How Top-Tier VCs — Sequoia China, Legend Capital, Northern Light Venture Capital, and SoftBank China — Navigated Healthcare Investments Post-Pandemic in 2020
On February 3, the market opened. The Shanghai Composite Index plunged more than 7.7%, and the Shenzhen Component Index dropped over 8.4%. The biopharmaceutical sector stood out, with dozens of stocks hitting their daily upper limits.
During the COVID-19 pandemic, many industries such as tourism and catering suffered severe setbacks, while certain niche segments within the healthcare industry garnered increased attention. According to the recently released annual report, Ping An Good Doctor’s app saw its daily average number of consultations by new users surge to nine times the usual level, and some health insurance companies reported policy sales volumes 180 times higher than normal. Significant changes have thus emerged in areas such as internet healthcare and commercial health insurance.
In addition to the positive aspects, on the other hand, offline medical service providers in the industry were unable to resume operations on schedule due to the epidemic and were significantly affected.“Survival” has become the top priority for many companies this year. In the primary market, investment volume and deal count in the first half of 2020 are expected to decline significantly due to the inability to conduct activities such as investment due diligence. Many venture capital (VC) firms have begun implementing measures to support their portfolio companies.。
Certainly, in the healthcare and medical industry, capital will remain enthusiastic and active. According to multiple investors who spoke with VCBeat,“In recent years, major top-tier venture capital firms have gradually increased their investment allocation in the healthcare sector, and many state-level funds have also successively participated in industry investments.”
In the vast and expansive healthcare sector, investment firms hold diverse investment philosophies. Through interviews with venture capital firms such as Sequoia China, Legend Capital, Northern Light Venture Capital, and SoftBank China, as well as numerous investors, this article seeks to explore the investment logic and trends in the healthcare industry in 2020 amid the impact of the pandemic.
More than a decade ago, Xu Xiaolin, now the founder of Huagai Capital, was serving as the General Manager of the Industrial Investment Fund at CCB International. While reviewing the fund’s investment strategy, he took note of a particular curve.
“The healthcare sector will not underperform in any given year compared to the previous one, nor will it experience explosive growth. Instead, it will exhibit steady, sustained growth, making it well-suited for large-scale, long-term capital commitments.” Xu Xiaolin shared his assessment with his team and decided to launch a fund dedicated exclusively to healthcare investments. Thus, the CCB Healthcare Growth Fund became one of the early healthcare-focused funds in the industry.
In mid-January 2020, at the J.P. Morgan Healthcare Conference in San Francisco, Neil Shen, Global Executive Partner of Sequoia Capital, and Robert Nelsen, Co-Founder of ARCH Venture Partners, engaged in a dialogue.
Two top-tier investors engaged in extensive discussions.
Robert Nelsen said, “Amazon, Walmart, Google, Alibaba… these giants will all become some type of healthcare company in the future.”
Shen Nanpeng said, “China is building a vast ecosystem around innovation in healthcare, much like the development seen in the information technology sector two decades ago. The gradual establishment of such an innovation ecosystem is most exhilarating.”
To some extent, this conversation has established a consensus that “Healthcare” is the first keyword for investment in 2020.
According to data from the official website of the National Health Commission,In 2018, China's total health expenditure is projected to reach RMB 5,799.83 billion, accounting for 6.4% of GDP. Five years ago, this proportion was only 5.56%.
Many have recognized the potential of the healthcare industry. According to data from VCBeat, in 2019, the financing scale of the healthcare sector in China’s venture capital and private equity market reached $7.732 billion, ranking second only to the internet sector.
“In ten years, the broad health sector will become the largest industry, surpassing real estate and automobiles.” This memorable statement was made by Chen Dongsheng, founder of Taikang Insurance Group, at a conference last year. Jack Ma has also publicly stated on various occasions that the healthcare sector is most likely to give rise to the next generation of enterprises on the scale of BAT (Baidu, Alibaba, and Tencent).
Deng Feng, founder of Northern Light Venture Capital, stated in an interview with VCBeat: “The healthcare sector is poised for significant transformation in China over the next 10 to 20 years. Many future enterprises with market capitalizations exceeding $10 billion are likely to emerge from the life sciences and healthcare fields, as all segments—including biopharmaceuticals, medical devices, diagnostics, healthcare services, and digital health—are accelerating their development.”
As can be seen, every niche sector within healthcare is “highly competitive and valuable,” with venture capital (VC) firms having long entered the industry armed with capital, strategies, and logical frameworks.
