Legend Capital on powering China’s healthcare ecosystem

An ageing population, an upgrading industry with strong innovation capability and a wave of venture capital investment means the Chinese market is well-positioned for increased healthcare interest, says Legend Capital’s Jafar Wang.

This article is sponsored by Legend Capital.

How does Legend Capital approach healthcare investing and seek to create value in the sector?

Jafar Wang, Legend Capital

Legend Capital is one of the leading venture capital and growth managers in China, managing over $10 billion of assets. We have invested in more than 500 companies over our 21-year history, with a focus on innovation and growth opportunities across TMT, advanced manufacturing, professional services and healthcare.

We have been investing in healthcare for 15 years and have a team of 16 professionals who have deployed in excess of $1.5 billion in 140 investments. We focus on high-potential early and expansion stage companies in the biotech, medtech and professional services sectors.

The majority of our companies rank in the top three in their subsectors, and we have built long-term strategic partnerships with top financial institutions, multinational companies and scientific research institutions. Through interactions with those stakeholders in the ecosystem, we have created unique investment opportunities, including spin-offs, incubations and co-investment opportunities.

At the same time, we have over 20 in-house consultants at Legend Capital, covering general management, legal and finance, and they are providing value-added consultancy and mentoring to portfolio companies, based on their accumulated experience from Legend Capital’s 500 portfolios.

Lastly, managers at Legend Capital are actively seeking exit opportunities, including IPO, trade sales, M&A and secondary fund transaction. So far, we have completed 24 IPOs, more than 30 M&A and trade sale exits, and one GP-led secondary transaction in healthcare (then the largest of its kind in Asia). This has made Legend Capital one of the most experienced VC managers in exits in China.

Taking the long-term perspective, we believe operating the VC firm in a responsible and sustainable manner is critical. We adopted environmental, social and corporate governance guidelines in 2019, published the second version of ESG standard operating procedure in daily investment activities, and implemented ESG due diligence in all new investments. We are actively communicating with the UN’s Principles for Responsible Investment on ESG implementation and sharing experience with LPs and other GPs.

As a long-term investor, what do you find particularly attractive about the healthcare sector?

What we’ve found most attractive in healthcare investment is that basic science and technology innovation never stops. Implementation of such science and technology innovation could potentially address huge unmet medical needs worldwide.

There are unique opportunities in China’s healthcare sector at the moment. There are multiple favourable factors contributing to the upgrading of the industry, and the quantity and quality of China’s innovation is steadily on the rise. With this trend, since 2018, China has surpassed Europe and become the second-largest region to attract VC money into biotech, and we believe China has the potential to become the world’s second-largest region of healthcare innovation soon.

Today, China’s global innovative drug pipeline sees nearly 40 percent annual growth, innovative medical devices are launched frequently and two Chinese companies are listed among the top five drug discovery contract research organisations in the world. If you look at Chinese assets’ out-licensing deals to international multinational companies and biotechs, both the number and deal size have been growing steadily in recent years.

In the long run, China-based biotech and medtech companies could further incorporate into global communities on co-development and co-promotional efforts to meet unmet need.

The next decade should be a golden era for China-based biotech and medtech companies and for venture capital firms focused on the healthcare market.

What are the biggest challenges facing investors in healthcare, and how is the sector impacted by current macro themes?

We think the covid-19 pandemic did bring about supply-chain issues and cause a temporary shutdown of research and development activities and medical product service supplies in some areas. What’s more, valuations in both primary and secondary markets are currently going through significant adjustments.

However, we still think there are good opportunities coming out of the pandemic to focus on making up lost ground and building towards recovery.

Despite uncertainties ahead, we believe major economies around the globe are indeed recovering. The covid-19 pandemic has re-shaped the industry on multiple levels. On the innovation side, translation of innovative technologies from the lab to the clinic has been expedited – a good example of this is mRNA vaccine development. Innovative in vitro diagnostics toolkits and services also enjoyed significant success in the past two years.

