BoYuan Capital: "Invest Early and Invest Small" Has Become the Consensus; Global Innovation Is the Future

VCBeat monitors and reports on investments in the healthcare sector each quarter, compiling a list of the top ten most active investment firms in the industry. In these reports, BioTrack Capital was featured in every quarter of 2022. Further statistics reveal that BioTrack Capital achieved strong returns in its investment portfolio in 2022: in addition to several portfolio companies going public, approximately two-thirds of the projects it invested in during 2021 secured new rounds of financing in 2022.

How did BioTrack Capital achieve such impressive results in 2022, and what new areas will it focus on in 2023? In an interview with VCBeat, Chen Penghui, Founding Partner of BioTrack Capital, generously shared comprehensive insights to provide reference for the industry.

Chen Penghui, Founding Partner of BioTrack Capital

VCBeat: What changes do you think have occurred in the healthcare investment sector in 2022 compared to previous years?

Chen Penghui:The overall market performance of the healthcare industry in 2022 can be described as highly volatile. Starting from the second half of 2022, the healthcare sector in the secondary market began to fluctuate and decline, hitting bottom in September, with the industry’s overall price-to-earnings (P/E) ratio reaching its lowest level across several cycles in the past decade. Furthermore, the number of healthcare companies listed on China’s A-share and Hong Kong stock markets, as well as the scale of funds raised through these listings, saw a significant decrease in 2022 compared to 2021. This broad market cooldown was transmitted rapidly and directly to the primary market.

Fortunately, following the favorable policy of fiscal interest subsidies for medical equipment issued by the National Health Commission last September, the healthcare market has ushered in a long-awaited recovery. The secondary market has not only warmed up but even experienced a sharp rebound. For instance, more than 60 pharmaceutical companies listed on both the A-share and Hong Kong stock markets have seen their share prices rise by over 50% in the past three months, with more than a dozen of them surging by over 100%. The Hang Seng Healthcare Index has also corrected by more than 50%.

The year-end surge has helped restore confidence across the healthcare industry. Driven by the pandemic, a global investment boom in the healthcare sector unfolded over the previous two years. After more than a year of adjustments in 2022, healthcare investment valuations have, to some extent, returned to rational levels, and the stabilization and rebound at year-end have bolstered market confidence. As 2023 marks the first year after the lifting of pandemic-related restrictions, the industry is eager to seize opportunities and pursue robust growth.

As a primary market investor focused on China’s healthcare sector, BioTrack Capital has seen numerous portfolio companies complete their initial public offerings (IPOs). Consequently, we maintain an intuitive understanding of and active participation in the dynamics of both the primary and secondary markets within the healthcare industry.

Last year, both the total financing amount and the number of deals in the primary market declined significantly. Investors became more restrained and rational, with a prevailing atmosphere of cautious observation. Rather than merely “calm,” the trading activity in the primary market could even be described as “sluggish.” Meanwhile, the private equity market did not experience the same pronounced recovery as the secondary market. Through communications with market participants and third-party agencies, we learned that the number of biopharmaceutical private equity financing transactions in the fourth quarter of 2022 hit a three-year low.

In the investment sector, influenced by the performance of secondary markets, biotechnology or pharmaceutical projects seeking financing in 2022 likely faced significant challenges. Most projects in this niche are still in clinical or preclinical stages, remaining far from commercialization, let alone profitability. Consequently, such projects are relatively more vulnerable to market corrections. For this reason, in 2022, medical device and diagnostic projects—whose technologies are easier to validate, products simpler to develop, regulatory approvals quicker to obtain, and sales faster to generate—attracted greater attention even in a cooling market. Of course, the surge in the diagnostics sector was largely driven by the pandemic. Frankly speaking, the impact of the pandemic on healthcare investment over the past few years has presented opportunities and challenges that are rare in an investor’s career.

In terms of investment stages, “investing early and investing small” began to emerge as a trend last year. Recent data show that in the biopharmaceutical industry, the combined share of seed, angel, and Series A financing deals exceeded 70% in 2022, up from around 50% in previous years. Meanwhile, the average deal size for private equity financing in 2022 was less than half of that in 2020. This shift indicates that by 2022, “investing early and investing small” had become a consensus among many still-active investment institutions, with numerous funds establishing incubators or dedicated angel funds to support this strategy.

Having said all this, while challenges and volatility have been prevalent, crises and opportunities always go hand in hand. We have still observed many positive developments. On one hand, we have seen that truly valuable companies continue to gain recognition from investors and the market, regardless of the broader macroeconomic environment. For instance, two-thirds of the projects we invested in during 2021 secured new rounds of financing in 2022. This ratio would be even higher if we excluded companies that had no short-term fundraising plans. It is precisely during difficult market conditions that a company’s true value is most clearly reflected. We have witnessed these portfolio companies maintain high morale and unite as one to achieve one seemingly impossible performance target after another, despite the challenges posed by over half a year of pandemic prevention and control measures and market turbulence. As investors, we are deeply encouraged and moved by their resilience. We will continue to stand alongside these outstanding entrepreneurs on their journey, creating greater value together.