Aurora Venture Capital’s investments in the healthcare sector are personally overseen by its founder, Deng Feng. Aurora first entered the healthcare space in 2009, adhering to a strategy of “being aggressive strategically while remaining conservative tactically.” “When we identify a promising sector, we must enter it early on. Even if it means paying ‘tuition’ initially, we will invest in one or two projects to conduct reconnaissance—for example, by co-investing in mid-to-late-stage deals. Once we have gained clearer insights, we commit substantial capital and human resources, gradually extending our focus to earlier-stage investments.”
“Aim to invest in the best companies within the most promising sectors.” According to Zhai Jia, Managing Director at Sequoia China, his investment approach extends beyond the conventional selection of startups to include co-incubating enterprises with large platform companies. After identifying health insurance as a key area of interest in 2018, Sequoia China jointly invested in Yuanxin Huibao Technology alongside Miaoshou Doctor, and in Nuanwa Technology together with ZhongAn Insurance. By 2019, as the health insurance sector experienced explosive growth, Sequoia China emerged as the most prominent investor in this field.
Hillhouse Capital adopts an empowerment-driven strategy, focusing on industry M&A and consolidation. It once sought to make the largest investments within specific sectors, with its most notable case being the multi-billion-dollar acquisition of 10,000 pharmacies. Matrix Partners China focuses on early-stage investments, with single-ticket sizes below $10 million, primarily targeting pharmaceuticals and offline healthcare services. Meanwhile, CDH Investments and Huagai Capital both follow a private equity (PE) style.
The pandemic has arrived.
The healthcare industry has been thrust into the spotlight, amplifying anxiety and concerns across all sectors about the overall scarcity of medical resources.
Evergrande Institute released a widely circulated analytical report containing the following passage: “The catering, tourism, film, transportation, and education and training sectors have been hit the hardest, while the pharmaceutical/medical and online gaming industries have benefited. A rough estimate suggests that box office revenues of RMB 7 billion (market forecast), plus RMB 500 billion in catering and retail (assuming a 50% decline), plus RMB 500 billion in the tourism market (completely frozen) resulted in direct economic losses exceeding RMB 1 trillion for these three sectors alone in just seven days. This accounts for 4.6% of China’s Q1 2019 GDP of RMB 21.8 trillion, excluding losses in other industries.”
As analyzed in this report, the counter-cyclical nature of the healthcare industry has become even more pronounced during the pandemic, and it is expected that more capital and R&D investment will flow into healthcare-related sectors.
Analysis of the Impact of the Epidemic on Various Sub-sectors of the Healthcare Industry:
For innovative drug companies, the overall impact is predominantly positive. The most immediate effect is the delay in clinical project timelines, while other potential R&D impacts are minimal in the short term. Policy approvals will give a green light to COVID-19 vaccine development.
For medical device companies, there may be some impact, with the clinical trials and regulatory approval timelines for new products potentially delayed;
For diagnostic companies, the overall impact is positive, boosting product sales in the short term for molecular diagnostics firms and respiratory pathogen diagnostics enterprises.
For service-oriented enterprises, companies with a primary focus on offline operations face significant short-term impacts, as institutions such as dental clinics, medical aesthetics providers, and health examination centers are unable to resume work and business operations.
Nevertheless, the overall investment logic for the healthcare industry during the pandemic remains largely unaffected. Wu Kai, a partner at SoftBank China, stated, “We will continue to maintain our current pace and scale of investment in this sector this year.”
"In response to the impact of the pandemic on businesses, venture capitalists (VCs) have also rapidly introduced numerous measures to assist companies."
Northern Light Venture Capital has always focused on early-stage technology projects, which are not currently among the core industries most severely impacted. Nevertheless, Northern Light promptly engaged in one-on-one communications with its portfolio companies to identify risks related to budgets, cash flow management, and financing strategies. In addition to business services, its finance, human resources, and legal teams have provided targeted, specialized support during this exceptional period. This includes timely coordination with partner banks to propose short-term loan facilities that alleviate companies’ financial pressures; researching and sharing various tax and subsidy policies introduced during the pandemic; conducting training on work-resumption procedures under pandemic conditions; and providing immediate professional legal advice and financing assessments to support subsequent fundraising and restructuring efforts.
Song Gaoguang, Executive Director of Northern Light Venture Capital, stated that healthcare has once again come into the public spotlight, signaling positive trends for the industry. “In times of major disasters and crises, the healthcare sector tends to move counter-cyclically. Emerging stronger from such trials, the industry will see a surge in innovation and rapid advancement.”
