Essex Woodlands Establishes Shanghai Presence

The health care industry long ago became a global game for multinational pharmaceutical and medical product companies. To survive, large device and pharmaceutical companies must penetrate emerging markets – particularly China – and access those growing markets, and venture capital firms with hopes and designs of being a firm of some global heft must follow. Essex Woodlands, the large growth equity and venture capital player, became the latest US-based venture capital firm to officially enter the China market by opening an office in Shanghai. The firm joins the community of Kleiner Perkins Caufield & Byers, Orbimed Advisors, Vivo Ventures, and Warburg Pincus LLC, which have offices in the city.

Essex Woodlands, which is still investing its $900 million fund, has always looked globally for opportunities to invest. In addition to offices in the US, the firm maintains an office in London and has considered investing in India and China, largely eschewing the former in favor of the latter. The firm has made two investments in China – China Cord Blood Corp. and MicroPort Scientific Corp. Both have offered liquidity opportunities for investors. MicroPort went public on the Hong Kong stock exchange in 2010. [See Deal] China Cord went public that same year after being acquired by a public shell company.

The Shanghai office represents Essex Woodlands’ first full press into China. Managing Director Scott Barry, who previously managed the firm’s growth equity investments, will split time between the US and China. He’ll be aided in China by new hire Managing Director David Yang, who spent the past five years in China working on behalf of Warburg Pincus. Barry says the office will be an extension of the Essex Woodlands overall strategy.

The pair will pursue investments in biopharmaceuticals and medical devices, which will likely account for most of the investing. Essex Woodlands will also pursue service-based companies, an increasingly popular investment theme as China wrestles with lowering the costs of delivering health care.”There’s a lot of effort and investment by the government to try to change some of the regulatory policies to really open up some of the sectors for foreign investment,” Barry says. Hospitals represent a potential opportunity as do companies providing ancillary services like dialysis centers.

Essex Woodlands’ geographic focus will be simple yet sizable – China. It won’t invest outside of the country. “We’ll be looking at Chinese companies focused on the China market itself,” Barry says. The firm will pursue revenue-generating companies with high growth potential.

China largely is flush with capital for new ventures, but US-based venture capitalists are touting their expertise within the health care industry as a selling point for China-based companies looking for insights as well as dollars. Barry says, “Health care is becoming a very popular sector for investing, but there are very few dedicated health care funds, and even within the bigger, broader funds, there are very few that have dedicated teams or teams with the expertise that we bring.” Essex Woodlands would draw on its network of companies, co-investors, executives, and others to aid any potential investment in China. “Entrepreneurs who want to grow and build their company are looking for partners who can really help them do that,” he says.

Essex Woodlands also could supply products. Venture firms like Vivo Ventures and Domain Associates have found China-based companies eager to license products from the United States. In 2010, Domain and Orbimed co-led a 2010 investment in Eddingpharm International Holdings Ltd., based in Hong Kong. [See Deal] (Sequoia Capital China Growth Fund also participated.) Domain General Partner Brian Halak says Eddingpharm manages a pharmaceutical sales force selling into China and other countries and is looking to the US to provide approved products to sell. Vivo Ventures, meanwhile, is building an entire fund strategy around connecting US portfolio companies that have drugs and devices to sell with China-based companies that can sell them in China. (See (Also see "Vivo Ventures’ Time Arrives As All Eyes Look To China" - In Vivo, 19 Dec, 2012.).) Yang concurs, “Five or seven years ago some of the more successful companies in China were focused on generic products, just offering the very basic care. Now, more and more entrepreneurs and companies in China want to be able to access better technologies and better products.”

Barry also describes a scenario where Essex Woodlands licenses a technology or approach and uses it to start a new company in China, led by a local management team. “We think that’s a significant opportunity here for us,” Barry says. “And we think within our own portfolio there may be opportunities to explore that.” Barry concedes experienced managers in China are in short supply, but that is where Essex Woodlands’ expertise is important.

The move into China comes with risks. While the Chinese government is intent upon broadening health care coverage it’s wary about approving innovative drugs and devices that might carry a significant price tag. This might limit the upside for US-based companies, but China’s 1.3 billion people should still provide some opportunity. Finally, Essex Woodlands will continue to press for complete financial transparency from potential portfolio companies. “When we make an investment and partner with the entrepreneur and the local company, it’s because they’re looking to either ultimately sell or do a public listing, and in order for either of those to happen they will need to be fully compliant,” Barry says.