Overseas, a New Battlefield for Chinese Medical Enterprises | JD Insight

2024-12-23

Abstract:Getting into the game in person is the only way to find out the answer.

Research team｜ JD Capital Medical & Health Investment Department

Zhang Yunfeng,Managing Director zhangyf@jdcapital.com

Zheng Xi,Senior Investment Manager zhengxic@jdcaptial.com

How can an enterprise grow into a giant?

In the medical field, a relatively consistent path referring to the development history of overseas multinational enterprises is to reduce the single market risks by laying out international market and constantly open up growth space.

Take Japan as an example, in the 1980s and 1990s, due to the slowing down demand and the declining growth in local market, coupled with a series of regulatory reforms in medical field, enterprises are forced to accelerate their international layout. During this process, by cooperation with MNC for R&D, authorization on pipeline or patent, overseas equity investment and other ways, medical and pharmaceutical equipment enterprises such as Takeda, Astellas and Terumo alleviated the lack of domestic demand and achieved profits growth, which also foreshadowed their improvement of global competitiveness.

Take Takeda as an example, the 2023 annual revenue of the company is JPY 4263.8 billion, of which only about 10% come from local market, while 51% come from the United States, Europe, Canada and other overseas markets.

In fact, Chinese medical enterprises have gone overseas for more than two decades. In the process of going global step by step, Chinese enterprises have experienced the evolution from made in China to design in China, transforming from simple export to global resource layout.

Today, going overseas has become a relatively certain thing that can be rarely seen in domestic medical industry.

In face of a new wave of globalization, how to develop appropriate strategies for enterprises to ；go overseas under the fast-changing internal and external environment and how to efficiently and skillfully promote localization are the questions testing the decision-making wisdom and vision of enterprise founders.

In this article, we will talk about the trend of medical enterprises going overseas and discuss about what we have seen in the process of investment and serving invested enterprises.

Ⅰ.From trade export to new globalization

For Chinese medical enterprises, going overseas is a hot concept in recent years. But in fact, the export of medical products has always existed.

From the API to the relatively low-cost medical device substitution and to the biotech for today, more and more innovative technologies originated in China have acquired recognition from overseas giants. Chinese medical enterprises have begun to export to overseas markets through diversified ways.

More importantly, it is no longer a sweep of goods for overseas giants this time.

What we found is that since 2022, the average transaction valuation of overseas MNC for domestic innovative medicine license-out has exceeded the bid level of domestic giants. As of 2024, the innovative medicine industry has inverted the amount of capital obtained in equity financing and license-out.

This also happens not inferiorly in medical device industry.

According to the statistics of the General Administration of Customs, in 2023, China's total exports of medical devices reached RMB 484.30187 billion, of which medical device exports increased by 5.4% year-on-year, an increase of 54.8% compared with that in 2019. More data showed that the number of overseas registrations of Chinese medical devices has increased more than ten times in less than a decade, from 4325 in 2015 to 54784 in 2023.

For the founding teams of medical enterprises, they can only get licenses, go to the market and sell their products in the past. Going overseas means that enterprises have changed their relatively simple development path. With differentiated regulatory approval system and market supply and demand in overseas markets, enterprises have gained more possibilities.

In the past, China was known as the world's manufacturing factory, its capacity advantage in medical field was also very obvious. However, in recent years, there has been a gradual mismatch between the slowing medical demand in domestic market and the huge capacity in supply.

Except for some developed countries in the world, there is still a lot of demand in overseas market for basic medical care and improved medical care, which brings huge opportunity for Chinese medical enterprises to go overseas.

JD Capital believes that from the traditional trade mode of "made in China, sell globally" to the situation of today, some new features have shown in new generation of medical enterprises:

First of all, enterprises going overseas is no longer an export trade based on traditional production capacity advantages, it is a must for them to rely on technology and industrial chain advantages to open up global market.

Secondly, the enterprise cooperation in overseas market is more in-depth. In the past, enterprises went overseas mainly for one-off deals. But now, they need to establish deeper cooperation with overseas pharmaceutical enterprises, scientific research institutions, etc. to bind with them in a longer term and deeper way. What’s more, more diversified approaches appeared in the mode of cooperation, such as going overseas autonomously, manipulatively and cooperatively.