Qi Fei, Investment Director at Legend Capital, shares a similar perspective. He believes that investment in the healthcare and medical industry has been on a fast track in recent years and will continue along its established trajectory and pace. “Major healthcare investment firms in the market have already navigated through economic cycles; they will neither be deterred by the pandemic nor rush in en masse because of it. The pandemic will not significantly alter the fundamental investment logic of this industry, though it will indeed accelerate the rapid growth of certain niche segments.”
However, Qi Fei believes that the pandemic has had a significant impact on the macroeconomy this year. Currently, there is no clear timeline for recovery; if conditions do not improve soon, many enterprises will not survive the outbreak. For businesses,“The most important thing this year is to survive.”
KingMed Diagnostics, Huirui Gene, and Jinshi Gene, all portfolio companies of Legend Capital, have been supporting epidemic testing efforts on the front lines of the pandemic response. During the Spring Festival holiday, Legend Capital’s healthcare team engaged in discussions with the CEOs of more than 80 portfolio healthcare companies to monitor the impact of the outbreak on their operations and cash flow positions, deliberate on subsequent contingency plans, and facilitate bank loan introductions for those facing cash flow constraints.
Sequoia China’s investment team has shifted to fully remote work during the pandemic and will host two Demo Days for nearly 30 early-stage portfolio companies, helping them connect with more than 50 venture capital and private equity firms. Some of Sequoia’s portfolio companies based in Wuhan have been significantly impacted. The Sequoia team is implementing targeted short-term support measures, including completing remote collaboration tool training for over 100 companies, preparing telephone-based remote sales training, organizing recruitment and labor law compliance workshops, and facilitating discussions with multiple banks and corporations regarding loan cooperation during the pandemic.
Wang Xiaocen, who previously worked at CEC Health Fund and Matrix Partners China, is a well-known investor in the internet healthcare sector. During the pandemic, she collaborated with a listed company to complete an investment in a vaccine R&D enterprise within just five days. She maintains a long-term bullish outlook on the pharmaceutical industry, noting that the pandemic had little impact on her overall investment decisions.“This industry is heavily influenced by policy. I believe that after the current pandemic ends, the government will place greater emphasis on this sector, offering increasing leniency in terms of policy support, funding, and regulatory approvals.”Wang Xiaocen said.
Zhai Jia recently noticed a detail on social media concerning the total number of hospital beds available in Hubei Province and how many patients they could accommodate. The inquiry process still relied on manual labor, which was highly traditional and incapable of providing real-time updates.
“This detail clearly reflects the inadequacy of healthcare informatization; local hospitals and regional medical consortia lack a unified data platform to support such operations. If informatization were properly implemented, there would be no need to take out mobile phones and make individual calls for verification.” Zhai Jia believes that the development direction directly revealed during this pandemic is healthcare informatization and the application of healthcare big data, which will remain a sustained investment theme in the future.
Lin Yusheng, Executive Director of Hai Mei Capital in Hong Kong, has over 20 years of experience in the pharmaceutical industry. He began his career in distribution channels before transitioning into investment, and has also served as CEO of several listed companies. Lin believes that while the pharmaceutical industry will not see an immediate inflection point in investment post-pandemic, certain investment hotspots will emerge. He has identified five key subsectors for investment:
1. The traditional Chinese medicine (TCM) industry will receive greater emphasis, with strategic institutions established at the national level to provide leadership. This is because TCM has played a crucial and decisive role in every major epidemic throughout Chinese history, and its starring role in the fight against COVID-19 is no exception. This novel virus is expected to coexist with humans for the long term rather than disappear, persisting in a manner similar to seasonal influenza. Therefore, in addition to vaccine development, there will be extensive research and development of traditional TCM formulas, aiming for new breakthroughs in the efficacy of formula granules and decoctions. Capital investment will also elevate the conceptual understanding of the TCM sector, leading to renewed market coverage and valuation adjustments.
II. New progress will be made in the “de-terminalization” of pharmaceutical retail endpoints. First, based on tiered diagnosis and treatment and the separation of prescribing from dispensing, the shift of prescription drugs from hospital endpoints to offline pharmacies and online e-commerce platforms will accelerate. It is estimated that 70% will flow to pharmacies and 30% to online e-commerce platforms. Second, pharmacy endpoints are beginning to evolve toward mass-market household consumption. By leveraging remote video consultations and co-managed home medicine cabinets (or boxes), services will extend down to the household level, creating a dispersed, widespread presence. Pharmacies will no longer serve as final endpoints; instead, they will become an intermediary layer—acting as transfer hubs or last-100-meter distributors for households. These changes will trigger a fission of the B2C model, while channel distributors will experience accelerated decline and contraction.
