Amid a Challenging Healthcare Investment Climate, This Top-Tier Firm with Over RMB 10 Billion in AUM Identifies High-Potential Medical Technology Opportunities

In 2023, the healthcare sector underwent transformation under high pressure. Amid the ups and downs of the industry cycle, how should healthcare investment strategies be adjusted? VCBeat (WeChat ID: vcbeat) interviewed Gao Jieliang, Senior Partner at VGC Fund (Dinghui Innovation & Growth Fund).

VCBeat’s interview took place just before the Spring Festival, yet healthcare professionals did not slow their pace during this cold season. In the days leading up to the holiday, Gao Jieliang, like his colleagues at CDH VGC, maintained a busy schedule of corporate visits and attending board meetings of portfolio companies. During the interview, Gao candidly shared that, based on his conversations with entrepreneurs, the past year had been quite challenging. Nevertheless, several portfolio companies have gradually achieved tangible results, indicating that the industry remains vibrant. Historically, the force that has dispelled every “winter” has stemmed from the vitality of these innovative enterprises and the opportunities brought about by technological advancements.

In Gao Jieliang’s view, although medical investment cooled down in 2023, China’s vast market has provided fertile ground for the budding of innovation and technological progress, leaving ample new opportunities. Data shows that approximately 1,000 companies still secured financing. For investment institutions, generating returns through exits is becoming increasingly difficult; instead, greater returns are derived from growth value. The broader environment demands a higher tolerance for investment error: whereas previously targeting the top 20% of companies could lead to success, now it is necessary to identify the top 10%.

CDH VGC (Venture & Growth Capital), established in 2015, focuses on healthcare as one of its core investment themes. As a long-term partner to the healthcare industry, CDH VGC has invested in companies such as Lead Discovery Center, GemPharmatech, Nanxin Pharmaceutical, Genesis MedTech, DeMei Medical, Weiyuan Genomics, Qitan Technology, and New Horizon Health. The fund currently manages assets exceeding RMB 10 billion.

On December 26, 2023, CDH VGC Innovation and Growth Fund III (Chengdu) completed its first closing. The fund is expected to have a total size of RMB 3 billion.

Below is the dialogue between VCBeat and Gao Jieliang, Senior Partner at CDH VGC:

VCBeat:2023 saw the medical investment sector in a downturn. As a long-term companion to the healthcare industry, how would you summarize the state of healthcare investments in 2023?

Gao Jieliang:The market began to cool in the second half of 2022, and 2023 saw a continuation of this downturn, which represents a cyclical shift. The introduction of Chapter 18A of the Hong Kong Stock Exchange Listing Rules and the fifth set of listing criteria for the STAR Market in 2018–2019 drove healthcare investment to a peak, spurring rapid industry growth but also creating some bubbles. Influenced by multiple factors in 2022, healthcare investment entered a downward cycle. Financing data show that the total amount of financing in China’s healthcare sector shrank in 2023, with healthcare projects facing greater difficulties in securing funding. This trend is expected to continue in 2024, albeit at a more moderate pace of decline.

VCBeat:How has CDH VGC adjusted and changed its investment strategy in response to shifts in the macroeconomic environment?

Gao Jieliang:Overall, the healthcare industry experienced a contraction in 2023, with declines in both the number of investments and total capital deployed. Investment institutions have adopted stricter criteria for evaluating company valuations and fundamentals, including technical teams, market size, and competitive advantages. As a comprehensive fund, CDH VGC has adjusted its sectoral focus, resulting in a relative decrease in the proportion of healthcare investments.

The second major shift is that healthcare investment is moving toward both ends of the spectrum.. One end focuses on early-stage and innovative investments, shifting toward early-stage investments has become a consensus in healthcare investing; against the backdrop of a market downturn, scrutiny of early-stage projects will be more stringent.The other side focuses on growth-stage and late-stage projects.In recent years, the surge in IPOs of healthcare companies drove up valuations for late-stage projects in the primary market, even leading to valuation inversions between the primary and secondary markets, while investment returns for late-stage projects continued to decline. After nearly two years of adjustment, valuations for late-stage projects have returned to reasonable levels. Meanwhile, as more milestones are achieved and projects approach or commence commercialization, risks have decreased. We will therefore strategically allocate investments to projects at this stage.

VCBeat:CDH VGC primarily invests in early-stage and growth-stage projects. What changes do you think occurred in the market’s requirements and preferences for early-stage projects in 2023?