On the supply-chain side, geographical tensions – in addition to the pandemic – have brought uncertainty into the global supply of upstream devices and consumables in healthcare, and generated a wave of investment opportunities in the broader supply chain sector.

As the arbitrage model between the primary and secondary markets no longer works, GPs are moving towards earlier investment opportunities and becoming more selective. That also means that post-investment empowerment and value creation become key differentiators, and managers need to be in a position to actively create exit opportunities through M&A, equity transactions, secondary transactions and IPOs.

What are the current themes in the healthcare market in China, and where do you see opportunities to support the development of the industry?

The fundamentals of the Chinese healthcare market are very strong, not only because China has the largest population of any country globally, but also because by the year 2030 around a quarter of that population will be over the age of 60. That means a growing demand for medical help and gives China the largest patient base across a number of key medical areas.

On the other hand, affordability is improving significantly. There is a large amount of room for improvement in the total healthcare spending of the Chinese population, which currently stands at 7 percent of GDP compared with 18 percent in the US. As Chinese incomes steadily increase, people will become more willing to pay for quality-of-life-related products out of their own pockets.

Innovation and technology platforms and assets are going to be the long-term focus for the healthcare sector in China, just as they are in the global markets. We will continue to focus on innovative assets, including therapeutics, medical devices and diagnostic tools, with a special focus on those with the potential to capture global market share.

In the turbulent geographical environment, the pharmaceutical industry’s strategy on innovation has changed to that of “In China, for Global”, which has multi-layered meanings and implies unique opportunities. The US and EU are still the larger piece of the pie, and we are actively talking with overseas Chinese scientists to help them found start-ups and encourage them to out-license assets to the Western industry players.

At the same time, South-East Asia, Japan and South Korea are also becoming attractive areas for investment. We have invested in Etana, an Indonesian biologic manufacturing and commercialising platform, and we are working on another South-East Asia-focused platform in order to fully capture the growth potential of the region.

The quality-of-life-related sector is another area of interest. We invested in several companies in the out-of-pocket payment sector to capture the huge potential of consumption upgrade in China. Examples include Dearer Group, a leader in the contact lens market, and PhiSkin, an aesthetic medicine service provider.

Can you give any examples of portfolio companies that you have worked with and how the investment progressed from sourcing through to exit?

A good example would be our investment in Innovent Biologics, which is one of China’s most successful biotech companies and is a business in which we were an early investor.

Legend Capital’s healthcare team started to look into the biologics space since 2012. We visited all the top players back then, trying to identify the potential leader. We got to know the founder Michael Yu through a biotech CEO workshop. We looked into Innovent deeply and were excited to find the company could be the potential leader we were looking for – a strong pipeline with the most advanced PD-1 antibody in China and several biosimilar assets at late development stage, industry standard execution efficiency and world-class and China top-tier biologics manufacture facility and know-how.

So, in 2015, we led a $100 million series C financing in the business, with another three rounds of follow-up investments.

After investment, our team and in-house consultants interacted with Michael and the senior management team a lot. We invited key members of the management team to attend our training sessions, assigned consultants to provide on-site training and consultancy, and discussed IPO strategy with the core management team.

Innovent experienced strong growth momentum in their leading asset commercial up-take as well as their market cap performance after IPO. Legend Capital’s team supported Innovent to further strengthen their leading position. We introduced the founder of Etana, an Indonesia-based biologics company to Michael, which later became one of Innovent’s investment portfolio and the commercial platform for Innovent’s biologics to go to the south-east Asia market.

Legend Capital has been looking for investment and partnership opportunities in the southeast Asian market since 2019 and ultimately invested in Etana in 2020. By leveraging the advantages of the portfolio ecosystem, Legend Capital has played an active role in promoting the strategic co-operation between Innovent and Etana, and we are glad to hear that the two companies’ biosimilar Bevagen has recently been approved by the Indonesian Food and Drugs Authority.

Jafar Wang is co-chief investment officer and managing director at Legend Capital