Future investments in the pharmaceutical industry will focus on points (retail terminals), lines (distribution, information flow, and logistics), and planes (platforms). We are more optimistic about the certainty and stability of retail pharmacy terminals, and aim to improve business models, enhance gross margins, and boost sales volume by penetrating lower-tier markets.
3. Online consultations or telemedicine. Supported by big data, blockchain, 5G, and artificial intelligence technologies, and complemented by internet-based medical insurance, a micro closed-loop ecosystem will be formed. Significant future traffic dividends are expected to emerge in this sector, making it a promising long-term investment opportunity.
Internet healthcare is a platform characterized by low-frequency usage but inelastic demand. During the recent pandemic, platforms such as DXY.cn saw their page views reach into the billions. Wang Xiaocen also believes that internet healthcare was the sector most significantly stimulated by the pandemic, stating, “Internet healthcare has proven its value during this outbreak.” She argues that the pandemic provided free market education and promotion for internet healthcare. When routine medical resources were confronted with a sudden public health emergency, the inadequacy of medical supply was fully exposed. In the future, policies may expand the scope of internet healthcare.
4. Health and wellness pharmaceutical e-commerce platforms operating on the model of consumer-centric social commerce platforms will be a sector highly favored by investors. This is primarily due to the integration of private traffic acquisition methods—such as live streaming (led by Key Opinion Leaders, KOLs), short videos (led by KOLs), micro-communities (driven by Key Opinion Consumers, KOCs), and official accounts (managed by KOCs)—into traditional pharmaceutical e-commerce platforms, establishing a standard version of social commerce platforms. There is particularly strong optimism regarding the B2C 4.0 upgraded model, which enables precise marketing through private traffic acquisition and integrates the upstream and downstream industry chains.
5. We remain consistently bullish on investments in high-end generic drugs and biotechnology. If the current pandemic is to catalyze a new inflection point for the pharmaceutical industry, it will emerge within this sector. In the post-pandemic era, the acceleration of R&D for vaccines and specific therapeutic agents will serve as a major explosion point for growth.
During the pandemic, Wang Xiaocen completed an investment case in this field within just five days. On February 4, according to an announcement by Pengyao Environmental Protection, the company disclosed its decision to invest RMB 30 million of its own funds to acquire a minority stake in Beijing iDNA Biotechnology Co., Ltd. iDNA’s novel coronavirus vaccine under development has completed stages including vaccine design and preparation of candidate vaccine strains.
Wu Kai believes that China’s IVD market holds significant promise, with third-party sterilization and automated PCR testing representing promising areas for future investment.
Is there a certain investment bubble in the rapidly developing healthcare industry?
Qi Fei believes that certain niche segments of the healthcare industry experienced a bubble in 2017 and 2018, and the entire sector is now undergoing a cycle of value reversion. Given the impact of the pandemic on the overall economy and liquidity conditions,For the entire industry, 2020 may be a year of continued value reversion.
Zhai Jia believes that the presence of a certain degree of bubble in the industry may actually be a positive development. “The healthcare sector holds significant social value, and a moderate bubble can attract more capital and talent into the field.”
Beyond the Bubble: The Story of the Healthcare Industry Continues in the Capital Markets
Wu Kai believes that after the pandemic ends, valuations of many companies in the market will undergo a significant correction, presenting an opportune moment to enter.
In the early hours of February 15, the latest filing submitted by Hillhouse Capital to the U.S. Securities and Exchange Commission revealed that Hillhouse had newly added three biopharmaceutical companies to its portfolio. Among the 54 companies held by Hillhouse, 25 are in the biopharmaceutical sector.
Not only Hillhouse Capital, but also top-tier venture capital firms such as Sequoia China, Legend Capital, and Northern Light Venture Capital are accelerating their pace, advancing toward their respective visions for the healthcare sector.
In an interview with VCBeat, Deng Feng, founder of Northern Light Venture Capital, shared his perspective on the healthcare landscape: “I am very optimistic about the future. From China’s standpoint, the share of healthcare in GDP will continue to grow rapidly, the number of innovative medical products from China will keep increasing, and China’s healthcare reforms will make progress.”
In ten years, population aging will undoubtedly become a major issue. While this trend presents significant opportunities that we have been closely monitoring, it remains unclear which segments within the aging economy or “silver economy” are asset-light versus asset-heavy. The global expansion of China’s healthcare industry is definitely a major trend; an increasing number of Chinese enterprises will become competitive on the international stage, and industry consolidation will inevitably occur.“In the pharmaceutical sector, China will see several multi-billion-dollar companies akin to BeiGene.”