Call it the Industrial Revolution for healthcare, the century of biology, Moore’s Law for medicine, or all three. Whatever metaphor you choose, the meaning is the same: Thanks to our rapidly evolving understanding of biology and the application of new technological tools—and a bit of urgency sparked by the Covid pandemic—explosive change is coming in our ability to diagnose, treat, and even cure many debilitating diseases. Indeed, a golden age could be dawning for patients and healthcare practitioners—and investors in pharmaceutical and biotech stocks.
Along with the abundant hope, there’s also lots of hype, and separating the two can be a formidable challenge. That’s one of the goals of our annual healthcare roundtable, which met virtually in mid-September, and on that score and others, this year’s panel didn’t disappoint. Even so, our experts found it hard to stifle their enthusiasm for the wave of innovation occurring throughout the sector, and the “value creation” that could result.
The members of this year’s healthcare roundtable are Ziad Bakri, manager of the $20 billion, five-star-rated T. Rowe Price Health Science fund (PRHSX); Liisa Bayko, a managing director and biotechnology analyst at Evercore ISI; Stephen Berenson, a managing partner of Flagship Pioneering, a creator of life-sciences companies, including Moderna (MRNA), on whose board he sits; and Chris Schott, a managing director and healthcare analyst at J.P. Morgan.
In the edited conversation that follows, our panelists take a deep dive into the innovations reshaping the industry from a scientific, business, and regulatory perspective. They also home in on companies, large and small, that are leading the revolution and offer compelling value for investors.
Barron’s: Welcome to our second annual healthcare roundtable on Zoom (ZM). As that suggests, Covid-19 is still in the picture. How will the pandemic evolve from here?
Ziad Bakri: We are learning to live with the virus. As the population gains some level of immunity, we will probably see continued waves, but they will grow more moderate. Covid will go from pandemic to endemic. We will have to adapt our behaviors. Measures like mask-wearing in crowds will be normal, as it is in many countries in Asia. The world is forever changed, but we will figure out how to do in a safe way the vast majority of things that made us happy in the past.
Liisa Bayko: I agree, but I’d note that the response to Covid differs by region. In Canada, where I was visiting family recently, life is very restricted. In the short term, we are fumbling our way through. There is still a debate about boosters, and we’ll be chasing variants for a while. We need a long-term vision.
What are the ramifications of Covid for the healthcare industry?
Stephen Berenson: We were caught with our pants down by Covid. There wasn’t an ounce of preparedness that any country in the world was able to bring to this problem. That is a big lesson for the future. There are going to be efforts and investments to help prepare companies against what could be the next pandemic.
Second, there was a tremendous amount of innovation around the regulatory process for getting Covid vaccines approved. Thoughtful people are going to look at those innovations and ask whether some should be incorporated in the future in the drug-review and approval process.
Finally, the two companies at the forefront of helping the world address the pandemic never sold a product prior to their Covid-19 vaccines. There was a tidal wave of skepticism around the ability of the BioNTech (BNTX) and Pfizer (PFE) partnership, and Moderna, to do what they did. I hope people look at the power of innovative companies differently in the future.
Will the experience of Covid speed up the drug-approval process in the future?
Berenson: I don’t want to make that prediction, but there have been innovations in the process that could be made permanent and enable approvals of safe and efficacious medicines that get to patients faster.
Chris Schott: I agree with Stephen on regulatory innovation. There is a debate occurring about whether the Food and Drug Administration has become less predictable. We have seen industry and regulatory agencies come together in an area like Covid, where there is huge unmet need, to think about best practices and unique paths to market. Hopefully, that can be applied more broadly in the future.
The vaccine category used to be a competitive, well-supplied, and rather dull part of the pharmaceutical Olympics. Now it has become much more important. Will it remain a star of healthcare post-Covid?
Berenson: I understand the narrative, but there are interesting exceptions. Prevnar [which protects against infection from pneumococcal bacteria] is a gigantic product for Pfizer. Shingrix [a shingles vaccine] is a gigantic product for GlaxoSmithKline (GSK). Innovative vaccines that solve important problems not addressed elsewhere will be valuable products.
