A Jiffy Biomedical Primer for Generalist Investors
Covid has drawn unprecedented attention to the biomedical sector. As a corollary, many generalist investors are starting to take an interest in the sector.
Regardless of the pandemic, just by wanting to explore further, generalist investors are already on the right track. It has long been understood that healthcare is approaching 20% of the US economy and is growing similarly in importance around the world. But what covid has done is to sharpen the spotlight on one of healthcare’s key constituents — the biomedical sector. A respected student of innovation who is also the biographer of Albert Einstein and Steve Jobs recently predicted: “Just as the digital revolution drove innovation in the last half of the 20th century, the biotech revolution will drive the first half of the 21st century…digital coding will be surpassed by those who study the code of life”. Little surprise then that the biomedical sector has become an important part of the investing universe. This primer is accordingly aimed at providing a broad orientation of this key sector to the generalist investor.
There have been many fascinating scientific discoveries, inventions and applications across a number of areas such as digital therapeutics, artificial intelligence in drug discovery, robotic surgery, deep brain stimulation, sophisticated tools and diagnostics. To not get lost within this dizzying range of developments, in this “jiffy primer” we will focus our discussion only on two of the most ground-breaking medical revolutions of recent years: cell therapy and gene therapy.
I start with some brief historical background on the biomedical sector and then dive into the incredible scientific developments in these two particular fields. We will see that the important field of cell therapy works through human cells within the body’s own immune system, modifying them to make them more effective in fighting problems like cancer. The other major field is gene therapy which involves either replacing or editing defective genes that cause disease. I then explain what it takes to turn these exciting scientific developments in cell therapy and gene therapy from laboratory wonders into commercial products. After providing a little covid context, I conclude that generalist investors will need to build deeper domain knowledge when investing in the biomedical sector.
The Historical Build-Up
To understand why there has been such upsurge and ferment within biotechnology in recent years, a quick look back at the industry’s evolution would be helpful. (Note: although the term “biomedical” is slightly wider in meaning, in this primer we use it interchangeably with “biotech” or “biotechnology”)
Biotech was born as an industry in the early 1980s. Companies such as Genentech and Amgen attempted to build businesses around the new methods of genetic cloning. Further excitement in biotech emerged by the late 1980s and early 1990s as companies adopted another range of technologies, such as monoclonal antibodies. The use of monoclonal antibodies gradually became central to medical treatments. They also became a pivotal first step towards one of the two fields we discuss in this primer (see section on Cell Therapies).
The publication of the human genome sequence in 2003 had been expected to usher in the next wave of biotech. But early results were disappointing (see section on Gene Therapies). And as the global financial crisis struck, biotech companies fell on hard times so were not really in a position to see their science through.
As the global financial crisis faded, however, a new generation of biotech technologies and companies emerged. In particular, scientific developments accelerated along two broad and related areas: Cell Therapy and Gene Therapy.
Cell Therapies
As the name suggests, cell therapies treat diseases by using human cells. This currently revolves around cells that have long been identified and known to be part of the human body’s immune system, such as T-cells. T-cells and their cousins protect the human body from threats such as parasites, viruses, bacteria etc.
What scientists have learnt is that, although part of the immune system, T-cells turn out to have internal brakes or checkpoints in the form of what are known as CTLA4 and PD1 molecules. While these checkpoints rightly prevent T-cells from getting too aggressive and doing self-harm to the body, they may also hobble the fight against rogue cells such as cancer. Two researchers — James Allison and Tasuku Honjo — went on to win the 2018 Medicine Nobel Prize for their seminal work showing that by inhibiting these CTLA4 and PD1 checkpoints, T-cells could be restored to greater vigor in fighting cancer.
Immuno-oncology using monoclonal antibodies
Based on these seminal insights, biotech companies as well as big pharma companies began to figure out how to develop and launch products that inhibited the CTLA4 and PD1 checkpoints, thereby un-hobbling T-cells as they fight back against cancer. This unshackling of the immune system was labelled “immuno-oncology”. Strictly speaking, immuno-oncology isn’t cell therapy. It works through the earlier technology of monoclonal antibodies. However, we cover it here because its medical insights and commercial success paved the way for actual cell therapy to emerge.
