From Overlooked to Overvalued: How Long Will the IVD Reagent Raw Materials Boom Last?

“Promising targets are seeing their valuations change almost daily,” an investor told VCBeat. He has recently been focusing on the sector of raw materials for IVD reagents, having visited nearly all the well-known domestic projects. However, upon re-engaging, he found that valuations had risen, forcing him to rethink his investment decisions. “The competition is truly intense.”

The fervor surrounding IVD reagent raw material projects was arguably the most indisputable trend in the healthcare investment circle in 2021. “There is a curious phenomenon in primary market investments in IVD reagent raw materials: companies that have not yet achieved profitability are often more sought after,” said another investor, “simply because their valuations tend to be slightly lower.”

In the past two years, nearly all investment institutions involved in healthcare have been analyzing the windows of opportunity and potential in the IVD raw materials sector. Corresponding to the heavy traffic at the doors of IVD raw material companies is the steady rise in announced financing transaction amounts. Taking Yeasen Biotechnology as an example, it rapidly completed its Series B and B+ funding rounds in June and August 2021, raising a total of 560 million yuan. Compared to its Series A financing one year earlier, its valuation increased several-fold, attracting prominent investors such as Legend Capital, CPE Yuanfeng, and Huimei Capital. Furthermore, Hanhai New Enzyme’s announcement in November of a nearly 800 million yuan Series C financing round surpassed the 600 million yuan record set by Abclonal in December 2020, clearly demonstrating the high demand and popularity of IVD raw material projects.

In the secondary market, the IVD reagent raw materials sector has also stepped into the spotlight. ACROBiosystems, Nanomicro Technology, Sino Biological, and Vazyme have successively completed their initial public offerings (IPOs), systematically filling the gap of listed companies in the IVD reagent raw materials segment and creating the only sector in 2021 with no new stocks breaking their issue price upon listing. Outside the capital markets, HyTest Biotech, Kangwei Century, and Nearshore Protein have long been poised for entry. It is no surprise that in the investment strategy reports released at the beginning of the year, 25 out of 32 securities firms highlighted the upstream segments of the life sciences and pharmaceutical industries, with nearly ten sell-side analysts designating this industry as a key recommended sector.

“It is estimated that the heat will last until the end of 2022.” More than one investor told VCBeat. For them, investing in IVD reagent raw material projects is no longer a question of whether or not to invest, but rather a resource challenge of whether they can seize market share. However, trends always shift and hype eventually fades; how long IVD reagent raw material companies can remain hot ultimately depends on their underlying logic.

Undoubtedly, the most evident rationale for IVD reagent raw material companies currently being in the spotlight is their widespread and sustained wealth-creation capability.

For investment institutions that have strategically positioned themselves early, companies specializing in raw materials for in vitro diagnostics (IVD) reagents have proven to be exceptionally valuable assets. Take Vazyme Biotech, which went public at the end of 2021, as an example. This company focuses on upstream basic consumables such as enzymes, recombinant proteins, and antibodies. Its market capitalization exceeded RMB 34 billion on its first day of trading, delivering over 700-fold returns to Danen Capital, which had generously invested in the company as early as 2013 and remained a partner for nearly a decade, thereby achieving remarkable recognition. In addition, other institutions including Huatai Health Care, Longma Peak Capital, GF Xinde, and Sherpa Investments also saw their stakes in Vazyme translate into multi-fold investment returns. For instance, in 2019, Huatai Health Care and Longma Peak Capital held 1.97% and 0.5% of Vazyme’s shares, respectively, with investment amounts of nearly RMB 80 million and RMB 25 million. These holdings corresponded to 6.7389 million shares and 2.736 million shares after the subsequent joint-stock reform. On Vazyme’s listing day, the value of these shares in the secondary market rose to RMB 370 million and RMB 150 million, representing 4.7-fold and 6-fold increases, respectively, compared to their initial investment values.

A review by VCBeat of the prospectuses of IVD reagent raw material companies reveals that, unlike innovative drugs and medical devices—which may bring disruptive solutions to healthcare—IVD reagent raw material companies rarely had institutional investors accompanying them in their early stages. In one notable incident, during the second year of ACROBiosystems’ establishment, its original major shareholder decided to withdraw capital due to the lack of prospects for rapid profitability, forcing founder Chen Yiding to scramble for funds to sustain the company’s development. Similarly, when Danen Capital invested in Vazyme in 2013, it did so with a certain spirit of adventure, akin to “investing in disruptive innovation amidst a vast ocean.”

