Download Insights—Biotechnology: Growth Opportunities in a Shifting

Biotechnology—Sustainable Growth
Opportunities in a Shifting Landscape
Artisan Partners Global Equity Team
ARTISAN PARTNERS
Insights
Biotechnology—Sustainable Growth Opportunities in a Shifting Landscape
Artisan Partners Global Equity Team seeks to invest in companies
By 2012—using sequencing technology—10 different subtypes had been
demonstrating attributes we believe will lead to sustainable growth,
discovered. By uncovering those genetic differences in the cancer cells,
and that are further advantageously exposed to global secular trends or
researchers can better tailor therapy discovery and development.
themes. Here, we discuss investment opportunities in biotechnology, a
subset of our technology theme.
Greater understanding of human genetics is merely one of a host of
scientific advancements that is enabling more targeted therapies with
Biotechnology is itself a fluid term, with the line between biotech and
fewer adverse side effects, better patient selection and ultimately, greater
pharma increasingly blurring. For years, many traditional pharmaceutical
clinical success.
companies have relied to varying degrees on biotech company
acquisitions to bolster their pipelines—increasing their exposure to
Heightened R&D Productivity
“biologics,” (i.e., large-molecule drugs based on naturally occurring
Partly in acknowledgement of the heightened safety and efficacy of
bodily proteins rather than the prior standard of chemically engineered,
next-generation therapies, the US Food and Drug Administration (FDA)
small-molecule drugs). Further, though biotech firms may once have
has taken measurable steps to streamline and accelerate its review and
represented a niche corner of the market, today, a cluster of biotechs
approval process, particularly for therapies addressing serious conditions
have emerged as mega caps, generating significant revenues. In the US,
and showing early efficacy in trials. New drugs approved by the FDA
the number of biotechs with annual revenues of at least $500 million
reached a record high of 50 in 2014, and the average approval time for
expanded from 7 in 2000 to 19 in 2014.
drugs receiving the FDA’s newer “breakthrough therapy” designation in
2014 shrank to just 4 months.
While biotech is becoming a more mature part of the market, the industry
does still pose inherent risks, particularly when investing in early-stage
Shorter approval times allow companies to more quickly bring their drugs to
companies whose future earnings may hinge on the success of an initial
market, widening their marketing lead time over competitors. Further, earlier
pipeline drug. However, we believe a host of shifting dynamics makes
FDA feedback during trial periods can lead to more predictable regulatory
this an interesting time for investors with the expertise to navigate this
outcomes and more efficient use of development budgets. For investors,
complex industry.
it can result in greater visibility into a company’s earnings growth potential.
Scientific Advancements
Evidencing this growing R&D productivity, Exhibit 1 compares the number
Exhibit 1: FDA Approval Count vs. Total US Product Sales in Fifth Year
After Launch
Along with these shifts came the rise of bioinformatics—technology that
point: for many years, breast cancer was known as a single disease. Then,
somewhat by happenstance, about 25 years ago researchers discovered
the first gene (HER2) associated with hereditary breast cancer.
28
13.6
6.4
4.3
$0
5.6
40
20
10
5.4
0
2014
8.3
50
30
11.3 10.5
9.2
2013
$5 7.4
8.5
26.1
18.3
26
26
14.1
12.7
$10
35
35
34
2012
26
31
2011
of patients who are more likely to benefit from a particular therapy. Case in
$15
29
2010
correlated with certain types of diseases, allowing them to select subsets
35
32
2009
design. Now researchers can more precisely define the genetic mutations
33
38
2008
scientific approaches grounded in “rational” (as opposed to “random”)
$20
43
2000
a molecular level has marked an industry turning point, enabling new
$25
Sales ($ Billions)
of sheer trial and error, a shift toward studying the causes of diseases at
50
US Sales in Year 5 After Launch
NMEs + Biologicals Approved
Source: EvaluatePharma® World Preview 2015, Evaluate Ltd, www.evaluate.com. NME stands for new
molecular entity.
Biotechnology—Sustainable Growth Opportunities in a Shifting Landscape
FDA Approvals
what was formerly a black box. While drug discovery was once the product
60
$30
mines troves of genetic data for patterns, in a sense cracking the lid on
2007
million in 2004, today it’s $1,000 and falling.
estimated to have more than $800 million in sales in year five after launch.
2006
the industry. While the cost to sequence a human genome was about $29
success. For example, each of the top-10 new drugs approved in 2014 is
2005
technology—and a dramatic reduction in costs—are again transforming
likelier to come to market where they can realize increasing commercial
2004
effective therapies. More than a decade later, advances in sequencing
trends signal a new era of R&D productivity—one in which more drugs are
2003
causes of diseases—an important step toward designing more
(post 2009) US sales in year five after launch (bars). We believe recent-year
2002
the greatest advancement to date in understanding the underlying
of new FDA drug approvals in each year (line) to the actual or forecast
2001
The successful mapping of the human genome in 2003 signaled perhaps
Sustaining this productivity trend will require substantial investment.