Schott: We’re seeing a renaissance in vaccine innovation. There is some exciting stuff on the horizon. Vaccine development is one way to harness some of the things we have learned from Covid. Historically, vaccines have had a 15-year development pathway, where you’re sitting in Phase 2 testing for five or six years. Maybe we can now bring innovations to market faster than we would have thought five or 10 years ago, or even two years ago.
Bayko: There is excitement around pushing messenger RNA vaccines into other areas, such as cancer. The relative benefits are still unknown, but there is new momentum and life in the category, which was probably much-needed.
Bakri: The uptake of vaccines is going to be much greater as new vaccines are developed, especially if we get the holy grail: rolling treatments for RSV [respiratory syncytial virus], PIV3 [parainfluenza virus type 3], Covid, flu, hMPV [human metapneumovirus], all this stuff, into one shot. As Steve Jobs said, it’s not for the customer to tell you what they want. You have to figure it out for them and then delight them with it. I am extremely bullish on vaccines. They are another form of preventive medicine, which is always the best way to treat disease.
So, should an investor buy the biggest vaccine makers?
Schott: I cover some of the largest vaccine makers. The pipeline is critically important. Pfizer has a single product with its Covid vaccine, but does it have a platform? The technology and pipeline are going to be more important in the future than a company’s legacy position in the vaccine market. We are talking about a paradigm shift, rather than incremental innovations, for which some of the existing vaccine manufacturers would be better-positioned.
Bayko: As in many other areas of healthcare, biotech will be a source of innovation, although for distribution purposes, new technologies might end up in the hands of the big pharma companies. People are more willing to invest in small vaccine developers now. Three years ago, if these names had come across my desk, I would have paid no attention. Now we’re looking at these companies, and we expect a lot more dollars to be applied to innovation in vaccines. We see this a lot in the therapeutics area. Gene therapy for Duchenne muscular dystrophy enjoyed some early success, and suddenly gene-therapy investments took off. Sometimes, you need a couple of early wins, and we have had them with Covid vaccines. Not everything will work, but more effort will lead to more products.
Bakri: Also, the government is going to be more willing to fund, buy, and stockpile vaccines.
What other medical innovations look particularly promising?
Schott: Alzheimer’s is a big, controversial topic in healthcare. People may have differing views about the FDA’s handling of drug approvals in this area, but from an investor standpoint, this is the biggest unmet need. Eli Lilly (LLY), one of our favorite names, is a play on Alzheimer’s. The company’s Alzheimer’s therapy, donanemab, is in Phase 3 trials.
In the next few years, multiple Alzheimer’s products will be up for review; we will get some big data releases next year. Physicians are going to face a dilemma: They might not agree with the FDA’s approval bar, but there is huge patient demand for these products. I am optimistic that we will continue to improve patient outcomes. That could open up a $30 billion to $50 billion category. In our conversations with investors, Alzheimer’s therapies are top of mind, along with Covid vaccines.
Bayko: We have also seen some exciting developments this year involving the use of Crispr technology in gene editing, and we will see more. We are awaiting data from Editas Medicine (EDIT) on a potential one-time therapy to restore vision in patients with a genetic disease that causes blindness. We have seen proof of concept from Intellia Therapeutics (NTLA); in late June, the company and its partner, Regeneron Pharmaceuticals (REGN), proved the efficacy of gene editing in humans, with a treatment targeting a rare eye disease]. Crispr has also been used effectively to treat sickle-cell anemia and beta thalassemia. We are on the cusp of much greater progress. There are a lot of gene-therapy programs in progress right now, and a lot of concern and debate among regulators, too.
In addition to the promise of genetic medicine, we’re following developments in precision oncology, or the use of drugs designed to target specific mutations. There have been innovations in areas such as kidney disease, and we could see some potentially interesting breakthroughs in treating obesity and NASH, a form of nonalcoholic fatty liver disease, which affects large populations, especially in the U.S. We have also been focusing on innovations in the use of artificial intelligence for drug development.
Give us some examples, please.
