Investment Opportunities in the Precision Medicine Industry: 2016 Prospectus

By Xiaoen Daxia

On Precision Medicine.Currently, there are four major sectors: first, gene sequencing and microarrays; second, next-stage testing based on gene sequencing chips, including liquid biopsy; third, precision medication, with antibody drugs being the primary representatives in this niche; and fourth, tumor immunotherapy with immune cells.

At present, all four major sectors have achieved progress and breakthroughs, yet deficiencies remain. In the early stages of industry development, many effective disease treatments have emerged, alongside some suboptimal clinical cases. Such information is often highly sensitive to the secondary market.

Today, the primary goal is to provide you with a framework. While it may not offer a fully clear and comprehensive explanation of what precision medicine truly entails, it will at least introduce some fundamental concepts, which could be helpful for understanding or engaging in future investments.

First, let’s examine valuations in the secondary market, as primary market investors often pay close attention to trends in the secondary market. If numerous publicly listed companies show significant interest in a particular sector, many primary market investors will swiftly and proactively position themselves early.

This analysis screens publicly listed companies in the secondary market with “gene-related” business segments over the 12-month period from November 6, 2015, to November 6, 2016. First, there was a noticeable decline in their average P/E valuation, which was partly attributable to the overall downturn in valuations across the secondary market, as well as changes in valuation levels within specific sub-sectors. Nevertheless, when averaged over this 12-month period, the P/E multiple for “gene sequencing” remained at 59.2x, while that for “gene chips” stood at 86.9x, indicating that these valuations were still exceptionally high.

During the investment process, when evaluating the valuations of mature companies, the aforementioned valuation levels are indeed excessively high. Of course, for venture capital (VC) firms operating in the primary market within the fields of gene sequencing or precision medicine, the price-to-earnings (P/E) ratio is meaningless for many portfolio companies, as there is no “E” (earnings per share, EPS). This necessitates the adoption of alternative valuation methodologies, which will not be elaborated upon here.

Let’s examine another metric—the Price-to-Sales (P/S) multiple, which is a multiple of sales revenue. This metric is not widely used in valuations within mature markets.

From both absolute and relative valuation perspectives, the valuation of many drug R&D assessments should not rely solely on this metric; rather, it serves only as a reference data point. Here, we similarly screened data from the past 12 months, and in terms of the price-to-sales (P/S) multiple, “gene chips” reached 7.3x, which is also quite high.

If we examine other sectors within the broader healthcare industry, including medical services and medical devices, the perspective may become even more apparent. From a safety-oriented investment standpoint, the preference is for valuations to be as low as possible, or at least reasonable. Furthermore, regarding valuation metrics in the secondary market, the aim is to provide investors with a clear conceptual framework.

Furthermore, the New Third Board also warrants attention, as it includes some companies in this field. Although there are not many precision medicine-related companies on the New Third Board at present, each has its own distinctive characteristics.

For instance, Darui Biotechnology has achieved a market capitalization of RMB 3 billion on the New Third Board, primarily focusing on diagnostic reagents, particularly in prenatal screening, which aligns with the sequencing and testing aspects of precision medicine mentioned earlier. Lepu Genetics and Genema Genetics specialize in high-throughput gene sequencing, RNA interference technology, and other genetic testing services. In addition to these three companies, other notable examples include Personal Biotechnology and Hamilton, among others.

We have primarily discussed the secondary market; what is the current state of PE and VC in the primary market?

This section provides a brief overview of current market activities. It primarily presents case analyses of private equity (PE) and venture capital (VC) investments in the healthcare sector from January 1 to the end of August 2016, covering the first three quarters. The investments are categorized into PE and VC based mainly on investment amount or stage. The data are sourced from Chinaventure disclosures.

In the realm of private equity (PE) investment, biotechnology accounts for a relatively small share, as many private investments in public equity (PIPE) transactions are categorized under this sector. Traditional pharmaceutical industries, including traditional Chinese medicine and chemical pharmaceuticals, still constitute the largest portion of the market. From a PE investment perspective, the share attributable to biotechnology remains relatively modest, both in terms of proportion and absolute capital amount.