Thirdly, enterprises care more about brand building in overseas markets. In the past, Chinese enterprises simply sell up their goods overseas without considering the promotion of local market. But now, an important lesson for enterprises going overseas is to build their brands and market recognition in local market.

Fourthly, enterprises are no longer limited to traditional distributors and exhibitions, abundant digital tools have become an important means for more enterprises to expand overseas markets.

Fifthly, the degree of localization penetration is gradually deepening. More and more Chinese pharmaceutical and medical equipment enterprises have begun to build their own R&D, production, sales and even after-sales capabilities overseas, gradually achieving integration and localization in overseas markets.

JD Capital believes that these changes are based on China's changing role in global industrial chain: China has gradually transformed from cost advantage to technological innovation advantage. From the perspective of industrial division mode, China has gradually moved from single product to full chain integration.

If combing with the development pattern of China's medical industry itself, JD Capital believes that there are three "critical moments" in the industry that have contributed to the tide of medical enterprises going overseas today:

Firstly, in the field of innovative medicine, the SFDA restarted review of new medicines in 2015. In 2017, China is officially in lined with ICH. At the same time, CDE refers to the more stringent standard review and approval, forcing the industry to achieve relatively strict GLP, GCP and GMP standards. In this process, China's pharmaceutical supervision industry has also made great progress, joining the ranks of the global standardized market.

At the same time, the internationalization of intellectual property rights was combined with the reform of the domestic MAH system, and the division of various links in pharmaceutical industry chain was gradually refined, which gradually contributed to the market-oriented balance between supply and demand of various links in the international and domestic industry chain.

Secondly, the medical insurance reform and capital market reform in recent years have made a large number of innovative pharmaceutical and medical equipment enterprises begin to face financial constraints, which contributed to their urgent needs to seek changes in business modes and funding sources.

At the medical insurance level, the price of products is compressed to the extreme due to centralized procurement. Together with the reform of various payment systems, suppliers have to promote the transformation of business modes.

At the capital market level, in recent years, with the tightening policy of IPO in the Science and Technology Innovation Board and the Second Board, the poor performance of secondary market and the cooling financing in primary market have made industry bubble gradually receded and capital preference gradually tightened. We have seen that since the end of 2021, a large number of innovative medical enterprises have been financing difficulties and financial constraints.

Finally, in terms of policy, China's increasing international influence has opened up new destination markets for enterprises, such as the Middle East, South America, Southeast Asia and the Belt and Road countries in recent years. These markets are also more inclined to cooperate with Chinese enterprises in current international environment.

In China, since 2019, the eight major domestic biomedical industry development bases (Beijing, Shanghai, Suzhou, Hangzhou, Chengdu, Wuhan, Guangzhou, Shenzhen) have released a series of biomedical policies. Overseas development has become one of the focus points of encouragement policies for biomedical industry in recent years.

Ⅱ.What’s behind going overseas: hard survival or growth driven?

There have been media reports this year that based on R&D investment in 2023, about 13 listed biotech enterprises will not have cash on their accounts by the end of 2024. Listed pharmaceutical enterprises are performing like this, those unlisted will only be worse.

Take innovative medicine as an example, the data seems to uncover the truth of the current Chinese medical enterprises' "hard survival". This wave of going overseas is more likely to be a kind of forced survival of enterprise.

In the view of JD Capital, in traditional areas of full competition, such as generic medicine, centralized procurement has led to falling product prices. Most of unselected generic medicines are gradually losing the market, facing an extremely competitive environment. Due to the overseas listing declaration threshold, it is very difficult for them to go overseas and solve their survival problem. As a subsector with long-term overcapacity, API must be export-oriented and adopt a global supply mode.

In the field of medical devices, going overseas is more of a logic to open up a market with greater demand and growth space. Compared with other areas, the market threshold for medical devices to go overseas is lower and easier. Enterprises could grab opportunities as long as they can find the right dealer or partner in local area.

