2 June 2017
In the years 2012-2014 stocks of biopharmaceutical companies were on a roll. This was mainly the result of decades-long medical research and development that eventually translated into novel products. One important event that ushered in a transformative era in drug discovery and development was unlocking the secrets of the human genome at the turn of the millennium. Recent advances in genomics have provided more insight into how genetic information determines the development, structure and function of the human body and how abnormal variations in the DNA sequence cause disease. This information has opened up a bewildering array of new targeted treatment avenues.
In a typical cycle (see below), it takes years of scientific research and clinical development to move an innovation from the lab to the market. But once products launch, the growth trajectory hits an inflection point. This is what happened in 2012 which led to multiple expansion and strong investment returns.
Biopharma Investment Cycle: Expansion phase still in its early innings
Source: GAM Investment Management
Over the past 18 months healthcare stocks have been consolidating, a healthy process in a multi-year cycle due to the US presidential election and a temporary slowdown in new drug approvals. As a result, valuations have retracted and are now sitting at multi-year lows, while fundamentals remain as strong as they have ever been. Biotech is trading at its lowest level in our data history and buy-side positioning has fallen to its lowest level in six years.
Despite minor setbacks in clinical development every now and then, drug pipelines continue to shape up as a major growth driver and the primary source of value creation for investors. The combination of a much better understanding of disease biology, the focus on genetically validated targets and the use of biomarkers to learn early whether a compound is having the desired effect is revolutionising the treatment paradigm of many diseases. Being able to correlate patient biology to specific genetic mutations has led to an increase in new targets for drug discovery, faster drug development timelines and improved the success rate of clinical trials. In addition, global alliances and partnerships among biopharmaceutical companies and with academia provide an open platform that helps advance the standard of care in various disease areas through innovation.
Investing in healthcare today is about capitalising on these exciting developments, which we seek to maximise by putting innovation at the core of every single investment decision. We identify areas of high unmet medical need and invest in companies that have incorporated strong scientific rationale into their business models and are developing best-in-class assets. We take a selective approach focusing on a combination of emerging technologies and companies that provide visibility into long-term growth through a high-probability pipeline. While good progress has been made treating cancer, disorders of the central nervous system, liver diseases, multiple sclerosis, rare diseases, cystic fibrosis and other genetic diseases, much remains to be done to realise the full potential of recent scientific discoveries.
2017 is setting itself up to become a pivotal year, with a rich pipeline, positive news flow and an enhanced focus on bringing products over the finish line. Based on our conversations with management of major corporations, the appetite for deals is unabated. While the timing for a pickup in M&A activity is difficult to pinpoint, we believe further clinical confirmation of the value of product pipelines is all that CEOs need in order to pull the trigger. Innovative products disrupt the market place, gain market share and are the envy of larger, growth-starved companies. In biopharma, this close relationship between innovation and M&A is what drives the investment cycle for an extended period of time.
With our strong bias towards innovation, we believe we are well positioned to capture some attractive investment opportunities as we enter this potentially lucrative stage of the cycle.
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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.