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Where We Are Finding Growth: Health Care Innovation
In the six-plus decades since Francis Crick and James Watson published their short but revelatory article about DNA’s double-helix structure, ongoing research has accelerated understanding of human genetics.
That acceleration continues today. The human genome was first fully mapped in 2003—after 13 years and a cost of $2.7 billion. By 2007, the cost required to sequence DNA’s roughly 3 billion molecular pairs had collapsed to a mere $1 million. As of 2012, genome sequencing ran $10,000. As 2013 ended, a dominant gene-sequencing and analysis systems player announced it had achieved the $1,000 genome—the biologic equivalent of breaking the sound barrier. As of 2021, a $100 test was very close to being widely available.
A Bigger Discovery and Therapy Toolkit
The increased speed and ease of sequencing DNA has allowed vastly expanded awareness of how genetic code gets translated into the biology of our bodies—and what causes disease. That has opened the door to an ever-growing toolkit of both discovery and therapy delivery which has contributed to a material shift in the pharmaceutical industry—the rising prominence of biologic drugs.
Biologics are large-molecule drugs, typically based on naturally occurring proteins or optimized versions of proteins with some therapeutic effect. The first genetically engineered biologic drug—human insulin for diabetics called Humulin®—was FDA-approved in 1982. Prior, pharmaceuticals were near exclusively chemically manufactured, small-molecule compounds. Though lab methods have improved vastly over time, discovery of traditional pharmaceuticals and their function is still largely the same, often lengthy, process of trial and error—even mere happenstance. (The discovery of penicillin’s effectiveness against bacteria was famously serendipitous.)
As opposed to trial and error, biologics are rationally designed. They are based on naturally occurring proteins performing targeted functions with outcomes that, in most cases, have already been observed. Therefore, their effect can be reasonably well understood ahead of time.
Nature’s experiments yielding rational designs
Rational design of drugs can yield myriad benefits, like more effective, less toxic therapies yielding better outcomes in clinical trials due to fewer unanticipated adverse events, and condensed approval periods.
For example, several years ago, researchers observed that a small subset of the population had very low, exceptionally healthy levels of LDL cholesterol (i.e., the “bad” cholesterol). Researchers then discovered this population shared a specific trait—a small genetic mutation blocking production of a certain enzyme (PCSK9).
Nature did the experiment—demonstrating the desirable outcome if the PCSK9 enzyme is blocked—allowing researchers to understand reasonably well how to effect it. Now, several biotechnology firms are successfully testing monoclonal antibodies—a class of biologic drugs that mimics natural antibodies to harness the power of the human immune system—to block PCSK9 in populations with very high cholesterol.
The original scientific papers highlighting findings on PCSK9 were published in 2006, and by the end of 2015, the FDA had approved two anti-PCSK9 drugs. To have a new drug approved within nine years—and just five years after pharmaceutical firms selected drug candidates to test—is fairly unprecedented and a promising sign of a new era of precision medicine.
The biologic drug era
The rise of biologic drugs has changed the marketplace. In 2006, just 21% of top 100 drug sales were biologics. That jumped to 34% in 2010 and reached 53% in 2018.
The Emergence of RNAi
There are likely still many exciting developments to come in the biologics field. We are also seeing promising progress in the development of novel small molecule drugs, particularly in the area of oncology.
And there are other, potentially ground-breaking new biopharmaceutical medicines still in very early stages. One example is the emergence of RNA-interference (RNAi). When discussing RNAi, we generally refer to two key platforms—RNAi and antisense. Though functioning somewhat differently, RNAi and antisense therapies both effectively and potently target the source of disease-causing enzymes or mutations. This stands in contrast to more traditional pharmaceuticals which were designed to target certain disease-causing enzymes, but only after those enzymes have been produced.
The appeal of next-generation biologics, emerging RNA therapeutics and other novel drug discovery platforms is underpinned by some key benefits.
More targeted therapies: By precisely targeting a disease’s source, next-generation drugs hold promise for more effective therapies for a variety of cancers, cardiovascular diseases, inflammation diseases, metabolic diseases and even genetic diseases. Targeting can also result in safer therapies, resulting in fewer adverse events, limiting black box warnings and drug recalls which can hinder drug profitability.
New biologic targets: Next-generation therapies have opened access to diseases once thought “undruggable,” including ultra-rare, often genetic, life-threatening or fatal diseases such as atypical hemolytic uremic syndrome (a rare disease causing blood clot formations and leading to stroke, heart attack, kidney failure and/or death) and spinal muscular atrophy.