In the field of innovative medicines, JD Capital believes that going overseas is for better partners and higher product valuation and premium. At present, domestic market demand for innovative medicines is not large. Even if enterprises can be successfully listed, they are also facing pressure from medical insurance and national negotiation, which contributed to the challenge between cost and income. In the overseas market, due to the more complete payment environment, enterprises can achieve greater business value. In addition, the regulatory endorsement of standardized market can also back feed domestic medical promotion.

Taking the PD-1, which was hot a few years ago for example, many domestic enterprises were producing this product, leading to a fierce market competition. For innovative medicine companies that have invested in R&D, if they did not win the approval and the bid, or even if they acquired the approval, they are unlikely to achieve positive commercial return in domestic market due to the clustered enterprises that also won the approval. The choice for these enterprises is to go overseas.

Is going overseas really an effective means of growth? How can enterprises develop appropriate strategies for going overseas?

In the view of JD Capital, the competition should not be limited in domestic market for every industry. Only by participating in more comprehensive and rigorous market validation can enterprises gain stronger competitiveness and greater room for growth.

In particular, some industries in domestic market have developed to be extremely saturated with fierce competition and zero profit, as well as facing the pressure of centralized procurement. However, the product itself is ahead of that of non-standard market enterprises. Therefore, going overseas is an inevitable choice for domestic enterprises currently.

Taking gene sequencing as an example, according to our observation, the unit price in overseas market is three times that of the domestic market with broader market space. Domestic market for medical device consumables is now very saturated, some segments such as blood-collecting vessel and surgical stapler that developed overseas market earlier have already gained one third of revenue from overseas.

The growth rate of such industries in domestic market has slowed down to less than 10%, but there are still many markets in the world that are not covered. At the same time, some markets that have long been monopolized by high-priced products from Europe and the United States now have a large probability to be "substituted" by Chinese products.

For innovative medicines that started to go overseas at clinical stage, we can see that Chinese enterprises are accustomed to fast-follow and their innovation is mostly me better/best with mature targets as the mechanism for technological innovation or with new means to change the targeting of medicines. At present, overseas MNCs are inclined to these categories and give a higher average valuation premium because although the first in class can gain higher commercial returns, it also faces higher risks and may soon be replaced by second and third generation medicines.

Therefore, in order to maximize the value of pipelines, enterprises must search for the best buyers and partners worldwide and must also consider the internationalization strategy early on.

Of course, the rhythm of innovative medicine enterprises to go overseas should also match the stage of their own pipelines. A healthier pattern we can see is that:

● Enterprises in earlier stage usually spend about 60% of their energy on domestic market to solve problems such as R&D and market access and 40% on overseas market development. With the life cycle of the product is gradually opened, the proportion of overseas markets is gradually increased.

● Pay attention to the cash flow as concentrating on overseas deals. Enterprises cannot rely on equity financing excessively, but they also cannot be independent of equity financing. Only by maintaining a diversified capital sources can enterprises have a stronger resistance against risks.

Ⅲ.Destination market: adjust measures to local conditions and be in the game in person

Going overseas is a hot word for today and also a lucrative adventure with great danger. The first problem enterprises have to face when stepping out of the country is how to choose the destination market.

JD Capital believes that if medical enterprises choose destinations overseas, the common factors need to be considered are:

1.Demographic factors. Medical needs come from people themselves. Countries and regions with a larger population base can have a larger market volume and opportunities.

2.Level of economic development. Medical needs are different at different stages of social and economic development. In general, at a lower level of economic development, social security capacity can only meet basic medical needs such as common medicines and low-value consumables. With the increase of economic development level, the demand for innovative medicines, high-end medical treatment and high-value consumables increases with the gradually increasing penetration rate.

3.Regulatory policy and threshold. Each country has different regulatory policies and threshold. From the perspective of threshold, compared with medicines, the threshold for medical device is lower and is relatively easier for enterprises to go overseas.

For enterprises going overseas, they must combine their own product characteristics and competitive advantages with different local competition environment.

Taking a biomaterials company that JD Capital has invested in as an example, the company is in the early stage of development. The company is in its initial stage for domestic market and overseas markets are also being explored simultaneously by the company.

