Show Transcript
New technologies focused on cancer and other disease areas may be poised to propel the biotech sector forward. John Hall, Investment Analyst for U.S. Biotech, T. Rowe Price, joined MoneyTalk’s Anthony Okolie to discuss.
Print Transcript
[AUDIO LOGO]
* We're joined now by John Hall, Investment Analyst for US Biotech with T. Rowe Price. And, John, thanks very much for joining us.
* Thanks for having me.
* Now, our audience is familiar with larger-cap pharma companies. What's the difference between biotechs, and how do you approach investing in them?
* Right. Well, so pharma companies are large, diversified businesses-- a lot of revenues, a lot of drugs on the market. They sort of are approaching bigger disease areas with established modalities. Biotech companies tend to be smaller in nature. They tend to be going into disease areas that are maybe less well-established, where the market opportunity is less certain. They'll tend to try to find new ways to approach disease that maybe isn't in the pharma companies' bailiwick. They stick to certain types of drugs and programs.
* And biotech is a bit more exploratory in how they go after these things. So when we think about investing in biotech, we try to say, where is there an unmet need? Where is there a technology that maybe isn't in a pharma pipeline? What sort of opportunities are there that-- as you think about pharma, they manage by committee. They're not nimble. And biotech companies tend to be more focused and more nimble and better ability to dive into areas that maybe pharma is overlooking.
* OK. Now, you also indicated that there's a lot of innovation happening right now in biotech. What's driving that innovation?
* So there's a huge increase in the tools and technologies of research. So our ability to understand the basis of disease is increasing exponentially. I like to give an example about the cost of the Human Genome Project. So when we first sequenced the human genome, it cost about $3 billion and took 13 years to complete. Today, we can now sequence a genome for less than $1,000 and do it in days. So when we have the ability to access larger amounts of data at scale much more rapidly than we could previously, we can now start to do comparisons, population comparisons, look at people that have disease versus not having disease, and develop unique insights.
* In addition, the depth of the biology that we're able to interrogate through emerging technologies has allowed us to see better what we couldn't see before, better understand the drivers of disease. And when we understand the foundation of the disease, we can now start to develop new technologies that treat the disease in ways that we haven't been able to do so before.
* OK. So given that backdrop, what are some of the emerging technologies and modalities that you're most excited about?
* Yeah. So I think we all remember from high school biology every cell has--
* I was never good at biology, so-- [LAUGHS]
* Well, you'll get a little lesson here. So anyway, every cell has DNA, the genetic code. And that DNA is turned into an intermediate called messenger RNA. The messenger RNA is then turned into a protein. And as humans, as animals, we are just a collection of proteins. Traditionally, we focused on making drugs that inhibit the activity or modulate the activity of the protein. As we get better understanding the science and we develop new technologies, such as antisense therapies or gene therapy, we can intersect earlier along the biologic pathway.
* So instead of waiting until a cell makes a protein that causes a disease, we can say, hey, let's change the DNA or let's change the mRNA so we prevent that protein from building up in the population. These types of approaches have the advantage of-- protein turnover is very rapid. They live for a couple of days. If I want to make a drug that interacts, intersects there, I need to have a drug that's at high levels all the time. If I can leverage pathways that go further upstream, maybe the duration of the activity can be much greater. So there's a lot of companies that are working on longer-acting drugs, which would be a huge advancement in the space.
* OK, let's go a step deeper. What are some of the disease areas and biggest markets that biotechs are pursuing right now?
* So if you look at the NIH funding, so the US government funding in diseases, I think more than half of the money-- and it's mirrored in biotech-- has been in cancer. Cancer, as we know, is a terminal disease. A lot of the drugs treat it and delay death. But those patients have a finite lifespan. What we're finding is that newer disease areas, like inflammation, neurodegenerative diseases, are areas where maybe those patients have a quality of life that's impacted, but they're going to live forever. And they're going to cycle through different types of treatments.
* So companies are now trying to intersect in diseases where we can improve the quality of life. But if you're a 50-year customer versus a 3-year customer, that's a much better market for a drug company. So as we discern new insights about what's driving inflammation in these diseases, that's one area where there's a lot of investment and interest that companies are really trying to work to solve.
