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Genomics approaches 'critical mass' on data

The biotech sector faltered in the latter part of 2018, but the coming years will see an accelerated roll-out of gene-linked therapies
July 4, 2019

The Human Genome Project was completed way back in April 2003. And many people would be hard pressed to say what difference the project has made to their lives. But the intervening period has seen a gradual – and latterly accelerated – accumulation of genetic data, a prerequisite for the development of the industry and the resultant investment opportunities.

 

Sequencing costs plummet

In 2007, it would have cost you $350,000 (£278,430) to utilise the first direct-to-consumer genome sequencing service. Today it would set you back around £149. Analysis from the MIT Technology Review found that as many people purchased consumer DNA tests in 2018 as in all previous years combined. If the rate of increase is maintained, then the genetic make-up of more than 100m people will be available by 2021.

The exponential growth in the personal sequencing market is reflected in analysis from Zion Market Research, which revealed that the global genomics market was worth $16.4bn (£13bn) in 2018 and is expected to generate around $41.2bn by 2025, implying a compound annual growth rate of 14.2 per cent through 2019-25.

Companies such as Ancestry.com and 23andMe have tapped into the growth of personal sequencing, but the potential revenue streams extend well beyond tracing ancestral lineage. The co-founders of 23andMe, Anne Wojcicki and Linda Avey, have declared that the home testing kits sold by the company are only the initial, although essential, phase of the business plan. Once enough data have been aggregated, the resultant database, or sections thereof, can be made available under licence to medical research and pharmaceutical companies.

Little wonder that GlaxoSmithKline (GSK) has already come on board, investing $300m as part of a four-year collaborative venture with 23andMe. The pharma giant already has plans to study a potential new therapy; essentially a small molecule inhibitor that is in pre-clinical development as a potential treatment for Parkinson’s disease.

 

Big data is the key to individually tailored therapies

The science is driving R&D activity in drug discovery and molecular biology and is at the heart of the development of bespoke therapies based on genetic profiles. CAR-T (chimeric antigen receptor T-cell) therapy provides a case in point. Recently approved by NHS England to combat the most common form of childhood cancer, it is specifically designed for individual patients and involves reprogramming their own immune system cells, which are then used to target their cancer.

Genetic material is essentially data. So, understanding the structure, function, and mapping of genomes is analogous to statistical or textual analysis, although it relies on large datasets. An estimated one in 25 children carry a genetic disorder, some of which may be apparent at birth, while others might develop in later life. Criteria are employed to determine the likelihood of a variant contributing to a genetic disease, or whether it’s simply benign. Chief among them is how common the variant is compared with the incidence of disease in a population. To gain meaningful insights, researchers need to access different genetic datasets and population data.

The exponential growth of these data-sets has given rise to demand for suitable infrastructure, software, computational speeds and programming platforms to extract meaning from such huge swathes of information. Cloud computing provides a relatively low-cost approach to genomic data management because clients pay only for the services they need, thereby opening opportunities for smaller operators in the sector.

The genetics datasets have been developing at an accelerated clip, but it could be argued that they’ve only just attained ‘critical mass’ – the point at which the accumulation of large datasets starts yielding widespread clinical applications. Just consider that genomics technology has revolutionised plant breeding over the past two decades by identifying the genes that make crops more productive and disease resistant. There’s no reason to think that won’t be steadily replicated across human populations as DNA sampling throws up more and more information.

Nasdaq's big fivePrice change (% 1-month)Price change (% 1-year)Price change (% 3-year)PEDiv yieldBetaMarket cap
Amgen8.30.721.015.13.111.06113,838
Gilead Sciences8.2-3.4-18.915.13.661.0587,534
Celgene-0.818.1-6.814.4na1.2666,210
Illumina22.333.116464.4na1.1954,591
Vertex Pharmaceuticals7.75.810578.4na1.26345,981

 

A ground floor investment option: CRISPR Therapeutics AG 

The UK genomics industry is characterised by smaller companies, mainly concentrated around Cambridge and London, reflecting the strong regional academic base for genomics. The number of listed pure-plays in the UK is relatively small when compared with Nasdaq, but, as usual, you can gain broader exposure, while saving yourself some legwork, by investing in open-ended biotech funds. Polar Capital Biotechnology (IE00B42P0H75) investment vehicle, for example, has delivered a cumulative return of 66.4 per cent over the past three years. And assuming you haven’t been permanently spooked by the recent travails of Woodford Patient Capital Trust (WPCT), there are some specialist, close-ended options, such as the Biotech Growth Trust (BIOG).

