Trends will ensure healthy growth
The health care sector plays a fundamental role in society, is well underpinned by both demographic and cultural trends but is also driven by exponential advances in technology and innovation. Genes are being mapped and modified, population data are being digitised and studied, and doctors can now even perform surgery remotely.
This is a summary – click here to read a longer article on pages 18-21 of the latest Investment Outlook.
The pandemic has brought many personal tragedies, but it has also led to a new respect for good hygiene and ventilation, while digitisation has accelerated. The research community has collaborated globally, and in record time the pharmaceutical industry has shown it could rise to the challenge of developing not just one, but several good COVID-19 vaccines.
During 2020, concepts such as antibodies, T-cells, herd immunity, cytokine storm and spike protein became become part of everyone’s vocabulary, and the average person wanted to learn the difference between an mRNA vaccine (Pfizer/BioNtech and Moderna) and an adenoviral vector-based vaccine (AstraZeneca, Johnson & Johnson and Sputnik V).
An mRNA vaccine has many advantages
Proteins are the body’s work horses. They are used to build muscles and organs and also manage most of the body’s chemical functions. The construction blueprint comes from DNA, which is found in our genes. To produce proteins, the body must first read the DNA, which is done with the help of an intermediary – RNA.
An mRNA vaccine provides RNA with the blueprint for the virus protein to the body’s cells, after which they start making it. Immune system cells will then detect this foreign protein and render it harmless with the help of antibodies or T-cells.
The advantage of this technology is that it lets the body’s cell machinery do most of the work, while RNA breaks down quickly in the body, reducing the risk of side effects. This has been an obstacle in the development of other drugs but is an advantage for vaccinations since the substance does not need to be stored in the body. Moreover, it is “simply” a matter of changing the RNA sequence to develop a new vaccine. Pfizer, BioNtech and Moderna − aside from producing second-generation COVID-19 vaccines − can also tackle influenza, respiratory syncytial virus (RSV), cytomegalovirus and even cancer.
One ground-breaking technological advance after another
Development of mRNA vaccines is just one of many ground-breaking technological advances now under way. The productive alliance of Big Data, artificial intelligence (AI) and biotechnology is revolutionising drug development. However, one of the greatest discoveries in this area went relatively unnoticed in 2020.
DeepMind, a British-based AI company acquired by Google in 2014, has managed to overcome one of the greatest challenges in the biological world – predicting the three-dimensional structure of a protein, which determines its function, based on its amino acid sequence. This knowledge can be used in all kinds of research contexts, including pharmaceuticals, materials technology and plant breeding.
The 2020 Nobel Prize in Chemistry attracted more attention. It was awarded to Emmanuelle Charpentier and Jennifer Doudna for the CRISPR-Cas9 gene-editing tool. This tool is used in basic research as well as to develop new forms of treatment. A multitude of start-ups have been founded on the basis of this technology. Another field that has developed at lightning speed is cell-based therapies. Cells can be removed from the body, treated in various ways – for example, with a gene-editing tool – and then replaced after being modified.
Well placed to respond to cultural and demographic trends
In previous issues of Investment Outlook, we have reported on such megatrends as ageing populations and health tech. People are indeed living longer, but so-called diseases of affluence are also steadily on the rise. However, there is growing awareness among consumers of the long-term effects of our modern lifestyle. We are generally less accepting than previous generations of letting the diseases of ageing prevent us from leading an active life.
On the whole, the health care sector is very ESG-friendly, that is, compliant with good environment, social and governance practices. It has no major problems related to the environment or working conditions, and the purpose of its products is to save lives. The areas where there is room for improvement are management-level gender equality, diversity and drug pricing. However, the drug pricing issue is usually resolved once the patent expires, which averages about ten years after the product is launched.
Revolutionising the health care experience
New health tech devices are revolutionising the health care experience, and many of these devices have been given a big boost during the pandemic. Health tech includes innovations and devices aimed at increasing the efficiency and productivity of health care and facilitating the development of new medicines and treatments. One example of a health tech innovation is sensors. They can measure the blood sugar of diabetics in real time. Insulin doses can then be regulated more optimally, and the system can warn patients and save their lives if they fall into a diabetic coma.
With increased access to sensors, there has been explosive growth in the amount of medical data available, and with that growth come stringent IT security requirements. As we know, the pandemic has accelerated the development of IT services. One of the most visible of these services is online doctors.
"The development of a new medicine costs an average of USD 2.6 billion if all failures along the way are factored in"
Pharmaceutical companies are often criticised for making too much money from human diseases, but developing new original medicines is also an expensive process. According to the Tufts Center for the Study of Drug Development, it costs an average of USD 2.6 billion if all failures along the way are factored in and takes about ten years. The drug development period also eats up part of the time the product is patent-protected, which is about 20 years.
Blurry dividing line between pharmaceuticals and biotechnology
The original definition of a biotech company was that it develops protein-based drugs, which must be genetically engineered and then injected by syringe, whereas pharmaceutical companies make small chemical compounds that can be administered in pill form. Nowadays, however, pharmaceutical companies make both kinds of products.
In Sweden, biotech companies are often cited as examples of companies that have no revenue or earnings. The industry is much more mature in the US, where many biotech companies are profitable and some are as big as the largest pharmaceutical companies. Smaller companies are often candidates for acquisition as they near commercialisation. Large companies have a high share of in-house research. After deducting costs, they usually put 30-50 per cent of their free cash flow into dividends and share buybacks, and the rest into acquisitions.
The odds against success in drug development are brutal
A drug that has just completed the first phase of development has only a 10 per cent chance of making it to market. Some 90 per cent of products fail, on account of side effects or inefficacy in treating a disease. To improve the odds, investors should wait until the drug has undergone more clinical trials. Yet even in Phase 3, some 30-40 per cent of drugs fail, and even after a drug has been approved it may fail commercially. Diversification of company risk is thus crucial, and the expression “don’t put all your eggs in one basket” is highly appropriate, especially in the biotech sector.
Big differences in valuations between various types of companies
In general, pharmaceutical companies, large biotech firms and health service companies are attractively valued, while valuations of health tech and IT companies have surged during the pandemic. Last year was extremely strong for small health care companies, but shares of the large companies move less − both upward and downward − and are cheap in both relative and absolute terms. This has been somewhat overlooked in the reopening rally that has been under way since Pfizer/BioNtech announced its surprisingly good vaccine data in November 2020. In the long term, health care is among sectors that will outperform the broad market – driven by demographics, innovation and barriers to entry.