Bayko: There are two types of companies working in this area. Some are developing tools, and others are using the tools to develop drugs. The drug developers end up being more valuable. They are uncovering new targets for treatment, and rapidly enhancing lead molecules [chemical compounds with likely therapeutic use] in just a couple of years, with an investment of $10 million or so, versus a lot more money and time in the past.
Clinically, using artificial intelligence to enable efficiencies will be critical. We have seen some innovation around the use of AI to identify the best patient populations on which to test particular drugs. Whether the drugs are more effective remains to be seen. Even the big pharma companies that Chris covers are using AI in drug development. It’s like the Industrial Revolution, but in pharmaceuticals.
Berenson: We have two portfolio companies working in this area. Generate Biomedicines—run by Michael Nally, who was in contention to be Merck ’s (MRK) new CEO—is using a series of advanced computational tools to generate novel protein therapeutics. These tools potentially could massively compress the time between identification of a target and the creation of a product that goes into preclinical development.
Another Flagship company, Cellarity, is using computational tools to discover and develop drugs that act on an entire cell, not simply a single molecular target. This could open up a new avenue in drug discovery and significantly improve clinical success.
Stephen, you have written that Flagship seeks to innovate only in distant white spaces. What do you mean by that, and what do you see in those distant spaces?
Berenson: We are pioneering in areas where there is no one nearby. That would describe our initial exploration, back in the summer of 2010, of the therapeutic use of messenger RNA. If you have the area to yourself and your innovations are successful, you can develop a potent intellectual-property moat. You will have privileged access to adjacent innovations, and maybe a significant lead time, relative to eventual competition. The reasons not to innovate in those areas are at least as long, if not longer: There are no guideposts. How do you gain the confidence that the work you are doing is progressing to a potentially positive conclusion?
Ziad, what is your take on the industry’s innovation cycle?
Bakri: There are some analogies to the tech industry 20 or 25 years ago. The internet was developed in the 1990s, and became progressively more useful. Some of the tools being used in healthcare were invented a while ago and have gotten progressively better as they’ve been optimized. The sequencing of the genome is a good example: It has gotten progressively faster, and cheaper. That has led to new applications, like liquid biopsies that can detect cancer at a very early stage.
It has also become a lot easier to start a biotech company because of the emergence of many great CROs [contract research organizations] and CDMOs [contract development and manufacturing organizations]. In a similar way, cloud computing and AWS [Amazon Web Services] made it much easier to start a tech company. As a result of Covid, healthcare investment and innovation are accelerating.
Berenson: You could extend the AWS analogy to the emergence of biotech companies based on platforms, as opposed to single products—a platform being either a new understanding of biology or a new biological technology, which can produce a broad range of product candidates across multiple therapeutic areas. That changes the game from an investment perspective. As our CEO [Noubar Afeyan] will tell you, if you launch a category with a product that works, that increases the probability that other products in that same category will work. And the economics associated with that are potent.
Bakri: If you think of a traditional biotech company as a collection of oil wells, the probability of finding oil in one well is completely independent of the probability of finding it in another. These companies have pretty good research and development, but they can’t figure out the timing and probability of success. Sometimes, they go through droughts, or have products go off-patent, or have a lot of cash flow that they spend on other things, supplementing organic growth with inorganic growth. A platform company is different; the probability of a successful Covid drug, for instance, increases the probability of success with drugs Nos. 2, 3, and 4. That sort of company can scale in a way that traditional biotech companies haven’t been able to do.
I got into this business in 2006. My hope has been that down the road, maybe toward the end of my career, we’ll have a FANG of healthcare—a group of platform companies like Facebook (FB), Apple (AAPL), Netflix (NFLX), and [ Alphabet ’s ] Google (GOOGL) that investors want to own because all their businesses are interconnected. It wouldn’t surprise me if we head in that direction because of all the innovations that Stephen, Liisa, and Chris are talking about. Maybe Moderna or BioNTech will be the first of them.
Bayko: I agree that having a platform reduces the reliance on serendipity. Intellia went from a $5 billion company to an $11 billion company almost overnight, not because of the value of one successful product, but because of the value ascribed to having a platform that can deliver medicines to treat many diseases that have some commonality. A client recently questioned the valuation of Editas, which I believe reflects the same kind of thing. Although the company is targeting a rare eye disease, the success of its gene-editing therapy suggests a greater likelihood that it will work against other diseases.
