Beyond Technological Gap and Valuation Systems: Key Drivers Behind the Divergence in U.S.-China Healthcare Investment

Editor’s Note: This article was originally created by China Renaissance Capital and has been authorized for republication by VCBeat.

The 6th China Renaissance Healthcare and Life Sciences Leadership Summit, which concluded at the beginning of this month, featured speeches, discussions, and insights shared by nearly 100 distinguished guests on stage. These included Zhao Yue, Chief Economist at Fu Tu Securities (Hong Kong); William F. Doyle, Executive Chairman of Novocure; Nancy Tang Nanshan, CEO of Ansun Biopharma; Gu Yan, Chief Digital Officer of WuXi NextCODE; Li Yiping, Director and CEO of JW Therapeutics; and Wu Jinzi, Founder, Chairman, and CEO of Ascletis Pharma, among others.

VCBeat (WeChat: vcbeat) hopes to share these valuable and brilliant sparks of thought with more readers who are concerned about the development of the healthcare industry.

Liu Wanlin:

This year, 40% of the capital invested in the U.S. biopharmaceutical sector came from China. Some argue that the world’s truly leading technologies remain concentrated in the United States, and that much of China’s pharmaceutical innovation is merely incremental or business-model innovation rather than breakthrough scientific advancement. What are your views on this perspective?

Huang Lu:

I broadly categorize companies in the healthcare industry into product-oriented and service-oriented enterprises. Whether it involves R&D of new drugs or new medical technologies, I do not believe these product-oriented companies have achieved genuine business model innovation. The development models of Chinese and U.S. companies are consistent: they develop products and sell them to the market. The so-called innovative models are common practices abroad and are not truly new.

Successful enterprises owe their success to the fact that these founders possess a more global perspective and network, as well as stronger technical judgment capabilities in China, compared to other entrepreneurs within the already highly internationalized pharmaceutical industry. This is driven by capability; I do not believe it is entirely model-driven.

However, in the realm of healthcare services, China will inevitably develop its own distinct model, which is inherently different from the landscape in the United States. From an investor’s perspective, business model innovation carries significant risks. The success of many innovative healthcare service models in the United States is attributable to their mature payment systems; within such established frameworks, new models are easier to validate. In contrast, China’s healthcare landscape faces substantial risks of structural rigidity and is currently undergoing transformation amid uncertainty, making the risks associated with business model innovation potentially even greater.

Liu Wanlin:

How many years is the United States ahead of China in technology? Is it 20 years, 10 years, or do they each have their own strengths?

Wang Guowei:

This issue remains relatively complex. It is evident that in the early stages, companies in the United States held a distinct advantage over those in Europe and Japan, particularly among highly innovative startups developing novel drugs and medical devices.

I believe that the favorable environment in the United States stems from significant differences between its startup ecosystem and that of China: many founders of U.S. biotech startups originate from academia, where biological innovations frequently take place. Furthermore, within major U.S. pharmaceutical companies, every clinical trial is led by Key Opinion Leaders (KOLs), and American physicians bring substantial independent insights to clinical research. If China aims to catch up with global leaders, it must implement substantial reforms in basic medical research.

On the other hand, there are challenges in clinical research. Prominent physicians in China are perpetually short on time, leaving them unable to devote sufficient thought to many critical clinical issues. Consequently, although China has seen the emergence of numerous first-in-class new drugs, clinical researchers lag significantly behind in their understanding of clinical innovation and the clinical indications for first-in-class drugs. It is difficult to quantify exactly how many years China trails behind the United States; however, only by improving clinical research and clinical trials can we achieve genuine breakthroughs in innovative drug development.

Liu Wanlin:

This is a comprehensive system encompassing all aspects, from the academic environment to clinicians and hospitals; therefore, it is a systematic engineering endeavor. However, with rapid development and substantial investments of time, resources, and personnel, we hope to bridge the gap relatively quickly.

On this point, there is actually a question that has drawn widespread attention. The reasons why many people go to the United States are, on one hand, because there are indeed many high-quality assets available there, and on the other hand, many overseas companies are now coming to China for financing. How do you view this issue?

Is it because there is more capital available in China, or is it due to the strategic importance of the Chinese market and the desire to secure strategic resources here? Mr. Luo Yitian, what are your thoughts on this? Yunfeng Capital has been at the forefront among domestic funds in both outbound expansion and investing in overseas projects.

Luo Yitian:

In fact, over the past few years, changes in the ratio of domestic to overseas investments in China have revealed a clear shift in trend:

Five to ten years ago, the amount and proportion of overseas capital entering the Chinese market were gradually increasing; however, from five years ago to the present, the trend has reversed, with a continuously rising proportion of Chinese capital expanding into overseas markets. This growth trend was temporarily halted in 2016 due to macroeconomic policies and other factors, but resumed rapid growth in 2017. This year, it has once again come to a standstill for various reasons, indicating that the phenomenon has always been undergoing cyclical fluctuations.

