Medical Startups Struggle to Survive: Walking on Thin Ice Through a Challenging Six Months

Market contraction, intensified competition, sluggish innovation, slowed investment, tighter IPO regulations, anti-corruption campaigns in the pharmaceutical sector...

Over the past six months, the healthcare industry has been rocked by a series of market-disrupting revelations, repeatedly forcing entrepreneurs to confront critical questions: Does our solution align with the rapidly evolving market? Can our product or service stand out amidst fierce competition? Will our cash reserves last until our innovations come to fruition?

Faced with such scrutiny, healthcare entrepreneurs teetering on the brink of cash flow rupture and market collapse have responded in different ways: some have chosen to exit, others have gritted their teeth and persevered, while still others have pressed forward through trial and error. Some founders have fallen, but more remain steadfast in their resolve. They believe that enduring the darkness will ultimately give way to dawn.

Reflecting on her entrepreneurial journey over the past few years, Li Mei has mixed feelings.

He returned to China in 2019 to start a business, focusing on the field of neurointerventional medical devices. Initially, leveraging his work experience in relevant departments of international giants and nearly 20 years of experience in the medical industry, the neurointerventional company founded by Li Mei progressed very smoothly. It not only rapidly laid out R&D for a series of products such as coils, thrombectomy stents, and distal access catheters, but also completed financing in 2020.

Everything appeared so promising, as if continuing down this path would inevitably lead to the pinnacle of success. However, he soon sensed something amiss. Following the announcement of volume-based procurement (VBP) for coronary stents, the annual market, previously valued at RMB 10 billion, shrank to RMB 1 billion. Companies in the stent sector promptly pivoted to other niche markets, with neurointervention emerging as one of the favored segments perceived to be immune to VBP in the short term.

Consequently, a large number of entrepreneurs and speculators from various industries have flocked into the neurointerventional market, with investors committing substantial capital. From 2020 to June 2021, there were more than 15 financing events in the neurointerventional field, with total funding exceeding RMB 1.5 billion, involving at least 24 innovative enterprises and 60 investment institutions.

Moreover, most of these companies have adopted a platform-based strategy by simultaneously developing portfolios of neurointerventional products. This has led to significant product homogenization. In 2021, more than 25 neurointerventional products received approval in China; in 2022, this number surged to over 120. The majority of these approved products were homogeneous, including 63 access devices and 24 balloon catheters.

The neurointerventional market has rapidly heated up. Li Mei, who has focused on the neurointerventional field since 2019, seized this opportunity and successfully secured financing. Nevertheless, he still faces significant pressure. “At the time, neurointervention was undoubtedly a high-potential sector with ample room for growth and, in the short term, exempt from centralized volume-based procurement. However, too many players have crowded into the space. For instance, 40 models of intermediate catheters have received regulatory approval, and nearly 20 models of thrombectomy stents have been approved. Currently, competition in the neurointerventional industry has become fiercely intense; competitors are gritting their teeth to endure, with some even engaging in price wars.”

To make matters worse, some regions began including neurointerventional products in centralized volume-based procurement (VBP) programs in the second half of 2021. Over the past six months, an increasing number of provinces and municipalities have implemented VBP for neurointerventional products such as coils.

Li Mei remarked with emotion, “We have truly come to appreciate the hardships of entrepreneurship. As soon as one problem is resolved, new ones emerge. This time, the myth that neurointerventional devices would be exempt from centralized volume-based procurement (VBP) in the short term has been shattered, and their market potential is set to shrink significantly due to the impact of end-user pricing. Nevertheless, we remain bullish on the neurointerventional sector, as its fundamental logic remains sound: patient treatment needs will persist over the long term, while both the patient population and the penetration rate of neurointerventional procedures continue to grow steadily.”

In response to volume-based procurement (VBP) and the resulting contraction in market space, many neurointerventional companies have chosen to expand into new fields, much like orthopedic companies that pivoted toward digital orthopedics and robotic surgery after VBP implementation. Leveraging their existing neurointerventional technology platforms, these companies are extending their reach into pulmonary artery intervention, peripheral intervention, and respiratory intervention, aiming to establish a second growth curve beyond neurointervention.