Schott: In my world—the world of big pharma companies—we’re on the cusp of perhaps the biggest innovation cycle that many of us have seen in our careers. Yet, drug-company valuations are at all-time lows, relative to the broader market, seemingly reflecting a view that these big, legacy companies can’t pivot. R&D efficiency is going to increase dramatically, and big drug companies can partner with or acquire earlier-stage technologies. The market is saying they can’t capitalize on the innovations ahead, but there could be some interesting opportunities for some of these names. They might not have the upside of pure-play biotech bets, but they don’t have the volatility, either.
For all of your optimism about biotech, the stocks are underperforming the broad market this year. The IBB (IBB), or iShares Biotechnology exchange-traded fund, has returned about 13%, versus about 20% for the S&P 500 index (.SPX). What will it take to reignite investor interest?
Bakri: It depends how—and from when—you measure the sector. The IBB is market-cap-weighted. The XBI (XBI), or SPDR S&P Biotech, is equal-weighted. It’s down about 7%, year to date. Biotech IPOs have flooded the market in the past two years; that has had a dilutive effect. There are also short-term headwinds, related to the FDA or politics or payer behavior, or a dearth of mergers and acquisitions or blockbusters, but these are mean-reversing. You have to ride it out, and remember that the majority of returns are produced by a small number of companies. Also, most healthcare indexes I track are up 30% to 40% from the start of the pandemic. We got most of the juice in 2020.
Bayko: There were 97 healthcare IPOs last year among IPOs above $30 million, representing 54% of all IPOs. This year, so far, there have been 105 healthcare IPOs, or 44% of the total. These are record levels. It is hard for investors to track so many new companies.
As Ziad notes, the sector is driven in part by Chris’ companies buying my companies. We are starting to see some nice-size deals, in the $2 billion to $3 billion range. That sort of momentum will get investors excited again. In fact, the sector has rebounded in the past few weeks.
Schott: We saw a wave of consolidation among major drug companies in 2019. That is probably the last time we’ll see big buying big. The big drug companies are now moving into more targeted M&A as they face drug-patent cliffs. If you look out to 2025, ’26, ’27, their pipelines are good, not great. This isn’t like 2010, ’11, or ’12, when they headed into patent cliffs with almost no pipelines.
Using targeted M&A to cement a business line you’re developing, or to build a beachhead in a market to which you want exposure, makes a lot more sense than buying a big company with similar problems and firing half the staff. That was the old M&A model. The challenge is to bridge the valuation gap, as some of the more-interesting technologies are priced highly to reflect the perceived opportunity. We are also seeing a lot more partnership deals. The bottom line is, there is no way Big Pharma is going into 2025 and letting earnings collapse due to patent expirations. These companies have a lot of cash, and there are hundreds of smaller public and private biotech companies to look at, unlike a decade ago, when there were just a few. There almost has to be an uptick in M&A.
Berenson: Data show that the return on research at large pharma companies is low to negative. M&A is the principal way for these companies to grow the top line. They have to find a way to do it intelligently, strategically and financially. What Pfizer did with BioNTech was a thing of beauty: Pfizer’s ability to run a massive trial so quickly, and engage with global governmental authorities to commercialize BioNTech’s product, was the best of Big Pharma at play.
Schott: I agree. Pharma’s value-add is in things like running big clinical studies. That is where scale matters. I am encouraged that R&D productivity within my coverage area is improving, although returns aren’t spectacular. A hybrid model like Pfizer/BioNTech may be the way to go.
Let’s move on to stock picks. Chris, which pharma stocks look most attractive to you?