This cyclical trend is driven, in part, by the technological generation gap between overseas markets and China. In particular, it is an indisputable fact that European and American markets maintain varying degrees of technological leadership over China across most subsectors of the healthcare industry. This disparity fundamentally underpins the rationale for Chinese companies establishing funds to pursue investment, financing, and M&A activities abroad.

From another perspective, we observe that growth in the European and American markets has become largely stagnant, regardless of how promising certain sectors may appear to us. For instance, cardiac pacemakers are considered a high-barrier sector, with only five or six companies globally capable of competing, and merely four achieving respectable sales volumes. Yet, in the United States, this sector experienced a -1% growth rate in 2016, and the decline has likely deepened from 2017 to the present. In China, such a sector would be characterized by both high entry barriers and rigid demand; therefore, it is difficult to imagine its performance declining in the U.S. and Europe.

And the motivation for foreign enterprises to enter China is straightforward: mature companies seeking development and growth have no choice but to identify new growth drivers and explore new markets.

However, there are two dilemmas. One is how to navigate the policy barriers in many developing countries; the other is that the existing market size in many emerging markets is insufficient, requiring resources to be invested in expanding the market base, which introduces significant commercial uncertainties. In this regard, there are limited options for countries whose market environments are relatively favorable to foreign investment. China is undoubtedly the top choice, and India may be the next rising market. This is a crucial factor driving overseas companies to enter and invest in China. From this perspective, the motivation is primarily economic.

There are three levels of reasons for Chinese enterprises to go global.

The first reason is the technological generation gap mentioned earlier; the second relates to team dynamics. In many early- and mid-stage companies, founders and key technology holders often have overseas educational backgrounds or come from large multinational corporations. They naturally feel more affinity toward overseas companies and technologies, preferring to seek high-quality investment targets in familiar and trustworthy market environments. The third reason stems from constraints within China’s financial market environment; investing overseas can facilitate subsequent cross-border mergers and acquisitions.

These factors have increasingly driven companies and funds to pursue overseas mergers and acquisitions from economic and financial perspectives, rather than focusing exclusively on the domestic market. Once a company takes its first step abroad by making a strategic initial investment in an overseas project, it becomes significantly easier to conduct subsequent cross-border investments using that project as a platform.

Liu Wanlin:

From the perspective of Chinese companies or investors, there is indeed significant momentum to expand overseas. Meanwhile, we are also seeing many projects proactively seeking investors in China. Some ventures with uncertain near-term prospects in the Chinese market are also coming to China to court investors. At the same time, I believe Chinese investors are willing to evaluate these projects, possibly to gain access to cutting-edge technologies, among other reasons. What is your view on this phenomenon?

Sun Lefei:

It cannot be ruled out that some companies come to China merely to raise capital. From another perspective, investors in the two markets differ in their recognition of company valuations. For instance, U.S. investors tend to invest only in market leaders or second-place players; if a company falls behind in development progress, securing further financing in the U.S. becomes increasingly difficult. To sustain growth, such companies turn to China for funding, which aligns with both their capital-raising needs and their market expansion strategies. Among these, careful selection can still uncover high-quality opportunities, including Chinese companies that have already demonstrated strong domestic prospects with their products but require new technologies to achieve further advancement.

Luo Yitian:

One additional point that cannot be overlooked is the rise of cross-border financial advisors (FAs). Many Chinese investment banks are now focusing on cross-border M&A transactions, particularly in the European market. On one hand, compared with the more mature U.S. market, Europe offers a relatively larger number of high-quality targets with sound capital structures. On the other hand, the European market is more fragmented, allowing investment banks to play a more significant role in identifying potential targets. For example, China Renaissance, listed in Hong Kong, is increasingly shifting its focus overseas.

Wang Guowei:

Some European and American companies now believe that valuations in China are higher. The top-tier U.S. companies do not face financing challenges, while most mid-tier firms, if they need to raise capital, have already formed the perception that it is worthwhile to explore opportunities in China. Meanwhile, many Chinese enterprises looking at overseas assets also find them quite affordable. For example, there is a U.S. company developing a major drug for breast cancer, a segment not yet entered by local Chinese firms. If a Chinese company were in Phase II or Phase IV clinical trials for such a drug, its valuation could be five times higher than that of its U.S. counterpart.

Liu Wanlin:

Beyond new drug development, there is also significant innovation in areas such as big data, healthcare IT, and insurance. Tech giants in both China and the United States are actively making strategic investments in these fields. What are the major differences in the approaches, strategic directions, and achievements between the two countries?

