Nearly two years after moving his venture Insilico Medicine from the US to Hong Kong, Alex Zhavoronkov has grown more convinced of the view that the future of the world’s pharmaceutical industry lies in mainland China – especially with what he has observed in recent months – a trend of “much more aggressive” dealmaking efforts in the region.
Backed by Qiming Venture Partners and ex-Google China head Kai-Fu Lee’s Sinovation Ventures, Insilico was created in 2014 at the Johns Hopkins University in Baltimore, before Zhavoronkov moved the headquarters to Hong Kong in April 2019, relocating closer to the rapidly growing pharma market on the mainland.
His decision of stepping up focus on China came as the country – already the world’s second-biggest pharma market – has been turning up sales increases that continuously surpass those in the US and other developed regions for major drug makers globally.
Driven by favourable government policies, a wealthier middle class, and backflow of talent, pharma spending in China totaled $137 billion in 2018 and is expected to reach $140-170 billion by 2023, according to data provider IQVIA.
With a team of 140 professionals, Insilico is one of the few emerging companies worldwide that employ artificial intelligence (AI) and deep learning, a subset of machine learning that imitates the mechanism of the human brain in processing data, for drug discovery and aging research.
Insilico’s treatment focus area is idiopathic pulmonary fibrosis, a type of lung disease that makes it difficult for the patient to take in a deep breath and can potentially lead to death.
The firm claims to have brought an AI-discovered novel preclinical candidate for IPF treatment to the preclinical candidate selected phase, a stage right before Investigational New Drug (IND)-enabling, within 18 months at a cost of $2.6 million. Under the traditional approach, this could cost at least hundreds of millions of US dollars and approximately 4.5 years, if not longer.
Compared to a few years back when only a handful of investors would be interested in this research-heavy, capital-intensive sector, VC and private equity companies – particularly those located in mainland China – have grown more appetite in AI-enabled drug discovery, said Zhavoronkov, founder and CEO of Insilico, while this technology is still viewed by many in the US as “unproven.”
Soon after the relocation of its headquarters, Insilico secured $37 million in a Series B round led by China’s Qiming Venture Partners. The deal, announced in September 2019, saw the participation of investors including Eight Roads, Lilly Asia Ventures (LAV), Sinovation Ventures, Baidu Ventures, and Singapore’s Pavilion Capital.
Prior to that, the firm had raised $14.5 million in its first funding round.
Power of capital
Insilico, whose strategic investors also include Chinese medical tech platform WuXi AppTec, is not alone in its attempts to ride on China’s surging capital inflows into the AI-enabled drug discovery market.
Between January and mid-October 2020, at least 19 AI-enabled drug discovery companies gathered over $1.4 billion in China – about 30.4% of the total financing of nearly $4.6 billion across 56 such firms globally, according to statistics compiled by Chinese healthcare-focused media outlet VCBeat. The data cover both listed and unlisted companies.
“I’m now more focused on tech. From a funding perspective, I don’t need to fight anymore,” said Zhavoronkov. China has “an abundance of capital” and “more trust in AI” compared to other countries, he said, recalling his experience of seeing AI applications across many other areas in the country, such as AI-based robots for food delivery.
Indeed, Chinese investors’ recognition of AI continues to rise after the success stories of China-based companies like SenseTime, which in just four years, grew from an academic project to the world’s most valuable AI firm at $7 billion. They also witnessed the growth of Ant Group and TikTok-owner ByteDance into two of the world’s highest-valued startups, both of which heavily deploy AI to their offerings.
However, the Chinese market for AI-enabled drug discovery may have just started taking off. Among the country’s privately held fundraisers in 2020, research firm EqualOcean tracked nine AI-enabled drug makers pocketing about $400 million.
Most of these transactions happened at an early stage, i.e., at Series B round or before. The biggest fundraiser XtalPi raked in $318.8 million in a Series C round jointly led by SoftBank Vision Fund 2; PICC Capital; and China’s 5Y Capital, or previously known as Morningside Venture Capital.
But Zhavoronkov indicated that investors could be using the playbook of their more mature portfolios elsewhere to envision the future of these startups in China.
US-based Schrödinger, for example, raised $232 million in an initial public offering (IPO) on Nasdaq in February 2020. The firm, which counts Qiming, Bill Gates, and hedge fund legend David Shaw among investors, saw its stock price almost fivefold from the offering price of $17 and command a market cap of $5.6 billion as of March 19. Its counterparts Relay Therapeutics, Berkeley Lights, and Lantern Pharma, all of which went public last year, are trading above their public offering prices.
“Some investors already cashed out from their investments and made good money. They’re looking to reinvest,” said Zhavoronkov.
He expects investments in AI to grow further as more investors behind pharma firms “unlock value” through IPOs on the “active stock market” in mainland China or the increasingly tech-savvy stock exchange in Hong Kong.
For his own venture, Zhavoronkov said that the firm is not in a rush to sell any drug candidates for profits. Instead, he plans to take drug candidates to at least Phase II human trials before considering the next move. “The beauty of drug discovery is: The longer you hold the asset and the further you take it, the more valuable it becomes.”
Insilico is looking to expand the team in Asia by hiring 20-30 biologists and bioinformaticians with an AI background in 2021. Besides its headquarters at the waterfront Hong Kong Science Park, the firm also operates from regional sites in Shanghai and Taipei.