Schott: We like Lilly, AbbVie (ABBV), and Horizon Therapeutics (HZNP). Lilly is our top pick. It is bucking the pharma-industry trend toward lack of innovation. It is a best-in-class, diversified company that can generate high-single-digit revenue growth and mid- to high-teens growth in earnings per share, not just for a couple of years but for eight to 10 years. It is the only pharma name substantially through its patent cliff. Lilly should have two of the biggest launches in the industry coming next year. One is fairly de-risked: tirzepatide, a diabetes and potentially an obesity drug. The other, donanemab, is more controversial. Both have peak sales potential of $10 billion to $15 billion per year. Tirzepatide looks to be 50% more effective than Trulicity, Lilly’s largest drug, a $5 billion to $6 billion [per year] product. Donanemab is the most potent remover of plaque from patients’ brains. Based on Biogen ’s accelerated path to market with Aduhelm, we think Lilly’s drug could be approved in 2022. It could redefine the category. The push-back to Lilly is valuation. In an industry where nothing is expensive, Lilly trades for 28 times our 2022 earnings estimate. But given its growth potential, that isn’t a crazy multiple.
AbbVie is the value play in my group. We see both earnings upside and potential multiple expansion as the company commercializes two new immunology drugs and invests much more aggressively in its aesthetics franchise. The stock is trading for 9.5 times trough earnings and yields 4.8%. Wall Street is concerned about AbbVie’s ability to navigate the Humira patent cliff in 2023. Using a worst-case scenario, we see the company earning around $12 a share in 2023, which should be its trough year for earnings. That is only slightly below what we are forecasting for 2021 earnings per share. Considering Skyrizi [a plaque psoriasis treatment], Rinvoq [a rheumatoid arthritis treatment], and the Botox franchise that has thrived under AbbVie’s ownership, the company could grow the top line by high-single digits, and earnings by low-double digits off of that 2023 trough.
What is the appeal of Horizon?
Schott: Horizon is a mid-cap that could become a large-cap. It had one of the industry’s best-ever rare-disease launches last year with Tepezza, for treatment of a thyroid eye disease. It works in 80% to 90% of patients. It could generate revenue at a $2 billion annual run rate by year end, 18 months after its launch, and is on its way to being a $4 billion drug. Horizon is using that cash flow to broaden its pipeline. It now has four assets in Phase 2 or Phase 3 development. The stock is trading for about 19 times 2022 earnings.
What is your view of Pfizer?
Schott: Pfizer did an amazing job with its Covid vaccine. The question, from a valuation perspective, is whether this is a single asset or a platform. We think of it as more of a single asset. Backing out our fairly optimistic view of the Covid vaccine’s value, investors are paying about 15.5 times earnings for the core business. That isn’t expensive relative to the broad market, but Bristol Myers Squibb (BMY) trades for eight times earnings, AbbVie is at nine times, and Merck is at 11 times, and all face similar issues. I don’t see enough in Pfizer’s pipeline now to support its higher valuation.
Thank you. Let’s hear from Liisa.
Bayko: If you were interested in Chris’ comments on tirzepatide, you really need to look at Altimmune (ALT). The stock is trading for $17 and has a $650 million market cap. Our price target is $25. Altimmune continues to report data for ALT-801, a GLP-1/glucagon combination product that fosters weight loss. It could also be used to treat NASH. We’ve seen six-week data that were impressive, and we’re awaiting 12-week data, along with data from trials involving higher doses. Altimmune was developing a Covid vaccine that wasn’t successful. While it was pursuing that, it raised a lot of money that allowed it to fund development of ALT-801.
Editas, which I mentioned in my discussion of genomics medicine, is another name we’ve recently gotten excited about. We moved from an Underweight rating to Outperform because of the progression of the company’s effort in ophthalmology diseases. Editas is targeting LCA10, a rare eye disease, but positive data could create significant platform value. Editas is the cheapest company among core Crispr names; it has a market cap of just $4 billion. We’re waiting for more data that will validate our valuation model and the platform; it could come on Sept. 29 at a meeting on retinal diseases.
Finally, the ability to develop a drug pipeline from one molecule is an important concept, and consistent with our discussion of the benefits of platform companies. BioCryst Pharmaceuticals (BCRX) is a pipeline-in-a-molecule story.
