Fund focus: Panacea defies biotech downturn

In the first half of 2021, when Panacea Venture was preparing to launch its second healthcare fund, sentiment on the sector was beginning to dissipate. The XBI, which tracks US-listed biotech stocks, had peaked in February and LPs warned of pain to come. “But no one saw the current bear market coming,” said James Huang, founder of Panacea. “Heading into the fourth quarter, they were stunned.”

Panacea launched the fund, which has a global focus but a bias towards China and the US, in the third quarter, targeting USD 250m. Shortly thereafter, the XBI embarked on a seven-month downward spiral and lost half its value. Various public healthcare funds were liquidated, and biotech IPOs were put on hold – the impact coursing from the US to Asia.

“Hong Kong has been very important for Chinese companies going public, but there are now more than 50 waiting to get there. The mood became so conservative, bankers couldn’t get anyone to look at them,” said Huang. “From a fundraising perspective, the current market is as severe as I’ve seen.”

The XBI has staged a modest recovery from its June nadir, but it remains down 30% on a one-year basis. The Hang Seng Healthcare Index and the MSCI China Health Care Index are down 39% and 37%, respectively, following sharp selloffs earlier in 2022. Private equity investment in China biotech is USD 4.5bn year-to-date, having previously risen from USD 1.5bn in 2019 to USD 8.3bn in 2021.

Against this troubling backdrop, Panacea has closed its fund. A total of USD 276m was raised, comprising USD 255m for the main fund – up from USD 181m in the previous vintage in 2019 – and USD 21m for an opportunity fund. There are about 30 LPs in total, including sovereign wealth funds, fund-of-funds, endowments, foundations, and family offices.

Only two Fund I investors didn’t re-up, both Europe-based fund-of-funds. Most of the new investors came from the US and Europe, although Asian representation rose from two to four. Huang notes that there are no Chinese LPs; Asian investors come from Hong Kong, Singapore, and Taiwan.

“We were fortunate that we had some strong LP interest. All the time, we heard that investors were reducing their existing portfolios and only selectively picking very few new managers. And then a lot of them were shying away from Greater China funds,” he added.

Geographical patterns

The opportunity fund is more likely to invest in public stocks than participate in follow-on rounds. Huang notes that many biotech public biotech companies are trading at negative enterprise values – their market capitalisation is below their cash level – while growth-stage activity on the private side has been restricted by uncertainty over IPOs.

“Once enterprise values fall to USD 50m or below, you could argue that public companies are cheaper than any Series B opportunity you might find,” said Huang. “In Greater China especially, private valuations have not come down meaningfully despite COVID and everything else. There has always been a valuation gap between China and the US, and now it’s wider than ever.”

Fund I made 15 investments, and the split was 45% China, 45% US, and 10% Europe. Fund II is expected to be 50% US, 35% China, and 15% Europe. This assessment is based on each company’s jurisdiction of origin; it is not unusual for a start-up to emerge from research conducted in Europe, conduct early development in China, and then move to the US for clinical trials.

Biotech and pharmaceuticals account for 70% of Panacea’s investments. This leaves 20% for diagnostics, chiefly precision medicine, and 10% for medical devices and healthcare IT and services. Huang said that devices and services will likely feature less prominently in Fund II, given the challenging environment and the length of time it takes to achieve exits.

Interest in contract development and manufacturing organisations (CDMOs) in China, for example, has fallen away. Huang observes that the industry is undergoing consolidation as smaller players – many of them drug developers that received government incentives to establish drug manufacturing facilities in industrial parks – struggle to stay afloat.

“They wanted to raise capital to develop their own products, but they must also support these facilities. Many are now trying to sell the facilities to fund project development. We are seeing fire sales, with WuXi Biologic and others buying up facilities cheaper than the cost of building new facilities themselves,” he said. “As a fund, CDMO doesn’t make sense for us.”

Incubating innovators

On establishing Panacea in 2017 after a decade at Vivo Ventures and KPCB, Huang made two intentions clear: his funds would focus on early-stage investments; and he would incubate companies using his own capital, with the successful candidates coming into the funds. Four Fund I companies were originally incubation projects; so far, a couple more have made it into Fund II.

Despite the difficult market conditions, plenty of academics and corporate executives are looking to spin out and, for the most part, develop new drugs. Panacea has staffed up considerably to shepherd these nascent companies to scale: there are now 17 partners and venture partners in different parts of the world, with an 18th set to join in December. This compares to six when Fund I launched.

Technology is playing an integral role in this process, with artificial intelligence (AI) drug discovery platforms enabling entrepreneurs to work faster, smarter, and cheaper. They are moving into development with a much better understanding of biological targets and how they function, which means less time and money is spent running down blind alleys.

In cancer therapeutics, for example, traditional drug development involves targeting receptors that communicate with cancer cells. According to Huang, scientists now recognise there are multiple receptor sub-types that communicate with each other and effectively find ways to evade the drugs trying to negate them. This has resulted in treatments that focus on specific sets of sub-receptors.

“Tumours are found inside organs that are growing, so the micro-environment is complicated,” said Huang. “AI allows scientists to understand the signalling between receptors. Maybe just going after one receptor doesn’t work; maybe for a particular cancer, sub-types one, two, and five out of 12 are most important, so you go after those. By being more specific, you produce better drugs.”

At the same time, treatments have moved beyond traditional small-molecule antibodies to incorporate different types of engineered proteins. Huang also highlights the potential of gene therapies based on the adeno-associated virus (AAV), which is used to deliver therapeutic genetic material into living tissue to address a variety of diseases.

“Even within AAV, there are different AAV types. We are seeing incredible innovation that makes therapies more efficient and much safer,” he said. “It shows how the drug classes are not the same as before. People are going into new areas, and it makes us ask how we define drug development.”

Two companies from Panacea’s first fund have gone public, with Zhaoke Ophthalmology and Kindstar Global both listing in Hong Kong last year. Three more are described as being on course for M&A exits; and one of those, cardiovascular and metabolic disease specialist NewAmsterdam Pharma Holding, announced a merger with a special purpose acquisition company (SPAC) last week.

Able to point to actual or impending liquidity events for one-third of the portfolio, by the one-quarter mark of a 12-year fund, Huang believes the firm is in good shape. Moreover, despite concerns about the overall exit environment, he tells entrepreneurs not to hurry.

“Biotech has long product development cycles – it’s a hockey stick, more so than other industries,” he added. “It takes time to achieve scale and maturity.”

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• Topics
• Greater China
• North America
• Fundraising
• Healthcare
• Venture
• GPs
• China
• USA
• Pharmaceuticals
• Panacea