Success started with Bristol Myers Squibb, one of the earliest companies off the blocks, and its blockbuster Yervoy and Opdivo cancer drugs. Soon many other companies jumped into the fray, trying out a wide array of immuno-oncology approaches to attack different kinds of cancer. One of the most prominent immuno-oncology drugs has been Merck’s Keytruda, which has been approved to treat a whole range of cancers.
Many of these immuno-oncology drugs show significant efficacy in extending patient lives and some have even led to remission of cancers. No wonder that immuno-oncology drugs have become a major pillar of cancer treatment. Starting from almost nothing, revenues from Keytruda and other major immuno-oncology blockbusters have crossed more than $ 25 billion and still represent a fast-growing part of the entire pharmaceutical market.
CAR-T Cell Therapy
Immuno-oncology drugs to unblock the immune system may have paved the way. But once it became clear that the body’s own immune system could be harnessed to fight cancer, it was realized much more could be done. Scientists and biotech companies began to work on ways to directly modify T-cells and other immune cells to “assist” them in their fight against cancer. This science, still evolving very rapidly, has generated fresh excitement among scientists and biotech companies.
The most prominent cell therapy is CAR-T, the concept behind which is relatively straightforward. T-cells are extracted from patients, modified outside the human body to boost their cancer-killing potency and then re-infused. The modification through genetic engineering (of which more below) involves something called synthetic CARs (chimeric antigen receptors) which can better recognize cancer “signatures” on the surface of malignant cells e.g. one prominent one called CD19. Clinical trials have shown that these modifications can be very successful and have thus far led to two commercial products, Novartis’ Kymriah and Gilead’s Yescarta, both going after specific cancers.
Cell Therapy Beyond CAR-T
CAR-T’s limitations such as the inability to penetrate solid cancer tumors (i.e. tumors other than those in blood), possible damage to the nervous system and its narrow specificity have prompted scientists to explore other strategies. For example, to treat solid tumors, tumor infiltrating lymphocytes (known as TILs) are collected from tumor, multiplied and infused back without any genetic modification. Instead of genetic modification, they rely on the innate ability of the cells to recognize and fight the tumor, but just by doing it in now much-multiplied numbers
Yet another approach is to work with other kinds of immune cells that confer special features in fighting cancer e.g. gamma delta T-cells (unrelated of course to financial options trading) or the spine-chillingly named natural killer (“NK”) cells.
Beyond these individual approaches, a broad but significant direction is for allogeneic or off-the-shelf cell therapies i.e. where the infusion does not depend on the cumbersome and time-consuming extraction, modification, expansion and re-infusion from and to the patient’s own body. By using cells already harvested from a donor and then processed (hopefully) safely enough to transfer freely to other patients, the intention is to make cell therapy more easily and widely accessible.
In general, cell therapy is still in its infancy. With several innovative approaches under investigation in labs or human clinical trials, it is widely believed to be a hot scientific area that is just taking off.
Gene Therapies
Another set of major scientific breakthrough has been in the area of Gene Therapies.
Although this field has been several decades in the making, many believed it had reached a significant inflexion point with the publication of the human genome sequence in 2003. However, at the times, sequencing costs were still prohibitive and the frustration was that the genetics of most diseases turned out to be more complex than had been anticipated.
Nonetheless, despite a difficult decade of scientific disappointment which happened to coincide with the global financial crisis, biotech companies, academic teams and the NIH continued plugging away at the challenges. And by the late 2000s, miniaturization, improvements in chemistry and computational power to analyze the huge amounts of genomic data enabled genetic disorders to become better understood. The new knowledge and effective toolkit were finally unveiling secrets of the genetic basis of disease, triggering an exciting new era of breakthrough medical treatments applying genetic knowledge.