For the standardized market in developed countries, this company has gradually opened the market with cost-effective substitution advantages by discovering customers of the benchmark companies, seeking suitable agents and using the channel of the benchmark companies after solving the market certification and access threshold.

In developing markets such as Brazil, where there is no demand for core products of the company, the company vigorously expand new business directions such as bovine serum by looking for local partners, fully understanding of local regulations and combining the rich local bovine serum resources with company's advantages.

In this process, the core for the company to go overseas is to fully understand local business ecology with the help of local talents/partners, accurately explore local needs and match with company's core technology.

JD Capital believes that in recent years, the mainstream destination market for domestic medical enterprises to go overseas can be divided into three categories:

● Standardized market, mainly referring to Western Europe, North America, Japan and South Korea.

Their common characteristics are developed economy, strong payment ability, price insensitivity and strict regulatory policies. These countries attach importance to the protection of innovative patented technology and focus on market demand of differentiated innovative products.

The challenge in these countries is that the competition is very intense because everyone values this kind of market. Therefore, the quality, safety, effectiveness and related data base of the products are very demanding.

A common way that can possibly break into the market is by integrating start-up technology, mature capital and rich experience. The basis for entering this type of market is company’s solid R&D, which can create unique advantage over local products in terms of original innovation.

On this basis, enterprises should also realize that the most important thing in the compliant market is compliance itself. Any cut corners in clinical trials, data, etc. will eventually become a short board that needs to be patched up.

● Pan-Asia-Pacific market, which refers to Southeast Asia, India, Belt and Road countries, etc.

The advantage of such a market is the large population and the fast growing economic and medical demand. At present, such markets are more like China around the millennium, which is particularly suitable for Chinese enterprises to tackle their overcapacity. In addition to solving the problem, for some high-priced products that have long been covered by Europe and the United States, Chinese enterprises can also provide more cost-effective alternatives.

From the perspective of product types, this kind of market has a demand for innovative medicines, but prefers general medicines such as cardiovascular and cerebrovascular medicines; It is also an export area for major medical devices, such as home medical equipment, rehabilitation equipment, in vitro diagnosis, low-value consumables, imaging equipment, etc. In addition, China's traditional advantages such as API and intermediates still have cost advantages in these markets.

Moreover, due to the depth of this type of market with rich demand in many segments, some niche market opportunities may emerge. The challenge lies in the diversity of geographical and ethnic contradictions, as well as the high demand for both quality and price.

● Tyrant market, such as the Middle East, island resource-based countries, etc.

This kind of market has a strong payment ability, but the medical level and infrastructure are relatively poor. Their demand is mainly focused on high-quality products and products that meet the requirements of local sustainable development.

Therefore, the main advantages of Chinese enterprises in such markets are concentrated in the field of medical infrastructure and medical basic services, which are also the areas that our exports concentrated, such as large-scale diagnosis and imaging equipment.

There are also significant opportunities in the Middle East for some subdivisions. Due to the religion, social culture, economy, eating habits and other reasons of the local residents in the Middle East, obesity, diabetes, cardiovascular and cerebrovascular diseases and other problems are frequently happening, coupled with the local special disease spectrum, IVD and diabetes-related products have more advantages to go to the Middle East market.

There is no doubt that Europe, the United States, Japan and South Korea and other standardized markets are the commanding heights. However, because of the large investment, long cycle and high risk, many enterprises cannot afford such period and costs.

However, JD Capital believes that the core of small and medium-sized enterprises to develop a strategy to go overseas is not whether they are limited by financial resources, but their own products and technical capabilities that is needed to be taken in to consideration first.

If the technology and product of an enterprise could rank as the top in a segment market global-wide, or it can provide differentiated value in relevant indication area, even small and medium sized enterprises can anchor the market of a higher threshold and higher value.

For enterprises with cost-effective advantages and cost advantages, they should give priority to those areas with relatively low threshold and large population from the perspective of survival and sales, so as to sell their product and enlarge their scale.

Take a gene sequencing enterprise that we contacted for example, it chose Europe as its first stop mainly because European market has strong payment ability and lower threshold than that of the United States. Although gene sequencing technology is already well developed in foreign countries, Chinese enterprises have the advantage of cost-effectiveness.