On the other hand, from a long-term perspective, people’s enduring demand for health and quality of life will remain unchanged. China’s healthcare industry has consistently demonstrated steadfast growth and development within a long-term upward trend. We firmly believe that the healthcare sector is one of the industries with “the longest slope and the thickest snow,” a metaphor indicating sustained high-growth potential. In this industry, innovative technologies, products, and business models are destined to continually emerge. Over the long term, these innovations will inevitably possess both global competitiveness and distinct Chinese characteristics. This is precisely what we, as an early-stage investment institution focused on China’s healthcare industry, strive to pursue and support.

Therefore, from a meso- and micro-level perspective, the changes in the healthcare industry are dynamic, proactive, and vibrant; from a macro-level perspective, the industry is developing upward with determination, stability, and certainty. BioTrack Capital remains bullish on the long-term development of China’s healthcare industry.

VCBeat: In response to the changes in 2022, what adjustments and shifts has BioTrack Capital made to its investment strategy?

Chen Penghui:BioTrack Capital’s overall investment strategy has always adhered to the principles of “upholding integrity while fostering innovation, and pursuing progress with stability.” Our investment strategy comprises both enduring core elements and evolving components.

Our steadfast commitment has been to invest in early-stage and early-growth companies since the inception of our first fund. In retrospect, this strategy has been thoroughly validated, as these investments have delivered strong returns.

One aspect of our evolution involves increasing our allocation to early-stage and growth-early companies, continuously strengthening our capabilities in evaluating talent, identifying trends, and assessing scientific merit, and translating these strengths into investment outcomes. Another aspect is the expansion of our investment boundaries. Beyond core healthcare, we are also exploring structural opportunities within the broader healthcare ecosystem and the application and expansion of biotechnology in cross-disciplinary fields. With biotechnology as our core, we are conducting further explorations within our sphere of core competencies.

To put it plainly, we previously invested heavily in follow-on and incremental innovations within the biopharmaceutical sector. These projects delivered solid returns to the fund under the market conditions at the time. However, we also recognize that the window for investing in such follow-on and incremental innovations is closing. Investing in globally leading innovations is undoubtedly the future trend. Of course, achieving global leadership in innovation first requires globally leading scientists. We have observed a positive trend: many top-tier Chinese professors around the world are returning to China. Given our long-standing focus on developments in cutting-edge global biotechnology, we have had the privilege of becoming their earliest investors.

In the field of medical device diagnostics, we are contemplating when Chinese healthcare enterprises can rise to the global forefront and seeking out medical device and diagnostic companies with the potential for groundbreaking global innovation. For instance, we invested in Lixiao Medical, which achieved breakthroughs in global technology by introducing overseas technologies; Fitlan chose to acquire overseas companies to gain access to international markets and technologies; while Qitan Technology and Yuce Biology attained globally competitive innovative capabilities through independent research and development. As early-stage investors, we must not miss the opportunities for globalization in the medical device and diagnostics sector.

VCBeat: So, what were the major investment achievements of BioTrack Capital in 2022?

Chen Penghui:In 2022, amid the overall cooling of the primary market, BioTrack Capital maintained its own investment rhythm. We neither adopted a passive wait-and-see approach nor engaged in blind, aggressive bottom-fishing. While conducting thorough and prudent research and due diligence, we actively deployed capital to support entrepreneurial teams with genuine innovative spirit and technological advantages, firmly accompanying these entrepreneurs as they navigated the path of China’s healthcare development. Thanks to this steadfast commitment, we have achieved substantial returns.

Notably, we also invested in leading enterprises across various healthcare subsectors in 2022.

For example, Beiqi Biopharma. Founded in Beijing in July 2022, the company was incubated and primarily invested in by BioTrack Capital. Leveraging discoveries made by Professor Deng Hongkui and his scientific team at Peking University, the company focuses on developing global innovative cell therapy drugs based on its chemically induced pluripotent stem cell (CiPSC) technology platform.

Professor Deng is a Boya Chair Professor at Peking University, Director of the Peking University Stem Cell Research Center, and a Changjiang Scholar. From 2010 to 2016, he served as a Council Member of the International Society for Stem Cell Research (ISSCR) and as an Editorial Board Member for journals including *Cell* (one of only two in China) and *Cell Stem Cell*. Professor Deng has published more than 100 papers in prestigious journals such as *NEJM*, *Nature*, *Science*, *Cell*, and *Cell Stem Cell*, with over 10,000 citations.

