Gao Yu: Finding certainty in an uncertain environment

Gao Yu is the chief financial officer of New Horizon Health. (PROVIDED TO CHINA DAILY)

In late April, a new session of the CFO Salon was successfully held in Beijing and the chief financial officer from a biotech company shared his insights on finding certainty in an uncertain environment.

Gao Yu, CFO of New Horizon Health, was the guest speaker at the fifth session of the second season of CFO Salon at Peking University School of Economics on April 23. Focusing on the core concept of "long-termism", he also shared his career experience from the perspectives of corporate strategy and career planning.

Fusion of opportunity and long-term

As a CFO of a public listed biotech company, Gao's career experience is quite distinct. He received his bachelor's degree in electrical engineering from Shanghai Jiao Tong University and master's degree in industrial engineering from Purdue University. He then joined ZS Associates New York office and began his 15-year career in the healthcare industry. During his tenure at ZS Associates, he earned his MBA from Columbia Business School. Later he joined healthcare investment banking team at Bank of America Merril Lynch in New York, advising healthcare clients on IPO, M&A, hostile defense and other strategic transactions.

In 2016, Gao returned to China as a vice-president at Fountainvest Partners, where he focused on private equity investments in medical device, biotechnology and healthcare services companies. From investment banking to private equity before turning into a corporate executive, his career change is indeed unconventional.

"There were many career choices that were very opportunistic, but now it seems that there is some logic or theme behind these choices, and it is these choices that have shaped my view of long-termism and uncertainty," he said.

The change of identity is certainly driven by various opportunities and uncertainties, but behind his decade-long career and numerous positions, what is consistent is his deep cultivation and love of perseverance in the field of biotech, from which we can also see a glimpse of his "long-termism" philosophy.

Long-termism

Gao has an MBA from Columbia Business School in New York, and this seems to be the reason why he is obsessed with the philosophy of "long-termism" from investors perspective. Why "long-termism" thinking? In Gao's opinion, it is the inevitable result of game theory, and the way for companies and individuals to establish a competitive advantage.

In the short term, everyone expects to "make a quick buck", in other words, to get the most profit in the shortest possible time.

But in reality, this path is highly competitive and uncertain, as he said: "From the perspective of game theory, assuming you do not have any specific resource advantage or extraordinary luck, everyone's short-term goals are often highly overlapping, and the entry barrier for anyone to participate and compete is very low, which means that the competition is likely to be cut throat and difficult for any ordinary individual to stand out, which will in turn degenerate into a zero-sum game.”

When looking from the long-term perspective, however, the conclusion could be different. In the long run, many industries or jobs can cultivate a unique competitive advantage which offers a higher degree of certainties.

What is a competitive advantage? Gao recalls Columbia Business School’s value investing theory, which emphasizes that entry barriers are the necessary conditions for any real competitive advantage, which applies to both business strategy and career planning.

For quality businesses and jobs, if entry barriers are not established, the excess profit or benefits will gradually disintegrate as competitors continue to come in, so building entry barriers is a key part of establishing competitive advantage.

What are the typical entry barriers for a company? First of all, it is certain that "money" alone is not enough to constitute a barrier, as there is no shortage of funding to support good ideas or entrepreneurial endeavors in a developed financial market.

Gao’s examples on entry barriers include network effects, cost advantages due to economic scale, and exclusive patents. He explained the role of patents in building long-term barriers to entry: "A patent is a license for market monopoly for a period of time backed by government, which, on the one hand, grants short-term excess returns to patent holders to incentivize future innovations, and on the other hand, such patented knowledge will become public domain knowledge and social wealth after the patent is expired, and the excess returns will also dissipate".

However, not necessarily all patents can be qualified as entry barriers. Taking the biotech industry as an example, although many innovative biotech companies claim to hold numerous patents, there still exists homogeneous competition, and such patents do not translate into competitive advantages as these patents cannot serve as entry barriers and fend off competitions.

The process of building entry barriers and establishing competitive advantage is long-term, and this is the root of Gao's emphasis on "long-termism". He pointed out that "if barriers can be built in the short term, everyone would build barriers, such barriers would become a false proposition and do not form a competitive advantage".

Under the fierce competition, following the value orientation of "long-termism" is the only way to establish the competitive advantage of a company. Based on this, he further shared how to make strategic decisions and career planning under the guidance of "long-termism".

Real-life application of "long-termism": strategic decision making and career planning

From a long-term investment perspective, what industries are we looking for? In Gao's view, there are two major categories: industries that are in their infancy and not yet fully priced, and industries whose market consensus can be materially improved through value-add operations, and the company that Gao served as CFO, New Horizon Health, is an example of the latter.

