"Winter" Watch: Suspension of the Fifth Listing Standard and the Yet-to-Come Wave of Biotech Failures and M&A

More bad news seems to have emerged in the second half of the year.

On the first day of November, solid evidence emerged during a forum that new applicants under the fifth listing standard of the STAR Market have been suspended. The tightening trend in IPO reviews will persist; restrictions will only be lifted when the secondary market improves.

Bad news travels fast. If you are in this industry, you will continually hear disturbing facts: biotechnology startups are tightening their belts, laying off staff, streamlining their pipelines, and even triggering a series of personnel disputes. Unverified rumors are also spreading rapidly within industry groups: star biotech firms are shutting down, while gossip about founders invariably garners more discussion.

The wave of bankruptcies and mergers anticipated at the beginning of the year has yet to materialize on a large scale; founders and investors may be making their final efforts.But some believe that after SteadyMed and Rejuvenate, this barrier has been broken.

Behind these changes, industry professionals’ concerns about the future are so clear, and their desire for certainty is so strong—that at every major industry conference,There is always a focus on a specific point in time.——When exactly will the bubble clear, allowing the industry to return to its proper track?

Meanwhile, since the lifting of restrictions this year, most industry conferences have focused on themes such as “navigating the winter” and “breaking through impasses.” At one event, an investor complained, “We’ve heard the term ‘winter’ so often that we’re tired of it.”

It has been nearly two years since the “winter” began. Beyond this term, what other keywords better define our era and describe the current landscape? While the capital market is undoubtedly in a downturn, the biopharmaceutical industry is highly heterogeneous, with realities that extend far beyond the single narrative of a “winter.”

We are destined to live in a world where problems outnumber solutions, so it is normal to feel confused about what comes next.VCBeat surveyed a range of representative entrepreneurs, business leaders, and investors in the industry, as well as its most ordinary participants.We inquired about their current status and mindset, and engaged in conversations with them.

The Zeitgeist of the Era Is Inevitably Projected onto Every Individual: Some Have Completely Exited the Industry, Others Have Adjusted Their Mindsets, and More Are Still Striving.

In September, at an investor panel during an industry conference, the moderator posed a question, inviting the participating investors to predict what changes would occur in the biopharmaceutical industry before next September. Would it maintain its current state, or would it bottom out and rebound? Most importantly, are there any indicators in the primary market that entrepreneurs seeking refinancing and investors evaluating projects can refer to for consideration?

“As the river warms in spring, the ducks are the first to know.” The two groups most sensitive to market shifts are entrepreneurs and investors. At the event, most investors stated that they cannot predict the future. “However, when entrepreneurs find that fundraising is no longer so difficult and valuations no longer need to be slashed painfully, it may signal a recovery in the capital markets.”

Startups face significant challenges in securing financing, with venture capitalists showing weak investment appetite and valuations continuing to decline. This is perhaps the most direct perception of the “capital winter” among industry professionals.

Another term, “financing cliff,” seems to better capture investors’ cautious sentiment and lowered market expectations. This year, young biotech startups in the United States such as Vedere Bio II, Faze Medicines, and Ambys Medicines all collapsed before securing their Series B financing rounds. In recent years, U.S. biotech companies have found it relatively easy to obtain Series A funding, but many have exhausted their cash reserves before securing Series B rounds, thereby facing existential challenges.

Entrepreneurs are struggling, as they commonly face a dilemma:Can the cash on hand sustain operations until product development is completed? If not, how can financing be secured, and is it even feasible? Is it cost-effective to raise capital by issuing equity at current depressed valuations? Compounding these challenges, the cash flow crisis has triggered layoffs and pipeline cuts, leading to low employee morale, while the financing impasse is being repeatedly exacerbated in these difficult times.

Investors are also torn,“Investing in one cycle and exiting in another” has become a common sentiment among many investors.The market slowdown over the past two years has created a disconnect between corporate valuations in 2021 and those in 2023, a shift that has become a major source of friction in subsequent funding rounds. Furthermore, many investors report being significantly battered. “Previously, positive and negative news alternated, but over the past year or so, we’ve faced one heavy blow after another. Investors’ morale has been gradually eroded, leaving them deeply pessimistic.”

