Liu Yun, Founding Partner of Huayi Capital: Medical Industry Restructuring Amid the Pandemic Unlocks New Opportunities

Since the outbreak of COVID-19, apart from the tense rescue efforts on the front lines in affected areas, all other aspects of life have been put on “pause.” Cities are no longer teeming with people; streets are so empty that they evoke a sense of unease. Even the laughter typically heard during holidays in rural areas has now been ruthlessly isolated.

Yet these are merely the surface manifestations. The pandemic has severely impacted not only people’s lives but also many industries, which are now facing transformation and restructuring, with some even on the brink of collapse.

“The impact brought by the epidemic is unprecedented,” commented Liu Yun, Founding Partner and Chairman of Huayi Capital.

What changes will the pandemic bring to the healthcare industry? Which sectors will present new opportunities? Recently, VCBeat conducted an exclusive interview with Liu Yun, Founding Partner and Chairman of Huayi Capital. His unique insights have been compiled into this article for our readers.

(Liu Yun, Founding Partner and Chairman of Huayi Capital)

Liu Yun holds a Ph.D. in Venture Capital and an M.D. from Peking University. A former executive at GE Healthcare, he brings twenty years of experience in the healthcare industry, spanning pharmaceuticals, medical devices, and medical consumables. He has served as a healthcare project advisor for nearly ten fund management companies, including China AMC and Bosera Funds. Currently, he serves as an external lecturer for PwC and China Merchants Bank, a judge for the Forbes Industry Elite list, and an advisor to dozens of biomedical industrial parks across China. His research and professional focus areas include healthcare industrial economics, healthcare investment, corporate strategy and integration for healthcare enterprises, and healthcare fund product design. His representative academic work, Eight Questions, Nine Paths, is the only academic thesis in China dedicated to studying equity investment in the Chinese healthcare sector.

Liu Yun noted that although the healthcare industry is rarely susceptible to external disruptions, the sudden onset of the COVID-19 pandemic has subtly yet significantly influenced and reshaped the landscape of the medical sector.

Following the outbreak of the epidemic, global market capitalization declined. According to media statistics, plagued by the novel coronavirus pneumonia (COVID-19) crisis, global market capitalization decreased by $4 trillion (approximately RMB 28 trillion) from January 20 to February 3. As the epidemic progresses, this figure continues to expand.

In terms of the short-term impact on China’s domestic economy, the primary manifestation was a comprehensive contraction in Spring Festival consumption, with approximately RMB 400 billion worth of inventory becoming a net social loss. Meanwhile, production and consumption related to epidemic prevention—represented by masks, protective suits, and disinfection supplies—surged rapidly, driving swift growth for relevant enterprises.

Regarding the long-term impact on the domestic economy, Professor Cao Heping of Peking University predicts that, under an optimistic scenario (where the epidemic is fully contained starting from February 8 and ends within 45 days), the impact on China’s economy will range between 0.2% and 0.4%. China’s gross domestic product (GDP) for the full year of 2019 was RMB 99086.5 billion, meaning the economic loss would amount to RMB 198.173 billion to RMB 396.346 billion. Furthermore, industries such as healthcare, public health, and epidemic prevention are poised to experience a new round of growth during the economic recovery period.

As evident from the above, the economic impact brought by the pandemic has been enormous. Liu Yun pointed out that, in fact, the restructuring of the healthcare industry began to change as early as 2018. In March 2018, the National Healthcare Security Administration (NHSA) was established. Within a year and a half of its establishment, the NHSA introduced 24 major policies, recorded 122 actual dynamic actions, and pioneered innovations in six key areas.

Following the National Healthcare Security Administration, a series of macro-control policies have continued to intensify. In April 2018, the People’s Bank of China issued new regulations on asset management; in May 2019, the policy of zero markup on medical consumables was gradually rolled out, starting in Zhejiang Province; in July 2019, pilot programs for volume-based procurement of medical consumables were launched in five cities nationwide, and DRG (Diagnosis-Related Groups) payment reform pilots were implemented in 30 cities across China; in September 2019, the “4+7” volume-based procurement program was expanded to 25 provinces; in January 2020, the second round of centralized procurement was conducted; most recently, the ongoing COVID-19 pandemic...

These pivotal moments constitute the iterative process of transformation in the healthcare industry. The outbreak of the pandemic has directly propelled emerging sectors with promising prospects onto the historical stage.

