GSR United Capital: Amid Accelerating Market Polarization, How Can Founders Navigate the Crisis?

Looking Back at 2023: Healthcare Investment Turns Rational Amid the Capital Winter

As the industry “cools down,” valuations in the biopharmaceutical sector have rapidly returned to a reasonable range for investment institutions, reflecting a process of “deflating the bubble.” Some promising projects are now at an opportune time for investment. Healthcare investment is a long-term endeavor that requires a healthy investment ecosystem. Within this ecosystem, participation is needed not only from investment institutions but also from entrepreneurs. During the period of rapid industry expansion, certain shortcomings of entrepreneurs were masked; however, the current environment imposes higher demands on them.

At the invitation of VCBeat, Dr. Wang Xiaoyan, Managing Partner of GSR United Capital’s Runpu Medical Fund, shared her observations on the biopharmaceutical industry in 2023 and her outlook for 2024.

Speaking of the market in 2023, Wang Xiaoyan used the word “divergence.”

In the boom years of recent times, everyone was rushing forward. Because capital was easily accessible, it was difficult for outsiders to discern whether a company was truly performing well or poorly. However, in a challenging macroeconomic environment, a company’s actual capabilities are fully revealed, leading to pronounced polarization: strong performers stand out significantly, while those that are less robust indeed struggle to move forward.

In the past, companies were accustomed to raising capital from venture capital (VC) and private equity (PE) firms. However, during periods of macroeconomic hardship, those unable to diversify their funding sources beyond VC/PE will face even greater challenges.

Some companies engaged in outbound business development (BD) collaborations, such as license-out deals, or pursued the commercialization of their own products in 2023, all of which demonstrate their capacity for self-sustaining revenue generation. In challenging times, a company’s ability to survive and advance determines its fate: those with such capability face boundless opportunities, while those without gradually decline, leading to increased industry divergence.

Of course, it is a pity that some enterprises, such as innovative companies, may be overwhelmed if they run too slowly and their products have not yet reached the stage of commercialization or licensing out, even if the project itself has great potential.

“Project initiation capability is key for enterprises,” stated Wang Xiaoyan, “especially in the current macro environment.”

Innovation has long been a central theme, but it should not be pursued for novelty’s sake. Rather, it must genuinely address unmet clinical needs. Innovative products must have market viability, and the addressable market must be sufficiently large. For innovative companies with strong project initiation capabilities, their products are either well-received by the market, enabling rapid commercialization, or they attract acquisition interest from major pharmaceutical companies, thereby accelerating their commercial rollout. Another type of company excels in speed, achieving First-in-Class status. Even amid the particularly sluggish financing environment in 2023, investors remained focused on identifying these two types of enterprises. At the same time, investors place significant emphasis on another factor: whether the company possesses sustained fundraising capability. This is a critical consideration for navigating economic cycles.

In 2023, the VC fund jointly established by Jinsha River Capital and Runpu Medical invested in two projects, its angel fund invested in two projects, and Yuanxi Haihe CVC invested in five projects. Among these, Bowang Pharmaceutical stands out as a prime example. Founded just over two years ago, the company has developed multiple products based on its advanced RNAi platform, achieving superior efficacy, activity, and duration at lower doses. Furthermore, Bowang has accelerated its project development at a remarkable pace, with several product candidates ranking among the most advanced globally. In 2023, Novartis took notice of Bowang’s two cardiovascular drug candidates due to their impressive data, culminating in a major deal at the end of the year with a total transaction value of $4.165 billion, including an upfront payment of $185 million.

Looking back to last year and even earlier, many projects that achieved strong sales or successful exits had clearly defined value objectives at the project initiation stage. Blindly initiating projects, on the contrary, would deplete the already limited resources of startups, and may even amplify the negative impact on enterprises in the current environment.

Regarding the outlook for 2024, Wang Xiaoyan believes that funding conditions will remain relatively tight, with increasingly pronounced differentiation.

Over the past year, Chinese biopharmaceutical companies have increasingly expanded into global markets, demonstrating that their innovative capabilities have gained worldwide recognition. By continuing to pursue this path of international expansion, they will be rewarded by the market.