If we examine the investment cases in detail, the top 20 are led by Biosensors International, with a transaction volume reaching RMB 7 billion. Following it are Baiyunshan, Tonghua Jinma, Ruikang, and others; the vast majority involve private placements by listed companies. Ranked 20th is Junshi Biosciences, which is also listed on the New Third Board. This company is quite remarkable: despite generating virtually no revenue, its valuation has already reached RMB 6–7 billion.

Let’s take another look at venture capital (VC) investment. Private equity (PE) firms primarily focus on later-stage mature companies and private placements for publicly listed firms, whereas VCs are more concerned with the early- to mid-stage market. It is often said that precision medicine is somewhat overheated, and many precision medicine companies appear to be raising funds. But what is the reality?

At the very least, based on publicly disclosed data, venture capital (VC) investment in biotechnology remains relatively robust, accounting for a considerable share in both the number of deals and the total transaction value.From the perspective of venture capital (VC) investors, there are significantly more precision medicine-related projects in their portfolios compared to those of private equity (PE) firms. This disparity reflects, to some extent, that PE firms tend to focus more on traditional pharmaceuticals and mergers and acquisitions (M&A) consolidation, whereas VCs place greater emphasis on companies driven by novel technologies.

Similarly, examining the top 20 cases reveals that, in addition to medical devices and services, there are also biotechnology companies, many of which are related to precision medicine. For instance, the ninth case, Shanghai Cell Engineering, received approximately RMB 185 million in Series B funding from Legend Capital. Henlius Biotech received RMB 127 million in investment from Huagai Capital.

The above provides a general overview of the secondary and primary markets, aiming to offer readers a foundational framework and key concepts. Next, we will explore where the opportunities lie.

Regarding the growth trends across various subsectors of the healthcare industry, we should closely examine the opportunities that our peers are focusing on. For instance, during this year’s investment activities, there has been a consensus that hospitals are a hot sector. While hospitals indeed attract significant attention and heat, have we considered why they are so highly sought after?

Let’s take a look at the secondary market data.Currently, hospitals are largely categorized under medical services, which also encompass other diagnostic and hospital-related operations. Over the past three years, revenue from medical services has grown rapidly. The compound annual growth rate (CAGR) for this segment, derived from 219 publicly listed pharmaceutical companies and those specifically engaged in medical services, reached 39.1%. In fact, growth over the past year alone was approximately 38%. This medical services sector is predominantly composed of hospitals, whose revenue growth has been driven both by organic expansion and by rapid mergers and acquisitions.

Furthermore, we can observe that sectors such as biologics and medical devices are experiencing relatively rapid growth. A more in-depth analysis of the market’s expansion trajectory from its nascent stage to its current scale would further substantiate this observation.

From the perspective of the broader healthcare industry, as a private equity (PE) investor, I would likely focus more on healthcare services. Of course, niche segments within the biopharmaceutical sector are also critical. Although the era of explosive growth for biologics has not yet arrived, the past two years have generated significant positive momentum, with companies such as Innovent Biologics and BeiGene already gaining substantial market recognition.

Next, let’s explore the potential directional opportunities in the four aforementioned fields of precision medicine and discuss them together.

The industrial chain in the fields of gene sequencing and gene chips can be divided into upstream, midstream, and downstream segments. The upstream segment mainly consists of equipment, where domestic opportunities are believed to be limited; globally, current sequencing is also dominated by large foreign companies.Illumina essentially holds an 80% share of the global sequencing market. Due to the high technological barriers, opportunities in China are relatively limited. Nevertheless, some domestic companies have begun purchasing or acquiring such equipment from overseas.

The midstream segment of the industry primarily consists of sequencing services, which have relatively low entry barriers. As a result, a large number of companies have entered this field; according to basic reports, there are currently more than 200 such companies.Downstream applications in the industrial chain are currently limited in clinical settings, with greater adoption seen in research institutions. In the future, more opportunities—particularly those involving precision medicine and blockbuster innovations—are likely to emerge; however, these advancements will entail greater technical challenges and longer development timelines.

