Upgrading Industries at the Right Time: Sustained Innovation Drives Opportunities for Emerging Enterprises

“This marks the first time in recent years that various stakeholders in the broader health ecosystem have felt a relatively prolonged capital shortage and a downturn in investment.” Such was the assessment offered by Wang Junfeng, Co-Chief Investment Officer of Legend Capital, regarding healthcare investments in 2023.

Over the past year, China’s broader health industry has faced another round of significant shocks. In terms of liquidity, the prolonged U.S. interest rate hiking cycle has led overseas capital to temporarily bypass the technology sector, resulting in cautious investment behavior in the primary market. At the capital market level, the periodic suspension of global IPOs and sluggish stock prices in the secondary market have further exacerbated the difficulties for innovative enterprises in securing external funding. Some biotech companies facing financing obstacles have even been pushed to the brink of survival.

Throughout this process, the continuous shifts in the macroeconomic environment have further heightened uncertainty within the industry. With the U.S. declaring direct competition with China in fields such as gene technology and synthetic biology through the “Endless Frontier Act,” and subsequently restricting the U.S. operations of relevant Chinese health companies via the “BIOSECURE Act,” a number of Chinese upstream service and equipment manufacturers expanding into global markets have frequently encountered obstacles.

On the other side of the coin, since 2023, a large number of multinational pharmaceutical companies have come to China to “snap up” assets, with frequent high-value asset transactions. For the first time in history, a multinational pharmaceutical company has fully acquired a Chinese startup. Even in the midst of a winter chill, companies that possess superior technology and assets, have the ability to secure continuous financing, and boast highly resilient teams will weather the cycle and emerge victorious in the end.

As a professional force in China’s medical innovation, how will investment firms seize new opportunities in the new cycle? At the beginning of the year, VCBeat conducted an exclusive interview with Wang Junfeng, who shared Legend Capital’s observations and reflections on new investment opportunities in China’s medical innovation sector, as well as the professional competencies that investment firms need to strengthen to capitalize on these opportunities.

VCBeat:According to data from VCBeat, Legend Capital led its peers in the number of healthcare investments made in 2023. In your view, what was the most significant change in Legend Capital’s healthcare investment strategy compared to 2022? What factors triggered these changes?

Wang Junfeng:Over the years, we have maintained a steady investment pace, deploying capital in approximately 10 projects annually. We have neither become overly exuberant during market overheating nor adopted a passive, non-investment stance when the market cooled down.

In this process, we have indeed perceived changes in the external environment. Consequently, we have raised our standards for project fundamentals and become more sensitive to valuations when making investment decisions. Meanwhile, we are adopting a more cautious approach toward assessing a project’s commercialization potential. Key considerations include: How far is the project from commercialization? Can it rapidly achieve self-sustaining cash flow? These reflect some shifts in Legend Capital’s current investment style. However, our core principles—investing in early-stage ventures, backing innovation, and maintaining a long-term perspective—remain unchanged.

Furthermore, during our investment activities in 2023, we placed greater emphasis on asset differentiation and scarcity. We observed that projects in the market generally exhibited two key characteristics: first, significant homogenization, making it difficult for offerings to achieve strong distinctiveness; second, persistent valuation bubbles. Although market valuations corrected somewhat in the second half of 2023, squeezing out some of the bubble, excessive valuations remained pronounced for certain projects. In this context, we more actively pursued early-stage opportunities in 2023, prioritizing seed-round investments to become the earliest investors. This approach enabled better valuation management and helped avoid compounding existing bubbles with further overvaluation.

VCBeat:We have observed that in 2023, Legend Capital strengthened its interactions and collaborations with local state-owned assets, particularly intensifying its venture capital partnerships in certain inland cities. What factors drove this shift? After expanding into inland regions, has Legend Capital identified any standout projects or investment opportunities that were previously overlooked?

Wang Junfeng:Legend Capital’s new fund is based in Chengdu, marking a significant milestone for us in 2023. Seizing this opportunity, we are actively expanding our presence in Chengdu’s healthcare industry ecosystem. We have observed that, after years of steady accumulation and breakthroughs, regional hub cities like Chengdu are seeing their industrial chains become increasingly robust, early-stage incubated projects begin to yield tangible results, and the commercialization of scientific research achievements gain strong momentum.

In fact, from the perspective of investors, many inland cities, including Chengdu, have seen a significant improvement in asset quality and density in recent years. Meanwhile, with relatively low talent mobility and reasonable valuations, these cities have entered an opportune window for strategic investment.