However, they miscalculated in their expansion into new therapeutic areas this time. Not only has centralized volume-based procurement (VBP) been extended to neurointervention, but it also now covers peripheral intervention, artificial joints, intraocular lenses, sports medicine, spinal surgery, trauma surgery, and electrophysiology. Even consumer healthcare products previously considered immune to VBP, such as orthokeratology (OK) lenses and dental implants, have gradually been included. With VBP now institutionalized and fully implemented, it is expected that future new therapeutic areas and products will also be subject to centralized procurement.

“Under the normalized volume-based procurement (VBP) regime, the overall market space for China’s medical device industry has been somewhat constrained. Therefore, blindly entering new therapeutic areas holds little significance and would only waste corporate resources. With this in mind, we did not rashly expand into other segments; instead, we chose to continue optimizing our neurointerventional products and strengthen the commercialization of our neurointerventional portfolio,” said Li Mei.

Since the beginning of 2023, Li Mei has shifted her work focus to cost reduction and efficiency improvement. Previously, several of her company’s products had been selected in the centralized volume-based procurement (VBP) tenders. To enhance market competitiveness, Li Mei now prioritizes production processes, operational efficiency, and product quality. Over the past six months, she has spearheaded the optimization of production workflows to improve yield rates and reduce waste. Meanwhile, she has onboarded additional key raw material suppliers to lower production costs and strengthen supply chain security.

Li Mei added, “I also wanted to leverage the convenience of centralized procurement to accelerate channel expansion. However, limited capital and talent have left me unable to meet this goal. Meanwhile, large enterprises with substantial financial resources are using centralized procurement to further penetrate sales channels and enter more primary-care hospitals.”

Today, supported by factors such as increased market penetration, growth in surgical volume, and improved patient affordability, Li Mei’s company has achieved year-on-year revenue growth, with many other high-quality neurointerventional companies also seeing revenue increases. It is believed that once the surge in domestic surgical procedures, optimization and upgrading of related products, and the genuine commencement of medical device exports take hold, entrepreneurs in the neurointerventional field like Li Mei will see greater new hope.

In the past six months, Wang Miao has found himself frowning more often. “I feel like I’ve even gained a few gray hairs,” he said.

Wang Miao is an entrepreneur in the field of pulsed field ablation, primarily engaged in the research, development, and manufacturing of pulsed field ablation (PFA) systems for cardiac ablation therapy in patients with atrial fibrillation.

Pulsed field ablation is an innovative technology that was first applied in humans for atrial fibrillation ablation by U.S. cardiac electrophysiologists in 2018. Compared with other therapeutic modalities, pulsed field cardiac ablation features tissue selectivity and non-thermal mechanisms, and is widely recognized as the future direction of the electrophysiology industry.

Domestic entrepreneurs have shown great enthusiasm for this new technology. Within just five years, at least 50 companies in China have entered the field, focusing on the research and development of pulsed field ablation systems for cardiac applications (PFA systems).

Wang Miao said with a wry smile, “There is an excess of homogenized research and too many players crowding into the field. This high-threshold, highly challenging technology seems to have become as commonplace as cabbage in China. However, we have observed that many individuals simply copy foreign products directly, without mastering core technologies or achieving genuine technological innovation.”

Although many companies engage in plagiarism and imitation, their emergence has significantly intensified market competition. Failure to respond effectively could lead to established players being overwhelmed by chaotic, uncoordinated attacks.

Similar to the field of pulsed electric fields, the emergence of many new sectors in China is often followed by a surge of entrepreneurs rushing to enter. Sectors such as surgical robots, spatial omics, electrophysiology, and vascular intervention have rapidly attracted more entrepreneurs after gaining prominence. This indicates intensifying competition within China’s industry, where even innovative and highly niche sectors see participation from numerous companies.