Bayko: The company just got promising data on the use of its oral therapy to treat PNH [a rare blood disease] in a trial involving 16 patients. Today, they are treated mainly by injectable therapies. The trial results suggest that the company’s oral factor D inhibitor could play a role in treating a lot of diseases where factor D is a key player. BioCryst has a $2.7 billion market cap. It is trading at $15. Our price target is $20. This is a company that some of Chris’ companies should be looking at.
Chris, take notes. Ziad, where do you see value today?
Bakri: I’ve got four companies, connected by a theme. All are platform companies. They are a bit bigger than Liisa’s companies, and we believe they are capable of becoming much bigger over time. The theme is investing in companies with A-plus management teams. Also, unintentionally, they all start with the letter A: Acceleron Pharma (XLRN), Ascendis Pharma (ASND), Alnylam Pharmaceuticals (ALNY), and Argenx (ARGX). Acceleron has one drug approved, Reblozyl, to regulate TGF-B [transforming growth factor beta]. This is a complex, poorly understood area of biology implicated in many different diseases. Acceleron partnered on the drug with Bristol, and gets royalties of 20% or so on sales. Bristol has said this could be a $3 billion to $4 billion drug, longer term.
Acceleron’s second drug is sotatercept, a treatment for a life-threatening disease called pulmonary arterial hypertension, or PAH. This is a $5 billion to $7 billion market today. The drug seems to work on patients who aren’t doing well with other PAH drugs. I expect that the Phase 3 data will look good, and that this could become a multibillion-dollar drug. In the pipeline are other drugs to treat severe conditions whose biology is related. In 2016, Johnson & Johnson (JNJ) bought Actelion, a company specializing in PAH treatments, for $30 billion, to give you an idea of the value that can be generated in this space.
Next, Ascendis is developing a drug-delivery platform that modulates the rate at which drugs pass through the body. Its first focus is on hormones. It has one drug approved: a long-acting formulation of human growth hormone. It will be a decent-size drug, not a huge one, but that’s not why I love the company.
What else is in Ascendis’ pipeline?
Ascendis is developing a drug for hypoparathyroidism, a hormone-deficiency condition that has severe impacts on bone and cardiovascular health. This drug is best-in-class and could become a blockbuster. The third, an earlier-stage drug for dwarfism, has a good chance of working. This is a scarce platform company that can replicate its success with multiple drugs, and whose management team is capable of growing Ascendis into a much larger company over time.
Alnylam, my third pick, is pursuing a technology that’s kind of the opposite of Moderna’s. Messenger RNA sends instructions to cells to make certain proteins. Alnylam’s technology, RNA interference, or RNAi, turns off the production of certain proteins. Alnylam is probably the most innovative company in this space. It has launched three wholly owned drugs targeting rare diseases that are generating hundreds of millions of dollars in annual sales. Now, the company is going after more-common diseases and conditions, including high cholesterol, in partnership with Novartis (NVS), and high blood pressure. Soon, we may be able to deliver RNAi drugs for the masses. It could become a commonly used modality.
What is the case for Argenx?
Argenx, my last name, is building a platform based on FcRn inhibitors, a new class of drugs to treat autoimmune diseases. The company’s drug is efgartigimod. The category is a race between two players: Argenx and Momenta Pharmaceuticals, which was acquired last year by Johnson & Johnson for about $6.5 billion. Argenx has a market cap of $16 billion. Efgartigimod could become a multibillion-dollar drug, like AbbVie’s Humira, which treats rheumatoid arthritis.
Efgartigimod’s end-markets have been de-risked by IVIG, a product derived from blood donors that is meaningfully supply-constrained, yet still sells about $6 billion annually in many of the same autoimmune conditions. Argenx is in trials for six different disease indications, and its drug could potentially be used in more than a dozen diseases over time, potentially making it a megablockbuster. Argenx has a top-tier management team that is already scaling the company globally, in advance of efgartigimod’s first launch in Myasthenia Gravis next year.
Stephen, Flagship has ownership stakes in public and private companies. What are some of the companies that investors ought to watch?
Berenson: I’ll stick with some of our private companies, which may become public companies in the future. Laronde operates in the field of translatable RNA medicines. There is a broad landscape of RNA-based medicines, as we’ve heard today. The company focuses on eRNA [Endless RNA]. Based on the data we have, it can generate persistent protein expression over prolonged periods of time. It can be repeatedly redosed, and can be dosed by multiple different routes of administration. Laronde just raised $440 million in Series B financing. We’re super-excited about the company’s prospects.
