In recent decades, thanks to a deeper understanding of underlying biological mechanisms, drug development has progressed in leaps and bounds as research into new compounds has evolved beyond a trial-and-error approach. Whereas traditional methods screened large numbers of compounds in a scattershot search for desirable therapeutic effects, researchers now look for compounds that only bind with previously identified targets associated with specific disease vectors. Vertex has been a trailblazer of this new approach and its generalized adoption in conjunction with a reduction in the cost of gene sequencing at companies like Illumina is ushering in a new era, in which many of the treatments we receive will increasingly be more precise, personalized, and effective than they are today.
To design drugs with the precise shapes required to bind to the intended biological targets at the right location, scientists need to determine the molecular structure of the targets. FEI, acquired by Thermo Fisher Scientific in 2016, is a pioneer in cryogenic electron microscopy (cryo-EM), an innovation in atomic resolution imaging that was recognized with the 2017 Nobel Prize in chemistry. Cryo-EM is simpler to use than older techniques and produces three-dimensional biochemical maps with far more detail which are vastly expanding the range of targets available for potential exploitation.
The types of drugs are also expanding, beyond traditional small molecule drugs to next-generation formats such as “biologic” drugs, in particular a sub-category called monoclonal antibodies (mAb). These mAbs, roughly 1,000x larger than small-molecule drugs, are too complex to be synthesized chemically and thus need to be produced biologically from specially engineered cells. Biologic drugs have great therapeutic and commercial potential in oncology and autoimmune diseases, areas with large patient populations with unmet needs. Of the top 30 global blockbuster drugs in 2020, over two-thirds were new biologics, including Herceptin and Avastin, oncology drugs manufactured by Roche and its Japanese partner, Chugai Pharmaceutical**.
Innovations in biologics have sparked a wave of drug discovery efforts across the biopharma industry, and we are invested in a handful of participants well-placed to deliver persistent and profitable growth. Genmab is a pioneer in new types of mAb which binds with not just one, but multiple therapeutical target sites. Abcam, based in the UK, produces and distributes high-quality research-grade antibodies that allow live cells to be analyzed at a molecular level. A significant drawback of biologics, however, is the demanding and highly complex manufacturing process with the attendant exacting regulatory scrutiny. Many smaller biopharma companies with promising drug candidates simply don’t have the capital or know-how to manufacturer large-molecule drugs themselves. As a result, small- and mid-sized biotech companies, and even some large ones, often outsource development and commercial production to contract development and manufacturing organizations (CDMOs), such as Lonza and WuXi Biologics, as well as Patheon, another Thermo Fisher subsidiary. Outsourcing speeds up the development process by leveraging manufacturing expertise and reduces the need for capital expenditure.
The strong growth in biologic drugs emerging from the development phase to full production is a boon to Danaher, a leading provider of highly specialized equipment for manufacturing them. Its bioprocessing business grew over 20% in Q1, a growth rate that excludes the additional boost to revenues emanating from vaccine-related demand. Spirax-Sarco, a British industrial company, is another enabler of the biologics industry; its Watson-Marlow unit is a leading maker of peristaltic pumps, a critical component of bioprocessing. We see companies like these as the “shovel makers” in a gold rush across the life sciences that, after years of hype, is finally approaching what could be some deep veins.
Healthcare remains our largest overweight and an area where we have recently added.
[**] Morgan Stanley Equity Research