How to Tap Into the Genetics Revolution

Genetic advances are providing investors with many opportunities to profit and save lives, says Lydia Greasley, investment analyst at EdenTree Investment Management 

EdenTree 29 March, 2019 | 9:51AM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. 

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Genetics is a growing area of research that offers responsible investors the opportunity to help improve public health and power the discovery of new drugs for difficult to treat medical conditions.  

Genetic research is thriving, fuelled by scientific and technological advances. The cost of genome sequencing, which determines an organism’s complete DNA sequence, has fallen significantly. And data storage has increased in capacity and shrunk in physical size and cost – the 3.2 billion bases in the human genome produce close to 4GB of data, which requires considerable storage to sequence.

Given the fast pace of development, competition and constraint on R&D, most pharmaceutical companies cannot afford to build out specific research expertise internally. Instead, they seek to partner or acquire from the flurry of small and mid-cap specialist companies with strong patent portfolios that emerged typically as university spin-outs. These partnerships, which combine specialist knowledge with pharmaceutical scale and expertise, present an attractive investment opportunity to inform drug development. Horizon Discovery (HZD), for example, uses its in-depth knowledge of genetic editing to create targeted genetic cohorts for drug discovery and testing. It partners with large pharmaceuticals, including AstraZeneca (AZN) to research personalised cancer therapies.

Niche Players

Sequencing is the engine for genetic research and discovery. The first full genome took about four years and cost billions of dollars to sequence; now it can cost less than $1,000 and takes about a day. Estimates of the potential sequencing market vary widely between $20-200bn, with a range of players competing in the space. However, some of the most compelling investment opportunities can be found outside the market leaders, in niche players.

For example, through intellectual property commercialisation company IP Group (IPO), we can access Oxford Nanopore. IP Group’s largest holding is renowned for producing inexpensive portable sequencers, which use different underlying technology than peers’ and read in real time. These devices, ideal for infield sequencing, were used to understand the infectious agent in the 2014-2016 West African Ebola outbreak, generating results within 24 hours. Other potential applications include biometric security, food safety and superbug detection. IP commercialisation companies are a good way to access these innovative early-stage companies, spreading the high risk often associated with them.

Diagnostics Drives Efficiencies

Gene sequencing has progressed diagnostic capabilities, greatly improving patient outcomes, particularly in life-threatening conditions such as cancer. Companion diagnostic tests look for specific genes, rather than reading the full sequence, to identify patients most likely to benefit from a particular treatment, as well as those at high risk of serious side effects. Early and accurate detection removes needless trial-and-error approaches, creating economic efficiencies and, most importantly, improving patient outcomes. We view it as a robust long-term investment theme.

Erbitux, licenced to Merck (MRK), is a treatment for advanced bowel cancer, which attaches to growth receptors found on cancer cells, stopping growth. However, research has shown for someone with a mutant KRAS gene, the treatment is ineffective; this applies to approximately 40% of those with bowel cancer. As a result, patients are tested for a normal KRAS gene before the expensive course of treatment, significantly increasing efficacy and economic value.

Precision Targeted Drugs

Genetic research and sequencing are also enabling the personalisation of drugs. The number of patients that find prescribed drugs ineffective remains shockingly large, but targeted drugs have the potential to reduce this “hit and miss’” nature. In addition, new gene therapies offer hope to “cure” genetic diseases where previous approaches could only abate symptoms. As a result, precision-targeted drugs may act as a “disrupter technology”, threatening the traditional “blockbuster” drug business model. With a higher probability of being effective, even within a smaller subset of patients, they can be charged at a premium. Moreover, retesting drugs that were ineffective for the masses opens a new pipeline of possibilities.

The space is dominated by large pharmaceutical companies, such as Novartis (NOVN), and start-ups that could boom or bust. Novartis has developed Kymriah, the first regulatory-approved CAR-T therapy, which trains a patient’s immune system to recognise a protein found in most blood cancers and kill the cancer cells. The treatment costs approximately $475,000 per patient and is seen as a “miracle cure”, with 83% of patients, mostly children with hard-to-treat blood cancers, achieving complete remission after three months.

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The views contained herein are those of the author(s) and not necessarily those of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
IP Group PLC51.55 GBX-0.48
Merck & Co Inc131.10 USD0.26Rating
Novartis AG Registered Shares93.38 CHF0.24Rating

About Author

EdenTree  is an investment management firm with a focus on ESG investing

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