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Investing through the ups and downs of biopharma research

Even as biopharmaceutical firms continue to deliver exciting medical advances, the sector's performance has been mixed this year, with some firms negatively impacted by rising rates, clinical trial setbacks and regulatory uncertainty and others benefiting from strong free cash flows. Portfolio Manager Dan Lyons and Research Analyst Luyi Guo explain how investors might gain exposure to the sector's secular growth opportunities, while minimising downside risks.

Luyi Guo, Ph.D., CFA

Luyi Guo, Ph.D., CFA

Research Analyst

Daniel Lyons, PhD, CFA

Daniel Lyons, PhD, CFA

Portfolio Manager | Research Analyst

Matt Peron

Matt Peron

Global Head of Solutions

27 Jul 2022

Key takeaways:

  • The healthcare sector continues to make significant advances in medical research, including recent breakthroughs in breast cancer and multiple myeloma. That can lead to strong revenue growth for firms that successfully develop and/or commercialise these therapies.
  • There are also significant risks, with 90% of drugs that begin human clinical trials never making it to market. Rising interest rates, regulatory uncertainty and drug patent expirations can be further headwinds.
  • Taking the long view on a drug’s lifecycle can help minimise risk and allow investors to take advantage of healthcare’s unique growth drivers.

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1 The SPDR® S&P® Biotech ETF (XBI) tracks the S&P Biotech Select Industry Index, an equal-weighted index that draws constituents from the biotechnology segment of the S&P Total Market Index.
2 Bloomberg, data from 8 February 2021 to 11 May 2022.
3 The NYSE Arca Pharmaceutical Index (DRG) is designed to represent a cross section of widely held, highly capitalized companies involved in various phases of the development, production, and marketing of pharmaceuticals.

Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

Smaller capitalization securities may be less stable and more susceptible to adverse developments, and may be more volatile and less liquid than larger capitalization securities.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.

Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.

Volatility measures risk using the dispersion of returns for a given investment.

S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.

Carolyn Bigda: From Janus Henderson Investors, this is Research in Action, a podcast series that gives investors a behind-the-scenes look at the research and analysis used to shape our understanding of markets and inform investment decisions.

On today’s episode, we’re joined by two biomedical Ph.D.s. Dan Lyons, a research analyst and portfolio manager, studied immunology at Stanford University.

Dan Lyons: One of the rules that we always cite in our sector is that 90% of drugs that start in clinical development will fail over time.

Bigda: And Luyi Guo, a research analyst, got her Ph.D. in medicinal chemistry from the University of Michigan – Ann Arbor. Both now follow drug development in the biopharmaceutical industry, which might be one of the most exciting but highest risk areas of the investable market today.

Luyi Guo: I try to understand the treatment landscape, is this a true innovation in an unmet medical need? Or is there a bunch of already competitors or older drugs that’s doing a decent job and you’re just trying to innovate incrementally?

Bigda: I’m Carolyn Bigda.

Matt Peron: And I’m Matt Peron, Director of Research.

Bigda: That’s today on Research in Action.

Luyi and Dan, welcome to the podcast.

Guo: Great to be here.

Lyons: Yes, great to be here. Thanks.

Bigda: So, at the time of this recording, the 2022 ASCO Conference has just wrapped up. ASCO is the premier annual meeting of oncology researchers and physicians, during which results from clinical trials are announced and research is presented. Can you give us some of the highlights from this year’s meeting?

Lyons: Yes, happy to start off. And our team took a hybrid approach to this year with some members attending in-person, which everyone said it was just amazing to have people back with tens of thousands of people. I opted to do the virtual route, so I watched from afar, but saw some amazing presentations. For me, one of the biggest highlights I think was in the care of multiple myeloma, which is a blood cell cancer that impacts many people around the world. And there was updated research presented from several cell therapy companies, which use what’s called CAR constructs. And people refer to these as CAR T-cells. And what does that mean? That basically, what this construct does is enable the patient’s own white blood cells, or T-cells, to be retrained and to attack specifically just the tumor, which in this case is the blood cancer.

