Biotech – Where investors can access the value created by medical innovation
Investing in Health and Life Sciences
In the last 25 years alone, more than 900 products have been approved to treat over 500 types of severe disease and over 4.5 trillion doses of drugs were administered globally in 2020 alone.1
The use of biologicals* to treat disease has been on the rise over the last decade. In fact, out of all of the drugs approved by the US Food and Drug Administration since 2010, more than a third have been biologicals.2 These are being used to treat diseases from cancer and cardiovascular to Alzheimer’s and beyond.
One key field that has been completely transformed by the biotech sector is cancer treatment. Today, targeted therapies are increasingly replacing traditional chemotherapy and radiation therapy with better outcomes and, often, reduced side effects. The last few years have also seen major advances in immunotherapies like checkpoint inhibitors and Car-T cells, which harness the body’s own immune system to detect and destroy cancerous tumours. We now know that cancer is not a single disease, that even specific ‘types’ like prostate cancer or leukaemia are not homogenous. Rather, from a mechanism of action (the biochemical process through which a drug produces its effect) perspective, each incidence of cancer is distinct, requiring a specific treatment. With this in mind, 70% of cancer medications under development in the US in 2016 were based on personalised medicine, which takes into account a patient’s individual characteristics, like their DNA (see graphic).
Rare diseases are another area that biotech developments have delivered effective drugs for. Gene therapy, which can dramatically improve the outcomes for children with rare diseases, is one example. In 2019, the first drug to treat spinal muscular atrophy received approval3. Children with this condition have problems holding their heads up, swallowing and breathing, and experience difficulty performing essential life functions. Most children with this disease do not survive past early childhood due to respiratory failure. However today, there is an approved gene therapy that helps correct the protein in the motor neurons of a child with spinal muscular atrophy, improving muscle movement and function and ultimately their prospects of survival.
And the story is far from over. There remain over 7,000 rare diseases without a cure available today, despite the high volume (470) of drug approvals for such diseases.4 Biotech companies are on the front line in developing effective treatments for a host of complex diseases.
Encouragingly, the pipeline of biotech companies’ innovative drugs to tackle major unmet medical needs is rich.5 Because these drugs require funding to achieve maturity, private markets are the driving force behind this kind of healthcare innovation.
The drugs market is driven by innovation and despite strong barriers to entry, once a product to treat a disease with no other cure is approved for distribution, market penetration is less of a challenge. This means that most of the value creation takes place during the product development stage, in which most biotech companies are privately owned.
Smaller companies are responsible for the early development of more than 50% of the novel drugs approved for use in the US by the Food and Drug Administration every year, whereas bringing drugs to market is mostly driven by large pharmaceuticals companies.6 For this reason, investors looking to access the high-innovation end of the drug investment timeline may find more opportunities in private markets than among publicly-listed companies.
That said, in the biotech sector, the two sides of the market have a more interconnected symbiosis than in other sectors. Between 2014 and 2018, over half of all drugs changed hands before receiving regulatory approval. Of these, over 70% stemmed from smaller biopharma companies (companies with split licensing and trade sales business models).7 This biotech-to-big pharma transfer model lies at the core of pharmaceutical innovation and is central to the innovation strategies of the global pharmaceutical giants. As a result, most biotech companies are privately held and the value creation opportunity lies in the private market space.
At the same time, there has been a high volume of mergers and acquisitions activity in the sector. Indeed, according to CBI, the third quarter of 2021 marked the highest level on record, with more than 800 biotech M&A deals and over USD36 bn in funding flows. This growth in the biotech sector has been resilient and stable for over a decade.
Over the last decade, many privately owned biotech start-ups have gone public, through both the traditional initial public offering (IPO) and special purpose acquisition company (SPAC) routes. Indeed, over the last eight years around USD75 bn of net value has been created by IPOs in the sector. Furthermore, among those companies that went public but were subsequently acquired, 58% of additional shareholder value was created in the acquisition process.8 This reinforces the strong M&A drivers behind the fluid biotech–big pharma model, which investors who enter at the right point can benefit from.
 US Food & Drug Administration, 2019
 Source: IMS Institute for Healthcare Informatics, 2015
 Source: European Federation of Pharmaceutical Industries and Associations, 2022
 Source: www.fda.gov
 Source: HBM Partners and CBI Insights, 2020.
 Source: Life Sci VC, 2020