Sun Lefei:

For instance, Alibaba’s New Retail strategy represents a significant growth prospect for the company. Its recent expansion into pharmacy operations is part of building an integrated New Retail ecosystem, with these initiatives being closely interconnected. Last year, Alibaba invested in Winning Health, while Tencent partnered with Donghua Software; both are advancing into big data–related fields, underscoring the critical importance of data in the broader future landscape. Furthermore, collaborations with vendors enable closed-loop effects through platforms such as Alipay and WeChat Pay, thereby enhancing overall service delivery. This model differs somewhat from that of the United States, as China’s BAT (Baidu, Alibaba, and Tencent) have not ventured into developing innovative drugs or novel medical devices.

Wang Guowei:

One additional point: a major issue in China is the poor quality of EMR systems. Hospitals must spend millions of RMB to purchase these systems, which offer limited functionality and fail to meet the requirements for big data applications. Therefore, I believe China faces significant limitations in the realm of big data.

Liu Wanlin:

Without data in the healthcare system, any big data analytics based on such data would be impossible. Currently, many companies engaged in medical big data are able to secure high valuations simply because they have access to data or are in the process of establishing data systems.

However, this reflects deeper issues within China’s healthcare system, namely the uneven distribution of medical resources and the varying quality of healthcare professionals, which in turn lead to significant disparities in management standards across different regions. Nevertheless, we still observe substantial investment opportunities within many segments of healthcare services.

From my personal perspective, at least in terms of valuation, healthcare service providers in China are typically valued based on the price-to-sales (P/S) ratio. In contrast, the traditional U.S. valuation framework emphasizes actual profitability and cash flow. This represents a significant difference in valuation methodologies.

Sun Lefei:

In recent years, U.S. teams have launched numerous healthcare service projects, which have gained significant traction in the American market. I believe the primary difference between China and the U.S. in this sector lies in their respective challenges: China is still in the process of building its healthcare service infrastructure, whereas the U.S. faces prohibitively high costs. However, both markets are undergoing transformation. In such a climate, success will go to those with superior business models and stronger execution capabilities. The Chinese market continues to evolve, exemplified by the establishment of the National Healthcare Security Administration. Personally, I remain quite optimistic, as this represents an incremental market with substantial growth potential.

Huang Lu:

Although the Chinese market is vast, it is highly fragmented, with each city and even each region operating as a siloed market, making operations extremely challenging. How many companies can ultimately provide a positive answer to the dilemma of whether scaling up leads to greater losses or profitability? Nevertheless, opportunities remain for the future, as the overall healthcare landscape is evolving. More importantly, the new generation of entrepreneurs is bringing fresh dynamics. This year, we have encountered several projects where post-90s founders demonstrated how they leverage systematic technologies to deliver services, which is quite intriguing.

Liu Wanlin:

For many Chinese investors, investing in the United States remains a relatively new and high-risk endeavor. How did U.S. dollar-denominated institutional investors navigate their entry into China many years ago? What lessons learned can be shared with the community?

Wang Guowei:

At that time, whenever U.S. institutions invested in China, the first question they always asked was, “Where did you grow up?” All investors were well aware that localization was essential for investing in China and hoped that their teams had experience in the Chinese market.

Today, however, the situation is different. Most of our investments in the United States have not taken deep root from the U.S. perspective. Much like in China, investment activities in the U.S. tend to occur in clusters. From this standpoint, localization remains crucial; to truly identify better investment opportunities, one must establish a local presence and thrive within the domestic market.

Liu Wanlin:

What measures do you take in practice to avoid pitfalls, and how do you ensure a genuine understanding of local conditions?

Luo Yitian:

Most crucial are timing, location, and human harmony; one must not misjudge the broader trends. Doing the right thing at the right time yields twice the result with half the effort. I returned to China in 2010, having previously worked as a venture capitalist in the United States, and made many mistakes upon my return. For example, we initially invested only in profitable Chinese companies with price-to-earnings (P/E) ratios no higher than 10x. However, we soon realized that in 2010, nearly all such companies were preparing for initial public offerings (IPOs), causing us to miss out on numerous high-quality deals. While these companies may not necessarily be outstanding today, they did go public back then, and we missed the opportunity. Due to our limited understanding of the Chinese market at the time, we paid a hefty price for these lessons.

Why is timing the most critical factor? We must raise capital during fundraising cycles and invest during investment cycles. Doing the right thing at the right time is more important than many intricate details. This explains why some “straightforward and aggressive” funds grow rapidly, even if their teams are not necessarily highly professional.

The remaining factor is experience. Your team must include individuals with strong overseas expertise, which can further mitigate your risks. Additionally, you need a solid grasp of the Chinese landscape—specifically, which foreign enterprises have entered the market and how future policy environments may affect market access for foreign capital. Gaining this insight in advance allows for proactive strategic planning.

By mastering these three points, you can basically avoid most pitfalls.