Healthcare Disruptors

Recent advancements in medical modalities—such as cell/gene therapies, immune-oncology, and RNA-based medications—have led many researchers to believe that healthcare has entered a virtuous cycle of innovation.

While in some cases these developments have been evolving for decades, in our opinion the recent convergence of new diagnostic technologies, record levels of biotech funding, and expanded university/government research has resulted in a dramatic increase in the pace and magnitude of medical breakthroughs.  

William Blair healthcare analysts Tommy Sternberg, CFA, partner, and Travis Cope discussed these issues with Jim Foster, the CEO of Massachusetts-based Charles River Laboratories, as part of CONNECTIVITY 2021, a virtual conference hosted by William Blair that focused on healthcare disruptors and how they are potentially affecting the investing landscape.

Growth Themes Emerge as Innovation Accelerates

From an investment standpoint, Sternberg believes that this virtuous cycle of innovation has created significant opportunities to capitalize on advancements in the healthcare industry, especially in regard to companies that can effectively implement digitalization, big data, and artificial intelligence (AI). More specifically, he sees investment opportunities in areas such as next-generation gene sequencing, synthetic biology, and cell/gene therapies.

As innovation in healthcare has accelerated over the past several years, Sternberg has identified seven themes that he expects to drive growth throughout the industry. These themes are highly complementary, and together, Sternberg believes they have created a powerful cycle of healthcare funding, research, development, and product discovery.

Revolutionizing Research

Today, cumulative advancements in next-generation gene sequencing, spatial biology, single-cell analysis, and synthetic biology are driving a large increase in our collective scientific and medical understanding of how genes work and which genetic and cellular processes may affect diseases. These advancements are also helping us understand how we can develop tools to treat diseases in novel ways or even create new products that developers can grow biologically.

The body is composed of trillions of cells, each running unique genetic programming, says Cope. The human genome is composed of over 20 thousand genes, and the human body is known to synthesize millions of different proteins. Only recently have tools been developed to dimension the heterogeneity and complexity of human molecular biology.

Disease creates mutations in the genome and dysfunction in downstream protein production. Cope believes new tools should allow us to understand the complex biology of disease, diagnose disease accurately. and develop new biologic medicines to target disease precisely—so precisely that new medicines may increasingly be curative.

New Modalities of Medicine

Techniques such as gene editing, cell/gene therapies, and mRNA-based therapies have created new modalities of medicine—i.e., novel ways of treating diseases.

These treatments go beyond chemically derived small pills or even biologically derived monoclonal antibodies and attack diseases at the most basic levels. “[These techniques] get at diseases at the cell level, the gene level, and the protein level. It’s an enormous scientific breakthrough,” Foster said. “RNA drugs and cell and gene therapy are probably the most promising and dynamic modality of all.”

Foster also noted that given the efficacy of recent mRNA-based vaccines, the COVID-19 pandemic has dramatically accelerated and validated both the promise and the reality of RNA technology.

Looking ahead, Foster was optimistic about RNA’s future role in a variety of therapeutic techniques. “The potential for RNA to be a platform across multiple therapeutic areas to treat diseases at the genetic level is really quite powerful,” he said.

Bending the R&D Cost Curve

Historically, large pharmaceutical companies did much of their research and development in-house, which often led to inefficiencies in the process. This, in turn, led to higher costs at each link in the R&D chain and overall development costs that were sometimes untenable.

More recently, many big pharma companies have outsourced the drug discovery and development process to smaller companies that they may significantly reduce the R&D failure rate and ultimate time-to-market. Consequently, they can potentially add a reduction in the overall costs associated with drug development.

Preclinical efficiencies can add a great deal of speed to this process. “If you get the preclinical design to be in concert with the clinical design, there’s some transmissibility from the preclinical work to the clinical work, and you can take time out of the process,” Foster said.

Like outsourcing, preclinical efficiency can help reduce overall costs. As Foster noted, if potential medications can fail faster, researchers can cut time out of the development process, preserve capital, and direct their resources to drug candidates that appear to be more promising.

RNA drugs and cell/gene therapy are probably the most promising and dynamic modality  … The potential for RNA to be a platform across multiple therapeutic areas to treat diseases at the genetic level is really quite powerful. — Jim Foster, CEO, Charles River Laboratories.

 

AI is playing an important part in adding efficiency to preclinical research. “We use AI at Charles River in our discovery franchise to interrogate concepts very quickly and thoughtfully to give us early ‘go or no-go’ decisions,” said Foster, who expects AI to significantly decrease Charles River’s time-to-market and hit rate for new drugs.

On a broader level, in our view, the virtuous cycle of innovation is particularly powerful in bending the R&D cost curve. As companies develop more effective medical treatments, they may ultimately earn greater profits; as they earn greater profits, they are likely able to reinvest some of that capital into further research, development, and process optimization.

Over time, this cycle may attract greater interest from investors and lowers their ultimate cost of capital. “There’s more money, time, and technology deployed right now to discovery than ever. The pipelines are very robust and full,” Foster said.

Sternberg believes that this dynamic can potentially continue to add momentum to research and capital investments in life sciences, biopharma, and other research-intensive aspects of the healthcare industry.

Prevention and Early Detection, Disruptive Devices, Whole-Person Care, and Digital Backbone

We believe these final four themes, while distinct, underscore the complementary nature of the virtuous cycle of innovation that the healthcare industry is experiencing today.

While much of our current system is focused on treatment, prevention and early detection can potentially eliminate much of the need for treatment in the first place. On that basis, Sternberg believes that this theme can add a great deal of efficiency, efficacy, and cost reduction to the healthcare industry.

Screening technologies for early cancer detection or continuous glucose monitoring, for example, can potentially save hundreds of thousands of dollars in treatment costs for even a single patient.

Thus, disruptive devices that can detect and treat diseases in their early stages (as well as wearable devices that can continuously monitor a person’s health) will likely add momentum to the industry’s push toward preventative healthcare.

Similarly, smartphones, monitoring apps, and telemedicine are making it easier for practitioners and patients to focus on whole-person care in areas such as vision, dental, hearing, sleep, and mental health.

These products and services depend on an advanced “digital backbone” that supports the ongoing digitalization of medical information and more seamless sharing of information across all segments of the healthcare ecosystem.

In our opinion, this digital backbone is also essential for software and healthcare IT companies that support hospitals, medical practices, online drug distributors, and telemedicine providers.

Capitalizing on the Healthcare Investment Landscape

Together, we believe that these seven themes bring a degree of precision and personalization to healthcare that the world has never seen before. But again, none of these advancements would have been possible without the tremendously important discoveries that researchers have made in recent years—discoveries that have attracted enormous amounts of scientific attention, capital, and innovation to the healthcare industry over time.

Sternberg believes that the confluence of innovation in fields as diverse as spatial biology and wearable medical devices has created a vibrant investment landscape that offers vast opportunities to identify and capitalize on new forms of sustainable value creation.

In particular, he is focusing on companies that can successfully exploit advancements in new modalities of medicine such as cell/gene editing and mRNA-based therapies. Additionally, he anticipates substantial growth among companies that can help researchers optimize drug discovery, development, and manufacturing.

More broadly, Sternberg expects to find exciting opportunities among companies that can successfully integrate digitalization, big data, and AI within their operational structure.

To access more insights about themes that could change the healthcare investing landscape, we invite you to explore more insights from the sessions at our 2021 CONNECTIVITY conference: Healthcare Disruptors.

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