviously challenging here, particularly in medtech, and I have encouraged really all of our companies now to begin thinking that if they’re going to go out and do a financing, they should seriously think about how to position themselves for a fundraise in China.
TS: Well, how does one do that? Is it a matter of just booking some plane tickets and getting out there? Or does your company have to have some qualities that will be interesting to Chinese investors?
CY: So I think it’s definitely the latter. I think you have to do some positioning of your company. So for example, if you’re a pure US play and you have no interest in even exploring the Chinese market, those are not going to be companies that are going to have a hook, so to speak, to get into the door. But I think if you have a thought of what is going to be our long term kind of strategy: does it mean we want to go out there to get our device approved in that market, do we want to partner with a distribution partner; I think if you can articulate a credible story for how you’d eventually get into the Chinese market, even if it’s frankly far in the distant future, I think that’s enough to make it interesting. You know, the Chinese firms are looking for some China angle, and a rationale to look. But I think in the end they’re actually quite flexible. What I’ve seen is that they’re willing to invest in a pure US story so long as there’s at least some kind of hope that they can kind of justify an evaluation of the company.
TS: And how difficult is it to develop that hook? You mentioned you could have a long term plan. Can it be just a plan written on a piece of paper? Or does it require some more infrastructure and something practical that investors can see and measure that will eventually help a company get into the China market?
CY: So just to give you maybe a tangible example, SentreHEART is a company in our own portfolio which is in the left atrial appendage closure space. And when we did our last round, we basically attracted 2 Asia-based investors called Pavilion and Decheng Capital. And these folks basically as part of their investment in the company requested that the company would at least begin the registration process for our product in China. Now in this particular case, both ourselves and the new investors had a lot of experience there, and so we’ve been able to effectively use folks that we know essentially as regulatory agents to help us get the product registered. But ultimately when we want to commercialize, we’ll decide on whether we want to do it ourselves or work with another partner. So in that case there’s a tangible link to the financing, to a commitment by the company to get their product registered in China. But you’ll see other examples where instead of a requirement for registration, it could actually just be, for example, an investment in return for distribution rights in China.
TS: Entering the China market has been on the minds of medtech CEOs and it has a lot of appeal in just saying it. But do you need to have a Vivo Ventures or a contact over there to really make it work? How challenging of a market is entering China to a company that may just be 20 people in Minneapolis, or 50 people in Boston.
CY: Sure so yeah, this is probably a little bit self-serving. Obviously I think part of our pitch and value-add to US companies is to help them navigate what you point is frankly a pretty complicated market. There are definitely ways to make the wrong step in China, and I think the stakes are increasingly higher when you make those mistakes. So I think going with someone who has experience in China is clearly a positive. That being said, I don’t think it’s necessarily the only path. There are now I’d say a few folks who are, I’d say, Western-based consultants who have set up shop in China, and I think are really able to provide at least some services in terms of helping companies get registered there. I would still say that if you’re looking for a distribution partner and kind of framing out a commercial strategy, having someone like us or other well-known kind of international funds I think is an important piece of doing that right. But I think for the first couple steps of getting your product approved, I think today there are more options than there were just a couple years ago.
TS: That’s great advice. We’ll be right back after this message.
TS: And we’re back. Let’s talk a bit about the fund. It’s obviously a very healthy size fund, $750 million. How much did you initially set out to raise?
CY: So our initial target was 600 million. But we did set a hard cap at 750 and I think we’re fortunate enough that we had a good enough, I think, insider support from our existing LPs as well as new folks to come and to kind of get to our hard cap and beyond. I think obviously for us the biggest challenge was helping folks get comfortable with the fund size jump. So our last fund, which was fund seven was for 375 million, so this is essentially a bubbling of our asset base. And I know that, as many folks in our industry know, that that’s been a leap in fund size that has been problematic for some, and I think for us our view is that given that fact that we are operating effectively in two very large markets, the US and China, you can kind of look at us as two $375 million funds. And that’s a very kind of reasonable size fund in each geography that really allows us to do effectively what we’ve been always doing, which is in the US, late stage venture deals, and in China, early stage growth.
TS: And did you – you brought in an interesting limited partner, a strategic investor in this fund, correct?
CY: That’s right. So for the first time we actually brought in J&J as a strategic investor. And I think this was a great validation of our quote-unquote bridge strategy approach, whereby we were really kind of linking the technology and know-how and sector expertise of folks here in the US and in Europe, and connecting it with the market opportunity, manufacturing capability in China. And I think J&J saw our efforts there, and I think we’ve had a good track record in China, and felt like for them to get exposure in that market, they wanted to work with a fund to do that. And I think we were just fortunate enough that they chose us.