From the perspective of academic publications, over the past 10 to 20 years, the volume of papers in fields such as stem cells and genetics has grown rapidly. However, actual research and clinical applications remain relatively limited. This highlights the importance of translating theoretical advances into practical guidelines. Venture capitalists with forward-looking insights may identify promising directions early on and strategically invest in areas with the greatest potential for breakthroughs.

Although there are currently over 200 sequencing companies, only a few truly excel in sequencing services. Beyond technology, equipment, and data services, several other points warrant mention. Third-generation sequencing technologies and leading fourth-generation technologies hold future potential, although their immediate prospects appear limited; early-stage venture capitalists are more inclined to invest in these areas. In terms of equipment, miniaturization and convenience are likely to be future trends. Data will constitute the most critical component going forward, particularly the analysis and services derived from accumulated data.

In terms of services, early diagnosis warrants close attention. Whether for cancer or other diseases, it is crucial to assess whether early diagnosis can generate a substantial market and leverage insurers and other payers.

Next year is likely to be a period of industry consolidation for the entire NGS sector. This perspective draws a parallel with the mobile health sector, which began gaining momentum in 2012 and heated up further in 2013. At that time, a startup comprising just four founders—typically one with a clinical background, one with IT expertise, and two others—could easily secure a valuation of RMB 40–50 million. Such a scenario is now entirely implausible. Currently, investors in the mobile internet healthcare space are adopting a more cautious approach; this does not indicate a lack of confidence in the sector, but rather reflects greater prudence in investment decisions.

As the industry develops, it will naturally experience a surge in growth, accompanied by bubbles. However, once these bubbles burst and the initial hype subsides, the industry will rise again, driven by prior groundwork, accumulated experience, and the natural selection of superior players.Therefore, my personal speculation is that many precision medicine companies may go under next year, but this does not mean I am bearish on the sector. On the contrary, those performing well will become even stronger. From a longer-term perspective, I remain optimistic about the direction of precision medicine; certain tolerance and sacrifices are worthwhile.

We just mentioned that tumor detection, being limited to early-stage diagnosis, may not be sufficient. Combining tumor recurrence monitoring with detection could unlock a larger market; for instance, the integration of NGS and ctDNA technologies is highly noteworthy.

In the realm of precision medicine, antibody drugs are the most typical representatives.Six of the top 10 best-selling drugs globally are monoclonal antibodies (mAbs). Adalimumab, ranked first, achieved global sales of $14 billion in 2015. In China, products from Kanghong Pharmaceutical and Hengrui Medicine’s PD-1 inhibitor serve as notable examples. Bispecific antibodies, which target two epitopes compared to the single target of mAbs, present significant opportunities, albeit with greater technical challenges. Additionally, antibody-drug conjugates (ADCs) are also a current focus in R&D within the field of precision antibody therapeutics.

Tumor Immunotherapy. In the wake of incidents like the Wei Zexi case, taking a long-term view, it may be beneficial to exercise greater caution in both medical services and precision medicine; at the very least, this would lead to stricter regulatory quality and standardization. To some extent, private hospitals have faced significant pressure, yet their development momentum remains positive, necessitating further in-depth efforts in the future.

In the field of cancer immunotherapy, you can visit clinicaltrials.gov to explore clinical trials. Early-stage investors closely monitor this website, as it essentially lists basic information and data on the most significant global drug development and research experiments. It allows professionals in the pharmaceutical R&D industry to see what others are working on, and the website is free of charge.

By 2020, the potential future market for CAR-T therapy remains substantial. In applied research, scientists tend to combine various cytokines with effective chemotherapy regimens and tumor-targeting antibodies. While market conditions may experience short-term fluctuations, from an industry chain perspective, cell therapy encompasses the entire spectrum—from biomaterials and equipment to the full value chain—with patent protection playing a critically important role.

Finally, a brief mention of Henlius Biotech. In 2016, Henlius Biotech received an investment of RMB 127 million from Huagai Capital. The company has a substantial pipeline of monoclonal antibodies and other pharmaceuticals, covering major therapeutic areas such as oncology and rheumatoid arthritis. Should these products achieve breakthrough success, the growth potential would be significant.

Source: WeChat Official Account “Xiao En Da Xia”