“It was originally expected that many companies would go bankrupt and many would be acquired in 2023. However, this scenario has not yet occurred on a large scale. I think it may be because everyone is making their final efforts,” said Wu Xiaobin, President of BeiGene, speaking candidly at an industry conference. “Some companies may break through, while others may perish just before dawn.”

A founder of a listed biotech company told VCBeat, “Everyone is in a tough situation; it’s just that the thin veil hasn’t been pierced yet,”Following the cases of Siwei and Ruishi, once the taboo is broken, more such cases are likely to emerge.”

Undoubtedly, we are experiencing a downturn characterized by a sustained decline in investor interest in biotechnology. Rising interest rates have weakened the overall performance of the stock market, exacerbating this slump. From the peak in 2021 to the present, biotech valuations have dropped by nearly 50%, while Chinese concept stocks have seen even steeper declines of approximately 60–70%. The fact that many companies hold more cash on their balance sheets than their current market capitalization is another direct manifestation of these challenging times.

The prevailing zeitgeist inevitably projects onto every individual. “Strategic meetings that used to be held annually are now convened semiannually, with informational exchange and discussion sessions even taking place each quarter.”The situation is changing rapidly, making it difficult to adhere to a single strategy throughout the year.“An investor remarked at the aforementioned meeting, ‘To be honest, sometimes I wake up in the morning, check WeChat, and feel like our strategy needs another adjustment.’”

Beyond the pessimism, VCBeat has also heard some different voices.

At a summit of pharmaceutical industry leaders, the most elite group in the sector generally believes that many people are currently overly pessimistic about the "winter," largely due to a lack of comparative perspective and an insufficient awareness of longer industry cycles.

“Cycle” inherently implies that people are destined to repeat the feast-and-famine patterns that have dominated the biotechnology industry for decades. Yet memory is short-lived; most investors working in the industry today may not have experienced significant boom-and-bust cycles. Some investors know nothing but bull markets.

To summarize their viewpoints: First, if we examine the past five years, the current climate appears quite cold. However, if we extend the timeline to thirty years, the present situation can by no means be considered a “winter.”

Second, from another perspective, capital is not lacking in its pursuit of good technologies and scientists; indeed, situations still exist where investors are unable to invest despite their willingness. As one industry leader bluntly stated, ““Winter” is a false premise. Winter for whom? For Me Too,"due to insufficient product differentiation."

Among the companies interviewed by VCBeat this year, there are also those that have bucked the trend during the downturn. PROTAC star company Cullgen completed a $40 million Series C financing round in May this year, led by the AstraZeneca CICC Medical Industry Fund; in June, it announced a research collaboration and exclusive option agreement with multinational pharmaceutical company Astellas, with the potential total transaction value exceeding $1.9 billion. “In the current market environment, Cullgen has achieved profitability,” CEO Luo Ying told VCBeat.

Investors are not entirely pessimistic. A partner at a top-tier domestic VC firm candidly stated that their current mindset is “to move forward steadily while remaining actively optimistic.” She explained that, beyond fundraising, the core responsibility of investors is to make sound investments and deliver greater returns to LPs. “This is what we work on every day. While the broader macroeconomic environment inevitably affects individual sentiment, we must not allow it to alter our original investment intent and philosophy.”

Some investors even believe that now is the best time for entrepreneurship and investment, as periods of widespread fear often present the optimal entry point.

It is difficult to judge who is right and who is wrong, but it is very important to understand the existence of another perspective and gain a comparative vision. A comparative vision,This means avoiding both “winner’s bias” and vigilance against the “victim narrative,” positioning reality within a more comprehensive frame of reference to reflect on oneself and understand the broader context.

Of course, we must also reflect on the issues exposed in the operation of the biotechnology industry’s system during the previous cycle, so as to prepare for the launch of the next cycle. Just as the “breaking of the impasse” in the biopharmaceutical industry has been frequently discussed at industry conferences, why is it necessary to break this impasse? An industry insider pointed out, “It is precisely because the upcycle of the past few years has created a ‘trap’ for us today.”

