Thanks to multiple favorable policies for the capital market in the past few years, Chinese Biotechs have seen an unprecedented opportunity to go public, resulting in some chief financial officers (CFOs) continuing IPO work at a new employer after reaching their goals. “Unlike Biotechs, CFOs come and go regularly” became the norm at that time. The career trajectory of Robert M. Davis, the new head of the global pharmaceutical powerhouse Merck Sharp & Dohme (MSD), has chartered a new course for CFOs to realize individual value. As the pace of investment slows, career goals of Biotechs’ CFOs will go beyond IPOs.

Mr. Song, who has been engaged in finance for over two decades, admitted in an interview with Pharm Cube that it is especially important for companies to be fundamentally sound in times of downturn, which also places higher demands on the CFO’s ability to be well versed in the whole process of technologies, products and marketing, to refine operations to support meaningful innovations, and to leverage industry opportunities to empower corporate development.

John Song, CFO of Nanos Medical

Senior CFOs tend to be more business savvy

Pharm Cube: What was the impetus for you to pursue a career in biopharmaceuticals?

Song: I started my career in 2001 when I was working in tax and consulting for an accounting firm in Shanghai, and around 2003, our client Thermo Electron Corporation (present-day Thermo Fisher Scientific) was about to start a large-scale integration of its business units' representative offices in the Chinese market, setting up R&D, production and sales operations, establishing regional headquarters and a logistics service center.

By coincidence, I joined Thermo Electron Corporation in 2004 and started my career in the life sciences field. Although I have been involved in the biomedical field for 18 years, I am still very passionate about my work thanks to various positive contributions that this industry can bring to society. During my spare time, I have also become a certified instructor of American Heart Association First Aid CPR AED Course, in hopes of contributing to the social good.

Pharm Cube: What are some of the major career changes that have occurred in the past 18 years since you started your career?

Song: After I finished a degree in finance, I got a finance job that calls for years of experience. In my opinion, the challenge of excelling in this job to a senior finance expert is being business savvy, being capable of planning and making financial decisions from a company's overall strategic perspective, possessing an expertise related to the industry, being able to communicate effectively with the company's technology, product and marketing departments.

Nanos Medical is the first Chinese company I have worked for, which is a big change in my career. Prior to joining Nanos Medical, I worked for large foreign companies, with six years at Thermo Fisher Scientific, five years at Covidien (formerly Tyco), six years at Medtronic and later at Cisco Systems.

During my stay at the global medical device powerhouse Medtronic, I was the Senior Director of Finance for its Greater China region, responsible for the company's financial budget and analysis. At that time, I was torn between whether to stay in a great foreign company or not. After thoughtful consideration, I decided to make a breakthrough. My initial intention was to check out how far I can go if only I was lucky enough to achieve certain successes. Since I was not raised under the umbrella of my parents, I was brave enough to step out of my comfort zone, even though I might succeed or fail in this process.

After joining a homegrown company, I found that on the one hand, I was able to make most use of my previous knowledge and experience; on the other hand, I was learning something new and addressing new problems every day, which made me feel very fulfilled. In addition to my daily work on investment and financing projects, my other primary responsibilities include ensuring the compliance of financial operations, while continuously improving the empowerment of the finance department to the business, establishing and optimizing systems and processes internally, improving internal controls, and enhancing the integration of business and finance.

Pharm Cube: How do CFOs like you, with experience in foreign companies, address emerging challenges at a Chinese company?

Song: This is a fundamental question that must be faced and answered by all senior executives who make the switch from MNCs to local companies. To me, the resources of foreign companies are basically within the company platform, where a CFO can get the support of favorable internal resources and the support from associates in each front and back office, with well-established processes and systems. Therefore, a CFO's focus is more about O&M.

Thanks to over a decade of experience in MNCs, I have the opportunity to bring my talent and experience in advanced and mature management ideas, standardized operation systems, and corporate governance approaches to handle large business volumes and sophisticated business into my current employer. In addition, all of us, from the founder Cui Teng to the middle and senior management, have experience working in international companies. Upon joining the local platform, we are also united to embark on a new venture.

For a local company like Nanos Medical at its infancy stage of growth, it is necessary to address all aspects including investment and financing, IPO sprint, market value management, financial operation, auditing, compliance, to name a few. The launching and commercialization of the company's products requires a CFO who is well versed in the industry and fine-tuned operations, as well as the vision and drive to be able to gradually develop the company from 1 to 10 after it has grown from 0 to 1.

Pharm Cube: In the past, there was a saying that “Unlike Biotechs, CFOs come and go regularly.” What do you think about this?

Song: This happened mainly 5-10 years ago, when many weaker but innovative Biotechs needed to complete IPOs in the secondary market after several rounds of financing, which called for the addition of CFOs with investment banking background to help them accomplish the goal of going public. Once that goal was achieved, the company gradually commercialized its products and needed an experienced CFO who engaged in the operation and finance sector, for which reason we often find that some CFOs leave after helping a company complete an IPO and head to the next one to resume IPO work.