“One of the macroeconomic factors driving the restructuring of the healthcare industry chain is the ratio of total national health expenditure to GDP. In this regard, developed European countries generally exceed 10%, the United States reaches as high as 18–19%, while China stood at 6.6% in 2018. In the wake of the pandemic, the healthcare sector has experienced growth and garnered greater attention at the national level, which will accelerate the growth rate of health expenditure,” said Liu Yun.

He predicts that after the epidemic subsides, China's total national health expenditure as a percentage of GDP is expected to rise to 10% or higher.

“The medical industry has undergone earth-shaking changes over the past two years. As an industry insider, I can deeply relate to this,” Liu Yun remarked with emotion. He shared a comprehensive map of the entire medical industry chain compiled by Huayi Research Institute. The map reveals the current scale of China’s medical industry, with an estimated value of RMB 12 trillion.

He pointed out that “enterprise services” will emerge as a dark horse in the industry chain, with enormous market potential.

“Enterprise services are akin to the American Gold Rush era, where many people went in search of gold with dreams and hopes. In this process, those who actually mined for gold did not strike it rich; instead, it was those who took an unconventional path by selling shovels who struck gold and reaped the rewards,” said Liu Yun.

He pointed out that this analogy is frequently reflected in the restructuring of the healthcare industry chain. Taking a recent case of corporate services, the listed company Asymchem serves as an example. Headquartered in Tianjin, Asymchem was established in October 1998 and is a leading enterprise engaged in contract research and manufacturing organizations (CRO/CMO) for pharmaceutical R&D and production.

The company’s business spans preclinical R&D of new drugs, process development and manufacturing during the clinical stage, as well as process optimization and large-scale production for commercialized drugs. Its clients include global mid-to-large pharmaceutical companies such as Merck & Co., Pfizer, Bristol-Myers Squibb, AbbVie, and Eli Lilly, as well as renowned Chinese pharmaceutical companies including Betta Pharmaceuticals, Hutchison MediPharma, Zai Lab, Fosun Pharma, Dizal Pharmaceutical, and Yangtze River Pharmaceutical Group.

Since 2016, Asymchem’s stock price has surged by 920.6%, nearly increasing tenfold in just three years.

Just two days after the new refinancing regulations took effect on February 14, Asymchem (002821.SZ) disclosed its 2020 private placement plan. The plan aimed to raise RMB 2.3 billion, with Hillhouse Capital subscribing for the entire amount.

Asymchem’s success reflects the immense potential in the enterprise services sector. “It is the dual drive of policy and market forces that has made companies providing ‘pick-and-shovel’ services to pharmaceutical firms more favorably viewed,” commented Liu Yun.

He noted that, from a policy perspective, the domestic innovative drug market has experienced explosive growth in recent years, driven by national initiatives to support the development of innovative pharmaceutical companies, reforms to the new drug review and approval system, and capital market incentives for the listing of such enterprises.

From a market perspective, emerging pharmaceutical companies typically concentrate their primary efforts on drug R&D. The implementation of the Marketing Authorization Holder (MAH) system has generated substantial demand for outsourced R&D and manufacturing of active pharmaceutical ingredients (APIs) and formulations among innovative drug enterprises, particularly emerging pharmaceutical companies. Contract Development and Manufacturing Organizations (CDMOs) are well-positioned to meet these service needs, thereby ushering in significant opportunities for growth.

“The market opportunity for enterprise services is substantial. Within the healthcare industry chain, there are many other categories of ‘pick-and-shovel’ services, where opportunities likewise exist,” said Liu Yun.

He also offered insights on the restructuring of the medical industry chain. These include advising against starting businesses in labor-intensive sectors such as masks and protective clothing, as demand will eventually stabilize after the pandemic; furthermore, in the field of medical devices, innovative products with high technological content will continue to attract significant capital attention.

In the biopharmaceutical sector, as national regulatory oversight gradually eases, a period of robust growth is inevitable. The IVD industry played a significant role during the pandemic and is poised for vigorous development in the future; however, due to the large number of listed companies and fragmented product offerings, it remains challenging to achieve substantial scale. In the internet healthcare sector, opportunities for startups are scarce, and the market will undergo gradual consolidation, with only the most resilient players emerging as leaders. The CSO (Contract Sales Organization) market offers substantial room for expansion and is filled with future opportunities.

In short, the landscape of the traditional healthcare industry chain is being reshaped...