So, the industry has gotten really good at this approach, and now there are several different unique targets that are specific for different types of cancers. But one of the highlights of the presentations, though, was showing that in later-line patients with multiple myeloma, use of this CAR T-cell therapy was able to give patients roughly 27 months, or over two years, back of their life progression-free, which is really amazing durability for a single therapy. And now, you know, the industry is trying to ramp up production to be able to serve as many patients with myeloma as possible.

Peron: And Dan, hasn’t the CAR technology been a long journey to get here, to really have productive and valuable use? It’s been challenged in the past, is that accurate?

Lyons: Yes, that’s a really good point, and, you know, this research actually started off many years ago at the National Cancer Institute. And they pioneered the ability to put these constructs into T-cells from patients, and it’s taken a long time to optimize the constructs. And this one company came up with a novel version of a construct, which seems to enable these cells to really durably benefit patients, and this kind of more than two-year benefit was the first time I’ve seen anything that’s lasted that long.

Peron: And in the past, the problem has been with a very challenging side-effect profile, right? So, this would be very difficult for patients to tolerate often?

Lyons: Yes, the early research in the field had major challenges. Basically, the cells are super potent, and they release a lot of what’s called cytokines, which basically, they amp up the overall immune system. And that can cause fever and severe side effects, which require patients to be hospitalized. And some of these newer versions have less of those side effects. Patients still have to be monitored really closely during the first period, but after they get through the first few weeks, you know, then they can basically live treatment-free for several years.

Bigda: And Luyi, from your perspective, what was the most exciting news that came out of the ASCO conference this year?

Guo: Yes, so to me, it was one particular presentation at the plenary session. This is one of the newer ADCs, which we call antibody drug conjugate, Enhertu, in the trial called DESTINY-Breast04 trial. In this trial, what we saw was really practice-changing; Enhertu was able to reduce the disease progression or deaths by about 50% versus the previous standard of care. And the overall survival improvement was also statistically significant and clinically meaningful. And so, in that case, this presentation got a standing ovation. I think it was the only major standing ovation for this entire ASCO, and it’s a truly exciting moment for not only the patient, for the doctors, but also for industry followers like us. You know, we kind of live for those moments.

Bigda: Yes, because that’s a pretty significant improvement in the progression-free survival rate, correct?

Guo: Oh, yes. For those patients, before, real-world study shows [that] these women have only a progression-free survival period of about four to five months. And now, we are doubling that to about 10 months. And this study is changing how people are classifying breast cancer patients. Because before, it’s HER2-positive, you know, or HER2-negative. Now we realize this vast majority – roughly about 50% the people who are HER2-low – can benefit from this treatment.

Bigda: And just very briefly, what do you mean when you say HER2-positive or HER2-negative? What is that?

Guo: So, we have basically diagnostics to take, say, a biopsy of a breast tissue, and you can test whether the expression of HER2 – it’s a marker on the tumor cell – is at a high quantity or low quantity. If it’s IH3, that’s HER2-positive. But if your IH1 expression or IH2 expression, you are considered HER2-negative already. But now, this trial shows those classifications could be considered HER2-low. So, you’re basically expanding the population who could, you know, benefit. And in fact, there’s a small amount of patients – about 50-some patients in this trial – that shows even if your HER2 expression is 0 by those tests, could still benefit almost exactly like the HER2-low patients. So, this is very exciting data for sure.

Bigda: Yes, it’s amazing. You know, it seems there’s a lot of research that’s going on in the area of cancer. What areas of cancer research are most exciting to you or that you think have the most potential to transform how we treat cancer today?

Lyons: Yes, that’s a really good question. And I guess, when I think about what’s one of the biggest ideas out there that could be transformative, I think of early stage cancer screening. If you can intervene in cancers at an earlier stage, say stage 1, you have dramatically better outcomes. You know, the differences in survival if you catch a tumor when it’s really early, you can have 90% five-year survival, whereas if you catch it at a late-stage or metastatic disease, you might only have 10% to 20% five-year survival.