TS: You mentioned you’re looking for early stage opportunities in China. Give me a sense of what sort of company you’re looking for. China KangHui was a success for you. It went public in 2010. Medtronic paid 800 million for it. A couple years later, it seemed to be a fully developed company. But was it an early stage company when you started, and are there other companies of that type that you’re seeing that are looking for investment in China?
CY: Yeah. So I should probably define it more precisely in the sense that I think when I talk about early stage growth in China, these are still revenue generating companies. So at least today, we tend not to invest in I’d say pre-commercial companies in China. And the main reason for that is just that again, in that market where you’ve got such incredible valuation pressure, you end up paying fairly high prices for early stage companies. And so for us, the risk-reward profile has just been better in kind of that early stage growth sweet spot. So these are companies that are doing what’s called less than 15 million in revenue, where we believe we can take that company from that level to what’s called 50 million plus. So that’s really has been our sweet spot to date. I would say you’re seeing kind of a constant change in the Chinese market, and I think we are beginning to see earlier stage companies emerge that are actually kind of interesting. So if you look at Shanghai in particular, you’ve got a lot of these great kind of government set up zones for entrepreneurs, so they give land grants, sometimes even financial grants for early stage companies to set up shop. And again, because of the robust funding environment, whereas I think in the US early stage medical device investing is really tough, in China I’d say it’s flourishing. So for that reason, I expect over the next 3 to 5 years to begin to see quote-unquote more innovative, young companies in China.
TS: And what about in other companies in Asia? Are you looking there as well?
CY: You know, we really haven’t. Japan is its own kind of mature market with its own quirks. And I think when you get to the rest of Southeast Asia, while I think there is real opportunity there, when you compare the scale of the opportunity in China, it’s just different. And I think for us we feel like focus on that region kind of has Differential benefit. So I think for now we’ve decided to exclusively focus on China.
TS: And how long do you think it’ll take to put this capital to work? And what surprises do you anticipate coming in this fund? I mean these markets have been developing. Both the US and China we’re seeing some different business models. Do you expect that you’ll be investing in a different kind of company, one or two different kind of companies with this fund?
CY: So great question. I would say I would anticipate that for the majority of our deals, they’ll be very similar in size and scope to our kind of current deals. But I would say that we are likely to do one or two deals that are a little bit different, likely to be larger, kind of bigger plays, higher conviction plays. I think that’s an opportunity that we are certainly seeing as, again, an emerging opportunity. So for example, the privatization of state-owned enterprises. Many of these are the largest kind of crown jewel life science companies in China. And they have been interested and approached us in working with them to spin out some of these companies in combination with some US based assets that we’ve brought over. So again, if you want to call them as a bridge strategy 2.0 for us, it’s something that I think is emerging as a very interesting opportunity for us in this next fund. I think in terms of surprises, I would say, gosh, in our business I feel like there’s always unexpected turns ahead, particularly when you invest in China. But I would say that our expectation is that the Chinese market is going to become increasingly challenging for investors. You’ve got an explosion of equity capital, and that’s always a tougher environment in which to operate. So I think we are going to have to be very nimble to figure out and make sure that we stay ahead of the curve to make sure that we do deals with appropriate discipline so that we can get the right level of investor return. I think the US the question really is going to be are we in a long kind of fundamental shift in terms of risk appetite in medical devices, or is the kind of wave of positive news and uplift that we’ve seen in the drug size of our business, is it going to translate to the medical device side. I think that’s going to be very important because again, as we look at the funding environment in the US, it remains challenging for medical devices. And so I think for us we’re very invested in figuring out how do we make sure that the ecosystem kind of recovers in medical devices.
TS: Fantastic. Well, it’s exciting to see a life sciences fund have great success in fundraising and in exits as well. Appreciate your taking the time today to talk about Vivo’s next fund.
CY: Great. Thank you for having me, Tom. Appreciate it.
TS: Thank you, Chen Yu for joining us today on Medtech Talks. It was a pleasure to speak with you as it always is. Tune in next week. We’ll have another tale from medtech. And of course join us on May 6 in Minneapolis at the Medtech Investing Conference. Go to medtechconference.com for more information and to register. And then we’ll see you in Minneapolis.