VCBeat:At present, medical innovation enterprises, especially Biotech companies, are facing phased difficulties in IPO exits. How do you view this situation?

Wang Junfeng:Difficulties in investment exit stem partly from macroeconomic factors, but more importantly, the primary and secondary markets previously held overly optimistic estimates of the intrinsic value of assets, creating a certain degree of bubble. We should recognize that now is the time to bridge the gap between price and value, and also an opportunity for external pressures to drive improvements in asset quality and industrial upgrading. We also believe that as long as Chinese innovative enterprises continue to enhance the quality and efficiency of their R&D assets, becoming more competitive and capable of going global, recognition from capital markets and global buyers is only a matter of time. As the saying goes, “No construction without destruction; no survival without risk.”

Regarding exit pathways, significant uncertainty remains. The five listing standards of the STAR Market in China’s A-shares have been tightened on a provisional basis, with market participants awaiting further regulatory guidance. Meanwhile, it remains to be seen whether the issuance and liquidity challenges faced by companies listed under Chapter 18A of the Hong Kong Stock Exchange will improve alongside the anticipated interest rate cuts by the U.S. Federal Reserve in the second half of 2024. At present, many biotech companies are considering listing in the U.S., particularly those with internationally competitive assets and significant overseas licensing deals. In our view, these companies should more actively consider listing on the Nasdaq.

VCBeat:In 2023, global expansion became one of the hottest topics in the healthcare venture capital and investment sector. Whether targeting Europe and the United States or Southeast Asia, companies across various industries are striving to enter international markets in their own ways. What is your perspective on this trend? In your view, has the surge in overseas expansion influenced the logic and decision-making processes within healthcare venture capital and investment?

Wang Junfeng:The current surge in business development (BD) deals has indeed provided crucial lifelines for biotech companies struggling through the capital winter. In recent years, some of our portfolio companies have secured non-dilutive financing exceeding hundreds of millions of U.S. dollars through BD transactions—a feat that is extremely difficult to achieve in primary market fundraising. We jokingly say within our firm, “Series A and B financing for biotech firms rely on venture capital (VC), while Series C and D depend on multinational corporations (MNCs).”

For biotech companies, going global typically involves prioritizing high-value business development (BD) deals. This requires biotechs to consider the needs of multinational corporations (MNCs) from the project initiation stage, ensuring differentiation and internationalization, generating clinical data as early as possible, and striving to achieve a top-three global ranking in their therapeutic area. Meanwhile, biotechs must enhance their capability to negotiate deals with MNCs by maintaining continuous communication with leading MNC BD teams in China, showcasing clinical data of their assets at major conferences such as the BIO International Convention, JPM Healthcare Conference, ASH, and ASCO, and actively exploring opportunities to facilitate asset transactions at appropriate stages and reasonable valuations.

VCBeat:In your view, what new trends will emerge in the global expansion of China’s innovative medical assets? How will this impact healthcare investment?

Wang Junfeng:The global expansion of China’s medical innovation enterprises is comprehensive, a trend that has become increasingly evident in recent times. On one hand, a growing number of Chinese assets are forging partnerships with major pharmaceutical and healthcare companies in Europe and the United States; on the other hand, many enterprises are expanding into Belt and Road Initiative markets, including Southeast Asia, Russia, and South America.

Previously, Legend Capital’s healthcare investment arm took the lead in entering the Southeast Asian market by investing in several platform-based enterprises, thereby facilitating the deployment of Chinese technologies and assets in the region. Taking Indonesia as an example, although it is the world’s fourth-most populous country, its overall development level is roughly equivalent to that of China 15 years ago. The government, healthcare system, and general population all require more advanced technologies, innovative pharmaceuticals, and medical devices. This presents a valuable opportunity for Chinese companies to expand overseas, leverage technology to access new markets, and create win-win partnerships.

Recently, we led more than 40 Chinese enterprises into Indonesia, engaging in dialogues with the Indonesian Ministry of Health and the National Agency for Drug and Food Control (BPOM). This initiative witnessed the growing confidence of Chinese listed companies in going global, firmly expanding overseas to break through the commercial ceilings of their products. Meanwhile, we have also observed some innovative startups beginning to cautiously explore overseas expansion.

In the future, we will continue to deepen our investment layout in overseas markets and assist domestic enterprises in going global. We often say internally that at this stage, projects without significant BD transactions or overseas expansion potential have no future.

VCBeat:What Types of Assets Will Legend Capital’s Healthcare Investment Arm Favor in 2024?

Wang Junfeng:We remain firmly bullish on the continuous enhancement of innovation capabilities within China’s broader healthcare industry, adhering to our strategy of investing in early-stage and innovative ventures while consistently cultivating and deepening our value-added support capabilities.