So, there’s a variety of companies that are leveraging new technologies to try to identify patients earlier, and it’s called pan-cancer screening approaches. It basically leverages what’s called next-generation sequencing, or advanced DNA-sequencing technologies. And what companies have found is that, you know, cancer cells have a unique fingerprint. There’s a lot of different mistakes in the genetic code for cancers as they’re rapidly dividing, and those create a unique fingerprint. The other amazing thing that’s been discovered is that cancer cells are also shedding DNA; little pieces of the genetic code are coming off. And so, you basically have this fingerprint going around in your blood at all times. And what this does is allows a pretty easily obtainable source, a blood test for an emerging area is what’s called circulating tumor DNA tests. We already know that this circulating tumor DNA can be really useful in the area of therapy selection. You can use tests that are able to pick up mutations in the cancer that are super specific just to that cancer, and in many cases, there’s now targeted therapies that can be used to address that. There’s already large companies that offer tests like this, and more and more people are getting therapy-selection sequencing tests.

Then, once you unfortunately have cancer, there’s monitoring tests that can tell, you know, if your cancer is getting worse or how it’s responding to therapies. And then the future, which we’re already starting to see the beginnings of today, is this pan-cancer screening, which basically uses these fingerprints to determine the people that might be at risk. And there have been some tests that can detect up to 50 different tumor types at an early stage. And so, we’ll see results of these studies over the next couple of years from hundreds of thousands of patients in the U.S. The UK’s National Health Service has a really large cohort of patients that are testing, and around the world.

Peron: Dan, is it fair to say that this is the next big step in the evolution of precision medicine or personalized medicine? We heard about, a number of years ago, the big promise of that, and this seems a big important step on that path.

Lyons: Yes, I think it is. And the thing that makes me even more optimistic about this, there are multiple approaches. So, other companies in this field are also adding in additional components that you can get from blood, different protein biomarkers. Looking at the size of DNA fragments, or what’s called epigenetic markers, which are little marks that occur on the DNA itself. So, there’s a variety of different fingerprints that are being applied, and now people are going through the tricky process of figuring out what the best fingerprint is and then applying that specifically to different tumor types.

Bigda: And it just seems like a massive market opportunity because you’re not just treating the cancer anymore, once you’ve discovered it. You’re detecting it all along the stages of its development.

Lyons: Yes, and companies in the space have characterized this market opportunity is, over time, a $75 billion opportunity. And the biggest component of that would be pan-cancer screening because that’s a test that, hypothetically, you could get at an annual physical or every couple of years. And, you know, when you think about most of the time, they’re focusing on kind of a higher-risk population like older people like me, over 50, that might be the first candidates for it.

Bigda: And could these screenings be potentially more accurate than existing screenings today? So, just going back to the breast cancer example, where you have an annual mammogram now to try to detect cancer. Could these blood-based screenings be more precise?

Lyons: They could, actually, and the way they’re envisioning using it is often on top of all the existing screening algorithms. So, there are tests out there today for breast cancer, for colorectal cancer, and they’re envisioning adding this on top of that because those tests provide real meaningful benefits already, and they want to kind of add on to that surveillance.

Guo: Yes actually, I want to just echo the point. There was a very important point that Dan brought up just now. The earlier detection and earlier treatment really makes the difference in survival, which is the goal for cancer patients. And so, for example, in the lung cancer treatment at this ASCO, I could see that the data is truly maturing for not only the neoadjuvant but also adjuvant treatment; so, we can call perioperative, you know, around-the-operation/before-operation/after-operation treatment for lung cancer, earlier lung cancer using checkpoint inhibitors.

Peron: And you brought up checkpoint inhibitors, which, again, is probably another full podcast on its own. But it’s a really another exciting development of a few years ago that was quite well-hyped and that’s still now even progressing, and we’re seeing more…

Guo: Oh, that’s a really good point because previously, we started off, often in cancer drug development, [in] later lines of therapy because those are the patients with the highest unmet need, and then you move along to earlier lines. So, the checkpoint inhibitors, when they first came out, they made a big difference in the metastatic setting [for] multiple tumor types: melanoma, lung, triple-negative breast cancer. But, you know, now we are seeing data and proof that they work in [an] earlier setting. So, stage 2/stage 3 melanoma; stage 2/stage 3 lung cancer. So, those are tumors you can operate on, but you can still use checkpoint inhibitors before operation or after operation to improve, you know, the survival, so yes.

Peron: And I should have defined [that a] checkpoint inhibitor is where you use your own immune system to fight the cancer as opposed to a chemical agent.

Guo: Correct.

Bigda: But specifically, with checkpoint inhibitors, it’s essentially turning off a signal that cancer uses to evade the immune system. Is that correct?

