As global markets were tanking on news of the burgeoning COVID pandemic in March 2020, I bought a few hundred shares of the Loncar China Biopharma ETF (CHNA), an exchange-traded fund that tracks a basket of Chinese biotech equities. It was a small and admittedly speculative bet, inspired more by my curiosity about the sector than any expectation of outsize returns.
Two years later CHNA is by far the worst performing asset in my portfolio. While many other equity investments are up considerably over that time period, my CHNA holding is down by roughly half from its mid-2021 high and a quarter from where I first bought it. Virtually all the ETF’s stocks are now deep in the red, mirroring a market that has hit Chinese equities in recent months.
All this raises tough questions about what the drawdown in Chinese biotech stocks says about the sector broadly. I’m not a professional investor, but as a longtime observer and operator in Asia’s healthcare innovation ecosystems, I’m still cautiously optimistic that many countries across the region, including China, will continue to make progress in their biotech ambitions.
Early Promise, But Caveat Emptor
I first learned about CHNA in 2018 when I came across the work of Brad Loncar, an American biotech investor and entrepreneur who founded Loncar Funds, a healthcare-focused investment firm. He was making the rounds on healthcare news media to tell and sell the story of China’s nascent biotech boom. I was intrigued by his message.
Loncar painted a compelling picture of a biotech industry that was coming of age. In a May 2018 episode on The Readout Loud, a podcast by the life sciences publication STAT, he spoke effusively about China’s efforts to become a globally competitive provider of innovative biotechnologies, moving beyond its status as merely an enticing market for biotech multinationals and a producer of generic and undifferentiated medicines.
Many of the necessary elements seemed to be in place. The Chinese government was signaling strong support for the sector, including major public investments in healthcare innovation and regulatory reforms that promised faster and more sensible approvals of novel medicines. Meanwhile, the Hong Kong Stock Exchange had recently changed its rules to allow pre-revenue biotech companies to IPO there, opening the floodgates for a rush of listings from early-stage companies.
Loncar was careful to note that the ecosystem was still very young and lacked some important ingredients for success, including a strong analyst and institutional investor community that could help determine the fair value of all those new listings. He predicted that the biotech markets were likely to be frothy, encouraging potential investors to look out for “starts and stops” and take a long-term outlook.
Ups and Downs
At that time, I had recently published an investigative piece for Techonomy on China’s challenges in healthcare innovation and was mindful of the risks. From biotech to digital health and traditional healthcare services, it was clear China’s burgeoning ecosystem was promising but needed time to mature, so when it came to investing in public equities, I initially took a watch and wait approach.
When the markets tanked in early 2020, I ultimately decided to throw caution to the wind, buy some shares, and put some skin in the game. Global markets soon rebounded and Chinese biotech equities went on a tear. By mid-2021, CHNA doubled in value, signaling strong investor sentiment (over that same time period, XBI and IBB, two of the most widely tracked US biotech indices, both surged as well).
But while some investors became progressively more euphoric, seasoned industry analysts warned that many publicly traded biotech companies appeared increasingly overhyped and overvalued, particularly in the small- and mid-cap segments. Some raised concerns that these companies were being aggressively marketed to unsophisticated mainstream investors who had only recently awoken to the promise of biotech amid a global pandemic.
As the euphoria started to wane last year, Chinese biotechs were hit by a double whammy when the broader Chinese market fell out of favor with global investors. Amid the government crackdown on China’s tech titans and ongoing US-China tensions, concerns about political and regulatory risk loomed large. The recent March 8 decision by the SEC to “provisionally list” three Chinese biotech companies under the Holding Foreign Companies Accountable Act seemed to confirm those fears and spooked investors further.
A Silver Lining?
While Chinese biotech equities rose and fell, research output and private market activity continued apace. Over the past two years, Chinese biopharma companies inked billions of dollars in licensing deals and forged a multitude of strategic partnerships with multinational pharma and biotech leaders, according to an Oct 2021 report by McKinsey. Many of these activities appear to be continuing into 2022, even in the face of ongoing market turmoil and geopolitical tension.
I’ve decided to hold on to my CHNA investment for now, even though the outlook for Chinese biotech equities remains murky. Following the frantic swings in Chinese capital markets in the past week, it’s reasonable to expect a lot more volatility in the coming months and years, and it’s perfectly possible that I’ll lose even more on this investment, or perhaps the whole thing.
If CHNA was a larger share of my portfolio, I’d probably be sweating bullets. But if I were a true believer in the China biotech story, I might view this as an unprecedented buying opportunity. Long term, I don’t know what outcome is likely for this specific ETF, but I’m rooting for the emerging biotech ecosystems in China and across Asia Pacific. If they succeed in developing new medicines and driving medical progress, we all benefit.