Over the past decade, basic scientific research at Chinese research institutes has continued to deepen, while talent and case studies in translational medicine have steadily expanded. The comparative advantages of China in clinical research have become increasingly prominent, and when combined with the vast Chinese market, these factors have made it difficult for global mainstream manufacturers to withdraw. As a professional investment firm, Legend Capital aims to further engage with this rising force of innovation by collaborating closely with research institutes, co-establishing incubators, facilitating the translation of professors’ early-stage achievements, connecting with industry talent, and supporting the commercialization of innovative assets into market-ready products.

Certainly. As we accompany innovative enterprises through their growth, we will continue to uphold Legend Capital’s tradition of deep empowerment. In addition to establishing an integrated empowerment model that combines targeted and comprehensive support in the realm of management enablement—namely, “building leadership teams, defining strategies, and leading organizations”—we will place greater emphasis on strengthening our capabilities in business empowerment, thereby truly participating in the founding and incubation of these enterprises.

VCBeat:Specifically, through what means and resources does Legend Capital primarily empower innovative enterprises?

Wang Junfeng:We have been empowering innovative enterprises for many years and have developed our own methodology and approach.

First is early-stage incubation. Based on our systematic and long-term industry research, we cultivate the team’s ability to select intellectual property (IP) and lead assets from research institutes, leverage the full-chain empowerment system of our ecosystem, systematically engage with CROs, clinical principal investigators (PIs), and clinical centers, collaboratively discuss clinical protocols, and oversee execution efficiency and capital utilization efficiency.

Second, asset transactions. As a professional investment institution, we urge our portfolio companies to place high importance on asset transactions. In this process, our team members actively engage by connecting these companies with the business development (BD) departments of foreign pharmaceutical firms and domestically listed pharmaceutical companies, participating in asset matchmaking discussions, and even contributing to negotiations on core transaction terms.

Third, collaborative global expansion. Leveraging Legend Capital’s industrial resource network, we assist portfolio companies in engaging with business development (BD) teams at European and American pharmaceutical manufacturers and facilitate the internationalization of their assets into these markets. Furthermore, Legend Healthcare Investment has proactively entered the Southeast Asian market, guiding Chinese assets and technologies to establish a presence in countries such as Indonesia and Singapore, thereby delivering cost-effective pharmaceuticals and medical device products to hundreds of millions of people in the region.

VCBeat:How Will Legend Capital’s Healthcare Investment Strategy Change in 2024?

Wang Junfeng:Last year, we unveiled our “Ecosystem+” strategy at the Legend Capital Healthcare CEO Summit in Chengdu, established the Healthcare Innovation Ecosystem Alliance (HIEA), guided our portfolio companies into a series of industrial parks, and facilitated the entry of our extensive ecosystem partners into Southeast Asian markets. This year, we will proactively engage with industry stakeholders, foster in-depth exchanges, and pursue co-investment opportunities.

In terms of investment, we adhere to systematic research, stay ahead of the curve, invest early and in innovative ventures, provide deep empowerment, and exercise strategic discipline by knowing what to do and what not to do.

Regarding exit strategies, we emphasize a “four-wheel drive” approach, namely the comprehensive advancement of IPOs, mergers and acquisitions (M&A), secondary sales of existing shares, and S-fund transactions. In 2023, several Legend Capital projects exited via M&A, achieving favorable investment returns and significant cash recovery. Additionally, Legend Capital completed a $270 million S-fund transaction in 2021, followed by another RMB 300 million S-fund deal in May 2023. This has become one of Legend Capital’s core exit strategies, creating opportunities for bulk exits for existing LPs while offering new investors access to high-quality assets, thereby achieving a win-win outcome that holds considerable promise.

Looking ahead, an exceptional GP must adopt a “four-wheel drive” exit strategy, encompassing IPOs, mergers and acquisitions, equity transfers, and secondary sales—each indispensable. A unicycle can hardly outrun a four-wheeled vehicle; thus, building robust exit capabilities will become a core competency that investment management firms must cultivate in the future.

VCBeat:Will Legend Capital Slow Down Its Investment Pace in 2024?

Wang Junfeng:As previously mentioned, our fund has maintained a steady investment pace. In the current and near-term market environment, where capital supply may be relatively tight, we will not relax our efforts in screening, discovering, and incubating high-potential projects. However, we aim to be more selective by raising our standards for companies’ fundamental quality, synergy with the Legend Capital ecosystem, as well as deal structures and terms.