Guo: Yes, that’s very good.

Bigda: But that’s different than other targeted therapies which are maybe going after a certain mutation within the cancer’s DNA…

Lyons: Yes, and that was another area where there have been advances recently. And even in this most recent ASCO, there were new, what are called targeted therapies, and you can use sequencing to determine that there’s a specific marker that’s actually driving the cancer. And so, you can go into a lung cancer patient and tell them, you don’t just have general lung cancer, you have very specific driver mutations, and we have a specific therapy that’s adapted just for your use. And one of the innovations that was highlighted at the ASCO meeting was a specific mutation. It’s called KRAS, which is just the protein that’s implicated here. And several companies now have drugs that specifically target this. This makes up about 13% of lung cancers and also occurs in other cancer types like pancreatic and colorectal cancer. The updated data at the meeting showed that these therapies may be combinable with immune therapies to get the best benefit. And also, showed that, you know, they’re able to add meaningfully in later-line patients, as well.

There was also another series of talks about another potential driver mutation which is called p53, which is present in a lot of different tumor types. It’s something that’s normally called a tumor suppressor. So, this protein’s job is normally to make sure that tumors aren’t coming up, and when mutations occur that can allow them to escape all these normal checkpoints and grow and cause cancer. And there was another small company that showed a benefit of a targeted therapy against a specific mutation there. That makes up maybe about 2% of all cancers, and so that’s another exciting target that’s been one of the holy grails, I think, in cancer, trying to get after this because this p53 is present in a lot of different tumor types.

Bigda: From the research that I’ve seen, it seems that a lot of the big advances are being driven not by the large biopharmaceutical companies, but by, actually, small-cap companies. And so, could you maybe talk a little bit about why that is? Why is it that the smaller companies are now kind of taking the reins and driving this research?

Lyons: Yes, that’s a great point, and I’ve seen statistics that a lot of innovation at the larger biopharma companies – I think maybe around two-thirds or so – is sourced externally, and I think smaller companies within the biotech sector can be a little bit more nimble sometimes. And they’re also oftentimes very connected to some academic groups where some of the early research comes out of. And so, I think they’re really good at harnessing early innovation, also coming up with new treatment modalities that the industry can use. And then Luyi can speak to this probably better than I can, but, you know, I think they really need to partner with larger biopharma companies for aspects of development and commercialization.

Guo: Yes, I agree. A lot of drug development does happen at smaller companies, and they tend to take more risks early on. But, you know, I think large-cap pharma companies have the strength to kind of do the development, especially large-scale development, especially from mid-stage onward. And this is also sometimes the technique for them to not only just broaden their pipeline from external sourcing, but also they can leverage their strengths. So, their strengths tend to be clinical development, regulatory, understanding the payer reimbursement environment, and commercialization. So often, it’s a partnership between both the smaller biotech companies and large-cap pharma companies.

Bigda: I was wondering if the two of you could sort of take us through what is the cost and the time that’s needed to discover a new drug, develop it, get it approved by regulators and then out and into the market? And what is the growth potential from there?

Lyons: I guess I would start by highlighting, you know, one of the rules that we always cite in our sector is that 90% of drugs that start in clinical development will fail over time. So, it’s a very tricky process, and I think Tufts [University] has done some great work around kind of what the average cost of bringing a drug to market through the research process is; it’s over $1 billion dollars. The number kind of goes up over time. So, it’s a very expensive and time-consuming process, and, you know, companies basically start off proving that they can hit the target and there’s a safe profile. And that’s done in early phase 1 trials, sometimes in healthy volunteers; sometimes in cancer you go directly into patients. And then companies get into mid-stage clinical development, where they are trying to get a proof of concept, trying to show that they can have an impact, ideally on a clinical aspect of disease, but sometimes it’s a biomarker or some element that gives you a sense that the drug is doing what they planned. And then ultimately, if it gets through that hurdle, they go into larger regulatory-enabling phase 3 trials, which ultimately, you know, prove the drug has clinical benefit and also safety for the regulators.