Gene Replacement Therapy
Gene replacement therapy is based on a relatively simple idea: treating genetic diseases by replacing the defective genes responsible for the problem. However, while the idea is simple, the challenge lies in safely getting the replacement genes into the right organs, tissues and cells where changes are required. Scientists have modified bacteria, viruses and plasmids (a kind of circular DNA strand found inside a bacterial cell) to make them harmless enough as vehicles to deliver the replacement gene.
The gene replacement therapy field has had a somewhat checkered history, having seen the death of a patient back in 1999. However, newer and improved vehicles for delivering replacement genes developed more recently have turned the technology safer. And although fresh concerns have arisen — e.g. higher doses trigger toxicity — proponents argue that gene replacement therapy needs to be looked at from a clinician’s perspective as something risky but potentially life-saving for those without alternatives.
In any case, the field has seen some exhilarating successes. The FDA in recent years has approved two gene replacement therapies: Spark Therapeutics’ Luxturna for inherited vision loss and AveXis’ Zolgensma for spinal muscular atrophy. Many more gene replacement therapies for specific diseases are under development in a number of areas and are expected to dramatically alter their respective treatment paradigms.
CRISPR and Gene Editing
One of the most ground-breaking developments in biology took place when scientists learnt how to precisely edit DNA. In October 2020, even as this primer was being written, Jennifer Doudna and Emmanuelle Charpentier won the Nobel Prize in Chemistry for developing this amazing technology.
To make precise edits in DNA, these scientists used the mechanism that bacteria use to fight virus attacks. When attacked by virus, a bacterium steals some of the virus’s DNA and permanently (and inheritably) stores it in what is called the CRISPR region of its own chromosome. This stored information is then used down the bacterial generations to recognize future attacks from similar kinds of virus. When such a virus attacks again, the bacteria mounts a counter-attack by transcribing the stored information into what is called a “tracer RNA”. Armed with this transcribed information, the tracer RNA goes out to hunt for viral DNA with the matching sequence, and it is accompanied by proteins produced by certain genes that flank the CRISPR region. If the tracer RNA-protein combination finds DNA that matches the information it is carrying, it cuts the offending DNA (breaks both strands) precisely at the point where it finds the sequence match.
Apart from admiring the cleverness of nature in evolving such a nifty immunization mechanism in bacteria, scientists realized that they could use the elegance and precision of this mechanism to edit genes. By designing the tracer RNA with the matching sequence for any gene that needs to be edited, they could make precise cuts in DNA as needed, almost like using a pair of scissors. It was realized that such scissor cuts could be used to disable specific genes, snip out problematic DNA or repair problems.
These “scissors” then became a tool for use in medical applications. Several such applications have entered human clinical trials. The first set of trials have generally involved blood disorders and cancers, where it is easier to extract cells and edit them outside of the human body. Vertex and CRISPR Therapeutics have used CRISPR gene-editing to address patients with beta thalassemia and sickle cell disease. Data released by these companies in June 2020 are indicative of their therapy improving patient outcomes; however, what needs to still be established is the longer durability as a one-time treatment. The major concerns revolve around the CRISPR scissors mistakenly making the DNA cut at points other than what was intended, leading to unwanted side effects or even causing cancer. Also the size of the CRISPR apparatus may be too large to enter some cells, so attempts are being made to develop smaller versions that can slip in more easily — a recent discovery of a “hypercompact” CRISPR should help.
From Labs to Commercialization
These scientific developments have been exciting and revolutionary. It is therefore no wonder that they have attracted entrepreneurship at a pace perhaps never before seen by the biotech industry. Yet, it is important to view them with a sense of proportion. The history of the biotech industry is littered with promising new science that could not hold up to rigorous testing in the clinic, threw up complex manufacturing problems or simply could not find anyone willing to pay for it.