Flagship didn’t invest in the creation of a first-generation gene-therapy company. There were a lot of challenges associated with the field. Instead, Ring Therapeutics, another of our companies, is creating a new class of viral vectors to be used in gene therapy and a wide range of other modalities. Its technology is based on a barely studied class of viruses called anelloviruses, which are commensal; they live inside us but cause no harm. Ring has been able to turn them into viral vectors. All of the data so far show no innate immunity in the population. We believe we can re-dose patients, which is hard to do with AAV-based vectors, and we are seeing meaningful hints of tropism—that is, we could direct these vectors to specific tissues in the body. This could be a paradigm-changing company in the gene-therapy space.
The final company I’ll mention is in agriculture/sustainability, which accounts for 20% of our portfolio. Inari creates seeds harnessing two things we’ve discussed today: advanced computational tools for predictive design and multiplex gene editing. The company’s seeds aim to dramatically enhance crop yields, while requiring the use of far fewer resources—water, nitrogen, and such—to grow crops than seeds that are available today. The seed business is dominated by a handful of players. We like our prospects of bringing disruption to the industry.
Washington plays a big role in the healthcare sector, whether the subject is drug pricing or Medicare expansion. What are the key regulatory and legislative issues that healthcare investors need to follow?
Schott: Little has happened on healthcare over the past 20 years. We’ve had the creation of Medicare Part D drug coverage in 2003 and the passage of Obamacare in 2010, but not much since then. Will we meaningfully change the reimbursement model for drugs purchased through Medicare by going to reference pricing? Going down that path is hard to do, especially given the current makeup of Congress. Practically, we are expecting incremental changes. It is easy to propose changes to the healthcare system, but difficult to legislate and implement them.
Bakri: It is impossible to know what politicians will do. Thus, our North Star is that truly innovative medicines addressing serious unmet medical needs will almost always get paid for. One thing to watch is the concept of inflation caps on drug prices, which would prevent drug companies from raising prices well in excess of the annual inflation rate. That makes sense.
Schott: We don’t see a lot of companies taking those price increases anymore. In the past few years, there has been almost a willingness on the part of large drug companies to acknowledge that they have to contribute a little more.
Bayko: The price increases that we consider normal now are very different from those of several years ago. They are all more modest. I don’t expect draconian legislation around drug pricing. Also, innovation can help to control pricing, as we’ve seen in other areas. In Car-T [T-cell therapy targeting blood cancers], for example, so many companies are going after the same targets with somewhat similar kinds of outcomes and efficacy that competition will force prices down.
Bakri: People say that market forces don’t exist in healthcare, but that’s not true. Consider the controversy around Aduhelm. It is expensive, there are questions around its efficacy, and payers are restricting who gets it.
Berenson: I come back to Ziad’s point about innovation. We are in the business of creating innovative medicines to go after unmet medical needs. My hope is that as regulators try to correct some of the obvious wrongs in pricing, they don’t harm the biotech industry in a fundamental way. This industry is a national treasure.
What is the best case for investing in healthcare now?
Bakri: We have already solved so many difficult problems. We have landed men on the moon. We’ve mapped the world with Google and connected it with Facebook. This is the century of biology. We are finally seeing the confluence and optimization of a number of different technologies that will allow us to ameliorate and cure many diseases.
Berenson: We also think of this as the biological century. Biology is in transition from an empirical science of trial and error to an engineerable science with much more predictable and scalable outcomes.
Bayko: To reiterate, we are witnessing the Industrial Revolution in biotech. As we accelerate the application of new and innovative tools, we will see an acceleration in value creation. Products will come to market faster, for less money, and with fewer failures. This is the healthcare version of Moore’s Law.
Schott: The innovation cycle of the 1990s created multiple hundred-billion-dollar-market-cap companies. Another wave of valuable businesses is being created today. Hopefully, in eight or 10 years, there will be multiple Modernas.
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