By around 2017, the industry welcomed its first wave of keen-eyed external institutional investors. Firms such as Qiming Venture Partners, Genesis Capital, Cowin Capital, and FenShare Capital—backing star projects like Nanomicro Tech, Sino Biological, ACROBiosystems, and Fitogen—mostly entered the market during this period, emerging as the big winners when giants began vying for IVD reagent raw materials. For these early-stage investors, what was originally an asset allocation strategy that traded low risk for stable cash flows turned out to be a pleasant surprise: performance surged during the COVID-19 pandemic, marking a turning point and triggering a rapid expansion in overall valuations.

According to the prospectus, in 2017, Yuansheng Venture Capital invested approximately RMB 1 million to acquire about 4.5% of the total equity of NanoMicro Tech at that time. Four years later, after several transfers, this equity stake evolved into nearly 14.58 million shares of NanoMicro Tech. Based on the IPO issue price, these shares were valued at approximately RMB 117 million, representing a return of around 117 times Yuansheng Venture Capital’s initial investment. Furthermore, calculated based on the stock price surges in the secondary market, this investment, held for less than five years, has grown by more than 900-fold.

Since 2019, prominent investment firms, albeit late to the scene, have successively made substantial equity investments in companies specializing in raw materials for IVD reagents. For instance, in addition to the aforementioned star institutional shareholders of Vazyme, Nanomicro Technologies received backing from Hillhouse Capital, Sequoia Capital, Huimei Capital, and WuXi AppTec in 2019. The following year, Fapon Biotech saw significant heavyweight investments from Puxin Capital, Defu Capital, Cathay Capital, and Sequoia Capital. Their entry has, to some extent, driven up the valuations of IVD reagent raw material companies. According to its prospectus, Fapon Biotech was valued at RMB 8.05 billion during its capital increase in 2018; by the time Cathay Capital, Sequoia Capital, and others invested in 2020, its valuation had reached RMB 10 billion (this growth was also accompanied by steady revenue increases at Fapon Biotech). Some early-stage institutional and individual investors capitalized on this trend to exit their positions, thereby realizing substantial wealth creation ahead of schedule.

As expected, the second wave of prominent institutional investors reaped substantial returns from the rapid growth of IVD reagent raw material companies. For instance, according to the prospectus, Hillhouse Capital, Huimei Capital, Sequoia Capital, and WuXi AppTec invested over RMB 86 million, nearly RMB 20 million, more than RMB 50 million, and over RMB 42 million, respectively, in NanoMicro Tech. Since its listing, these investments have increased by more than tenfold.

The straightforward logic of IVD reagent raw material companies feeding back excess investment returns indeed makes it hard for investment institutions to resist getting eager.

Shifting our focus back to the IVD reagent raw materials industry itself, we find that this sector is growing increasingly robust. The emergence of several listed companies as standouts marks a significant milestone in its development journey.

Since the 1990s, domestic manufacturers of IVD reagent raw materials have gradually emerged in proximity to Chinese IVD reagent product companies. Despite the long-standing dominance of overseas vendors in the IVD reagent raw material market, these local suppliers have managed to survive and slowly expand their operations by offering shorter lead times, higher levels of customization, and stronger local technical support, thereby facilitating the accelerated penetration of downstream IVD reagent products into clinical practice. This development has been driven by the interplay of both internal and external forces.

The first factor is endogenous momentum. The reverse-engineering approach, while simple to implement, has a low barrier to entry, leading to a rapid influx of competitors and a highly fragmented industry landscape. During that period, the quality of most domestically produced IVD reagent raw materials was subpar, characterized by small-scale workshop operations, non-compliant laboratory animal breeding practices, insufficient sustained production capacity, and low batch-to-batch stability. In fact, many manufacturers of IVD reagent raw materials lacked a thorough understanding of their own products’ characteristics and functions. Their development process typically began by emulating established systems for imported raw materials, followed by adjustments to component matrix formulations and manufacturing processes. As a result, they were barely able to meet users’ customized upgrade requirements, let alone achieve product iteration.

An investor told VCBeat that for a long period, suppliers of IVD reagent raw materials held very weak bargaining power in the industry chain. With severe homogenization among numerous products and minimal costs for downstream manufacturers to switch suppliers, business relationships remained unstable, placing significant pressure on the sales fronts of IVD raw material companies. “This has compelled some of them to innovate, yielding substantial rewards.”

