| Hi there, Chris Wood here, with some more exciting biotech news. Since I first wrote you a few weeks ago, we’ve seen six more biotech IPOs that collectively raised over $3.1 billion. On their very first trading day, they posted an average gain of 43.3%! There have now been more IPOs in biotech this year than in all other industries combined. We don’t recommend chasing IPOs, but it’s worth paying attention to these newly listed stocks. That’s because an IPO is a common exit strategy for venture capital investors. A VC firm may get 1,000 deal offers a year but only invest in about 10 early-stage companies. It fully expects that only one or two of these investments will create all of the returns, while the rest will fail. Most of the recent biotech IPOs are the success story of a VC investment made several years ago. For that reason, we need to pay attention to what venture capital is investing in today. Market research firm CB Insights analyzed thousands of firms and identified the top-performing VCs for investing in healthcare in order to create its “Healthcare Smart Money” list. The major healthcare winners of the next decade will likely emerge from this slate of companies. These are the areas the world’s best healthcare investors have been putting their money into over the last five years: Image Source: CB Insights Biopharmaceuticals is by far the biggest category for the Healthcare Smart Money investors, accounting for 55% of all deals since 2015. Here’s why the team at CB Insights thinks this is the case: The skew is likely explained by the high-risk, high-reward nature of investing in biopharma… the payoff for a “home run” biopharma investment can be substantial. Therefore, Healthcare Smart Money VCs may be disproportionately investing here to improve their chances of backing a successful drug. Within the biopharma category, VCs made most deals in small-molecule drugs (classified as “pharmaceuticals” by the FDA). However, the research firm noted, the smart money deal flow into small-molecule drugs may have peaked in 2018. Biologics (drugs made with components of living organisms) have attracted more capital than small molecules recently. In 2019, deals centering on DNA- and RNA-based therapeutics jumped by 78%. It makes sense, because over the past few decades, our scientific knowledge and technological advances around genetics have advanced exponentially. Thanks to big data, artificial intelligence (AI), and significant progress in computing power, the drug industry is undergoing a digital transformation from a “one-size-fits-all” model to a new era of precision medicine. Conventional drugs are designed and developed with the average human in mind. The idea is to treat the most people possible. Problem is, there is no theoretical “average” person. So in reality, drugs don’t work the same in everyone, or even most people. An estimated 90% of the current conventional top-selling drugs only work for 30%–50% of patients. Even worse, due to the side effects and adverse reactions from these drugs, 30% of patients end up in the hospital every year. But now, the biotech industry is harnessing the power of technology to create a new class of modern medicines. These are the three top areas of innovation that will play a vital role in the new paradigm of precision medicine: Personalized Medicine: It uses a distinct health profile for medical treatments tailor-made for individual patients. Personalized medicine is changing how drugs are discovered and developed, how patients are diagnosed and treated, and how healthcare resources are channeled to maximize patient benefits. Genetic Engineering: The Human Genome Project, which officially completed in April 2003, took 13 years and nearly $3 billion to sequence one person’s DNA. Today, one machine can do all that work in a few hours for about $800. And it’ll only get cheaper and faster. This tech breakthrough has boosted our knowledge of genetic disorders and our ability to treat them with gene-based therapies. Gene editing has the potential to cure the 6,000 genetic diseases we know of (and all the ones we don’t know of) in one shot. This will upend the economics of traditional therapy and destroy the business models of traditional Big Pharma companies. Regenerative Medicine: This used to simply mean organ transplants, but it has greatly expanded. Today, it involves restoring the structure and function of damaged tissues and organs through stem cell therapy, 3D bioprinting, and implantable medical devices. The field of regenerative medicine tackles some of the greatest medical challenges we face—and the goal is to cure previously untreatable injuries and diseases. The potential for humans to live longer and healthier lifestyles has enormous social and economic implications. Rapidly aging populations in most developed countries accrue huge, unsustainable healthcare costs. This is one of the biggest problems our civilization faces, and regenerative medicine may be the answer. This is all for our biotech series, but we will be continuing the conversation... so watch for an email from us tomorrow! Best, Chris Wood
Chief Investment Officer Healthcare and Biotech
Mauldin Economics | 