Testing for new drugs and treatments requires rigorous work in labs and animals before they are tried out in humans. Notwithstanding the use of computational tools and exploiting efficiencies from previous research, human trials — spread over three phases of increasing scientific and logistical complexity — could run up to a decade. As we have learnt so painfully over the years, the human body responds in convoluted and unpredictable ways to medical interventions — in some cases not showing sufficient benefit or in other cases causing deleterious side effects and even death. Quite often, such lack of benefits or side effects come to light only after many years of testing and much money has been spent. For example, two years after its $85-million IPO in 2017, San Diego based biotech company Tocagen found in a Phase 3 i.e. very late stage human clinical trial that its gene therapy for brain cancer was no better than standard chemotherapy in prolonging patient survival.
Even when trials are successfully completed, the results need to be evaluated and approved by regulators such as the FDA in the United States, the EMA in Europe, the NMPA in China and PMDA in Japan. These agencies hold the sponsoring companies and their treatments to very high standards of efficacy and safety.
Even if — and that is a very big if — trials are successfully completed, the challenges do not end. Cell and gene therapies involve a complex logistical dance for manufacturing and administration to the patient. In some cases, preparation and purification of a customized drug may need to take place months in advance. In other situations, the patient’s own cells are extracted, sent to the manufacturer for processing and then sent back for administering to the patient. Most of these treatments must be carefully supervised in medical centers, making them closer to individualized hospital surgeries than conventional mass production and distribution of drugs.
Finally, and perhaps most important of all, health insurers or government health ministries must agree that these new treatments substantially improve over older treatments and are therefore worth paying for. Those who pour years of scientific and clinical work as well as millions of dollars converting revolutionary science into new treatments are at risk of hitting a wall at the end of it all. They find that health insurers and government health agencies have limited budgets and therefore every incentive not to pay up. That said, companies developing cell and gene therapies seem to have recently pulled off eye-watering price tags by making the case for the value of their innovation e.g. the non-profit drug price watchdog ICER recommended that a price between $ 1.2 to 2.1 million for gene therapy Zolgensma would be reasonable.
Cell and Gene Therapy and Covid
Many generalist investors reading this primer probably had their interest piqued by covid. So, this section takes a short detour to correlate some of the above discussion to covid.
To start with, as we saw above, cell therapy involves deep knowledge of the immune system and reinvigorating T-cells to fight off threats. Much of this knowledge has been invoked in engineering the optimal covid vaccine: in particular, the ability to activate T-cells to provide immunity.
Similarly, understanding of gene therapies has helped develop more sophisticated vaccines. Both Pfizer/BioNTech and Moderna’s vaccines use mRNA technology. The earlier generation of vaccines involved injecting a small quantity of deactivated virus to “educate” the immune system so that it will mount an immune response when it encounters the same pathogen in future. With mRNA technology, it not the actual coronavirus or defanged coronavirus being injected into the human body. Instead, learning from genetic technology, the body is provided with genetic material that instructs human cells to produce the coronavirus’s spike protein, so that the immune system is again provoked and prepares to respond.
And, as regards CRISPR, it is being harnessed in covid diagnosis tests that are speedier — one of the tests being developed aims to provide results within 5 minutes.
What Should Generalist Investors Look For?
Thus far, this “jiffy” primer has already pointed out that cell and gene therapy are hot scientific areas. They are also widely seen as commercial game changers: it has been argued that these areas will mirror the explosive growth of monoclonal antibodies which collectively earned revenues reaching almost $ 125 billion within two decades of first launch. Even so, should professional investors consider investing in them — even if they lack biomedical sector expertise?
As we said right in the introduction, there is little doubt that the biomedical sector has become an important part of the investing universe. The recent spate of successful biotech IPOs has only added to an already long and varied list of public biomedical companies, available across exchanges in the US, Europe and Asia. What is more, these public biomedical companies as yet represent only a handful of investing opportunities, since there is an even deeper, richer and arguably more dynamic substrate of private biomedical companies exploring all kinds of innovative technologies. Accordingly, biomedical securities may slowly and surely become a necessary part of any serious investment portfolio.
