How to Excel in Healthcare Investing? Insights from a 15-Year-Old PE Firm

“Selecting investment targets with relatively certain profitability models and growth potential, and pursuing relatively certain investment returns, is our area of expertise,” shared Shi Wei, Partner at JD Capital, in a recent speech. In his view, “staying within one’s circle of competence is the key to navigating market cycles.”

In 2022, the chill had already permeated nearly every healthcare investor. According to VBInsight’s “Global Healthcare Industry Capital Report for H1 2022,” the global macroeconomic environment became increasingly complex and severe. Influenced by multiple factors including regional conflicts, SARS-CoV-2 variants, energy shocks, debt burdens, and economic inflation, global healthcare financing in H1 2022 decreased by approximately 43% year-on-year.

The healthcare industry is facing a capital winter. Nevertheless, “inelastic demand” and its status as a “sunrise sector” remain its fundamental characteristics. As valuations correct and the environment stabilizes, continuous innovation and steady growth will continue to define the long-term trajectory of the healthcare industry.

VCBeat has noted that JD Capital, founded in 2007, began systematically laying out its healthcare sector strategy around 2009. This included establishing specialized funds and recruiting professional talent to build dedicated teams. The firm has made systematic investments across the entire industry chain—spanning active pharmaceutical ingredients (APIs), chemical drugs, traditional Chinese medicine (TCM) patent medicines, medical devices, pharmaceutical distribution, and healthcare institutions. Its portfolio includes companies such as Panlong Pharmaceutical (002864.SZ), Jiudian Pharmaceutical (300705.SZ), Autek China (300595.SZ), Weili Medical (603309.SH), Liuzhou Pharmaceutical Group (603368.SH), and Lunan Eye Hospital.

Currently, JD Capital manages assets worth approximately RMB 61.6 billion, with cumulative investments totaling around RMB 34 billion. In the healthcare sector, it has invested in more than 50 companies, 12 of which have successfully completed initial public offerings (excluding those listed on the NEEQ).

Over the past decade, JD Capital has navigated the dynamic shifts in the healthcare sector, witnessing the industry cycles and evolving hotspots across various segments of China’s medical industry.

Nowadays, from the perspective of JD Capital, there are still systematic opportunities in the medical industry:

• With the advancement of urbanization, the intensification of population aging, and the development of China’s pharmaceutical industry and healthcare services sector, the overall market size will continue to experience stable long-term growth.

• As per capita GDP continues to rise, consumer demand for high-quality medical services is expanding, driving continuous upgrades in the supply of healthcare services.

• As technological capabilities and innovation in the pharmaceutical industry continue to advance, the pace of import substitution has accelerated, leading to a steady increase in the market share of domestically produced products.

• Since 2018, China has conducted multiple rounds of national centralized volume-based procurement (VBP) for pharmaceuticals and medical devices. Amid the profound transformation characterized by the normalization and institutionalization of VBP, a cohort of high-growth enterprises that are either subject to VBP or derive benefits from it will emerge.

Recently, VCBeat conducted exclusive interviews with Zou Lin and Zhang Yunfeng, the two heads of JD Capital’s Healthcare Investment Division, to discuss JD Capital’s investment methodology in the medical sector and its industry insights.

VCBeat: Jiuding Investment began to systematically lay out its presence in the healthcare industry around 2009. What was the market environment like at that time? Why did you make such a consideration?

Zou Lin：There are now many specialized funds on the market, such as healthcare funds and semiconductor funds. However, in the early years, the market was dominated by comprehensive or cross-industry private equity (PE) and venture capital (VC) funds.

At that time, against the backdrop of China’s sustained economic growth, government spending on medical insurance gradually became a key focus of fiscal transfer payments, and the high-growth trajectory of China’s health industry became increasingly clear. In fact, the launch of healthcare industry investment funds in China closely coincided with the initiation of healthcare reform.

Moreover, data from multiple sources and the development trajectories of overseas industries have demonstrated that the health sector is highly profitable, offering substantial potential for investment returns.

Therefore, around 2008, CCB International established China’s first corporate-type fund dedicated to investing in the healthcare industry. During the same period, JD Capital also began launching its own pharmaceutical fund and subsequently built a specialized healthcare investment team.

Currently, our healthcare investment team comprises seven to eight members, most of whom have professional backgrounds in medicine and pharmaceuticals, covering various sub-sectors of the healthcare industry.

VCBeat: There are now an increasing number of healthcare-focused funds in the market. When it comes to popular, high-quality, and scarce investment targets, institutional investors often find themselves in a race to secure deals. How does Jiuding Investment approach this situation?

Zhang Yunfeng: In our past investments, we have never overly pursued hot projects, nor have we paid much attention to the market’s enthusiasm for them.