He has made multiple pioneering contributions to the field of stem cell research, particularly in small molecule-induced cell fate reprogramming, establishing himself as a scientist with genuine international influence. This technology, independently developed in China, represents a breakthrough with true global competitiveness. It serves as a prime example of Chinese scientists standing at the forefront of the global academic stage. By resolving fundamental technical “bottlenecks” in the development of stem cells and regenerative medicine in China, it marks the first time that we have comprehensively surpassed and taken the lead over counterparts in Europe, the United States, and Japan in the global cell therapy sector.

This scientifically groundbreaking global innovation is precisely the focus of BioTrack Capital. Our investment in this project also bears the distinct hallmark of BioTrack’s approach: sustained, long-term attention. Our project lead interned in Professor Deng’s laboratory during his student years and has closely monitored the development of Professor Deng’s technologies over the more than ten years since leaving the lab. This enabled BioTrack Capital to learn of Professor Deng’s decision to launch a startup at the earliest opportunity, earn his trust through our professionalism and sincerity, and provide Beiqi Biopharma with its initial wave of support.

Fiteland is a “flagship” company in China’s high-end consumer healthcare sector for ophthalmology and optometry, leveraging advanced global technologies to drive business breakthroughs in key markets worldwide. As a global enterprise, Fiteland China is primarily responsible for the Chinese and Asia-Pacific markets, including establishing local production and domestic sales channels. Fiteland Israel serves as the overseas R&D and design center, focusing on integrating new materials and technologies from abroad, managing sales in the Israeli and European markets, and supporting the registration of imported products with China’s National Medical Products Administration (NMPA) as well as technology transfer.

Overall, Fitland’s products combine scientific rigor with consumer appeal. Its product portfolio includes various types of soft and rigid contact lenses for the ocular surface, as well as premium intraocular lenses, with consumer-oriented high-end medical devices serving as its core pipeline.

BioTrack Capital provided Fitlan with four consecutive rounds of financing, assisting the company in acquiring an overseas high-end crystal manufacturer, initiating clinical registration in China, and penetrating the domestic market. We believe that future industry chains will not be confined to China but will expand globally. Therefore, we are committed to supporting teams like Fitlan, which possess an international vision and exceptional execution capabilities, enabling them to seize opportunities in both the local and global markets.

Meanwhile, our investment in Feitelan also reflects our “healthcare + consumer” investment thesis. We are bullish on non-reimbursable medical demands in sectors such as ophthalmology, dentistry, and medical aesthetics. Feitelan’s focus on myopia prevention and control, as well as cataract treatment, precisely represents a combination of “out-of-pocket payment + high-end medical devices.” We believe that, leveraging its robust product portfolio and a management team with extensive sales expertise, the company is poised to become a leading domestic player in this field.

VCBeat: Which subsectors within the healthcare industry do you think will attract more attention in 2023? What are the reasons?

Chen Penghui:In the past, we seized opportunities at the intersection of healthcare and payment, healthcare and consumption, as well as healthcare and digitalization. BioTrack Capital has continued to identify and expand new investments in these areas of expertise. Meanwhile, we have also identified emerging opportunities, such as those arising from population aging and supply chain upgrades.

First is population aging. We believe that the new generation of seniors is ushering in a true window of explosive growth for the silver economy. As China’s “post-60s” and “post-70s” cohorts enter old age, their spending power, willingness to consume, and hierarchy of needs differ significantly from those of the “post-40s” and “post-50s” generations at the same stage of life. The silver economy driven by population aging remains a trend that healthcare investors cannot afford to ignore.

Next is the supply chain. Influenced by the international landscape and geopolitics, medical resources, as a core demand affecting national welfare and people's livelihood, must achieve domestic self-sufficiency and avoid being constrained by external bottlenecks. This is not only a mandatory choice for the nation but also an inevitable requirement and important direction for the development of the healthcare industry. The same applies to the upstream supply chain of the healthcare sector, ranging from core components to raw materials. We have already invested in multiple upstream healthcare enterprises with strong core competencies and competitive barriers. From a product perspective, we are further expanding into more upstream materials and components. While this undoubtedly poses significant challenges for investors, it represents even greater opportunities for us. After all, maintaining high standards of professionalism and scientific rigor has been unwavering since the very first day of BioTrack Capital’s establishment.

VCBeat: So, how should companies respond to market changes in 2023?

Chen Penghui:Entrepreneurs should confront difficulties with a more proactive attitude than established companies. For pre-revenue startups, founders must be willing to make tough trade-offs; ensuring the company’s survival and growth in the face of adversity is paramount. Shut down non-essential business lines and departments to maintain the stable development of core operations. Seize every financing opportunity to secure sufficient cash flow to navigate through challenging times.

For companies with sustained revenue, we recommend seizing post-pandemic opportunities. Adopt a longer-term perspective by attracting top talent and strengthening international expansion to prepare for the next leapfrog development.