Take Fapon Biotech, whose revenue increased tenfold during the COVID-19 pandemic, as an example. Between 2018 and 2020, Fapon Biotech invested heavily in strengthening its independent R&D capabilities. During this three-year period, R&D expenditures accounted for 37.90%, 35.92%, and 10.51% of sales revenue, respectively, while R&D personnel comprised over 40% of the total workforce for three consecutive years. The company has established a comprehensive core technology platform for bioactive raw materials, fully covering mainstream screening and testing platforms for immunological, molecular, and biochemical raw materials.

Next is the push factor from the outside in. In the downstream IVD reagent sector, which is closely linked to IVD reagent raw material suppliers, some companies have gradually broken the monopoly of foreign brands through technological advancements and product innovation, establishing influential brands in niche segments. Examples include Kehua Bioengineering and Joyee Bio in biochemical diagnostics; Mindray Medical, Autobio Diagnostics, and Snibe in chemiluminescence immunoassay; BGI Genomics, Hybribio, and Daan Gene in molecular diagnostics; as well as Wondfo and Getein Biotech in the POCT field. Their products continue to enter both in-hospital and out-of-hospital diagnostic settings, bridging the “last mile” of grassroots testing and expanding into higher-tier medical institutions. This trend has driven certain IVD reagent raw material enterprises to independently optimize their production, processes, and branding. Meanwhile, the sustained surge in demand has imposed higher requirements on the IVD reagent raw material industry, fostering positive growth across the entire IVD industrial ecosystem.

An investor once described his impression of visiting the workshop of a domestic IVD reagent primer and probe manufacturer for the first time: “The level of standardization was even comparable to that of some clinical IVD product manufacturers.” It was precisely this lean management, which exceeded the regulatory requirements for primer and probe enterprises, that enabled the company to become the largest supplier of nucleic acid testing reagent primers and probes in China during the COVID-19 pandemic, with its valuation multiplying several times over.

Essentially, due to the highly specialized nature of product attributes, companies operating purely in the IVD reagent raw materials business face a relatively low growth ceiling.

“I didn’t really understand the product’s practical applications; even after consulting a friend with many years of experience in the IVD industry, I still couldn’t gain a thorough understanding.” This is how an investor once described his first impression of a company specializing in raw materials for IVD reagents.

This is perhaps the initial confusion for most investors when they first engage with companies specializing in raw materials for IVD reagents, as the product portfolio involved is exceedingly complex. Taking common biochemical diagnostics, immunoassays, and molecular diagnostics as examples, each type of in vitro diagnostic test is essentially a multidisciplinary experiment spanning physics, chemistry, and biology. Due to their differing principles, the requirements for reagents and consumables also vary. For instance, immunoassays detect disease metabolism by observing the immune response between antigens and antibodies. In addition to detection instruments, the core reaction systems and carriers require substantial amounts of biological reagents such as proteins and enzymes, which involve complex production processes. To accommodate diverse products, the expression systems used for IVD reagent raw materials are highly varied, ranging from Escherichia coli expression systems, yeast expression systems, and insect cell-baculovirus expression systems to mammalian cell expression systems. Each expression system has distinct characteristics, and mastering multiple systems simultaneously presents an extremely high level of difficulty.

Hardly any single company can meet the entire demand for IVD reagent raw materials. The product portfolios of IVD reagent raw material suppliers are highly specialized, which naturally leads to a highly fragmented market. Even on a global scale, the IVD reagent raw materials industry remains highly fragmented, with numerous participants and small individual scales. Leading companies such as HyTest, BBI Solutions, Meridian, and Fibio hold only single-digit shares of the global market, while a large number of small and medium-sized laboratories have carved out their niches by supplying a few specialized products.

More notably, this already low ceiling for operational growth is facing further pressure: the intense competition in the IVD reagent industry has begun to spread upstream. Among the “Big Four” COVID-19 testing companies by revenue in 2020, three have expanded into the upstream segment through industrial M&A, thereby strengthening their bargaining power. In May 2021, Mindray Medical announced the acquisition of HyTest for €545 million (approximately RMB 4.26 billion), bringing under its wing the world’s most important supplier of raw materials for the IVD industry, with which it had collaborated for a decade. The following month, Sansure Biotech announced its plan to acquire a 14.77% equity stake in Zhenmai Bio for a total consideration of RMB 255 million, reinforcing its upstream layout in key processes such as fluorescence detection, nucleic acid modification, dye synthesis, enzyme mutagenesis, and surface chemistry technologies. In July and August, Jiangsu Bioperfectus Technologies stated during an institutional investor survey that it would extend its presence both upstream and downstream in molecular diagnostics, including projects focused on developing key raw materials for reagents and equipment. The company indicated it was considering either building proprietary platforms or pursuing acquisitions, and disclosed that it was evaluating potential targets both domestically and internationally.