And it’s interesting in terms of when large biopharma companies typically become involved. Over the last years, we’ve seen maybe a few companies take on a little bit higher risk in terms of larger M&A [merger and acquisition] deals, where they maybe get in even at a phase 3 or in the later stages of development. But oftentimes for M&A teams, they want to know that it’s already through the phase 3 and maybe even at the approval stage. But we see a lot of opportunities for partnership, and we’ve seen a lot of great deal structures where the large company can benefit and also the biotech company can benefit by accelerating development and getting to market faster.

Guo: I think that’s a really good recap of the process. And you know, companies always try to improve every step along the way. Some companies, especially the biotech early stage, they try to do the discovery of the target better. Sometimes the design of the molecule quicker and better. And then companies use AI [artificial intelligence], machine learning to run their clinical trial more efficiently. So, companies are always trying to improve along the way because it is such a difficult undertaking.

Bigda: The past year has been particularly brutal for the sector. Since hitting a peak in early 2021, the XBI1, which is the ticker for an ETF used as a broad benchmark for biotech, that’s declined by as much as 64%.2 So, what’s behind that sharp pullback? Is it just drugs failing their clinical trials? Or is there something else going on here?

Lyons: Yes, that’s a great question, and really, we saw this starting last year, and there are multiple factors that I would highlight. One would be, you know, the FDA [Food and Drug Administration] at that time didn’t have a permanent leadership. And as a result, some of the decision-making was a little bit erratic. So, it was hard to predict what the regulators were going to do. There was also an overhang from drug pricing. There were questions about, you know, what legislation might come up over time. And there were also some pretty high-profile clinical trial failures. The industry, as we highlighted, there are a lot of failures along the way. And sometimes, those come even at later stages of development, and those can be surprises, and there’ll be ups and downs over time. And so, we experienced a bit of a down on that front.

Then, we fast-forward to the beginning of this year, when the Fed [Federal Reserve] began to push up interest rates to try to combat inflation. And longer-duration assets like biotech were pressured in that environment, even though when you think about the longer term, the biopharma sector has really good pricing power and it should be more resilient to recession. However, early stage biotech companies that are dependent on capital markets for financing faced additional pressures.

In terms of the outlook going forward, things that make me feel comfortable and excited about the biotech sector would be one, we’ve already experienced a very large correction, even ahead of the rest of the markets. Second, large biopharma companies have really significant needs in their pipelines. They have patent cliffs, where they lose significant amounts of sales that have to be replenished. Lastly, you know, we estimate [they have] about $500 billion in cash firepower as of the end of 2022. So, we see the large biopharma sector with a need and also the ability to buy in pipelines, and that comes from the biotech sector. The other elements I would highlight would just be the regulatory backdrop, I think, is going to be improving. We have a permanent FDA director now, giving the industry a bit more clarity on that front. And lastly, I think, you know, drug pricing comes in and out of the headlines. It’s been in again a little bit, but in terms of anything meaningful happening this year, I think that’s very unlikely. So, all those things make me feel better going into the back half of this year for biotech.

Bigda: So, a lot of factors that were going against biotech over the past year might now be kind of turning the corner and hopefully becoming a tailwind for the sector. But before we get into that, I do want to just touch on the volatility a little bit of this sector. And I’m going to put you on the spot about this Matt, which is how do you think about this kind of potential downside in a diversified equity portfolio?

Peron: Yes, well, I’ll start off by saying that at the highest level, as Dan alluded to, biotech and the pharmaceutical industry generally march to their own drum. So, it’s a portfolio diversifier.

Bigda: It’s not necessarily going to move with the market, the broader market.

Peron: That’s right, that’s right, yes. And so, that’s important. But coming to your question, Luyi and Dan and the others are expert at looking at scenario analysis. They’ve seen many of these drugs over their careers. They model the scenarios: Here’s a successful one. Here’s where if the drug fails and we have to go back to the drawing board and tweak the molecule or whatever, it is. And we then can assess the risk profile of each drug or company or scenario and layer it into the portfolio in a collective way to balance the risk and reward. So, it’s a multistep process, and that’s really where the experts come into play in terms of looking at really how it will play out based on their experience.

Bigda: So, now I am going to ask the experts: How do you model whether one of these drugs is going to potentially succeed and make it to market? How do you determine when, you know, the odds aren’t looking very good?