As the leader of cancer screening biotech in China, New Horizon Health has pioneered the concept of "early screening for high incidence cancer at home" and has made great achievements in the field of early screening for colorectal cancer.

The multiple-year prospective clinical trial with close to 6,000 enrolled patients has proved that if the test result is negative, the negative-tested user would have a 99.6 percent probability of not having the colorectal cancer. If the test result is positive, the positive-tested user would have a 46.2 percent probability of having colorectal cancer or precancer lesions which would require follow-up colonoscopy procedures.

In this regard, Gao said, for colorectal cancer screening, New Horizon Health’s products have unparalleled competitive advantage which stems from four entry barriers.

Firstly, the clinical trial barrier takes new entrants 5 years to run a cancer screening registrational clinical trial and get approved by regulatory agency in China. So far, there is no follower who has initiated such trial, in other words, the company has at least 5 years of exclusive time window.

Secondly, at 95.5 percent colorectal cancer detection sensitivity, the product has reached the performance ceiling from statistical perspective.

Thirdly, the cost advantage enabled by economics of scale. With the continued business expansion, the unit cost of the product will drop rapidly given its central lab business model. Fourthly, the commercialization barrier: the company is rapidly developing and penetrating the colorectal cancer screening market, and New Horizon Health will have the dominant advantage in hospital access, medical guidelines, and expert mind shares.

Based on these insights, Gao made a keen judgment that it would be difficult for new investors or entrepreneurs to compete with New Horizon Health in the cancer screening market, so he decided to invest in New Horizon Health, and the facts of the past few years have shown that at least in the field of colorectal cancer screening, no potential competitor has been seen in the market, which also validates his game theory.

In terms of career planning, Gao said he had no idea about his first few career choices, which is, in fact, the norm for many people at the beginning of their career, but in his opinion, the concept of "long-termism" is still applicable, and its main insights include the following two aspects.

Gao's career has followed the development route of "healthcare consulting to healthcare investment banking to healthcare investment to healthcare executive”.

Although he focused on different areas, he found that "the dots that seemingly to be scattered and unrelated at first can now be connected one by one.

During his tenure at healthcare consulting, he undertook a lot of market research and strategic planning work, while in his investment banking role, he was exposed to many fund raising and M&A transactions, after he took his current role at New Horizon Health, these experiences proved to be highly relevant and valuable.

To focus on the accumulation of interpersonal relationships that each job can bring. “I was lucky to be surrounded by trustworthy and candid colleagues who are willing to share and help me at important juncture in my career," Gao said.

When he initially decided to return to China, he was concerned whether he could adapt to the domestic environment and to the culture of the firm. Fortunately, several friends familiar with the situation shared various aspects and dispelled his doubts. It was during his tenure at the investment institution that he led the deal team to carry out in-depth due diligence and eventually invested in New Horizon Health, which in turn laid a solid foundation for his career at New Horizon Health.

Response under ‘uncertainty’

In today's era, risks and opportunities coexist, and when it comes to the issue of "uncertainty", Gao also has a deep feeling. In recent years, there have been numerous changes of historical significance, which he has personal experience.

A series of black swan events such as anti-monopoly, education reform, and changes in Sino-US relations have occurred frequently, and emerging technologies represented by AI/ChatGPT have also caused huge changes and impacts on the operation of the economic system, work and human relationships.

In response, Gao firmly believes that "change is unpredictable, but historically, one thing is certain, and that is the survival of the fittest." In reality, behavioral change is difficult for both individuals and companies, especially for companies, which often need to "break their backs to be reborn" in order to transform successfully, but in the face of external shocks or even crises, people still need the courage to change in order to better adapt to this changing world.

For risk avoidance in an uncertain environment, Gao shared three aspects. Firstly, it is important to recognize risk early, he said. The definition of risk in financial markets usually refers to price fluctuations or volatility, but the real concern is downside risk, which is permanent and unrecoverable losses.

Preparation for the worst and leaving enough safety margin for a second chance come second. Thirdly, balancing the risk and the reward. Specifically, Gao pointed out that establishing competitive barriers could be risky and uncertain for companies and career planning.

Explained from the perspective of the game theory, it is the difference in risk appetites and difference in the perceived costs of associated risks that create the differentiations among companies.

From the perspective of personal career planning, Gao emphasized that the benefits of career change can be multifaceted, and from the perspective of opportunity cost, the earlier the decision often means the lower the opportunity cost, and under the premise of fully weighing the pros and cons, people should try to avoid the "boiling frog" type of choice process.