More importantly, there is no absolute head of large companies in this field in Europe. What’s more, Europe itself is a multi-level market with large differences between Eastern and Western Europe. The demand in many Eastern and central European countries is large.

These countries have a relatively good economic development, strong R&D capabilities and strong demand for scientific research, but lack of satisfying local suppliers. Therefore, Chinese enterprises can meet local needs with a more cost-effective advantage.

Ultimately, regardless of the external market situation, the first thing for enterprises to consider when going overseas is the internal cause. Enterprises should think clearly about their genes, advantages and characteristics, then match themselves with different destination markets so as to do a good job of products as well as after-sales, contract execution, capital and supply chain management.

After all, the first step to overseas is to "go out". Getting into the game in person is the only way to find out the answer.

Ⅳ.Find the right person, use the right person

In addition to the destination, "people" is another basis for Chinese enterprises to go global. A key person or the right partner can sometimes be the key to open up the market.

In the early stage of going overseas, how to avoid conflicts of interest or business moral risks from "people"? Different markets have different approaches.

Taking Brazil as an example, it has a large population, a large territory, rich natural resources, incomplete infrastructure, high transportation costs and unbalanced industrial development. The economic development of Brazil mainly relies on agriculture, mining, manufacturing, biological medicine and finance. The low level of industry development resulted in a low per capita income.

In recent years, Brazil has been gradually transitioning from traditional agriculture and mining to a new economy, which contributed to a plenty of business opportunities. At the same time, Brazil is a rule-of-law country. Although the government works inefficiently, it adheres to the spirit of the contract.

There are also some unique legal features such as the requirement that the legal representative of the company must be a Brazilian citizen or a foreigner with a permanent visa. The authority of the legal representative is very large. Therefore, finding a suitable local person to manage local affairs can give full play to local advantages and can be relatively safe.

When looking for market opportunities in Brazil, one of the biomaterial companies invested by JD Capital adopted the method of finding the person who is familiar with the local market and government regulation and jointly open factories through joint ventures.

Southeast Asia is different. Because of the political, ethnic and religious differences in different countries, companies must expatriate domestic team to be stationed in the country and set up a local team.

In the field of innovative medicines, the most important talent position for overseas business is BD, which need the talent to apply knowledge of R&D, clinical development, market access, local market habits and commercial chain, as well as command of commercial negotiation ability. This type of high-standard inter-disciplinary talent is usually highly priced and highly mobile.

JD Capital found that there are roughly several modes for different pharmaceutical enterprises to deal with BD talents:

1.Take BeiGene as an example, the first-tier enterprises often choose to build overseas business departments (commercial departments units or R&D departments) to gather two types of local talents: one is the talent focusing on products and technology and the other is the talent deeply understand local registration regulations. In this way, enterprises can gather more local people with different backgrounds and thus better understand local business. However, the premise is that the enterprise has the ability to invest in a long term and a large amount.

2.The second-tier enterprises usually choose to consult with large internationally renowned intermediaries to solve BD in the form of entrusted contracts. Such large institutions are relatively mature in foreign countries with small differences in national markets, but they do not have a very good understanding of some subdivided treatment areas. Therefore, this kind of cooperation is more suitable for pharmaceutical enterprises with a full product line and large quantities of product to go overseas.

3.The third-tier enterprises usually choose small, specialized and refined consulting agencies for cooperation. Such institutions are often familiar with medicine registration regulations, industry competition and commercial chain in a specific treatment field. Such institutions are more cost-effective and more suitable for most overseas enterprises under the situation of 2024.

4.Finally, from the perspective of the founders or core team to go overseas on their own, we have observed that since 2015, many enterprises have tried to send executives of the team to expand overseas market, but the overall effect is not obvious.

Ⅴ.Modes of go overseas: going out with a right posture

How can we open the door of overseas market more efficiently and skillfully?

In the field of innovative medicines, as an important way of enterprise internationalization, license-out mode has become the mainstream because of its unique advantages. Its core is to use external forces such as resources and experience of international pharmaceutical giants, multinational pharmaceutical enterprises and professional pharmaceutical investment institutions to achieve overseas approval and commercialization of products.