Guo: So, for me, I cover mostly larger-cap pharma companies. So, I focus a lot on what the clinical trial data says. So, I have the luxury of looking a little bit later than, you know, preclinical. Preclinical proof-of-concept is very important, and the preclinical animal model is very important. But the most important one to me to start my work is often looking at the available clinical trial data. I look at the efficacy signals; I look at, very importantly, how the safety profile looks like. And to me, that paints a picture of a drug profile, what I call. I try to understand the treatment landscape, also; how this new drug, potential new drug could fit in that treatment landscape. Is this a true innovation in an unmet medical need? Or is there a bunch of already competitors or older drugs that’s doing a decent job and you’re just trying to innovate incrementally? Or are you just playing a game of me-too drugs and having maybe a little bit better convenience for the, you know, patients? So, there are many different levels. And then, of course, are you the first to the market? Are you second to the market?

So, all those things come together, and based on data and industry understanding, we try to model how that launch uptake could be, how the market share could look like, and various parts and all those details get into a model of what we think that drug could ultimately sell.

Peron: You guys have the challenge of not only modeling the science, but also the commercial, the regulatory and commercial pathway.

Guo: Right, so the drug profile, the competitive landscape, the current treatment paradigm are also feeding into a very important question of whether the payers are willing to pay for it, not only in the U.S., but also outside the U.S. So, all those things come together. Yes, so it’s a very, always a very exciting area to model.

Lyons: Yes, and I think your comments echo on the 90-90 rule, with 90% of drugs failing in clinical development. And then also touching on the commercial risk side, where 90% of the time the Street [Wall Street] doesn’t have the estimates correct for new product launches. And I would just add to Luyi’s comments, to get an understanding both of the clinical risk side but also commercial, we go to medical meetings, we talk to physicians a lot and we read the literature. Up front early on, when we’re thinking about clinical risk for new drug targets, we take a close look at the scientific literature. Again, also talking to physicians to get a sense, does this target make sense? And then we look at the drug profile in detail from preclinical models, to make sure the drug’s getting to the right place at the right amount at the right time. There’s a lot of variables that have to go right in order for the drug to be effective.

In clinical development, you know, we use statistical models; after the drug’s gotten through a phase 2 trial, oftentimes you have a rough idea of the treatment effect size, and using our statistical models, we can get a pretty good gauge of what the likelihood of success will be in later-stage clinical trials or the final round of trials needed for approval. And so, we find that having our own statistical models helps us ask companies the right questions to make sure they’re designing the trials to win, if they can.

Then lastly, just on the commercial risk side, I think another tool that we use is physician surveys to kind of gauge some of the things that Luyi talked about in terms of, how will a drug be taken up in the market? Is it filling a significant unmet medical need? And, you know, are there competing therapies that might crowd it out? So, trying to do a better job than the admittedly dismal job that the Street does in terms of being wrong 90% of the time, we try to get launches right.

Bigda: So while small-cap biotech stocks have really taken a beating, some of the larger caps have actually held up better. Luyi, can you talk a little bit about why we’re seeing sort of this split in the market right now between these companies?

Guo: Yes, so I think Matt earlier said it really well about the biopharma industry supply and demand is, you know, march to its own drumbeat. So that’s one. And then for this year, I think, what helped at the beginning of the year, most of the large-cap pharma companies were considered value stocks, if you would characterize, versus, you know, growth stocks. And while the ETF ticker, say DRG3, you know, was trading much lower than the S&P 500; it was about like 16 times versus 23 times [earnings]. So, there’s a big valuation gap. And now the valuation gap is closed a bit, but still at a discount and that helps, you know, large-cap pharma really value-wise.

Now, in this inflationary environment, the large pharma companies have a lot of levers to pull. And the input costs are relatively small, and then they also, you know, have many ways to try to control the costs better than some of the other industries. So, that’s in my opinion, why pharma kind of holds up better.

Bigda: Matt, do you see large-cap biopharma as an important diversifier in this kind of market environment today?

Peron: Sure, when you look at a health care portfolio construction, you often could take a core/satellite approach. You anchor to the large caps that you feel have the runway, have the pipelines. Those can form the core, and then around the satellite, you say, what will complement that gives us some really great optionality? So, it’s a really good, you know – anchor it with the stable and growing, most promising large-caps and then support it with the upcoming technology.

