Over the past few years, the Chinese pharmaceutical market had been experiencing some volatility, but now there is a growing consensus among investors that the market has shifted toward steady development, with a focus on medical devices and innovative drugs.
Investments in the pharmaceutical market saw a slump in 2022, having been impacted by the declining capital market. The secondary market likewise reflected a downturn for pharmaceutical IPOs, with over half of new shares dipping below issuing price and the fundraising amount reduced by nearly 50% compared to 2021. According to data from pharmaceutical data research firm PHARMCUBE, investments in the innovative drug primary market in 2022 saw a year-on-year decrease of 36%, totaling RMB 39.3 billion (USD 5.5 billion).
Nevertheless, the pharmaceutical sector remained resilient — financial data and analysis firm Wind Index showed that, as of Q1 2023, the Shenwan Pharmaceutical Index increased by over 20% compared to last October.
The rise of the medical device industry
Over the past two years, substantial investments have been pumped into the medical device industry. According to data platform StarMine, there were 549 investments and financing cases in the primary market of medical devices in 2022, and 533 cases in the biopharmaceutical industry. This is the first time that the financing volume of medical devices exceeded that of biopharmaceuticals in China.
In addition to financial investments, the medical device industry has benefited from government policies designed to support innovative medical devices during review and approval stages, allowing for faster market launches. The National Bureau has approved 2,500 registrations of medical device products, including 55 innovative medical devices, and 192 innovative medical devices have been launched over the past 5 years.
Yu Jianlin, an executive partner of GTJA Investment, indicated that this interest in medical devices stems from a short return period and the low-risk nature of the industry. Unlike new drug development, which only can yield two outcomes —success or failure — medical device research and development is iterative, which paves the way for commercialization.
Medical devices also possess substantial potential for growth. Presently, the drug-to-medical device ratio in China is about 1:0.4. In developed countries, the drug-to-medical device ratio is 1:1, which suggests that China’s medical device sector has considerable opportunity for growth. Yu stressed that this does not mean there will be a complete shift toward investment in medical devices in the future; however, there is still significant unmet clinical demand in the area of innovative drugs.
Investment opportunities for innovative drugs
While investment and financing for medical devices have surpassed that of biopharmaceuticals, this growth has also led to tighter competition. A latent issue tied to medical devices is their highly segmented technology, which makes it difficult to launch high-revenue products. Yu Xiang, the Managing Director and Head of Medical Investment of CASSTAR, has an approach that balances medical devices and biopharmaceuticals. His strategy not only involves medicine but also life science equipment and consumables in the upstream market.
Medical investors in China are now focusing on investing early and in new products, an approach that has received validation from the market over the past two years. According to data from Cailian Press, in 2021 and 2022, the proportion of projects receiving seed funding to Series A funding accounted for 63.34% and 69.13% of the total, respectively. Both have seen increases year-on-year.
Yin Lei, the Managing Director of CAS Investment, stated in interviews that pharmaceutical investment needs to move towards innovation. Clinical demands will always exist, but the fundamental value of innovative drug companies is determined by their ability to truly solve problems. The execution ability of a company’s team and the resource integration ability of the industry chain are also factors worth considering.
Jiang Yangzhi, a partner of Delian Capital and Delian Capital Medical, believes there are two segments that have a promising future: innovative therapies and IBAT (the interdisciplinary field of biomedicine and information technology). There are still many opportunities for IBAT in China, such as in the fields of organoids, omics, single-cell technology, among others.
Some investors are focusing on opportunities that come from a changing market. Cao Feng, a partner of Yingke PE, noted that leading companies in their respective segments generally have their own commercialization capabilities and can withstand the risks of market fluctuations. Given this, there is still space for said leaders to discover greater opportunities.
Pharmaceutical investments saw booming development in recent years, and going forward, investors in this sector are adopting practical approaches as China’s market shifts and new opportunities present themselves. Despite the cooldown after a period of substantial growth, investors appear certain that market segments related to medical devices and innovative drugs still have strong prospects and significant clinical demand, as well as room for growth.
This article was adapted based on a feature originally written by Yu Shiqi and published on Venture Capital Daily (WeChat ID: gh_8b25bce7ef22). 36Kr Global is authorized to translate, adapt, and publish its contents.