Biotech firms took centre stage during the height of the Covid pandemic thanks to the development of lifesaving treatments and vaccines but their time in the spotlight is far from over.
Revenues at publicly listed biotech companies rose 35% to $216.7bn in 2021 from five years before – according to consultancy EY – largely driven by Covid vaccines and antivirals.
But the sector’s expansion is also being underpinned by a near doubling of investment in research and development (R&D), to the tune of $88.6bn from $45.7bn five years earlier. What’s more, all of the top 10 biggest selling drugs in 2021 were biotech drugs.
Disruptive tech
Biotech is disrupting the way that drugs were traditionally made, with the advent of messenger ribonucleic acid (mRNA)-based therapies, for example, heralded as a game-changer. A recent example is that both the Pfizer-BioNTech and Moderna Covid vaccines use mRNA, a tool that essentially teaches cells in the body to create an immune response to the virus.
We are seeing a growing number of companies moving into mRNA, including larger drug companies acquiring those with the technology.
For example, French pharmaceutical group Sanofi bought biotech firm Translate Bio in 2021 to accelerate its vaccine development and is aiming to “unlock the potential of mRNA in other strategic areas such as immunology, oncology and rare diseases”, after an initial 2018 collaboration.
In 2022, German drugmaker Merck bought Exelead, a specialist in injectable formulations that are a key element in mRNA vaccines.
Investing in companies developing or using disruptive technologies can be appealing as these companies are often making breakthroughs and are at the forefront of medical progress. When successful, these companies can potentially offer compelling equity investment returns.
Defensive characteristics
Biotech businesses are typically less dependent on economic cycles as there will always be a need for medicines and healthcare, as well as breakthrough drugs to treat existing or new conditions. We are seeing this now as biopharma companies report robust quarterly financials in more challenging economic conditions.
Biotech firms also benefit from intellectual property protection – drugs are patented, so benefit from a lack of direct competition at launch.
It can be argued that barriers to new companies entering the sector aren’t prohibitively high at the development stage – but many early stage pipeline products will unfortunately fail. So active investment managers need to construct a diversified strategy of companies, technologies and products that they believe are most likely to succeed.
The sector’s strong long-term fundamentals are being supported by several structural shifts we are witnessing in demographics and lifestyles. Populations are ageing – the share of the global population aged 65 and over is expected to rise from 10% this year to 16% in 2050. This means the healthcare market is likely to grow, while the prevalence of chronic ‘lifestyle’ diseases, such as heart disease and obesity, is also increasing.
A supportive regulatory environment
The trend over the past few years is an increasing rate of regulatory approvals, particularly in the US. In fact, regulators sped up their approval processes during the height of the pandemic, to get urgent Covid vaccines and treatments onto the market as soon as possible.
Moderna’s vaccine was able to progress from understanding the genetics of the virus to human trials within a record 63 days. Historically and in more ‘normal’ times, the fastest a new vaccine had been developed was four years – for mumps, in the 1960s – and a typical vaccine could take 10 to 15 years.
This ability to speed up assessment and approval timetables, without compromising safety, is something that will likely remain for new drugs to treat diseases and conditions with no other options.
For example, the US Food and Drug Administration (FDA) recently granted accelerated approval to Seagen and Genmab’s Tivdak, a new type of cervical cancer treatment, after early stage clinical trials gave strong results.
Exciting therapeutic areas of focus
Oncology is a particular area where we have seen exciting developments. Trials of cancer treatments rose 56% in 2021 from five years before, while cancer medicine spending stood at $185bn globally last year and is expected to reach more than $300bn by 2026, according to research and analytics company IQVIA.
There have also been major breakthroughs in recent years in genetic medicine, which targets diseases caused by a patient’s genetic code and can include treatments where deleterious genes are edited or replaced, and we view this as another potential area for investors to consider.
We would also highlight neurology and neuroscience. These are areas in dire need for new treatment options and we are starting to see some positive pipeline developments. Most recently, for example, Eisai and partner Biogen reported compelling headline clinical data for a potentially disease-modifying Alzheimer’s treatment.
We anticipate late-stage data from Roche and Eli Lilly over the coming year too. These drugs – if effective – are likely to represent the first entries into a market opportunity that could potentially be one of the largest within biotech.
We are passionate advocates that the expertise across basic science, technology platforms and drug development have, and will continue to have, meaningful positive impact on the lives of patients.
Investors should be mindful of the evolving regulatory landscape in the US – this summer’s Inflation Reduction Act included provisions to lower prescription drug costs while in September, President Joe Biden launched a new initiative to encourage biotech research and production in the US. Meanwhile, global access to medicines needs to be given more thought.
However, it is our view that high-efficacy, safe drugs will always have a material commercial opportunity as there are so many diseases and therapeutic areas where new products are desperately needed and, sadly, patient numbers continue to increase.
Companies with innovative products to fill this unmet medical need are likely to present an exciting long-term potential opportunity for investors.
Linden Thomson is a portfolio manager at AXA Investment Managers. The views expressed above should not be taken as investment advice.