* OK. Now, I want to get into a little bit of your strategy. Because it is differentiated in the market, as you invest in private companies as well. Why is that?
* So if you look at the biotech ecosystem, there's about 700 public companies. I think we would in define the investable universe as around 200. If you look, though, at the number of private companies, it's equivalent to the number of public companies. And if I am a biotech company, it's going to take me 5, 7, 10 years to get a drug to market from when I start to when I finish. But the private companies are coming along and trying to disintermediate those public companies before they even get a drug to market.
* So it's important to make sure that you are-- knowing everything that's out there, all the companies that are out there in the ecosystem. So if I want to have-- if I want to know what private companies are doing, I can't not be an investor in those companies. Because then there's no advantage to those companies in meeting with me.
* So I have the benefit of seeing the full spectrum of programs that are in development. And, as such, I invest in some of those companies, the ones that I think that are going after the biggest markets or the most exciting disease areas or advancing new technologies that I don't see elsewhere. So to be a player in the ecosystem, I need to be able to interact with these companies and invest in them.
* OK. So let's talk a little bit about risk. Because one of the risks that seems to be plaguing the US market, especially in the election cycles, is a higher cost of drugs versus other countries. Could regulatory and policy risk around drug pricing have a negative impact on the biotech industry?
* I think you can view this a couple of different ways. So certainly, the headline risk is that it could impact the biotech industry. The way that the market works is that, in reward for developing something, you have a patent. And the patent has a certain exclusivity period.
* And so if I take 10 years to develop a drug, at the end of that, I'll have 13, 17 years to sell it on the market without anybody else making that. As the regulators step in and say, hey, we don't like that exclusivity period, we want to shorten that because it's not fair that drugs are that high priced, the companies-- when you run a DCF, all of the value in the DCF is in the last year.
* That's discounted cash flow you're talking about.
* Correct, yes. Sorry. And so as you chop off the last years, the value of that drug decreases much more than the earlier. So as we reduce the exclusivity period, it has the problem that then the drugs have less value. So on the biotech side, one of the ways they've tried to correct for this is they said, if you're a single-drug company, we won't negotiate prices. We won't impact your exclusivity period. But if you're a pharma company, we will. So it could also accelerate the acquisitions of biotech companies by pharma companies, which drives a lot of the reinvestment in this space.
* So there's this dual-edged sword. It may be net positive for biotech companies because it accelerates acquisition by pharma companies, but it could also impact the pharma companies negatively. So there's a lot of unintended consequences that could happen that I don't think have been thought through as we pass these regulations. And it's obviously a-- it's a topic-- nobody defends high drug prices, but the drug prices represent the amount of dollars that it takes to invest-- or are invested to develop these drugs. So it could disincentivize development as well. So we're still trying to understand the implications. But it's--
* It's complicated.
* It's complicated.
* Yes. OK, let's talk a little bit about performance. Because biotech has struggled in recent years versus the market and the rest of health care, especially in 2022. Do you think their fortunes can change? And specifically, what's your outlook for biotechs in the years ahead?
* So I think if we think about today, everybody's focused on AI, Artificial Intelligence, and its potential impact in the world. As we talked about earlier, there are a lot of emerging technologies that don't have the same cachet as AI. But we're certainly accelerating the understanding of biology. So as someone who looks at a sector where our understanding is increasing, where we're creating new modalities and accessing diseases that we couldn't before, you can't help but feel optimistic that the opportunity set is so large. As we expand into the white space of diseases that we don't target--
* I was speaking earlier, and I think there's 20,000 proteins in the human proteome. Drugs that are developed target just a fraction of those proteins, hundreds of proteins. And so there's the opportunity to impact many other things that could have benefits in different diseases. So if I think about new technologies, different disease areas, better understanding of biology, those sum together into a great opportunity set. There needs to be a bit better culling of some of these companies that are fast followers.
* But the net push flow through the system is incredibly positive. And so I think that, as a sector, there's going to be innovation, there's going to be more drug approvals, and that should translate into better continued returns for biotech.