Zou Lin: Our core strategy has always been to focus on the certainty and growth potential of enterprises.

Certainty means that a company’s business model, corporate governance, and organizational capabilities have been validated, with established revenue and profit scales, rather than relying on probabilistic bets. In healthcare investment, regardless of the sector or how attractive it may seem, we must first understand it thoroughly and identify evidence that supports our determination of certainty.

Regarding growth potential, our considerations are as follows: First, the extent of future growth space for the enterprise or its specific sector. Second, the operational advantages that enable the enterprise to achieve future growth.

VCBeat: In the healthcare sector, what are the common characteristics of companies that simultaneously deliver certainty and growth?

Zou Lin: Taking the pharmaceutical sector as an example, from the perspective of competitive factors, we identify several commonalities: pharmaceutical R&D capabilities, sales and promotion capabilities, brand-building capabilities, and internal management and organizational capabilities.

After listing the competitive factors, we will quantify them using data. For instance, R&D capabilities can be quantified by metrics such as pipeline progress, R&D expenditures, and the number of R&D personnel. This approach makes it easier to identify which company holds a distinct advantage in a given area, thereby facilitating informed decision-making.

In the medical device sector, take Autek China as an example. The company currently has a market capitalization of nearly RMB 40 billion in the secondary market. When we invested in the company in 2011, it was still relatively small, with annual revenue of around RMB 40 million and annual profit of approximately RMB 20 million. We valued the company at about RMB 400 million, corresponding to a price-to-earnings (P/E) ratio of nearly 20x.

At that time, we identified two core elements of its value:

First, the company possesses strong technical barriers and was the sole manufacturer in mainland China to hold an orthokeratology lens product registration certificate issued by the China Food and Drug Administration (CFDA). This status remained unchanged until March 2019, when Aierbode obtained registration for its orthokeratology lenses, becoming the second enterprise in China to secure such a product registration certificate.

Second, the industry in which the company operates is large in scale. According to data from the National Report on Visual Health, China has the highest number of myopic adolescents worldwide. In 2012, there were 450 million people aged five and above with myopia in China. The predominant solution for myopia is wearing eyeglasses, while very few individuals use orthokeratology lenses. Compared with foreign markets, China’s penetration rate for orthokeratology lenses has significant room for growth.

VCBeat: What is JD Capital’s investment pace?

Zhang Yunfeng: Our investment process primarily follows these steps: project sourcing → project initiation → due diligence → project review → investment decision → legal review & fund disbursement → post-investment management. Typically, the due diligence and review cycle for a single project takes one month or slightly longer.

We do not blindly pursue a “fast” investment pace; more importantly, we aim to ascertain the company’s true value and growth logic during the investment due diligence process.

VCBeat: With numerous healthcare subsectors, how does Jiuding Capital make its selections?

Zhang Yunfeng: We will first construct an industry landscape map, breaking it down into various sectors and stages. Then, we will examine the key factors corresponding to each sub-sector, such as industry policies, so as to grasp the future development trends of the industry and identify sub-sectors with systematic investment opportunities. This is a top-down strategy, which we internally summarize as “following the map to find the horse.”

Since 2011, we have invested heavily in numerous high-quality companies specializing in active pharmaceutical ingredients (APIs), generic drugs, and traditional Chinese medicine (TCM), such as Chengyi Pharmaceutical (603811.SH), Fuxiang Pharmaceutical (300497.SZ), Wanbangde (002082.SZ), and Guangshengtang (300436.SZ).

This is because we noted at the time that the Good Manufacturing Practice for Drugs (2010 Revision) (i.e., the new GMP for drugs) came into effect on March 1, 2011. Newly established drug manufacturers and newly built (or renovated/expanded) workshops of existing drug manufacturers were required to comply with the new GMP standards. A transition period of no more than five years was granted to drug manufacturers under this regulation. We believe that the pharmaceutical industry witnessed a systemic investment and financing opportunity driven by hardware upgrades.

Since 2015, we have systematically invested in more than ten hospital chain groups, covering specialized hospital groups in fields such as ophthalmology, orthopedics, and obstetrics and pediatrics. This was also because, at that time, we observed changes in domestic medical insurance policies and policy support for private medical institutions.

VCBeat: Innovative drugs have been highly sought after in the capital market in recent years. What is JD Capital’s perspective?

Zou Lin: At present, we have invested in only a few innovative drug companies, as many such enterprises currently struggle to meet our emphasis on certainty and growth potential.

We believe that domestic innovative drug companies still generally face certain risks at the current stage.

For instance, a product may not necessarily obtain regulatory approval. Data from overseas markets indicate that the success rate for innovative drug development is 10%, which constitutes a low-probability event.

