Jingwei Capital: The Inflection Point in the Healthcare Sector Is Approaching — 'A General on the March Should Not Chase Hares'

Looking Back at 2022: Rationality in Healthcare Investment Becomes Industry Consensus

Amid the harsh winter, new forces are accumulating energy to break through. The emerging trend in the healthcare industry is to invest early and in innovation. In 2022, there were 1,218 financing deals in China’s healthcare sector, with nearly half occurring at the early stage; many mid- to late-stage funds have also begun to focus on early-stage investments.

In the turbulent year of 2022, Matrix Partners China (MPCi) maintained a relatively active investment pace, continuing to focus on China, empowering technological and industrial innovation, and creating value beyond commerce for society. Based on the capital allocation of MPCi’s new investments, 100% of its current portfolio is dedicated to supporting technological innovation. Over the past two years, MPCi served as the lead Series A investor for more than 80% of early-stage hard-tech projects; for over 90% of hard-tech projects, MPCi invested prior to industrialization or earlier than other industrial investors.

Healthcare has been a long-standing focus for Matrix Partners China (MPCi) since its inception. Over the past few years, the MPCi healthcare team has continuously refined its investment strategies and deepened its understanding of specific sub-sectors, consistently investing in global innovative technology platforms within the biopharmaceuticals, medical devices, and diagnostics spaces. In 2022, MPCi shifted its healthcare investments toward earlier stages, tracing opportunities back to the upstream sources of the industry chain by investing in early-stage tracks such as life science tools and synthetic biology. Meanwhile, the firm emphasizes systematic investment opportunities at the intersection of healthcare and other disciplines, proactively positioning itself upstream in the industry chain and continuing to invest in the digitalization, automation, and intelligent upgrading of the healthcare industry.

Which companies did MPCi invest in 2022? Which niche sector opportunities is MPCi bullish on for 2023? VCBeat (WeChat ID: vcbeat) interviewed Yu Zhiyun, Partner at MPCi.

In the long-cycle healthcare sector, sowing and reaping often occur in different seasons. Amid the market chill of 2022, many funds chose to concentrate their resources on leading companies they had previously invested in. However, MPCi continued to sow seeds, daring to invest in earlier-stage companies. This early-stage and innovative investment strategy enabled MPCi to identify two high-potential sectors—life science tools and synthetic biology—ahead of the broader market.

Investing early and in emerging ventures is not merely a matter of casting a wide net and relying on luck; rather, it demands deep industry insights. An examination of Matrix Partners China’s (MPCi) strategic foresight in two hot sectors—synthetic biology and life science tools—offers a glimpse into its early-stage healthcare investment approach.

In the field of synthetic biology, MPCi has sourced projects from prestigious institutions such as MIT and began investing in synthetic biology ventures as early as 2019. Between 2019 and 2022, MPCi successively invested in companies including Chengyuan Biotechnology, BOTA Biosciences, Huahao Zhongtian, and Weiyuan Synthesis. Even amid the bubble and valuation controversies that plagued the synthetic biology sector in 2022, MPCi’s portfolio companies continued to garner recognition from industry peers.

MPCi remains bullish on synthetic biology, particularly on its broad application prospects in new drug development, cell engineering, and high-end biomanufacturing through efficient cellular pathway engineering.

By anticipating shifts in the biotechnology industry chain, MPCi spotted opportunities ahead of the surge in life science tools.

Since the first half of 2020, MPCi has identified systematic investment opportunities in life science tools. To date, it has achieved comprehensive coverage across all sub-sectors of the upstream life sciences industry chain. As one of the earliest investors to strategically position itself in this space, MPCi has seen several of its portfolio companies gradually emerge as leaders in their respective niches.

The perception of opportunity stems from Matrix Partners China’s observation that China’s innovative drug sector has experienced rapid growth since 2015, with substantial capital and innovation resources flowing into the industry. As numerous novel therapeutic modalities—such as innovative antibody drugs, cell and gene therapies, RNA-based medicines, and next-generation vaccines—transition from laboratory research to industrialization, the underlying demand for biopharmaceutical manufacturing processes and scientific research services has surged in a fragmented yet widespread manner.

Leveraging its deep understanding of the R&D and manufacturing processes for innovative biotechnologies and novel therapies, MPCi has extended its investment footprint upstream in the industry chain. It invests in leading companies that provide core equipment, consumables, and high-end raw materials essential for R&D and production processes, collectively referred to as the life sciences tools sector.

The life sciences tools industry is growing faster than expected. The impact of the COVID-19 pandemic on overseas supply chains has accelerated the substitution of imported products with domestically produced ones, ushering in a wave of growth for Chinese life sciences tools companies. Can this growth sustain in 2023?

Yu Zhiyun stated: “The disruption of overseas supply chains in 2022 provided a favorable window of opportunity for domestic companies. As the pandemic eases and overseas supply chains gradually recover, it will be time for domestic companies to engage in head-to-head competition with their foreign counterparts. Therefore, 2023 will place greater emphasis on the fundamental product capabilities of life science tools companies.”