Gao Jieliang:Since its establishment in 2016, CDH VGC has consistently adhered to investing in technology-driven industries, supporting scientist-led startups and the commercialization of scientific research achievements, a strategy that remains unchanged to this day. In 2023, the criteria for early-stage investments regarding technology, market size, and competitive landscape have not differed significantly from those in the past. However, the requirements for founding teams have become more stringent."Previously, greater emphasis was placed on the team's R&D capabilities; now, equal importance is attached to the team's management capabilities."As you will gradually discover, early-stage entrepreneurs often possess strong scientific research capabilities but not necessarily robust management skills. Therefore, it is essential for the founding team to have complementary strengths, including an outstanding CEO responsible for the company’s operational management. As the company grows and enters stages such as clinical trials, regulatory registration, manufacturing, and commercialization, only strong operational and management capabilities can ensure the efficient translation of R&D achievements into marketable products.

VCBeat:Recently, China’s innovative drug industry has aligned itself with the Nasdaq model, witnessing a surge in project transactions. The cash flow sources for Chinese biotech companies are undergoing structural changes. How do you believe this will impact investment in innovative drugs? Do you anticipate that the trends in business development (BD) and mergers and acquisitions (M&A) will continue in 2024?

Gao Jieliang:After more than a decade of development, China’s innovative drug industry has established a comprehensive ecosystem encompassing innovative pharmaceutical companies, clinical hospitals, contract research and manufacturing organizations (CROs/CMOs), regulatory review agencies, and insurance systems. The surge in business development (BD) transactions for innovative drugs marks a milestone within the industry, signaling that domestic innovations are gaining recognition in the global biopharmaceutical market. For instance, portfolio companies of CDH VGC, such as I-Mab, Harbour BioMed, and Kineta Biosciences, have successfully executed multiple BD licensing deals. This trend reflects the gradual improvement of China’s biopharmaceutical innovation system and the increasing maturity of its innovative drug ecosystem.

I believe this trend will continue in 2024. Once the foundation for innovation is established, it will continuously yield new developments, representing the supply side. On the demand side, multinational corporations (MNCs) consistently require new products to maintain their market position. Meanwhile, the pandemic has enabled many companies to accumulate capital; thus, MNCs possess both the financial resources and the incentive to invest in high-quality assets. This dual drive from both supply and demand will sustain the continuous growth of business development (BD) transactions for innovative drugs in China.

VCBeat:The fruits of domestic innovation are being bought out, while Chinese innovative drug companies bear the most arduous, exhausting, and high-risk segments of the entire innovative drug value chain. Do you believe this will impact the sustainable development of China’s innovative drug ecosystem?

Gao Jieliang:Over the past two years, financing in the biopharmaceutical industry has been relatively challenging. Innovative drug companies have faced significant cash flow pressures, which have somewhat weakened their pricing power and ultimately impacted the valuation of business development (BD) deals.However, from the perspective of global biopharmaceutical development trends, business development (BD) transactions are a norm in the innovative drug industry and do not disrupt its ecosystem.

In the long run, a large volume of business development (BD) deals for innovative drugs holds positive significance for China’s domestic innovation ecosystem. Having evolved from scratch, China’s innovative drug ecosystem is now firmly seated at the global negotiation table, as evidenced by these numerous BD transactions. Moving forward, driven by upward industrial and economic cycles and the growing strength of China’s innovative pharmaceutical sector, the country’s influence and voice in the global innovative drug market will gradually increase.

VCBeat:Going global has become a key strategy for many medical device companies. Why do you believe there has been such a significant surge in attention toward international expansion? Which companies are poised to succeed in going global?

Gao Jieliang:Growing attention to overseas expansion is driven by two factors. On one hand, the broader context of “cost containment” has exerted pressure on domestic sales. On the other hand, as China’s industrial upgrading progresses, certain sectors have achieved import substitution with domestically produced alternatives and are now advancing further through independent innovation, thereby possessing both the capability and the need to expand into international markets.

Current Chinese enterprises expanding overseas can be divided into two categories.The first category relies on a low-cost strategy to expand overseas, leveraging cost-effectiveness to penetrate foreign markets.This category is relatively common, with stable production capacity and cost-effectiveness serving as the core competitiveness of enterprises.

The second category of innovative global expansion relies on product and technological advantages. Whether through license-out agreements, collaborative development of overseas markets with foreign enterprises, or establishing independent sales systems abroad, all fall under this category. This model demands a high degree of product innovation and is currently in its early stages. We have already observed some innovative companies beginning to strategize their global expansion at an early stage.