Furthermore, the company’s commercialization efforts are unlikely to meet expectations in the short term. For instance, the innovative oncology drug PD-1 inhibitors face intense competition in the Chinese market, with numerous players engaged in fierce price wars. Coupled with the volume-based procurement policy, this has led to a significant contraction in market size.

Zhang Yunfeng: However, high-quality innovative drug targets are inherently scarce. Once R&D is successful, the market prospects for these drugs post-launch are enormous. This has led to intense competition among institutions that previously invested in innovative drugs, often resulting in extremely high valuations while a company’s products are still in the clinical development stage.

Currently, as a large number of innovative drug companies listed on the STAR Market and the Hong Kong Stock Exchange have seen their share prices fall below IPO levels, the valuation inversion between primary and secondary markets has been confirmed. We anticipate that this sector may present systemic investment opportunities driven by a round of valuation corrections.

Overall, we do not completely exclude innovative drug projects; rather, we believe it is essential to thoroughly identify core technologies with genuine barriers and demonstrable clinical value.

For example, from the perspective of drug development logic, biologics are large-molecule drugs with significantly higher predictability than small-molecule drugs.

On the one hand, small-molecule drugs have relatively low technical barriers. After patent expiration, they are prone to experiencing a “patent cliff” (a sharp decline in sales and profits that companies previously enjoyed under patent protection). On the other hand, the development of large-molecule drugs involves higher barriers, requiring more complex technologies, particularly in manufacturing processes and quality control. Even after patent expiration, biosimilars of large-molecule drugs struggle to match the original innovator products, thereby endowing large-molecule drugs with strong brand effects.

On the other hand, large-molecule drugs have a higher success rate than small-molecule drugs. Approximately one out of every 20 small-molecule compounds entering preclinical research yields a marketable drug, whereas one out of every seven to eight large-molecule compounds entering preclinical research becomes an approved drug.

VCBeat: JD Capital has previously invested in many healthcare services projects. How do you view the investment trends in healthcare services in recent years?

Zou Lin: Over the past decade, the hospital chains we have invested in have been primarily concentrated in the field of serious medical care, such as orthopedics, ophthalmology, obstetrics and pediatrics, and hemodialysis.

Previously, we have also observed that many hospitals have attempted various new business ventures in non-core medical fields. However, in recent years, we believe thatA major trend in healthcare services is a return to more rigorous medical practice—namely, delivering services that truly address essential clinical needs, while clearly differentiating themselves from public hospitals.

For example, a hospital group we have invested in operates both orthopedic hospitals and women’s and children’s hospitals. Rather than competing with public hospitals on price, it focuses primarily on service quality and distinctive service offerings.

For example, this hospital group operates postpartum care centers. In addition to professional nurses, clinical nutritionists are also involved in providing care for new mothers. The professional nurses assess vital signs, wound healing, uterine recovery, lactation status, and other indicators. Meanwhile, the clinical nutritionists evaluate the mothers’ nutritional status, screen for nutritional risks, and develop scientifically sound, phased recuperation plans tailored to each individual’s clinical diagnosis, mode of delivery, constitution, nutritional needs, and dietary preferences.

VCBeat: In light of the trend of healthcare companies expanding into overseas markets in recent years, how does JD Capital view the opportunities behind this?

Zou Lin: Expanding into overseas markets is a significant source of growth for enterprises, and many companies have built their growth strategies around this approach. For instance, some diagnostic reagent companies listed on the A-share market primarily focus on exports. Although the domestic pandemic also spurred the development of Chinese companies, some firms carved out their own paths and achieved substantial success in international markets.

Currently, we observe that the vast majority of enterprises still prioritize the domestic market, as China represents a massive market and the national government is actively promoting the development of a unified national market. Therefore, our current focus remains primarily on enterprises centered on the domestic market.

Moreover, many enterprises that have successfully expanded into overseas markets have benefited from the advantages in products, technology, and talent—especially talent—accumulated after listing on the capital market. In the healthcare sector, to secure overseas orders, companies must specifically recruit professionals with experience in international markets, enabling them to navigate foreign healthcare policies and effectively engage with overseas distribution channels.

We have also observed that many professionals with backgrounds in foreign trade exports, such as toys and apparel, are gradually entering the medical industry to help domestic medical enterprises expand into overseas markets. However, due to the high barriers to entry in the healthcare sector, the outcomes driven by these cross-industry talents have been less than satisfactory.

We believe that a more realistic path for domestic medical enterprises to expand into overseas markets is to first achieve growth, obtain regulatory approvals, and become publicly listed in China before venturing abroad. For companies still in their growth stage, attempting to expand overseas may not be highly efficient.