In 2022, MPCi’s portfolio companies also achieved numerous breakthroughs in the field of life science tools. Over the past year, EcoCyte Bioscience has intensively launched new products such as serum-free T cell and NK cell culture media, successfully breaking the monopoly held by foreign brands; Inscinstech has facilitated the industrial upgrading of domestically produced small nucleic acid drugs, ranging from protein purification to nucleic acid synthesis; Kingyi Shengshi has established a comprehensive product portfolio centered on single-use bioreactors, accelerating the domestic substitution of single-use bioprocessing technologies.

In addition to identifying new growth avenues, MPCi continues to refine its investment thesis and maintain a strategic focus on innovative drugs, medical devices, and digital healthcare.

In the innovative drug sector, companies felt the chill of the winter more acutely in 2022. The investment logic for enterprises in this field has also undergone significant changes.

From a sectoral perspective, MPCi observes that in the biotechnology field, a cohort of Chinese companies with global competitiveness is emerging from the trough, particularly in emerging areas such as synthetic biology and cell/gene therapy, driven by the rapid development of innovation platforms. In the innovative drug sector, MPCi continues to strategically invest in disruptive platforms targeting global markets, as well as in differentiated platforms and therapeutics designed for global competition.

In the field of innovative drugs, Yu Zhiyun stated that investment criteria for companies would be higher. Companies that remain at the level of grand narratives would find it difficult to secure financing, as institutions would place greater emphasis on a company’s product pipeline, clinical data, and commercialization capabilities.

In the medical device sector, technology and products are updating and iterating rapidly. Homogeneous competition in China’s market is intensifying, genuine original innovation remains scarce, and there are critical bottlenecks in the upstream supply chain. MPCi believes that structural differences in the medical device and diagnostics fields create opportunities in both existing and incremental markets. MPCi is optimistic about opportunities characterized by high technological barriers and large clinical departments, while placing significant emphasis on foundational expertise in key components.

In the field of healthcare digitalization, Matrix Partners China (MPCi) has been strategically positioned for a full decade. After ten years of deep cultivation, MPCi, one of the earliest investors to bet on digital healthcare, is now entering its harvest period. In 2022, MPCi celebrated an IPO success with Zhiyun Health, a company it had supported since the angel round. As early as 2015, Matrix Partners China invested in Zhiyun Health’s angel round and subsequently increased its stakes in Series A and Series B financing rounds. MPCi will continue to focus on the direction of medical digital intelligence (digitalization, automation, and intelligence).

In 2022, the industry was deflating the overheated bubble from 2021, but the subsequent adjustments led to an excessive cooldown. The slowdown in IPO issuances in 2022 also exerted pressure on the primary market; difficulties in listing and poor performance in the secondary market hindered the entire ecosystem, resulting in stunted industry development.

How Does MPCi View Market Volatility?

Yu Zhiyun stated, “The industry’s excessive cooling has also fostered greater rationality. The downturn has made early movers in the sector realize that product refinement requires more time and patience; it is not something that can be rapidly achieved simply by injecting substantial capital. Ultimately, whether a product gains market recognition depends on its viability. This situation has also brought a clear-eyed awareness of the gap between domestic companies and leading overseas enterprises. Overseas firms have accumulated long-term advantages in specific fields, and it will take time for Chinese companies to close this gap.”

Market volatility also calls for greater patience rooted in long-termism.

He added that, on a global scale, the development of any new technology platform invariably undergoes multiple cycles of ups and downs. Initially greeted with high expectations, it often fails to deliver anticipated results as more data accumulates, leading to market pessimism and waning enthusiasm. Companies then focus on strengthening their core competencies and refining their products, ultimately enabling the industry to stage a comeback. Such fluctuations have occurred repeatedly in the industry, while China is only just beginning to experience this reality. As domestic industries increasingly prioritize original innovation, it is important to recognize that innovation and risk are closely intertwined: the newer the innovative technology, the higher the risk. All stakeholders must be well prepared.

Having Moved Beyond the Precariousness of 2022, What Advice Does Matrix Partners China Offer to Entrepreneurs?

Yu Zhiyun stated that founders need to stay clear-headed and make decisions that are in the best interest of their companies. Many firms in 2022 regretted turning down additional funding at the peak of the 2021 investment boom. Even during periods of overheating, it is essential to make reasoned judgments about commercialization. Commercialization is not an overnight achievement; it differs fundamentally from a surge of capital eager to invest. It requires time and space, and explosive growth is rarely attainable.

The industry is expected to see a recovery in 2023. However, this recovery does not mean that corporate financing will become easier. The higher the quality of a company, the greater its likelihood of securing funding. Valuations will not reach the high levels seen in previous years. Therefore, founders must remain calm and clear-headed, prepare themselves psychologically, and clearly distinguish between what is most important and where concessions can be made. As the saying goes, “A general on a mission should not chase after small rabbits.” Ensuring the company’s survival is the top priority; growth can be pursued thereafter.

Secondly, one must maintain a proper reverence for the healthcare industry. Medical entrepreneurship is inherently a slow-paced endeavor; therefore, avoid impatience and remain grounded to ensure steady and long-term success.