In the last 5 years, however, PEs and other organizations with investment banking background have grafted such resources onto Biotechs, and the IPO process has become more structured and transparent, resulting in a decrease in the importance of investment banking resources in the IPO process, and a greater emphasis on CFOs with operational backgrounds as the market has begun to focus more on the fundamentals of companies.

Pharm Cube: Could you share an example of how a CFO with an operational background can work?

Song: Here we look at M&A as an example. For the healthcare industry, it is essential for companies to carry out M&A deals in order to grow bigger and stronger. Post-M&A integration and operations are in fact also crucial to achieve a 1+1>2 synergy effect after the M&A.

For example, Nanos Medical's CAGR of over 200% in revenue in the past 5 years is closely related to its multiple M&As, such as the acquisition of Chengdu Mechan in 2019. We have also recently completed two M&A projects, i.e., an ENT surgical instrument company based in Hangzhou and an ODI of a German endoscopy company.

For conglomerates that integrate R&D, production and sales scalability (such as Biopharma), in-house R&D, license-in, and M&A are the means for the company to grow and develop. Regardless of which strategy should be pursued, the company must be solid in fundamentals, and then on this basis, perform well in capital and market investment and financing externally, and continuously improve operational efficiency and financial performance internally.

Supporting meaningful innovations

Pharm Cube: From a CFO's perspective, what makes a project innovative?

Song: I would say a meaningful innovation should be at least achieved with respect to therapy technology and business model. For example, a traditional pacemaker is about the size of a tea bag, which is mounted under the shoulder blade and connected to the heart through a lead; the latest pacemaker, however, is not only the size of a vitamin capsule (1/10th of its original size), but can be delivered percutaneously to the heart directly through a catheter crossing the femoral vein. This is a change-making, minimally invasive technology innovation that redefines the patient experience, avoiding scarring on the chest and securing less restrictive post-operative activities and faster recovery, while eliminating the pocket-related complications. Thanks to this technology, a procedure can be completed in about 30 minutes.

Personally, I have noticed that it is easier to achieve real technological innovation in small companies than in large conglomerates. Nanos Medical, where I currently work, is a small company that has gone from start-up into the infancy of growth. Sixty percent of our business is the cryo-plasma platform produced in Chengdu, with a wide range of application scenarios including ENT, sports medicine, reproductive surgery, neurointervention, hepatobiliary surgery, among other departments. It is a comprehensive innovation in business model and technology application.

Pharm Cube: To continue to lead in a certain segment, what are the key elements that you would like to focus on first?

Song: Currently, one of the new growth opportunities in the industry is consumer-based healthcare. As living conditions were relatively poor in the past, people were reluctant to seek medical treatment for diseases that were not life-threatening; as living standards improved, people's demand for quality of life also increased, and gradually they began to pay more attention to the consumer-based healthcare, including cosmetic surgery, ophthalmology, dentistry and so on.

The ENT we are working on also falls into the category of consumer-based healthcare, which is an area of opportunity we can capitalize on. Going forward, we intend to spend more resources on technological innovation in this area, in hopes of eventually forging an integrated healthcare solution, the so-called “total solution” concept.

Pharm Cube: Continuous innovation requires system support. What do you think is the most effective decision-making mechanism for startups?

Song: The healthcare industry is a highly regulated one, with rapid technological iterations and the potential for disruption by cross-border technologies, and rapid market changes at the domestic level in terms of policy and access. Given this environment, start-ups should keep an eye on and be concerned about the market and its trend two or three years down the road, while also ensuring that they meet their quarterly (annual) targets for compliance, operations and performance. These cannot be realized without the devotion of professionals, especially senior executives.

In my opinion, every executive should always ask themselves: How much time on average is spent each week and month on the company blueprint for two to three years? How much time is spent on this quarter (year)? Does the amount of time spent align with his or her role? Are management's responsibilities and time allocation neither duplicated nor gapped for the current phase and the next two to three years of operations?

Pharm Cube: From a management perspective, what is the right way to manage an R&D-driven innovative company?

Song: I have three suggestions for R&D governance, largely based on my experience in this industry, as I don’t have a background in R&D.

Synergy with the upstream market. There is an increasing amount of investors, according to us, are directly working with R&D professionals at universities and research institutes for entrepreneurship purposes. The ideas and pain points of upstream medical professionals are themselves conducive to innovation and R&D.

Spin-off of legacy and new technologies. Within a company, if legacy technology and new technology are applied in the same team, it is bound to restrict innovative R&D in terms of resources and environment, which is why there are rarely disruptive R&D outcomes in many pharmaceutical or device manufacturers nowadays, but instead there are many technical breakthroughs in unicorns.

Development of R&D incentive system. An enabling incentive system will facilitate the motivation of R&D professionals.

Leveraging industry opportunities for empowerment

Pharm Cube: From a supply chain perspective, what are the differences between foreign and Chinese companies in the upstream and downstream sectors?

Song: In the upstream area, I don't think there is much difference. In terms of R&D, technology and production, foreign companies enjoy more advantages; currently, the Chinese government is actively encouraging local companies to accomplish technological development, as local companies may enjoy certain advantages in terms of product registration, market access and medical insurance payment. Therefore, in terms of comprehensive cost, there is not much difference between imported and local products.