In the field of biomedicine, Big Pharma represents the ultimate form of private equity (PE). With their judgment capabilities, market channels, and ample capital, they can perform all the functions typically handled by PE firms. Historically, for most global biotech companies, particularly those in the United States, the primary exit strategy has been acquisition by Big Pharma, with only a small fraction evolving into independent pharmaceutical companies.

Currently, China is also rapidly evolving toward this model. Not only domestic biotech firms but also Chinese pharmaceutical companies are marketing their pipelines to multinational corporations (MNCs). Taking oncology as an example, except for companies like Novo Nordisk that do not engage in this therapeutic area, the intense competition among most big pharma companies in oncology laid the foundation for the surge in ADC licensing deals last year. As 2024 began, we observed a nascent trend suggesting that small nucleic acid therapies may be poised to take the baton.

Whether a company’s innovation meets high standards has already been answered over the past year. Who purchased the product? Was it Big Pharma? Was it a Big Pharma player with particular strength in this field? If so, this serves as a strong endorsement of the company’s capabilities.

Recently, some startups have gone bankrupt and entered liquidation. In fact, as early as 2021 or 2022, voices within the industry were already emphasizing that survival is the top priority. This situation is likely to persist in 2024; currently, the inflection point does not appear to have arrived unless there are significant changes in the macroeconomic environment.

If you were still harboring illusions about the broader market trends before, it is time to wake up after nearly two years of harsh market lessons. Entrepreneurs need to re-evaluate themselves and gain a more objective understanding: What is the true position of their projects within the industry? And in the context of global expansion, do they possess sufficient competitiveness in the global market?

Many have described 2023 as a year when investors chose to “lie flat.” However, at GSR United, we have never adopted such a passive stance. In fact, our business travel frequency remained exceptionally high throughout 2023. We reviewed numerous projects and are eager to collaborate with like-minded peers to jointly drive these initiatives forward. Currently, if a project is fundamentally strong and entrepreneurs no longer demand exorbitant valuations as they once did, investment institutions remain willing to support and advance it.

During market downturns, entrepreneurs must prioritize survival by rapidly addressing capability gaps or making concessions on economic terms—such as lowering valuations or merging with complementary companies through equity swaps—to attract additional resources and navigate the crisis collectively.

Entrepreneurship is a perilous endeavor with slim odds of survival, demanding not only time and patience but also strategy and courage.

Many startups have inherent weaknesses in their capability building, but they can collaborate with upstream and downstream partners across the industry chain for mutual development. If drastic measures are necessary for survival, do not hesitate in the current environment. Many entrepreneurs regard their projects as prized possessions; however, if a project cannot be successfully delivered, everything else is meaningless.

For biotech companies, spanning preclinical development, IND (Investigational New Drug) applications, clinical trials, and NDA (New Drug Application) submissions, it is not necessary to persist through every stage. Striving for the best within one’s capabilities and exiting in a timely manner can also be a sound strategy. Entrepreneurs must recognize their own limitations and determine the optimal exit timing at the very inception of the project.

The development of corporate organizational culture is also particularly important in the current environment.

During periods of severe market downturn, companies with strong organizational cultures are likely to demonstrate the greatest resilience. When market trends begin to diverge, such enterprises can quickly distinguish themselves from the competition.

Looking ahead, Wang Xiaoyan stated, “Future innovation will be driven by scientific research, focusing on groundbreaking ‘zero-to-one’ advancements. Last year, we engaged with several projects that initially seemed almost science-fiction-like. Through repeated validation, including third-party testing of their developments, we discovered that some innovations we once dared not imagine are already quietly taking shape in China.”

We hope that, after being tempered through this harsh winter, a cohort of truly competitive and influential enterprises will emerge. We also call on investors in the industry who have not yet given up to join forces in supporting those companies worthy of further advancement.

The Beauty of Innovation: Delicate and Graceful as a Maiden in Bud, Brilliant and Resplendent as Fireworks in Full Bloom After the Winter.