Asian family offices, endowments take closer look at biotech
Interest in biotechnology among Asian family offices and other institutional investors is improving as funding starts to pick up and interest rates come down, setting the stage for a sector revival.
"In Asia, interest in biotech has primarily come from family offices. About 70% of investors [in our biotech fund] are from the US, another 20%-25% are from Asia while the balance comes from Europe,” said Andrew Hendry, Asia CEO at Janus Henderson Investors (JHI).
JHI
“Interestingly we have seen more investor activity in Asia than in Europe, and there seems to be a little more risk appetite for biotech in this part of the world,” he told AsianInvestor.
The global spotlight on companies such as Eli Lilly and Novo Nordisk for anti-obesity blockbuster drugs have also helped.
Both companies have dominated the booming market for a class of weight loss and diabetes drugs in recent years.
Interest is also rising among endowments, said Agustin Mohedas, portfolio manager and research analyst on the healthcare team at Janus Henderson Investors.
He is one of the managers on the investment manager’s $395 million Horizon Biotechnology Fund.
“Because we are coming from a relatively low valuations base, interest rates coming down and an additional tailwind of M&A picking up, we believe the outlook for biotech has improved,” he added.
About 80%-85% of the fund’s investments are made in the US. The balance goes mostly to Europe and a very small proportion is allocated to Asia, which is an emerging area for biotech.
BIOTECH SCENE
Hong Kong is one of the leading fundraising hubs for biotech in this part of the world. About 126 healthcare and biotech companies have listed in Hong Kong, raising $35 billion through initial public offerings (IPOs) in 2023.
The Hong Kong Stock Exchange in 2018 also launched a new listing regime to allow pre-revenue biotech companies and new economy companies with non-standard share structures to raise capital in Hong Kong.
Other biotech hubs in the region include Singapore and Shanghai.
Biotech companies experienced a big boom in 2020, on the back of the COVID-19 pandemic, leading to frothy valuations in early 2021, especially for early-stage companies that had drugs or technology in the pre-clinical stage.
JHI
Eventually the market went into a bear slump in 2022, which continued until about October 2023.
“Immediately after, investors [in Asia] remained hesitant to come back into this space. A lot of them were also exposed to China biotech, both in the venture capital and public markets space, so there was a lot of caution,” added Mohedas.
CAUTIOUS OPTIMISM
As monetary policy in the US shifts towards lower interest rates in the next few months, a recovery could potentially be triggered in the biotech investment environment, an EY report titled Beyond Borders: EY Biotechnology Report 2024 noted.
There are early signs of a thaw in the financing and dealmaking environment for biotech, it said.
“The $179 billion spent on biopharma M&A in 2023 has boosted confidence that biotech will continue to find the capital investment it needs to advance innovation.
“Though it remains to be seen if this trend will continue for the remainder of 2024, proceeds from biotech follow-on offerings and initial public offerings (IPOs) also increased in 2023 and continued to show promise in the first quarter of 2024, with private investment in public equity deals (PIPEs) also emerging as another means of meeting the industry’s financing needs,” the report said.
William Blair
“Biotech funding has improved this year but remains well below the post-pandemic boom,” said Tommy Sternberg, partner and global research analyst at William Blair, although he noted investor sentiment remains subdued.
“We consider that...interest remain high in the obesity and metabolic space because of the increased total addressable market,” he told AsianInvestor.
“But we are seeing active development across almost every area of medicine, including but not limited to oncology, rare diseases, autoimmune diseases.”
BINARY OUTCOMES
From the equity investment perspective, the outcomes in the biotech companies can be somewhat binary: innovative new drugs undergo long and expensive trials and everything depends on the readouts from those trials, noted Raj Shant, client portfolio manager at PGIM Jennison Associates.
PGIM Jennison Associates
“Much like start-ups in other fields, many will fail, but the one or two winners should more than offset most of the investments that didn’t work and generate significant overall return," he told AsianInvestor.
“Therefore, investors seeking exposure to biotech should consider dedicated healthcare, or even biotech-specific funds, where they can get the appropriate spread of exposures rather than more broad-based funds,” he said.
JHI's Mohedas also emphasised the need for deep understanding before wading into the sector.
"90% of drugs being developed never entier the human testing phase and go to market," he said.
"If you're not disciplined and don't understand the science as well as the business to select the right 10% that have the chance of being approved [by regulators] and make it all the way to market, you will face a very challenging investment landscape."