What a Time to be Alive
Biotech and advances in "personalized medicine"
We have heard much about the advent of “personalized medicine” for the last 20 years, but it finally seems to be getting traction. The concept of personalized medicine involves using advanced technologies to identify patient specific information to help detect, diagnose, treat, and manage patients through a disease. One of the first forms of personalized medicine came in the late 1990s with the discovery that 30% of breast cancer patients overexpressed the HER2 protein, preventing the body from responding to the then standard treatment.(1) As research progressed, additional distinguishing breast cancer characteristics were discovered leading to refined treatment modalities for the individual. Consequently, breast cancer survival rates have improved by over 40%, and there are reasons to hope for continued improvement. (2)
For small cap clients only, in 2016 we speculated with a small position in a very small company that provided drug simulation software supporting drug discovery and research. The concept was certainly intriguing, but also resembled science fiction, so we watched with curious interest. Pharmaceutical and biotech companies found the drug simulation software useful and efficient enough that sales have been growing at almost 20% per year since 2016. Then came the pandemic. The pandemic caused us to home in on nerdy details of many previously obscure scientific topics, and we were amazed and exhilarated by what we saw. We are now tuning into the possibilities of personalized medicine.
Personalized medicine breakthroughs are probably closer than you think. In part this is because if certain drugs do especially well with phase I and certain phase II trials, a lengthy and cumbersome phase III trial is not required for approval. Furthermore, anecdotes and interim data from phase I and II trials may often rightly be shared while the trials are in progress, whereas phase III trials are normally double blinded until the very end. It is our understanding that Merck’s Keytruda was originally approved by the FDA in 2014, without a phase 3 trial. Keytruda’s mechanism of action turns out to help with a wide range of cancers which is why sales grew exponentially from $605 million in 2015 to $14.4 billion in 2020 and may eclipse $20 billion by 2025. In other words, when a drug, especially a cancer drug, works exceedingly well, the trial process may not take so long, and adoption can be rapid.
The investment implications are not so easy to parse. At the most basic level, the first drug to cure a widespread disease will probably see demand for the drug soar because the number of existing patients is large. However, future demand will eventually plummet, limited to new cases. From an investment standpoint it is not easy to determine the value of such a drug. Though Keytruda has been a ginormous success, Merck’s stock has only gone from around $60 in 2015 to around $75 in late March 2021. As a poignant humorous aside, we remember an annual report circa 2000 in which a drug company distinguished itself from peers by noting that none of its drugs would come off patent until 2006. The point is that it is far from easy to assess new drugs from a long-term investment perspective.
At the next level of complexity, there are exceedingly large numbers of possible interactions between healthcare industry participants if various breakthrough drugs become available. Medical professionals, hospitals, treatment centers, insurance companies, government programs, public and private companies, etc. may all need more than a chiropractic adjustment. However, we suspect that some changes in the health care industry will be profitably assessable in advance. Furthermore, the changes in the healthcare industry will probably impact the investment theses in many other industries and the economy as a whole.
The obvious winners in personalized medicine are the future patients. Take the developments in CAR-T over the last 60 years for example. CAR-T (chimeric antigen receptor T-cell therapy) involves infusing autologous living cells into the patient. It is only one of many approaches being studied, but it is important. The idea of CAR-T had been hypothesized since the 1950s, and in 1975 monoclonal antibodies became the first CAR-T therapy. Rituxin was approved in 1997 as the first monoclonal antibody cancer treatment. The CAR-T news flow was rather sparce until the approvals of two groundbreaking therapies in 2017.(3) The multidisciplinary mastery required to create treatments for complex diseases has been aided by advances in biotechnology, and the potential applications of CAR-T are exploding. The number of diseases and conditions that may be treatable by CAR-T is large and increasing. Now, there are six main innovative divisions within CAR-T, and there are so many companies working on CAR-T that it would be a full-time job to keep track of them all.
Below is graphic of the companies working on different divisions of CAR-T, reprinted with approval of our friends at William Blair & Co.
As impressive as the advances in CAR-T are, we are even more enchanted by advances being attempted in what can best be described as “A.I. Biotech,” but that topic is for another time. In our view, the future of medicine is set to change in a major way over the next five to ten years, and we are paying special attention to the implications for not just the healthcare sector, but the entire economy.
Please give us a call if you would like to discuss this topic or investing with Redmond Asset Management.
Redmond Asset Management, LLC April 2021
The opinions contained in the preceding commentary reflect those of Redmond Asset Management, LLC. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Redmond Asset Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Redmond Asset Management, LLC (RAM) is an independent, SEC registered investment management firm located in Richmond, VA and is not affiliated with any parent organization. RAM was founded in 2005 and registered with the SEC on 22 Dec 2005. The company offers investment management services for equity, balanced and fixed income portfolios to corporate, institutional, and individual investors.