* John, thanks very much for joining us.
* You're very welcome.
[AUDIO LOGO]
[MUSIC PLAYING]
* We're joined now by John Hall, Investment Analyst for US Biotech with T. Rowe Price. And, John, thanks very much for joining us.
* Thanks for having me.
* Now, our audience is familiar with larger-cap pharma companies. What's the difference between biotechs, and how do you approach investing in them?
* Right. Well, so pharma companies are large, diversified businesses-- a lot of revenues, a lot of drugs on the market. They sort of are approaching bigger disease areas with established modalities. Biotech companies tend to be smaller in nature. They tend to be going into disease areas that are maybe less well-established, where the market opportunity is less certain. They'll tend to try to find new ways to approach disease that maybe isn't in the pharma companies' bailiwick. They stick to certain types of drugs and programs.
* And biotech is a bit more exploratory in how they go after these things. So when we think about investing in biotech, we try to say, where is there an unmet need? Where is there a technology that maybe isn't in a pharma pipeline? What sort of opportunities are there that-- as you think about pharma, they manage by committee. They're not nimble. And biotech companies tend to be more focused and more nimble and better ability to dive into areas that maybe pharma is overlooking.
* OK. Now, you also indicated that there's a lot of innovation happening right now in biotech. What's driving that innovation?
* So there's a huge increase in the tools and technologies of research. So our ability to understand the basis of disease is increasing exponentially. I like to give an example about the cost of the Human Genome Project. So when we first sequenced the human genome, it cost about $3 billion and took 13 years to complete. Today, we can now sequence a genome for less than $1,000 and do it in days. So when we have the ability to access larger amounts of data at scale much more rapidly than we could previously, we can now start to do comparisons, population comparisons, look at people that have disease versus not having disease, and develop unique insights.
* In addition, the depth of the biology that we're able to interrogate through emerging technologies has allowed us to see better what we couldn't see before, better understand the drivers of disease. And when we understand the foundation of the disease, we can now start to develop new technologies that treat the disease in ways that we haven't been able to do so before.
* OK. So given that backdrop, what are some of the emerging technologies and modalities that you're most excited about?
* Yeah. So I think we all remember from high school biology every cell has--
* I was never good at biology, so-- [LAUGHS]
* Well, you'll get a little lesson here. So anyway, every cell has DNA, the genetic code. And that DNA is turned into an intermediate called messenger RNA. The messenger RNA is then turned into a protein. And as humans, as animals, we are just a collection of proteins. Traditionally, we focused on making drugs that inhibit the activity or modulate the activity of the protein. As we get better understanding the science and we develop new technologies, such as antisense therapies or gene therapy, we can intersect earlier along the biologic pathway.
* So instead of waiting until a cell makes a protein that causes a disease, we can say, hey, let's change the DNA or let's change the mRNA so we prevent that protein from building up in the population. These types of approaches have the advantage of-- protein turnover is very rapid. They live for a couple of days. If I want to make a drug that interacts, intersects there, I need to have a drug that's at high levels all the time. If I can leverage pathways that go further upstream, maybe the duration of the activity can be much greater. So there's a lot of companies that are working on longer-acting drugs, which would be a huge advancement in the space.
* OK, let's go a step deeper. What are some of the disease areas and biggest markets that biotechs are pursuing right now?
* So if you look at the NIH funding, so the US government funding in diseases, I think more than half of the money-- and it's mirrored in biotech-- has been in cancer. Cancer, as we know, is a terminal disease. A lot of the drugs treat it and delay death. But those patients have a finite lifespan. What we're finding is that newer disease areas, like inflammation, neurodegenerative diseases, are areas where maybe those patients have a quality of life that's impacted, but they're going to live forever. And they're going to cycle through different types of treatments.
* So companies are now trying to intersect in diseases where we can improve the quality of life. But if you're a 50-year customer versus a 3-year customer, that's a much better market for a drug company. So as we discern new insights about what's driving inflammation in these diseases, that's one area where there's a lot of investment and interest that companies are really trying to work to solve.