Certainly, the surge in performance and the wave of IPOs during the COVID-19 pandemic have prompted leading IVD reagent raw material companies to continue their quest for growth. Given the significant challenges associated with horizontal expansion, they have increasingly opted for vertical integration along the industrial chain to raise the industry’s ceiling. After all, by 2019, the market size for IVD reagent raw materials had only just reached RMB 13.6 billion. Even with the market expansion driven by the pandemic, the scale amounted to merely several tens of billions of yuan, representing largely a share captured from downstream segments. In contrast, the downstream CRO and IVD sectors each boast market potential on the scale of hundreds of billions of yuan.

Specifically, Sino Biological and ACROBiosystems are choosing to expand into the CRO sector. According to Sino Biological’s financial reports, as the domestic pandemic situation eased significantly, performance growth returned to normal levels. In the first three quarters of 2021, revenue decreased by 23.92% year-on-year, and net profit attributable to shareholders of the parent company declined by 25.88% year-on-year; however, the customer service business demonstrated remarkable performance. Sino Biological stated that its customer service business covers a wide range of areas, including protein expression, antibody development, antibody production, and testing services. In the first three quarters of 2021, revenue from CRO services reached RMB 58.8502 million, representing a year-on-year increase of 68.93%.

ACROBiosystems’ expanded testing services represent a natural extension of its core recombinant protein business, addressing the needs of most downstream biotech customers to evaluate raw materials supplied by vendors. This not only resolves customer challenges but also creates additional opportunities for the company to sell more products. According to the prospectus, ACROBiosystems’ revenue from testing services amounted to RMB 186,100, RMB 254,300, RMB 1.5856 million, and RMB 2.0234 million in 2017, 2018, 2019, and the first half of 2020, respectively, accounting for 0.40%, 0.37%, 1.57%, and 2.08% of its total operating revenue. Testing services have gradually become a key strategic focus for future growth.

Despite the frequent valuation challenges faced by China’s innovative drug industry amid intense investment competition, the underlying logic driving sustained growth in CRO demand remains unchanged. First, pharmaceutical companies have significantly increased their R&D expenditures. In response to policy shifts and intensifying market competition, both innovative and generic drug manufacturers have entered an “arms race” in terms of R&D spending and pipeline development. Although absolute R&D expenditure and R&D intensity still lag behind overseas counterparts, these metrics are rising rapidly and gradually converging toward global industry averages. Second, the growing number of Investigational New Drug (IND) applications has created rigid demand for CRO services. Data show that the total number of IND applications for drugs and non-biological generics submitted to the U.S. FDA’s Center for Drug Evaluation and Research (CDER) experienced significant growth in 2020, particularly for projects aimed at commercialization.

On the other end, Vazyme and Fapon Biotech are primarily expanding their product portfolios toward clinical testing solutions. Vazyme’s POCT diagnostic reagents experienced rapid growth amid the pandemic, with their share of revenue surging from 10.36% in 2019 to 35.81% in 2020. Additionally, Vazyme is independently developing antibody-based therapeutics. Meanwhile, after acquiring overseas fourth-generation sequencing assets, Fapon Biotech is striving to enhance its integrated IVD technology platform that combines “comprehensive development of core bioactive raw material reagents” with “innovative instruments.”

In fact, leading upstream raw material suppliers possess inherent advantages in extending their industrial chains. In vitro diagnostics (IVD) is the result of synergistic collaboration across multiple domains, including core raw materials, reagent research and development, and diagnostic platforms. It requires seamless coordination among raw materials, instruments, reagents, and services across diverse application scenarios. Upstream raw materials are undoubtedly the most critical link, as they determine both the quality of IVD diagnostic reagents and the feasibility of their widespread adoption.

Breaking out of the niche has seemingly become an imperative endeavor for manufacturers of IVD reagent raw materials. The IVD reagent raw material sector, originally a small yet profitable business, has undergone profound transformation due to a sudden inflection point in performance. How these companies can leverage their enhanced resource endowments to smoothly initiate a second growth curve is a question worthy of consideration by both investors and operators.