Venture Capital Healthcare Deals in Asia-Pacific Boom in H1 2021

Deal pipelines in the healthcare sector are maturing, and China in particular is ripe for venture capital and private equity investment

Venture capital (VC) deal activity in Asia-Pacific’s healthcare sector has accelerated since the onset of the pandemic. Preqin data shows that aggregate deal value almost reached $20bn in 2020 alone, a figure 2.5x greater than the previous year's total (Fig. 1). At the midpoint of 2021, momentum for VC transactions in the sector looks set to continue; 561 healthcare-related VC deals have been concluded so far this year, for an aggregate value of $14bn – more than 67% of 2020’s level. 

Interestingly, two-thirds of the approximately 1,000 VC-backed deals completed in Asia-Pacific in the past 18 months were for healthcare assets located in Mainland China. By value, China has soaked up a staggering $18bn, accounting for 89% of total aggregate deal value. The remaining third of deals were completed predominantly in Japan, South Korea, and India. 

China’s dominance isn’t surprising. Not only does China demonstrate strong and persistent demand fundamentals (including longer lifespans, improving quality of life, and an aging population), the government has also established proactive strategies to promote high-growth industries. Under the national strategic plan 'Made in China 2025,' launched six years ago, the Chinese Government laid out explicit goals to develop large and high-tech research and development (R&D) bases and increase the usage of domestic medical devices and services. To that end, it offered tax incentives, government funding, R&D grants, and talent programs. 

More recently, in 2016, The National Health Commission led a series of healthcare system reforms aligned with the 'Healthy China 2030' blueprint. The long-term plan aims to improve health, control major health risks, increase healthcare capacity, expand the healthcare industry, and perfect the healthcare service system in China.

Meanwhile, the expansion of government-backed and private health insurance in China played a part in increasing healthcare expenditure. Regulations have also made it more challenging for Chinese companies to invest capital overseas without an outpost, making domestic deals easier to close than cross-border ones. With rising levels of capital flowing into the sector domestically, what kinds of deals are getting done? And, perhaps more importantly, what could this mean for future deal activity in Asia-Pacific more generally?

The Rise of Healthtech and Advanced Medical Device Companies
Of all the VC-backed healthcare deals in Asia-Pacific, those in the pharmaceutical and biotechnology sectors have contributed the most to aggregate deal value, with their shares at 36% and 29% respectively in 2020. However, healthtech and innovative medical device firms are increasingly attractive, despite averaging 8% and 16% of total deal value respectively for the past three years. Deals in these sectors have even begun to top the table of the largest transactions in recent years (Fig. 2). 

While these two healthcare sub-industries are still largely new and unproven, Preqin data reveals a growing pipeline of maturing companies operating in the healthcare innovation space across Asia-Pacific. Venture capital deployed in Series D/Round 4 and later healthcare deals peaked in 2020, reaching their highest share in the past five years (Fig. 3). The record figure indicates a suitably deep pipeline of firms that are likely well on their way to developing commercially viable products. 

This is very good news for specialized VC firms on the prowl for new deals in the near term, and supports an increasingly fertile hunting ground for later-stage peers dabbling in growth opportunities across the region. Indeed, as healthcare start-ups continue to mature and soak up larger investment rounds, increasing participation from private equity firms should be expected. In some regards, competition is already heating up.

China Betting Heavy on Health Innovation 
With China home to the most regional VC healthcare deals, it's no surprise that the largest five deals in the past 18 months were for Chinese companies. Notably, they all focus on innovative healthcare solutions. For instance, the largest deal year to date was the Series B funding of Kangfeng Biotechnology, which amounted to $1.1bn. Also known as Cryofocus Biotech, the company focuses on manufacturing cryoablation devices, which are used for killing cancer cells with extreme cold. The round was led by GL Ventures, with participation from Future X Capital, Ningbo Tongshang Venture Capital, Qingdao Conson Financial Holdings, Shenzhen Furong, and Proxima Ventures.

Healthtech firm Hangzhou Guangfa Technology, also known as WeDoctor, raised $500mn in February this year during its pre-IPO fundraising round in the third-largest VC-backed healthcare deal in the past 18 months. Participating investors included Millennium Management, Sequoia Capital, and China Merchants Capital. WeDoctor operates a virtual platform for appointment registration to around 8,000 hospitals in China. It currently owns 30 ‘internet hospitals’ and hosts 222 million registered patients. Founded in 2010, the company is one of the pioneer unicorns in digital healthcare. Its equity investors will soon be harvesting, as the company reportedly filed for an IPO in April 2021 on the Hong Kong Stock Exchange.

In August 2020, Hillhouse Capital led the Series E fundraising round for MicroPort MedBot, a company specializing in surgical robotic systems and solutions. The company received $437mn in the fourth-largest VC-backed healthcare deal of the past 18 months, which raised its valuation to $3.29bn. Its investors could soon be reaping the returns, as MicroPort MedBot is aiming to raise more than $1bn through an IPO on the Hong Kong Stock Exchange in the coming months.

While these big deals are on the ‘bleeding-edge’ of medtech and medical device sectors, they also showcase a healthy deal environment comprised of companies ripe for later-stage financing options. As ‘start-ups’ enter the later stages of their lifecycles, the lines between VC and private equity (PE) are increasingly blurred across all sectors in Asia-Pacific.

For China, which has rapidly become one of the most important and largest private capital markets in the region in the past five years, the trend is even more pronounced. A managing director at a leading global PE asset manager active in Greater China told Preqin that “there has been a proliferation of specialized sector strategies over GPs following generalist mandates. More Chinese GPs now focus on just one or two sectors, such as technology, media & telecoms (TMT), consumer goods, enterprise services, and healthcare.” They explained that GPs have also started to hire specialized professionals to improve deal-sourcing and underwriting capabilities, as well as enhance their value-add potential with portfolio companies.

Returns Are Promising, but Challenges Remain
PEVC fund managers' drive to outperform could encourage increasing capital flows into emerging healthcare companies looking to capture unmet demand in Asia-Pacific. Writing off these potential opportunities could be a mistake for those on the fence about doubling down early on the sector. According to analysis conducted by McKinsey on developed markets across Europe, the US, and selected Asia-Pacific countries, healthcare companies with a strong technology component are valued at 17x earnings on average, compared with 15x as the industry average. Selected healthcare tech companies have even achieved 23-25x EBITDA. Additionally, later-stage PE players with the expertise and stomach to enter earlier financing rounds could avoid overheated valuations – a more common ailment among today’s VC-backed healthtech companies coming out of 2020.

Indeed, the emergence of industry leaders and unicorns in China in recent years explains why more PE GPs are backing earlier-stage innovations, which have conventionally been more suited for VC investments. Top-tier PEVC fund managers active in China increasingly focus on deployment in growth businesses and continuous follow-on investment in market-leading portfolio companies. 

Managers do face challenges, however. Across Asia-Pacific, economies and regulations are highly fragmented. Selecting suitable healthcare innovation firms to invest in will require proactive deal-sourcing, due diligence, and portfolio management, supported by strong cooperation between interdisciplinary teams that specialize in healthcare, technology, and regulatory policies. This combination of skills is fairly unique and not easily found in a single investment team, let alone one in the developing markets of the East. 

Amid rising competition, these factors are increasingly necessary. Identifying high-quality assets from a surging pipeline of healthcare deal opportunities is getting harder, and ferrying disruptive investee companies through a minefield of red tape to get a new product to market requires serious patience. That said, recent deal activity suggests the sector is finding its stride, whereby the spectrum of potential investments is deeper and more diverse than it once was.