For example, our Chengdu site produces hundreds of thousands of tips each year, the vast majority of which are supplied to the Chinese market; while an international factory engaging in the similar industry to us, with its production base abroad, supplies the global market with a large volume, which can reduce the unit production cost, but its high operating and management costs will lead to a significant increase in the overall cost. For most of the devices, the production and development cost is not the main challenge until the centralized procurement or VBP; while market access, patient education, and physician training are the “battlegrounds”.

In the downstream area, VBP or channel control is involved. VBP greatly affects the channel, which leads to the gradual work transition from distribution by many distributors to quasi-direct marketing. This is very much like the foreign GPO model, which relies on logistics providers such as China Resources, Shanghai Pharma and Sinopharm for direct distribution to hospitals. The technical superiority of some imported products at this stage makes the commercial presence of local companies on distributors and channels weaker than that of imported manufacturers, and the commercial arrangements and allocation of channel profits will therefore be slightly inferior.

Pharm Cube: Since the comprehensive cost difference is not significant, which products do you think can be substituted domestically?

Song: Personally, I think that there are three considerations for “domestic substitution”.

From the government's point of view, consideration should be given to health insurance spending, medical outcomes and technical bottlenecks.

From the patient's point of view, consideration should be given to the affordability of medical treatment.

From the surgeon's point of view, key considerations should be given to product safety, ease of use and medical outcomes.

Take medical devices as an example, with the government as the main driving force for “domestic substitution”, therapies with the following characteristics may be the first to achieve VBP and domestic substitution: high health insurance expenditure; uncomplicated surgery that requires high degree of standardization; reliable Chinese manufacturers available to ensure quality (in terms of technology and quality) and quantity (in terms of production and coverage) of supplies.

Pharm Cube: From a financial officer’s perspective, how do you see the opportunities in the industry as a result of the VBP policy?

Song: The Chinese medical device market is likely to form two main ecosystems after the game of parties - products that are mainly “affordable and high volume” (including some invisible champions); and products with truly innovative technology content, and obvious advantages in clinical effectiveness and value-based healthcare.

After the 19th CPC National Congress, Beijing introduced its “Healthy China” strategy, in a bid to safeguard the health rights of all citizens, improve health standards and enhance the quality of medical services, while controlling medical costs. As the aging population leads to increasing medical costs, China’s medical insurance system is required to ensure basic health coverage, which means that medical products and services are needed at affordable prices and in large volumes. With the auspice of health insurance payment reform, certain products with great demand, low-value attributes and higher gross profit per unit may be more likely to succeed.

Pharm Cube: In consideration of the said reform, how will the finance functions empower companies?

Song: The finance function can take the initiative to guide companies in the midst of dramatic changes in the industry to adjust their market strategies and execution strategies based on its understanding of business, market, products, competitiveness, channels, payments and other aspects, and its respect to true and accurate financial data.

Take the heart stent, for example, whose business model is facing a huge adjustment after channel profits are significantly squeezed due to centralized procurement. On the one hand, it is necessary to re-integrate the channel structure, re-account the price of distributors, and consider the meaning of “V” in “VBP” to the company; on the other hand, it may be necessary to redeploy the sales team to new regional markets; meanwhile, it is necessary to set new financial targets according to the new business patterns, and brainstorm on how to reach these targets, as well as the assessment and payout of sales bonuses.

Another example is the pricing of new products. As finance involves the approval of prices, it is necessary for the finance function to estimate an appropriate price that can meet the basic needs of the market while not compromising the company’s profits and profit margins? It has to figure out how to reasonably balance the profit distribution between the company and distributors, so that distributors have enough incentive to market new products while not compromising the company’s interests?

Pharm Cube: What’s your comment on the current scenario of difficulty in fundraising and slowdown of investment in the primary market?

Song: In the recent year, it is evident that some Hong Kong-listed 18A companies have fallen below the issue price, while others have been subjected to issuance risks after hearings. The root cause may be summarized as follows: bubbles reflected in the secondary market has already been accumulated in the primary market after rounds of financing, and the secondary market investors are not responsible for those bubbles. The secondary market valuation is pushing back the regression of the value of the primary market.

Significant slowdown of investment is also due to a decline in liquidity in the Hong Kong market caused by geopolitical issues, coupled with risk aversion among investors caused by war and COVID-19, as well as aesthetic fatigue towards 18A companies that are only telling stories but not performing well.

As it generally takes about 10 years for the development of first-in-class drugs, investors will be more patient with these drugs, and storytelling may still be useful. In contrast, it takes about 5 years for the development of first-in-class devices. If the blueprint formulated 3~5 years ago does not materialize on schedule, some investors will also be suspicious of its financing logic. Therefore, in times of a major downturn, it becomes especially important for companies to be fundamentally sound. Investors and the capital market will pay more attention to a company’s business foundation, operational capabilities, financial performance, etc., and further emphasize the importance of a team’s operational capabilities.