Sectors to Watch in Biotech and Healthcare Investing

This article is the second in a 4-part series about biotech and healthcare investing. The first can be read here.

As a physician, investing in what you know can be a practical way to grow your portfolio. Your medical training and clinical knowledge can give you considerable insight into which new treatments, therapies, and tools are likely to be clinically and commercially viable.

So, what are some areas of expected growth in the near- to long-term? Given the advances in stem cell research and gene and immuno-therapies, mobile and big data technology, and drug research into rare diseases, we believe subsectors poised for growth include regenerative medicine, digital health, and orphan diseases.

Regenerative medicine has far-reaching implications for treating numerous devastating and costly diseases. Digital health and health IT have already created administrative efficiencies unimaginable in the paper-based offices of the past; new technologies involving mobile, digital, data, and predictive analytics are showing similar promise for improving healthcare delivery. Though once an area with limited drug development, drugs targeting orphan diseases have become hugely profitable thanks to a favorable economic climate for research, development, and marketing products for rare diseases.

Regenerative medicine

The Alliance for Regenerative Medicine (ARM), a multi-stakeholder advocacy organization, defines regenerative medicine research as that which “translates fundamental knowledge in biology, chemistry and physics into materials, devices, systems and a variety of therapeutic strategies, which augment, repair, replace or regenerate organs and tissue.”

Regenerative medicine has the potential to treat a wide range of chronic and life-threatening diseases and conditions, including cancer, diabetes, genetic disorders, Parkinson’s, Alzheimer’s, ALS, macular degeneration, cardiovascular disease, and stroke. In addition, these advances have the potential to change the economics of both healthcare delivery and drug discovery by allowing for the treatment of the fundamental causes of disease and damage from injury and age.

But regenerative medicine isn’t limited to just stem cell or cellular therapies, as is commonly thought. In addition to therapeutics (either alone or in combination with other technologies such as gene editing or bioengineering), regenerative medicine companies are also developing tools to aid in drug development, such as the creation of in vitro models of human disease to enable drug discovery, as well as drug efficacy and toxicity testing. Lastly, companies also are developing drugs that stimulate the body’s own innate capacity to regenerate or repair itself.

According to a recent report from ARM, the field has reached critical mass and has matured enough to be ready for commercial development. There are more than 700 companies worldwide with a regenerative medicine focus and the field is drawing an increasing level of interest and investment from industry, as evidenced by many of the major biopharma companies having active programs underway.

The combined regenerative medicine field, including cell, gene, and gene-modified cell therapies, generated $4.74 billion through partnering deals, acquisitions, and public and private investments from March 2013 to March 2014. There are close to 700 clinical trials currently underway with the largest areas of focus in oncology, CNS disorders, and cardiovascular diseases. And, the clinical pipeline is maturing with over one-third of those trials in later stages (Phase II or III).

The rate of growth is reflected in the public markets: 25% of the biotech IPOs in the second half of 2013 were regenerative medicine companies. Gene therapy companies bluebird bio (Nasdaq: BLUE) and uniQure NV (Nasdaq: QURE) raised $116 million and $91.8 million, respectively, in their IPOs; Cellular Dynamics International (Nasdaq: ICEL), a manufacturer of stem cell tools, raised $46.1 million in its IPO. In the private markets, Juno Therapeutics, a cancer immunotherapy company, raised $145 million in its Series A round, one of the biggest ever in biotech.

This year promises to be a banner year with several companies expected to announce clinical trial results in stroke, cardiovascular diseases, cancer, and HIV, and more investigational new drug applications expected for the companies seeking to treat diabetes, Parkinson’s disease, and congestive heart failure, among other diseases.

Digital health, health IT, and bioinformatics

Digital health is the convergence of the digital and genetics revolutions with healthcare. In addition to letting individuals track, manage, and improve their health, digital health can help reduce inefficiencies in healthcare delivery by reducing costs, improving access and quality of healthcare delivery, and by allowing for personalization.

Digital health includes mobile health, big data, cloud computing, wearables, telehealth and telemedicine, precision and personalized medicine, genomics, bioinformatics, plus health IT—a broad sector in and of itself that encompasses companies specializing in hardware, software, data analytics, storage, telecommunications, and information technology infrastructure.

Since 2010, $7.4 billion has been invested in digital health; $1.35 billion was invested just in the first quarter of 2014 alone, more than double the first quarter of last year, and the upward trend is expected to continue. Money went to big data, B2B solutions, personal health, vital signs/monitoring sensors, and patient engagement. We’re increasingly seeing software as a service companies seeking to address quality and compliance for improved outcomes or that create greater transparency in pricing and decision making.

According to a recent Pew Research study, 7 in 10 Americans already track some aspect of their health. Now that smartphones are ubiquitous, there is increasing demand for technologies that use mobile devices to collect information about health-related activity and access to health-related information.

enable patients to play an active role in their diagnosis or treatment by putting medical tools in their hands. For instance, there is CellScope Oto, an app with an attachment that turns your smartphone into an otoscope. Imagine a parent being able to snap a photo of a child’s ear canal and sending it to the physician for review, rather than coming into the office. AliveCor is another app-plus-attachment product that turns your smartphone into a heart monitor.