For instance, emphasis on costs and cash flow should permeate every aspect of business operations. Biotech companies should not adopt the management style of multinational pharmaceutical corporations, nor continue the wasteful practices of the past in this new cycle; founders should not fight alone. “The biggest problem in China is that founders often operate in isolation, which is extremely dangerous without a team,” cautioned a seasoned investor and entrepreneur.

Not to mention the tuition fees paid by investors for the valuation bubble of enterprises, and the ongoing valuation adjustments.

It is foreseeable that over the next year, the number of mergers and acquisitions will increase, while the number of players exiting the market will also rise. Those leaving the market include not only entrepreneurs but also investors. The winter chill has caused the tide to recede, revealing who will truly remain in the innovative drug industry.

In summary, following this downturn cycle, a consensus should be reached: the innovative drug industry is not an easy venture. Individuals who are mentally fragile and prone to pessimism and disappointment are not suited for the biotechnology sector. At times, the external environment is filled with conflicting information and signals, causing indecisive investors and entrepreneurs to be easily misled, with their emotions swinging back and forth.

After consulting with industry veterans who have spent many years navigating the sector, VCBeat has summarized some of their heartfelt recommendations:

First, stop constantly checking stock prices. External factors such as U.S. interest rate hikes or Sino-U.S. geopolitical dynamics are both relevant and irrelevant to entrepreneurs.Do not run a company based on the whims of the secondary market.

Stocks inevitably rise or fall due to emotional contagion; this cycle appears unavoidable, as fervent sentiment is contagious and inevitably sows the seeds of recession when prosperity fades. Yet, for a long time, stock market indices have failed to truly reflect the health of any given industry or the prospects of any specific investment strategy.

Secondly,Abandon illusions; do not expect a timely rain to arrive.. The more you hope for the industry to improve rapidly, the less likely it is to do so; while additions to existing successes are common, timely relief rarely arrives. For instance, do not bet on whether there will be a policy shift in the STAR Market, the ChiNext Board, or the Beijing Stock Exchange; do not engage in speculative gaming based on specific timings or events, as history shows that such bets always result in losses.

Finally, shift attention away from the numerous but less significant biotech companies.Do not be deterred by the negative noise pervading the industry; instead, focus on biotech companies that are truly at the core., focusing on the most promising companies and pipelines in the industry, as well as the industry's underlying logic and fundamentals.

As summarized by the aforementioned industry leaders, “Some see only the risks, while others recognize the opportunities behind them; there will always be a group of entrepreneurs or investors,”They are so “blindly optimistic” that they can see opportunities in any difficult situation.。”

“Blind optimism” seems especially precious in difficult times.

Of course, we also need the continued perseverance of every practitioner. If you have chosen to embark on the journey of the innovative drug industry, it is surely because you recognize that biotechnology can help you achieve your ambitious goals. Therefore, through cycle after cycle, please remain steadfast in this field, especially during challenging times. Apply the lessons and experience from the past to your next project, next company, next round of financing, and next cycle, with the determination to do better.

“The China Pharmaceutical Innovation and Investment Conference has already held eight editions. Barring any unforeseen circumstances, the conference will once again take place in Suzhou next autumn. ‘I believe that anyone who can return to this venue next year is a winner; survival is what matters most,’ said an investor at the event.”

An entrepreneur who decided to launch her startup this year told VCBeat that she is enjoying her current situation. Although challenging, she feels she has gained more freedom in a certain sense compared to the “bubble” era. She also remarked, “Entrepreneurship is never easy.”

Yes, entrepreneurship is never easy.But don’t forget, even in the depths of winter, there are moments of sunshine.Please also believe that, just as in the classic tales of Homer’s epics, where Odysseus finally reached the shore after a long and arduous journey, entrepreneurs and enterprises that have endured the trials of harsh winters will one day welcome their moment in the sun.