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Biotech: three drivers behind an extraordinary investment opportunity

In the years since, it has proven uncannily accurate. However, when it comes to biotech, rates of progress have often left Moore’s law for dust.

Take genomic sequencing, for example. In 2003, the first whole human genome was sequenced via a laborious process that cost roughly $2.7 billion. Today, you can sequence the human genome for about $500. If Moore’s law had been in play, this cost would be closer to $500,000.    

Investing in biotech: Where are we now and what is the outlook?

Similar stories can be found in proteomics, ribonucleic acid (RNA) science, nanotech, sensors and Crispr, clustered regularly interspaced short palindromic repeats. Technologies that were unimaginably expensive and slow just five years ago are now rapid and cheap. That Moderna was able to make the first batch of its Covid-19 vaccine on 7 February 2020 – a month before the World Health Organisation declared Covid-19 a pandemic – is testament to just how powerful the biotech revolution has been.

Machine learning and AI are adding grease to the wheel, and we are at a point where the next giants in biotech could easily emerge from engineers tinkering in small labs, a bit like the last tech revolution that gave birth to Google and Microsoft.

The key message here is that biotech’s potential should not be underestimated, especially at a time when markets have become fixated on near-term macro risks. These can often be periods of opportunity for patient, long-term investors. 

However, investors need to be mindful that separating the wheat from the chaff – the businesses that will expand and cement their position as leaders over five or more years – requires deep analytical work, creative thinking and experience to identify an investment’s potential.

The seeds of growth

What makes biotech such an extraordinary investment opportunity now is the sheer breadth of inexpensive and accessible technologies that are converging to transform the industry. There are three key catalysts behind this transformation – tools, techniques and knowledge.

Investors turn to biotech as vaccine roll-out cools sentiment on big pharma

Starting with tools, perhaps the most important of these is next-generation sequencing, alluded to above. Illumina dominates here, with over 80% of all genomes ever sequenced done so on one of its machines. Illumina’s costs have fallen faster than Moore’s law because it has combined engineering improvements with better computational algorithms and hardware. Together these have further accelerated the cost declines for sequencing as these two exponential improvement curves have overlapped.

The array of tools has expanded, too. This is enabling companies like 10X Genomics to probe into individual cells, leading to important research in infectious diseases such as Covid and advances in areas like oncology. People typically think of cancer in terms of the organ it affects – cancer of the lung or liver, for example – but actually what matters is the cancer’s genetic profile and the things that have gone wrong in those cells. Advances in genomic technology mean work is being done to better understand the DNA of cancer cells, which helps early detection in blood, and to better understand the genetic characteristic of patients to identify those more prone to particular types of cancers. This can lead to much more effective rates of detection and treatment.

In terms of techniques, methods have been developed that enable new therapies, which are based on cells or use RNA to suppress or upregulate specific genes. Nanotechnology is bringing costs down and making the impossible possible. And the cost of producing biologic drugs has collapsed as companies like Sartorius Stedim deploy small, efficient bioreactors rather than the traditional, larger and more expensive units.

The third catalyst is knowledge. Science has made huge advances in the understanding of disease, and there are a handful of companies that are highly adept at consolidating their knowledge with each drug development increasing their rate of success. Ionis is a great example of a company that has developed a platform technology based on RNA. It can change the sequence encoded in its drugs to target different diseases. Knowledge has ballooned to the extent that companies are finally designing drugs to treat causes not just symptoms.

While the rapid development of Covid vaccines has brought biotech to the fore, we believe the sector is at an extraordinary juncture with its ongoing transformation offering a unique opportunity for investors.

Tom Record is a fund manager at Majedie Asset Management

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