Meanwhile, the market for wearables—devices that collect health-related data such as heart rate or blood-sugar levels—is also growing. Juniper Research reports the global wearable market at $1.5 billion in 2014, with device sales expected to reach 70 million items by 2017. Recently, Amazon.com launched a wearable technology store on its site, where one can purchase fitness and wellness gadgets like the FitBit and Jawbone, as well as healthcare devices, such as blood pressure, sleep, posture and pulse ox monitors.

We’re also entering the exciting era of —omics: genomics, proteomics, metabolomics, epigenomics. As sequencing technologies drive down the price per genome toward $1,000, genomic and proteomic technologies have the potential to dominate the fields of diagnostics and personalized therapies by allowing treatments to be tailored to individual patients.

All of the above tools, gadgets, and tests result in the collection of massive amounts of data. “Big data” is a buzzword used throughout many industries, but perhaps its biggest impact will be in healthcare. However, in order for it to have meaningful long-term impact on health, we need a way to manage, analyse, and integrate it, whether the data be genomic, proteomic, behavioural, vitals, etc.

Integrating information from multiple sources into a single functional system with predictive analytics is a major challenge in this field. But the increasing demand for patient-related predictive analytics will drive the development of new technologies necessary make sense of the information collected, and consequently result in favourable investment opportunities.

Orphan diseases

At one time, research and drug development for rare orphan diseases (typically any disease afflicting fewer than 200,000 people) was seen as a bad investment. R&D was far too expensive to justify so few customers.

However, recently, orphan drug development has gained significant momentum due to the cumulative effect of legislation in the US, Europe, Asia, and Australia over the last 30 years. The legislation, designed to stimulate orphan drug research, offers drug companies potentially profitable incentives to focus on rare diseases. Foundations dedicated to finding treatments and cures for orphan diseases have also played a role in strengthening drug development.

The result has been the most lucrative period ever for orphan drugs. Because orphan drugs are targeted at diseases with a very high unmet medical need, they often receive accelerated approval and high levels of reimbursement. Orphan drugs make up some of the most expensive drugs in the world. This adds up to significant profits for the drugmaker.

Have you ever prescribed a patient Soliris, Elaprase, or Naglazyme? Probably not. These are 3 of the most expensive drugs in the world, with annual costs per patient ranging from $350,000 to $400,000 a year. They all target an orphan disease.

Soliris is used to treat paroxysmal nocturnal hemoglobinuria (8,000 known cases in US) and atypical hemolytic uremic syndrome (300 known cases). Elaprase is used to treat Hurler syndrome, with an estimated 2,000 cases worldwide; and Naglazyme is an enzyme replacement therapy for patients with mucopolysaccharidosis VI, affecting 1,100 patients worldwide.

Another case in point, the orphan oncology drug Rituxan (generic: Rituximab) is the world’s second most profitable drug, just behind mainstream blockbuster Lipitor (generic as of November 2011), according to Thomson Reuters’ The Economics of Orphan Drugs. Rituxan is expected to earn over $150 billion in revenue over its lifetime, the majority of which is for orphan indications, the report says.

The orphan drug marketplace is a sector to watch for investment opportunities. According to the 2013 Orphan Drug Report from Evaluate, a London-based research firm, orphan drug sales will experience a compound annual growth rate of 7.4% between 2012 and 2018, nearly double that of the prescription drug market, excluding generics. By 2018, the worldwide orphan drug market is expected reach $127 billion.

Conclusion

The above 3 sectors are just a sampling of the promising areas in biotech and healthcare.

One unifying theme among these 3 areas is the potential to impact many diseases in a meaningful way, whether by direct therapeutics (regenerative medicine/orphan drugs), prevention and identification of disease modifying behaviors and interventions (digital health/bioinformatics), or insights into the underlying disease mechanisms and support for new drug development (regenerative medicine).

Physician investors have an important role to play in the future of these, and other growth sectors in healthcare and biotech. Using our clinical knowledge and training to invest in emerging companies can help advance treatments for serious diseases. At the same time, in spite of their risk, these investments also have the potential to yield positive returns.

Do you have questions about biotech and healthcare investing? Part 4 of this 4-article series will be a Q&A about the changes, opportunities, and challenges of investing in the sector. Send your questions to Rania Nasis at rnasis@poliwogg.com.

Rania Nasis, MD, is a managing director at Poliwogg, a financial firm that specializes in early-stage investments in healthcare and life sciences, indexes that measure the impact of public companies in unique subsectors of healthcare, and sector-specific venture funds focused by healthcare vertical. Contact Nasis at rnasis@poliwogg.com.

Private investment marketing and other broker-dealer services are currently offered through a partnership with SDDCO Brokerage Advisors, LLC, member FINRA/SIPC ("SDDCO-BA"). Poliwogg and its affiliates are independent and unaffiliated with SDDCO-BA. All such services offered by Poliwogg-associated persons are done so in their capacities as registered representatives of SDDCO-BA.