“For entrepreneurs, competition has always been the main theme; it is just more intense at present. Now, we need to tell fewer stories and focus more on business operations, concentrating on R&D, products, and marketing to win market competition through strength,” said Wang Miao. “Emerging technologies and products typically require a process of product refinement and market cultivation. The current difficult external environment presents an opportune time for entrepreneurs to polish their products and make thorough preparations.”

Emerging sectors are already fiercely competitive, and mature markets are certainly no exception. In emerging fields, entrepreneurs compete on product and R&D; in mature sectors, the competition shifts to channels and commercialization.

In the first half of the year, many domestic medical enterprises in mature markets faced challenges, with limited revenue growth or even a year-on-year decline. This is because the previous logic of domestic substitution has become less effective under the aggressive financial onslaught by multinational giants.

The state has consistently provided strong support for domestically produced medical devices. Relevant documents explicitly stipulate that where domestic drugs and medical devices meet the required standards, government procurement projects shall, in principle, procure domestic products, with a view to gradually enhancing the level of domestic equipment configuration in public healthcare institutions. Notably, medical device products manufactured by foreign-invested enterprises within China are also classified as domestic products and are entitled to the same preferential treatment.

Consequently, multinational giants such as Roche, Abbott, Johnson & Johnson, Medtronic, Beckman Coulter, Siemens Healthineers, GE Healthcare, Philips, Olympus, Stryker, and Intuitive Surgical have all launched localization strategies, investing heavily in establishing R&D centers and manufacturing facilities in China. To date, foreign brands have won bids in multiple public tenders that exclude imported products by participating as domestically manufactured entities.

In the first half of this year, international giants that implemented localization strategies aggressively captured greater market share through substantial capital, robust distribution channels, well-established brands, leading-edge products, and product positioning tailored to local manufacturing. For instance, the interim financial reports released by industry leaders such as GE HealthCare, Philips, and Siemens Healthineers revealed significant growth in their China operations, which in turn drove an increase in their respective groups’ total revenues.

Multinational giants are reveling, while domestic startups face hellish difficulty; they must vie for market share against dozens or even hundreds of peers, with competition intensifying significantly.

Furthermore, the commercialization of new technology products in emerging sectors will disrupt traditional solutions, affecting the scale and landscape of mature markets. For instance, the remarkable efficacy of the blockbuster weight-loss drug semaglutide has led to a sharp decline in bariatric surgery volumes, while also significantly impacting other weight-loss medical devices.

Faced with this highly competitive predicament, entrepreneurs have responded in diverse ways. Some have increased their investment in academic conferences, product promotion, and brand building; others have cut administrative and operational expenses to reduce costs. Some have strengthened innovation and developed new products, while others have reduced R&D spending and focused on managing production costs...

An industry insider stated, “Entrepreneurs currently facing fierce competition must either launch direct assaults on the main battlefield by leveraging advantages in product quality, capital, and distribution channels, or capture a niche market with differentiated products and boost revenue in other regional markets through guerrilla tactics. Companies and products lacking distinct competitive advantages are likely to struggle for survival.”

Amid Intensifying Market Competition, the Campaign Against Corruption in the Pharmaceutical Industry Has Been Launched.

In late July, the National Health Commission, in conjunction with the Ministry of Public Security and nine other departments, launched a year-long nationwide campaign to comprehensively rectify corruption in the pharmaceutical sector. Subsequently, the “Key Tasks for Deepening Healthcare System Reform in the Second Half of 2023” was released, listing anti-corruption efforts in the healthcare industry as a priority task for healthcare reform in the second half of the year.

In early August, provinces and municipalities including Guangdong and Zhejiang successively issued notices mandating a concentrated crackdown on corruption and irregularities in the pharmaceutical sector across their respective jurisdictions. Almost overnight, numerous WeChat groups for academic conference coordination were dissolved, many promotional academic meetings were postponed or canceled, medical representatives were barred from hospital visits, and certain departments were directly disbanded... It seemed as if the entire market’s promotion and educational activities had been put on pause.