Rational designs yielding longer asset duration: Drug patents most often expire at 17 years with 7 to 8 years lost to testing on average prior to marketing approval. The process gets longer as researchers contend with unanticipated adverse events.
On the front end, rational designs can lead to more predictable and exceptionally positive outcomes in trials, condensing approval time-frames and allowing companies to get their drugs to market faster— giving them more time to exclusively market. Also speeding time to market—drugs targeted for rare, life-threatening diseases and not vast populations may be granted even shorter approval timelines by the FDA.
On the back-end, unlike more traditional drugs, biologics and RNAi drugs are harder to copy, so firms can have a bigger profit potential for longer. The patent cliff becomes more of a patent slope.
While access to biologic drug technologies such as monoclonal antibodies has broadened in recent decades as the technology has matured, there still remain a limited number of thought-leading companies able to discover, develop and manufacture next-generation antibody drugs. In less-mature fields, such as RNA therapeutics, intellectual property remains quite concentrated in early pioneering companies.
The Rise of Personalized Medicine
Advances in human biology have collided with advances in next-generation therapies to give rise to the concept of personalized medicine.
To better understand personalized medicine, consider traditional chemotherapy. Patients are given a drug or a cocktail of drugs toxic to cancer cells, but healthy cells are often collateral damage. Further, cancer drugs have variable success rates—some patients respond well to certain drugs and others not at all. Physicians have traditionally not had reliable diagnostic tools to know ahead of time who will respond and who will not.
Which means, even when successful, chemotherapy can be lengthy and painful with debilitating side effects like nausea, fatigue, sores and immunosuppression, causing an increased risk of infection. Even after a patient is cancer free or in remission, they may suffer organ damage caused by chemotherapy and radiation treatments.
But researchers increasingly understand that natural, small genetic variations can make certain therapies more effective in some people and less so or not effective at all in others. Improved diagnostic tools are being developed that can rapidly profile patient cells to help physicians determine which therapy will be most effective.
Combine that with more effective therapies that can induce a powerful, natural immune response, and/or inhibit production of the enzyme that is turning on the cancer cells and/or can deliver cell-killing toxins directly to the cancerous cells and nowhere else, minimizing side effects and cellular damage—and the promise of next-generation diagnostics and therapies is potentially massive.
The concept of personalized medicine has applications far beyond cancer and, in our view, will be an important factor in future biopharmaceutical and diagnostic innovations.
Advances in Medical Devices
Another area in which innovation has been rapid is medical devices—in diverse areas and in ways that are changing the lives of patients. For example, progress in diabetes management has made rapid advances in recent years. Self monitoring of diabetes was first introduced several decades ago, allowing patients increased freedom and improved health. However, these systems required regular finger sticks, testing strips and portable meters in order to measure patients’ blood-sugar levels. Over time, the amount of blood required for an accurate reading has declined, as has the time until the reading is rendered.
More recently, technological improvements have eliminated the need for a finger stick at all. Patients can now continuously monitor their blood-sugar levels, rather than having to remember to perform regular tests throughout the day. These developments are revolutionary for diabetes patients, and as the technology improves and becomes more affordable and accessible, it likely proves a game-changing therapy for those who live with the chronic disease.
Similarly, developments in the spinal cord stimulation market have advanced quickly recently, with the US food and drug administration (FDA) approving a medical device that effectively treats patients with chronic back and leg pain. The potential market for such devices is sizeable—both in the US and globally—and there is the potential such devices may have applications in additional indications in the future. The same is largely true of the cardiovascular and other markets, where devices are increasingly technologically advanced and are shrinking in size, which makes surgery a less invasive alternative for patients who need such devices.
How We Identify Opportunities
Recent biotechnology and medical devices developments are exciting with tremendous promise. However, health care-industry research and development is still incredibly risky, and some platforms are still in very early stages. Failure rates and the cost to find out are both high—in terms of capital and time.
Further, the investable pool of innovative health care firms is large. Many of these companies do not yet have a marketed product and face binary events—approval for a first or perhaps only major pipeline drug or medical device. Approved drugs and devices can be economic windfalls, but the reverse is also true. Many health care investors aim to mitigate binary-event risk by holding a basket of relevant firms. That does diversify risk; however, our investment process is about getting large amounts of capital behind high-quality accelerating profit cycles.
To do that, we follow a highly selective process. We look for a “de-risked” profit driver—firms with one or two drugs or devices that are currently on the market or an investigational drug or device that has shown compelling clinical trial results, giving us confidence it will be approved by the FDA. Behind current profit drivers, we look for a diversified research and development (R&D) pipeline with a strong management team that has proven itself able to make good decisions about R&D investments historically.
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