Deal focus: Topolefin finds favour as import substitution play

China healthcare specialist HighLight Capital can point to a track record in medical devices and contract research organisations (CROs) that features Mindray Medical International and WuXi AppTec. In 2021, it went a step further and explored the supply chains feeding its portfolio. This is how the GP identified Topolefin Technology, a supplier of polymer materials used in the likes of endoscopic lenses and syringes.

“Several prominent global corporates have dominated the space, offering high-quality products at large scale,” said Steven Wang, a founding partner at HighLight.

“Previously, their Chinese clients were not willing to try products from emerging domestic start-ups. However, they have become increasingly open to new suppliers, taking them as supplementary sources and aiming to foster a more resilient and diverse supply chain.”

HighLight took part in Topolefin’s Series A in early 2022, alongside BioTrack Capital. This was the company’s first institutional round. Members of the founding team had previously provided CNY20m (USD 2.8m) in seed funding and Wang recalls being impressed by the “all-in” attitude. Additional seed capital came from Ofound Angel, an investment firm created by alumni of Zhejiang University.

Since its establishment in 2020, Topolefin’s position as a domestic substitution for overseas products has strengthened. This laid the ground for a recent CNY 1bn (USD 139m) Series B round led by Raystone Capital and KingRay Capitearal. Half a dozen other local private equity firms also took part.

The company claims to have successfully addressed major bottlenecks in high-performance polymer materials manufacturing. These include monomer synthesis (monomers are the component parts of polymer chains and can chemically bond with other molecules) and high-efficiency catalytic systems (part of the chain polymerisation process).

“By incorporating various additives or modifying the chemical composition of polymers, it is possible to tailor them to specific requirements such as heat-resistant or corrosion-resistant, enabling them to be utilized in a wide range of applications, such as medical devices,” said Wang.

One use case is endoscope lenses that can visualise internal body structures during minimally invasive procedures. The polymers that form the material for these lenses not only must be transparent but also resistant to chemicals and biocompatible. Another use case is camera lens covers, where there is a requirement for materials that can withstand extreme weather conditions and are impact resistant.

Topolefin has already received orders from various clients and is preparing to begin mass production. The Series B funding will go towards capacity expansion. The first phase, now completed, saw the establishment of 3,000 tons of annual capacity. The company has since set a new target of reaching 61,000 tons in capacity and generating annual revenue of CNY 5bn.

Approximately USD 11.5bn was deployed in China healthcare last year, less than half the 2022 total. Investment in the first seven months of 2023 reached USD 4.1bn, according to AVCJ Research. Most of the drop-off came in drug development, which slumped from USD 17.5bn in 2021 to USD 8bn in 2022.

HighLight claims to have accelerated its investment pace in the past year as start-ups have begun to adjust their valuation expectations downwards in response to the difficult fundraising conditions. Wang has noted a renewed interest in industrial products, but he disputes the notion that GPs are deliberately favouring more tangible business models over innovative and typically asset-light technology plays.

“I’ve always been a proponent of focusing on the micro level,” he said. “Opportunities only exist at an individual level and each opportunity is unique given the macro environment. It’s unsophisticated to conclude that one sector presents better chances than another. Outcomes depend entirely on the specific operations and strategies of each company, as well as the entry valuation.”

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• Topics
• Greater China
• Healthcare
• Early-stage
• China
• medical devices
• HighLight Capital