As the capital demand of innovative pharmaceutical enterprises is fixed and quantified, and the risk is concentrated in a specific stage, license transaction effectively leveraged these characteristics, making both buyers and sellers dispersed risks and reduced financial pressure, thus lowered the investment threshold of Chinese pharmaceutical enterprises in the early stage of internationalization.

This mode is especially suitable for those enterprises with limited resources and international experience. Enterprises can accelerate the entry of products into international market and shorten market penetration period through cooperation.

For innovative pharmaceutical enterprises that cannot be valued by overseas MNC and try to go overseas through license-out mode, the NewCo mode that Hengrui initiated has brought new inspiration.

NewCo mode is to establish a company by overseas capital, then the pharmaceutical enterprise will strip off the pipeline and authorize to this NewCo. In this way, the enterprise can obtain a certain amount of equity and capital. By taking this mode, enterprises can not only create a certain value by using their early staged pipelines, but also they can reduce their own risks, participate in company's decision-making and lock long-term returns through the equity acquired.

This mode can quickly adapt to the regulations, cultures and needs of different overseas markets. At the same time, by introducing diversified investors and partners, NewCo provides sufficient cash flow support and promotes the effective integration and optimal allocation of resources.

At present, the normalization of cross-border BD transactions, the willingness of deeper cooperation and a more equal status are becoming trends, which also means that the development of China's pharmaceutical industry is becoming more mature.

JD Capital believes that in the future, Chinese pharmaceutical enterprises in the choice of overseas cooperation modes will be more diversified. Only by basing on their own development goals, matching the strategies of all parties and embracing innovative cooperation modes with an open attitude can enterprises more efficiently open the door of overseas markets.

Different from innovative drugs, considering the product characteristics of medical devices, medical device enterprises also take different modes to go overseas. Most of the leading enterprises such as Mindray and United Imaging chose to go overseas independently by establishing localized sales teams, building product packaging and logistics centers, setting up after-sales service teams to expand overseas sales on a large scale.

In addition, a stable and complete industrial chain is an important part in the process for medical device enterprises to go overseas. Overseas merger and acquisition are effective ways to complete industrial chain. Through acquisition or self-construction of overseas factories, medical device enterprises can not only acquire overseas production capacity, but also get closer to their customers.

However, for most small and medium-sized medical device enterprises, direct sales, proxy sales, etc. are still the mainstream methods for them to go overseas. For some products located in supply chain, domestic enterprises formed a mode of OEM or ODM to go overseas by undertaking product R&D or production process. The core is still channel ability and order orientation.

In the view of JD Capital, whether it is the dazzling innovative medicine trading mode or the capacity and capital going overseas mode used by medical device enterprises, the essence is to solve the problem of capital and resource allocation through a more flexible and diversified mechanism. The various innovative modes precisely reflected the increasingly active overseas market and the more detailed industrial division.

Ⅵ.Enterprises cannot ignore either Chinese or global market

In essence, in the view of JD Capital, going overseas is not a separate industry for investment. However, enterprises that have the ability to go overseas and can find their own growth possibilities in overseas markets with higher growth potential must have more growth value and competitiveness in the future.

Take innovative medicines as an example, overseas markets have brought higher product valuations, premiums and more impressive business prospects for pharmaceutical enterprises with innovative R&D ability. Therefore, we can focus on the more innovative frontier direction. When judging a project, we should pay attention to the value of the project, as well as its ability to go overseas, its license value and its cooperation ability of overseas business.

At the same time, in the face of a new wave of medical enterprises going overseas, as an investment institution, JD Capital is also working together with enterprises to get into the game.

On the basis of financial investment, we are constantly increasing industrial empowerment to assist invested enterprises to explore more diversified growth paths. At the same time, we will use our advantages to link various ecological resources to assist enterprises to explore overseas opportunities at their right stage and help invested enterprises with overseas needs to connect with regulatory consulting, registration consulting, BD platforms, etc. to promote commercialization of destination markets.

Finally, to help invested enterprises achieving value growth is the essence of investment.