“There’s nothing we can do about it. We were organizing the academic exchange in full compliance with regulations, but since physicians were unable to attend, the conference had to be postponed. Nevertheless, we believe that the anti-corruption campaign in the pharmaceutical sector has an entirely positive impact on compliant companies; only those engaging in bribery, gift-giving, and other illicit practices are being targeted,” said an anonymous entrepreneur.

On August 15, the National Health Commission also released a Q&A on anti-corruption efforts in the pharmaceutical sector: Academic conferences conducted in a standardized manner and routine medical activities are to be strongly supported and actively encouraged. What needs to be rectified are unlawful acts such as fabricating fictitious academic conference titles out of thin air to facilitate illegal benefit transfers, or improperly distributing academic conference sponsorship funds for private gain.

In the long run, anti-corruption efforts in the pharmaceutical and healthcare sectors will help optimize the industry environment and promote its healthy development. This is undoubtedly positive news for compliant medical enterprises within the industry. However, it has also made some physicians hesitant to participate in academic exchanges, leaving some companies uncertain about how to promote their products and educate the market.

Currently, the market is seeking innovative and compliant marketing and promotional solutions; those who identify them first will gain a certain advantage.

Over the past six months, many entrepreneurs have also encountered funding issues.

Over the past two years, the capital market has been buoyant, with financing relatively easy to secure. However, in the first half of this year, total financing in China’s healthcare industry hit its lowest level since the first half of 2018, reaching only RMB 41.1 billion—a 43% year-on-year decrease and a decline of RMB 51.6 billion (or 56%) from the peak recorded in the first half of 2021.

This is an extremely trying period for startups. A financial advisor (FA) representative stated, “Many startups have already failed in the current market, primarily due to their inability to secure financing and subsequent depletion of cash reserves. The pharmaceutical and medical device sectors are both capital-intensive industries, requiring substantial cash burn, particularly in the early stages. If a company runs out of funds before achieving product approval and commercialization, and no new capital comes in, it will be very difficult for the enterprise to survive.”

Nowadays, investors favor companies with self-sustaining revenue models, preferably those that are already profitable. Many companies in the R&D stage have begun to lower their valuations and raise capital at a discount. However, some projects still fail to secure investment even after reducing their valuations, while those that do manage to close funding rounds often raise relatively small amounts.

According to calculations, the average financing amounts for projects from the first half of 2020 to the first half of 2023 were RMB 180 million, RMB 170 million, RMB 104 million, and RMB 63 million, respectively, indicating a significant decline in project financing.

Despite the downturn in the capital market, heads of R&D-focused enterprises are still actively seeking financing and striving to secure subsidies through government project applications and investment promotion initiatives.

In addition to the primary market, the secondary market has also experienced volatility. On August 27, the China Securities Regulatory Commission (CSRC) proposed a phased tightening of the IPO pace, along with a combination of policies including strict control over refinancing and share reductions, to coordinate the balance between the primary and secondary markets.

According to statistics from the websites of the Shanghai and Shenzhen stock exchanges, since July, no IPO applications for companies planning to list on the Shanghai and Shenzhen Main Boards, the ChiNext Board, or the STAR Market have been accepted. Even in June, traditionally a peak season for filings, the number of accepted IPO projects declined significantly compared to the same period last year.

As IPOs become more challenging, investors’ exit channels are constrained, which in turn dampens their investment activity, ultimately making it more difficult for entrepreneurs to secure financing.

Faced with financial constraints, some entrepreneurs have paused or scaled back R&D investment, others have laid off staff and dissolved departments, while still others are accelerating commercialization to achieve self-sustainability. Meanwhile, founders who previously focused heavily on fundraising are now shifting their attention to cash flow, commercialization, revenue, and profitability, hoping to weather the winter and welcome the spring.

Amidst drastic industry upheaval and a downturn in the market, entrepreneurs are persevering, united by the belief that “survival is kingship.”

Note: Li Mei and Wang Miao are pseudonyms.