Bigda: Got it, and they also have, they’re not as interest-rate sensitive because they’re not considered long-duration stocks, is that correct? And they have the free-cash-flow profiles that look interesting?

Peron: Yes, they don’t have the macro sensitivity, so, you know, the geopolitics tend to not matter so much. You have some political with drug pricing, as Dan mentioned, but, in general, you’re insulated from the macro. It’s all down to, you know, putting our microscopes on and figuring out how the science and the commercial pathway is going to work.

Bigda: Okay, so let’s get back to the science because that is the most important part of this sector, and let’s end by looking to the future. Cancer makes up a significant portion of R&D today, but it’s by no means the only area of research in biotech. So Luyi and Dan, what other types of treatments now under development are exciting to you and have the potential to transform the standard of care for patients, in your view?

Lyons: Yes, maybe I’ll start off. We talked earlier about how different modalities are really driving innovation across the sector. And so, when I look over the next couple of years, things that could be really exciting and transformative, you know, one thing would be Duchenne muscular dystrophy (DMD), which is a horrible condition that impacts mostly young boys around age five. There are several companies that are developing gene therapies that could help address that condition. And we’ll start to see data from those over the course of the next year.

Bigda: And Luyi, what about you? You recently actually wrote a blog post about some advances taking place with anti-obesity drugs. Could you maybe talk about that or other areas that are exciting?

Guo: Yes, so I’ll name a few. This a good part of this job; always very exciting data coming out. And even just in the near term, I’m looking at, of course, the anti-obesity drug that’s way more efficacious, with weight loss of more than 10% in, you know, a couple of compounds that we are seeing now; [it] is clearly going to transform how we think as a society of obesity. And then those companies are also working on proving if you treat obesity early on, longer term, you can impact favorable health outcomes. So that’s very exciting.

The other exciting field I found is Alzheimer’s disease. We will be looking at three different compounds reading out their data in the next nine months, I would say, within the next six to nine months. I’m sure that will make many headlines. And then the other ones that I’m excited about is newer anticoagulants, so they’re called factor XI(a), and we will be seeing some more data, proof-of-concept data very soon, I believe. And so that could potentially expand the clinical use of anticoagulants.

And then other thing that I’m excited about is also vaccines for RSV. RSV is Respiratory Syncytial Virus.

Peron: That affects mostly children?

Guo: It affects not only children, but elderly. So, we have those trials for multiple vaccines reading out, and then there’s already a positive treatment trial for infants, which is a long-acting antibody that we hope that will come to the market soon. So, RSVs are the leading cause of hospitalization for children in America and then it’s also one of the leading causes for elderly hospitalization. And there has not been, you know, effective vaccines. So, this to me is also very exciting.

Peron: So, exciting science for humanity, and also great news for, we have an endless supply of investment opportunities coming, so…

Bigda: It sure sounds like it. And hopefully we’ll get a lot of positive updates from all of these studies soon. Luyi and Dan, thank you so much for joining us today. It’s been a pleasure having you on the program. Here’s hoping the market will start to better reflect the value of biotech innovation over the coming months, too.

And speaking of the future, next month we will be joined by Adam Hetts, Global Head of Portfolio Construction and Strategy, to take stock of what’s happened in markets so far this year, what could be ahead for the remainder of 2022 and what that all means for investors’ portfolio allocations. We hope you’ll join.

Until then, I’m Carolyn Bigda.

Peron: I’m Matt Peron.

Bigda: You’ve been listening to Research in Action.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


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Luyi Guo, Ph.D., CFA

Luyi Guo, Ph.D., CFA

Research Analyst

Daniel Lyons, PhD, CFA

Daniel Lyons, PhD, CFA

Portfolio Manager | Research Analyst

Matt Peron

Matt Peron

Global Head of Solutions

27 Jul 2022

Key takeaways:

  • The healthcare sector continues to make significant advances in medical research, including recent breakthroughs in breast cancer and multiple myeloma. That can lead to strong revenue growth for firms that successfully develop and/or commercialise these therapies.
  • There are also significant risks, with 90% of drugs that begin human clinical trials never making it to market. Rising interest rates, regulatory uncertainty and drug patent expirations can be further headwinds.
  • Taking the long view on a drug’s lifecycle can help minimise risk and allow investors to take advantage of healthcare’s unique growth drivers.