VCBeat:Will M&A exits become our primary exit strategy in the future?

Gao Jieliang:At this stage, IPO exits remain the primary means of generating returns. However, in the current environment, achieving an IPO exit has become more challenging, making alternative exit strategies such as mergers and acquisitions (M&A) and equity transfers increasingly important. Among these, M&A exits represent a viable pathway to generate substantial returns, second only to IPOs. For instance, license-out transactions in the innovative drug sector can be viewed as a form of de facto M&A exit. Similarly, in the medical device sector, shorter R&D cycles and relatively lower capital requirements are offset by smaller market sizes for individual products, which preclude many companies from growing into large independent entities. Consequently, M&A will serve as a promising exit channel in the future.

In addition, mergers and acquisitions (M&A) in the domestic market have not been particularly active in recent years, with price being a significant factor. As previously mentioned, as healthcare investment cools, corporate valuations are gradually adjusting, which is also an important driver facilitating M&A activity.

VCBeat:Regarding investment in the in vitro diagnostics (IVD) sector, 2023 was a year of destocking. The Chinese IVD market reached a scale of hundreds of billions of yuan, with more than 75 listed companies, resulting in intense competition. As the impact of the COVID-19 pandemic waned in 2023, what significant changes do you believe have occurred in the IVD industry?

Gao Jieliang:As the COVID-19 pandemic subsides, the in vitro diagnostics (IVD) industry has returned to its pre-pandemic state. We continue to closely monitor specific segments such as molecular diagnostics, mass spectrometry, pathological diagnostics, scientific instruments, and upstream raw materials. For instance, in the upstream segment of the industry chain, we have systematically invested in projects including Singleron Biotechnologies, Qitan Technology, and Huapu Instrument.

VCBeat:Looking ahead to 2024, which sectors does CDH VGC favor, and how will it further tap into opportunities in China’s medical innovation industry? Which specific subsectors are expected to draw its attention?

Gao Jieliang:Technological innovation remains the core investment thesis we have consistently adhered to. Beyond key subsectors such as innovative drugs and medical devices, let us first explore some perspectives from various dimensions.

First, going global, regardless of the sector, with a particular focus on conducting clinical trials and commercialization overseas.

Second, identify projects with outstanding commercialization potential.Some domestically commercialized projects in their mid-to-late stages, despite a relatively cool market, have still achieved rapid revenue growth.

Third is interdisciplinary studies.such as interdisciplinary fields including artificial intelligence, synthetic biology, agriculture, regenerative medicine, and brain-computer interfaces.

Then, returning to the specific sub-sectors,Several Major Hotspots in the Innovative Drug Sector Remain Worth Watching, such as antibody-drug conjugates (ADCs), oligonucleotide therapeutics, cell and gene therapies, novel targets and indications in small-molecule drugs, and synthetic biology. These are not new hotspots, but they are all in the early stages of development and warrant continued attention.

In the field of medical devices, the integration of complex technologies is gradually becoming mainstream.The upgrade of China’s medical device industry has progressed from passive to active devices, and from low-end imitation to independent innovation characterized by the integration of multiple technologies. From a technological perspective, the focus remains on innovative technologies, including the application of foundational technologies such as minimally invasive techniques, new materials, AI, and robotics in the healthcare sector. From an application perspective, traditional fields such as cardiology, orthopedics, surgery, and neurology continue to warrant close attention due to their large patient populations and significant unmet needs. Meanwhile, consumer healthcare has emerged as a new key sector, with substantial growth potential in areas such as medical aesthetics, weight management, and ophthalmology.

VCBeat:The CDH VGC team has long engaged with investors and entrepreneurs. What specific recommendations do you have for how companies should respond to market changes in 2024?

Gao Jieliang:We have long stood by entrepreneurs, and the past year has been generally challenging. From my perspective, confidence is paramount for both entrepreneurs and investors. The pursuit of longevity and quality of life is cyclical-proof, and the value of the healthcare industry will only continue to grow. Another key insight is the critical importance of cash flow management. While struggling companies naturally prioritize this, even those experiencing smooth growth must prepare accordingly. On the revenue side, actively secure financing, advance commercialization, and pursue business development (BD) deals. On the cost side, concentrate resources on core products, strive to enhance operational efficiency, and control costs. Only by enduring the winter can we enjoy the blossoms of spring.