* OK. Now, I want to get into a little bit of your strategy. Because it is differentiated in the market, as you invest in private companies as well. Why is that?
* So if you look at the biotech ecosystem, there's about 700 public companies. I think we would in define the investable universe as around 200. If you look, though, at the number of private companies, it's equivalent to the number of public companies. And if I am a biotech company, it's going to take me 5, 7, 10 years to get a drug to market from when I start to when I finish. But the private companies are coming along and trying to disintermediate those public companies before they even get a drug to market.
* So it's important to make sure that you are-- knowing everything that's out there, all the companies that are out there in the ecosystem. So if I want to have-- if I want to know what private companies are doing, I can't not be an investor in those companies. Because then there's no advantage to those companies in meeting with me.
* So I have the benefit of seeing the full spectrum of programs that are in development. And, as such, I invest in some of those companies, the ones that I think that are going after the biggest markets or the most exciting disease areas or advancing new technologies that I don't see elsewhere. So to be a player in the ecosystem, I need to be able to interact with these companies and invest in them.
* OK. So let's talk a little bit about risk. Because one of the risks that seems to be plaguing the US market, especially in the election cycles, is a higher cost of drugs versus other countries. Could regulatory and policy risk around drug pricing have a negative impact on the biotech industry?
* I think you can view this a couple of different ways. So certainly, the headline risk is that it could impact the biotech industry. The way that the market works is that, in reward for developing something, you have a patent. And the patent has a certain exclusivity period.
* And so if I take 10 years to develop a drug, at the end of that, I'll have 13, 17 years to sell it on the market without anybody else making that. As the regulators step in and say, hey, we don't like that exclusivity period, we want to shorten that because it's not fair that drugs are that high priced, the companies-- when you run a DCF, all of the value in the DCF is in the last year.
* That's discounted cash flow you're talking about.
* Correct, yes. Sorry. And so as you chop off the last years, the value of that drug decreases much more than the earlier. So as we reduce the exclusivity period, it has the problem that then the drugs have less value. So on the biotech side, one of the ways they've tried to correct for this is they said, if you're a single-drug company, we won't negotiate prices. We won't impact your exclusivity period. But if you're a pharma company, we will. So it could also accelerate the acquisitions of biotech companies by pharma companies, which drives a lot of the reinvestment in this space.
* So there's this dual-edged sword. It may be net positive for biotech companies because it accelerates acquisition by pharma companies, but it could also impact the pharma companies negatively. So there's a lot of unintended consequences that could happen that I don't think have been thought through as we pass these regulations. And it's obviously a-- it's a topic-- nobody defends high drug prices, but the drug prices represent the amount of dollars that it takes to invest-- or are invested to develop these drugs. So it could disincentivize development as well. So we're still trying to understand the implications. But it's--
* It's complicated.
* It's complicated.
* Yes. OK, let's talk a little bit about performance. Because biotech has struggled in recent years versus the market and the rest of health care, especially in 2022. Do you think their fortunes can change? And specifically, what's your outlook for biotechs in the years ahead?
* So I think if we think about today, everybody's focused on AI, Artificial Intelligence, and its potential impact in the world. As we talked about earlier, there are a lot of emerging technologies that don't have the same cachet as AI. But we're certainly accelerating the understanding of biology. So as someone who looks at a sector where our understanding is increasing, where we're creating new modalities and accessing diseases that we couldn't before, you can't help but feel optimistic that the opportunity set is so large. As we expand into the white space of diseases that we don't target--
* I was speaking earlier, and I think there's 20,000 proteins in the human proteome. Drugs that are developed target just a fraction of those proteins, hundreds of proteins. And so there's the opportunity to impact many other things that could have benefits in different diseases. So if I think about new technologies, different disease areas, better understanding of biology, those sum together into a great opportunity set. There needs to be a bit better culling of some of these companies that are fast followers.
* But the net push flow through the system is incredibly positive. And so I think that, as a sector, there's going to be innovation, there's going to be more drug approvals, and that should translate into better continued returns for biotech.
* John, thanks very much for joining us.
* You're very welcome.
[AUDIO LOGO]
[MUSIC PLAYING]
