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Lumira has previously raised four venture capital funds to invest in private health sciences companies.Adrien Veczan/The Canadian Press

Lumira Ventures, one of Canada’s top investors in private health sciences startups, is launching a hedge fund to bet on publicly traded companies it believes have been oversold during the sector’s meltdown in the past year.

With its new fund, Lumira Ventures Opportunity Fund 1, the Toronto firm is following what many established U.S. biotech investors – including OrbiMed Advisors LLC, H.I.G. Capital and Baker Brothers Advisors LLC – have done for years by backing both public and private companies. By contrast, it’s rare to find fund managers in Canada that specialize in publicly traded drug and medical device development.

Lumira has previously raised four venture capital funds to invest in private health sciences companies – including its latest, a US$223-million fund last year that was the largest in Canada in two decades – and backed some of the top Canadian names in the sector, including Aurinia Pharmaceuticals Inc. and Zymeworks Inc.

It has recruited biotech equities analyst David Novak, previously managing director with Raymond James in Toronto, to manage the hedge fund.

Lumira Ventures raises largest Canadian life sciences fund in more than 20 years

The fund will aim to invest 80 per cent of proceeds in public companies, compared with a cap of 15 per cent for Lumira’s venture funds. It will mostly invest in stocks it believes will rise in value, with about 10 per cent used to “short” or bet against stocks it thinks are poised to fall.

The fund will focus mainly on established biotherapeutics and medical technology companies, typically with strong management teams, backed by big-name investors in the sector and within two years of a milestone development such as publication of trial results that could move the stock.

Planning for the new fund came together this year when Lumira managing general partner Peter van der Velden was talking with Mr. Novak about the deep sell-off, in which the Nasdaq Biotechnology Index dropped by nearly 30 per cent in value from its 2021 peak. In addition, the sector’s substantial outperformance over the S&P 500 Index – an average of eight percentage points annually from 2010 to 2020 – has been erased to just a 1-per-cent difference when extended to this year. About 180 public companies in the sector have had their market values shrink to less than the amount of their cash.

“It looked like a bigger reset than any of the others we’ve ever seen,” Mr. van der Velden said in an interview. “We concluded this was probably an unprecedented opportunity to think about doing something.”

Mr. Novak said despite the sector’s crash, industry fundamentals remain “stronger than ever,” with an aging population, growing obesity rates and recent innovations in health care, such as gene mapping and editing, the use of messenger RNA and artificial intelligence, and rising approval rates by regulators for drugs that precisely target medical conditions such as particular forms of cancer.

“This is a space that in a rational market should outperform the broader index” and should do so again in the years ahead, he said. He expects much of the value creation to come from pharma and medical device giants that collectively have US$1.2-trillion to spend on acquisitions.

Lumira has made one investment through its venture fund that looks to be an analog for deals to come, participating in a US$55-million private placement this year into publicly traded X4 Pharmaceuticals, a company with a negative enterprise value, alongside top investors including OrbiMed.

Biotech stocks, like information technology stocks, have sold off in the past year as investor appetite waned for risky early-stage companies in the face of rising inflation and interest rates. Biotech companies are particularly risky as most go public early in the process of developing drugs that will take years to meet clinical milestones, prove their effectiveness and earn regulatory approvals for sale to the public. Only a small percentage of companies that enter into trials make it all the way to market.

Despite those risks, the sector’s long-standing outperformance makes the new fund intriguing to industry veterans.

Two high-net worth families pitched by Lumira said they’re considering backing the fund.

“I think it is perfectly timed,” said Jonathan Goodman, chief executive of Montreal’s Knight Therapeutics Inc., who plans to invest $1.8-million. He praised Mr. Novak, a trained scientist, as a “thorough” analyst. Roberto Bellini, chief executive of Laval, Que.-based Bellus Health Inc., said his family’s holding company Picchio International is “definitely thinking about it. This makes a lot of sense. The timing couldn’t be better. "

The Lumira fund will target companies in areas where it has developed expertise, including personalized medicine, neurodegenerative, autoimmune and inflammatory diseases, aiming to participate in US$30-million to US$100-million financings alongside top-tier investors in the sector.