Checkpoint inhibitors are one of several therapies falling under the
And, encouragingly, emerging from a record-breaking fundraising year in
category of biologics. Because biologics are based on living cells and are
2014 (Exhibit 2), biotechs are exceptionally well capitalized to develop and
designed to mimic and influence naturally occurring bodily processes,
scale their pipelines—the true industry growth engine.
they hold the promise of affecting their targets, but without many of
the toxic side effects of small-molecule chemotherapies. Furthermore, in
Exhibit 2: Biotech Industry Capital Raised in US and Europe
the case of checkpoint inhibitors, researchers believe that a revitalized
$60
immune response can develop memory and build immunity against
Total capital raise was up
over 70% YoY in 2014.
$ Billions
$50
cancer recurrence, even long after therapies are administered. This
$40
prospect—durable cancer cures—is the holy grail of cancer discovery.
$30
Orphan Drugs
$20
Therapies designed to treat rare (or “orphan”) diseases—e.g., those affecting
fewer than 200,000 people in the US—have steadily gained market share,
$10
and their sales pace is projected to grow at nearly double the rate of the
Venture
Debt
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$0
Follow-on and Other
IPOs
Source: EY, BioCentury, Canadian Biotech News, Capital IQ and VentureSource.
Select Investment Opportunities
While opportunities are numerous, we’ve highlighted a couple of areas
overall prescription drug market through 2020 (Exhibit 3). Because therapies
in this category often target high-demand, life-threatening diseases with
few or no alternative treatments (for example cystic fibrosis, muscular
dystrophy and other life-threatening genetic diseases), they’re often
more likely to receive expedited regulatory approval. At the same time,
development costs are lower—the result of smaller trial sizes, government
tax incentives and lower marketing costs. We believe advancements in
genetic research will help narrow target patient populations even further,
we find particularly interesting.
helping bolster more targeted discoveries in these areas.
Immuno-Oncology
from the collateral damage of an overactive immune response. In recent
years, researchers have discovered that certain of these checkpoints
2020
2019
2018
2017
2016
2015
2014
0%
2013
suppress the immune system in certain cases to protect healthy cells
2012
For example, the body relies on a number of “checkpoint” signals that
5%
2011
suppression of immune responses.
11.3%
10.3%
10% 8.9%
15.6%
14.3%
13.0%
2010
better understanding of the biology underpinning the activation and
15%
2009
of discovery, the tide appears to be turning as researchers gain a
20%
2008
highly proficient at evading the immune response. But after decades
19.1%
17.6%
2007
discovery has been bumpy. That’s partly because cancer cells are often
25%
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
Orphan Drug Sales ($ Billions)
curing the US’s second-leading cause of death. To be sure, the path to
2006
immune system to fight cancer—holds tremendous promise toward
Exhibit 3: Worldwide Orphan Drug Sales and Share of Prescription
Drug Market
Orphan Drug Sales (% of Total)
The emerging field of immuno-oncology—harnessing the body’s own
Worldwide Orphan Drug Sales ($ Billions)
Orphan Drug Sales as a % of Total Drug Sales
(Excluding Generics)
(e.g., PD-1, PD-L1 and CTLA-4) are co-opted by cancerous cells to
escape immune recognition. The discovery led to the creation of drugs
Source: EvaluatePharma® Orphan Drug Report 2014, Evaluate Ltd, www.evaluate.com.
capable of blocking these checkpoints (appropriately called “checkpoint
Balanced Exposure
inhibitors”), in turn energizing the body’s own immune response to
recognize and attack tumors.
As bottom-up investors, our sector exposures are the residual of our
stock selection process rather than the result of allocation targets, and
Biotechnology—Sustainable Growth Opportunities in a Shifting Landscape
reflect the collective result of our pursuit for companies with sustainable
competitive advantages, superior business models and high-quality
management teams. Within the biotech and pharma industries, we seek
a healthy balance of strong cash flow-generating companies, as well as
companies that we believe have significant future earnings potential that
is not yet reflected in their current share prices. In order to reduce the risk
of binary outcomes—that the failure of a company’s first pipeline drug
proves fatal—we typically only become interested in companies after
they’ve generated some compelling trial results. We believe a discerning
vFund:
Exhibit 4: Biotech/Pharma Industry Weights (% of total portfolio equities)
As of 31 December 2015
16%
14%
12%
10%
8%
6%
4%
2%
0%
4.5%
Artisan
Global Equity Fund
investment process emphasizing a rigorous valuation and sell discipline
should yield attractive growth opportunities in the years to come.
9.4%
Biotech
Pharma
2.3%
6.6%
MSCI
ACWI
Source: Artisan Partners/FactSet (GICS)/MSCI.
vStrategy:
16%
14%
12%
10%
9.4%
Biotech
8%
2.3%
Pharma
|
For more information:
6%
4%
6.6%
4.5%
2%
Carefully consider the Fund’s investment objective, risks and charges and expenses. This and other important
information is contained in the Fund’s prospectus and summary prospectus, which can
0%
Visit www.artisanpartners.com
be obtained by calling 800.344.1770. Read carefully before investing.
Call 800.344.1770
Artisan
Global Equity Strategy
MSCI
ACWI
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Portfolio Managers: Mark L. Yockey, Charles-Henri Hamker, Andrew J. Euretig.
The views and opinions expressed are based on current market conditions as of 07 Dec 2015, which will fluctuate and those views are subject to change without notice. The views and opinions expressed are based on current market
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