However, if you’re looking to populate a speculative corner of your equity portfolio, there’s an interesting long-term play on offer, though it’s not for the faint hearted. Headquartered in Zug, Switzerland, CRISPR Therapeutics AG (US:CRSP) is engaged in the development of gene-based medicines for diseases using its proprietary CRISPR/Cas9 gene-editing platform. The group has established strategic collaborations with Bayer AG (ETR:BAYN) and Vertex Pharmaceuticals (US:VRTX) to develop CRISPR-based therapeutics for several serious conditions, including muscular dystrophy, and has been involved in various preclinical oncological studies.

But the primary focus of the group is its CTX001 candidate, a gene-edited stem cell therapy that is undergoing clinical studies to evaluate its effectiveness in treating rare blood disorders, including sickle cell disease. The US Food and Drug Administration (FDA) recently granted Fast Track Designation for CTX001 for the treatment of transfusion-dependent beta thalassemia.

It may take a decade before CRISPR launches any products based on the CTX001 therapy. However, lengthy lead times are synonymous with the industry, and the group effectively stole a march on its rivals when it instituted Phase I clinical studies for CTX001, while further clinical trials will commence shortly.

Nonetheless, prospective investors will need to weigh up the likelihood of dilution given the rate of cash burn, even though the group will receive up to $1bn in upfront payments and royalties on net sales for any products developed under its collaboration with Vertex, with the latter biotech group also picking up the tab for development and commercialisation expenses.

The scale of the potential returns, together with partial de-risking on the cost front, partly explains why hedge fund managers recently advanced their long positions in the group, but there is no doubt this falls under the category of high-risk/high-reward. Analysis conducted by Coherent Market Insights projects that the global CRISPR and CAS gene market, valued at $1.39bn in 2017, will hit $7.6bn by 2026, giving a CAGR of 20.8 per cent for the period. Bloomberg consensus projects revenues of $8.34m for 2019, rising to $29.3m in 2022, although the operating loss is expected to expand over the period.

 

The fund manager's view

Investors in the biotechnology sector have in recent years seen the emergence of a number of companies using exciting new technological approaches to developing medicines. The 'personalised' approach is unquestionably the future of medicine, and companies that successfully develop powerful new medicines using this approach have the potential to drive significant value for their investors. Yet as hugely exciting as the suite of technologies that directly repair, edit or enhance individual disease-causing genetics are, many of the companies basing their business models on these technologies have very high technology, operational and financial risk profiles – these technologies are novel, complex, not well understood and have little research, regulatory or commercial validation. Developing new medicines using these technologies will require small companies to raise significant sums of capital over time. And the competitive intensity in these technology areas is currently white-hot given the generous capital markets environment of recent years. It’s now typical to see multiple companies with drug development programmes in direct competition with each other. As professional investors with experience of investing through several of the industry's major technology cycles, we believe this makes the valuations assigned to many of these companies at the moment something to be at least wary of.

For the time being we actually prefer to invest in companies using more tried and trusted technology approaches – for example, those developing new medicines based on the latest generation of small-molecule chemistry approaches, as well as companies using monoclonal antibody technologies. These companies are still leveraging insights from genomics-style approaches to elucidating the role of genetics in various diseases, but they are developing precision medicines using well-understood and honed technology 'tool kits'. The medicines being developed by these companies still offer significant advances in the treatment of serious life-threatening diseases (sometimes bordering on 'functional' cures), but without the additional potential risks associated with the technologies attempting to tweak or manipulate a patient's genome. 'Genomics' and genomic medicine is a powerful investment theme that underpins the research and development efforts of almost every company in the global biotechnology investment universe. Investors just need to think carefully about how best to achieve acceptable risk-adjusted returns from it, given the current stock market enthusiasm for some of the newest high-profile technological approaches.

David Pinniger is a fund manager within the healthcare team at Polar Capital