Research

A Blockbuster Drug, an Innovative Business Model and New Treatments Could Fuel Growth in the Biotech Industry

Salim Syed
Senior Biotechnology Equity Research Analyst
April 22, 2021

Thanks to scientific advances, new therapies for a variety of difficult-to-treat diseases could potentially be on the horizon. For investors who have long viewed biotechnology stocks as one of the best sources of long-term growth, these breakthroughs could make the sector even more compelling.

Three key developments currently playing out in the biotech industry could help propel the sector for years to come—and warrant close monitoring by investors.

A pending decision on Biogen’s new Alzheimer’s treatment

On June 7, the U.S. Food and Drug Administration (FDA) will announce whether it has approved Biogen’s new drug for the treatment of Alzheimer’s disease, aducanumab. Approval would be a blockbuster event for the industry, and a major breakthrough for the nearly 50 million people worldwide who suffer from the disease or related dementia.[1]

Aducanumab would be the first new drug approved for Alzheimer’s in decades. While other drugs treat symptoms of the disease, Biogen’s treatment would be the first to address what some believe to be its root cause. The pending approval is not without controversy, though. Clinical results have been inconclusive. An advisory committee to the FDA recommended against approving the drug, but the final decision rests with the agency.

Regulators are now in a tricky position. The initial handling of the COVID-19 pandemic weakened public confidence in governmental scientific institutions, and the FDA is in a credibility-restoration mode. Signing off on Biogen’s controversial drug over the advisory committee’s recommendation could raise questions about the approval process.

Whatever the FDA decides in June, the ripple effects will be significant for patients, biotech companies, and investors. Aducanumab offers massive upside potential for Biogen’s stock, and almost as much potential downside if the drug isn’t approved.

The emergence of a new portfolio-based business model

Relying on the success of one product or technology is a major risk for biotech firms—especially small- and mid-sized biotech companies that have traditionally focused on effectively a single drug, treatment, or technology. About five years ago, a new business model emerged that now appears to be gaining steam. Companies like BridgeBio, Centessa, LianBio, Maze, Orange Grove Bio and TrialSpark are taking a portfolio approach. They’re simultaneously exploring treatments for multiple diseases, using a variety of technologies, and making their solutions available through a range of treatment modalities, such as pills, injections, topical treatments, or gene therapy.

Many investors who typically provide capital to fund biotech firms’ expansion and growth are comfortable supporting a specific interest; however, companies with a more diverse business portfolio may attract investors that typically don’t get involved in the single-platform biotech scene. A diverse portfolio removes some of the investor risk, as often times the various assets in the portfolio are uncorrelated to each other.

One potential investor drawback is that the portfolio approach typically requires more funding. These companies require more cash as various portfolio assets are developed at the same time. This new business model may also make sourcing assets from universities or research institutions more competitive as often times those relationships are not exclusive to one company.

The single-platform approach isn’t going away, to be clear, as the majority of biotech companies will still focus on it, and it holds advantages of its own (e.g. speed to set up, singular focus and domain expertise, and easier to exit). The biotech world is just now witnessing the emergence of an alternative model.

Promising new treatments for an array of diseases

Above all, the pace of innovation in the biotech industry continues to accelerate. Over the next several years, we could see a flurry of new treatments for a range of illnesses.

With the work of Assembly Biosciences and other firms, hepatitis B might become curable in the same way hepatitis C was after Gilead Sciences won approval for the drug Sovaldi in 2013. Atara is among the companies that could bring to market a drug that would significantly raise the quality of life for patients with multiple sclerosis. Nkarta and others are working on ways to harness the immune system’s natural killer cells, which could provide treatments for blood cancers such as leukemia and perhaps even solid tumors. Cardiovascular diseases could see promising new treatments, including a therapy for amyloidosis from BridgeBio and for hypertrophic cardiomyopathy, a complex type of heart disease, from Cytokinetics.

Of course, not every company will be able to deliver on the promise of a new drug or technology. This is the nature of biotech and inevitably, winners and losers will emerge. Still, unlike other industries, which can sometimes be influenced by seemingly random events, success in biotech ultimately comes down to solid research and concrete data that show whether a new therapy works. For growth-oriented investors looking to diversify beyond technology stocks, the biotechnology sector could offer secular opportunities that might be difficult to find anywhere else.

[1] https://www.alzheimers.net/resources/alzheimers-statistics

 
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