However, the biomedical sector is definitely not a sector for “tourist” investors. For starters, it an extremely high beta sector, driven heavily by market liquidity and also prone to extraordinary swings of market fascination and disgust. Most of the sector comprises companies that have products still under high-risk development that are nowhere near achieving revenue, let alone profit. Even more than other sectors, therefore, investing in the biomedical sector requires deep analysis.
However, the nature of analysis for the biomedical sector differs from traditional fundamental analysis. It is much more heavily dependent on scientific updates than on financial information. As scientific updates play out over the life of a biomedical company, its stock price (or private market valuation) fluctuates — often wildly — with every bit of newsflow.
Accordingly, instead of revenues, EBITDA or other metrics familiar to financial analysts, understanding each biomedical company requires drilling down into its scientific capabilities, whether it is at all working on genuinely unmet medical need, whether its technology is sufficiently differentiated, whether its intellectual property is well protected and whether it is at risk of quickly getting displaced by the next new technology. Manufacturing and supply chain processes are very complex for biomedical companies, the more so for cell and gene therapies, so any investment diligence must look deep into this. Attention must also be paid to risks of preclinical and clinical trials and what the realistic chances of products obtaining approval from regulators and health insurers are.
Apart from understanding biomedical companies and their particular scientific updates, investors must also always keep the larger sector context in mind. Very few biomedical companies, even those that go public, choose to stay completely independent with all their assets intact. The model that has evolved over decades is that smaller, more innovative companies develop new products but then transfer those products to larger pharmaceutical or medical device companies. The transfer happens either through licensing products individually or indeed by selling the whole company to the larger company. In times of intense scientific ferment and an arms-race for acquiring innovative biomedical assets such as the one we are currently witnessing, larger companies are eager to grab these products ever earlier in their development stage — potentially throwing up sudden, unexpected jackpots for investors. The upshot is that investors in biomedical companies are indirectly also absorbing risks that overtly or covertly creep in from the M&A and partnering strategies of larger pharmaceutical and medical device companies.
Other than this, the larger biomedical sector context often involves awareness of the political and media environment. Biomedical companies that develop the most innovative, life-saving drugs often find themselves drawn into public, destabilizing spats about whether the planned drug pricing is extortionate, whether potential profits are excessive or even whether the innovation is truly their own or somehow funded by the taxpayer. By one estimate, up to 60 new cell and gene therapies will be launched by 2030. If they prove to be as medically powerful as is hoped and yet priced to optimize returns on their respective underlying R&D investments, one can expect a veritable political and media storm surrounding the biomedical companies that develop them.
In light of what we have discussed in this section, a “jiffy primer” such as this one can at best provide an initial orientation. Biomedical investing requires deep domain expertise. If they wish to invest, generalist investors must start shedding some of their “generalist” approach, un-learn any excessive focus on financial metrics alone and dive deep into the scientific domain and broader context.
Concluding Summary
I hope this “jiffy primer” has been useful in providing the generalist investor an overall introduction to two of the hottest areas in the biomedical sector: cell therapies and gene therapies.
As we saw, cell therapies work through modifying cells such as T-cells within the body’s own immune system, modifying them to boost their fight against cancer. Meanwhile, in the field of gene therapies, scientists have used bacteria, viruses or plasmids to deliver replacement genes to treat patients with diseases caused by defective genes. In another major development, scientists have learnt to precisely edit genes using CRISPR technology, thus adding another important tool to addressing diseases caused by genetic mutations.
Not only have these scientific developments been incredible, luckily for us they have placed new knowledge and tools at our disposal in our response to covid. Meanwhile, from an investor’s perspective, they have resulted in the biomedical sector growing in importance within the investment universe. This primer recommends abundant caution and building deeper domain knowledge before actually deciding to invest.
Note: This paper benefits from many conversations with Jia-Yi Har who also kindly provided extensive comments on earlier draft versions. Her help is very gratefully acknowledged. Of course, all errors of fact and understanding remain mine alone.
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