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Health Care
The health care breakthrough that’s not an obesity drug
Rich Wolf
Equity Portfolio Manager
Christopher Lee
Investment Analyst
Judith Finegold
Equity Investment Analyst

You’ve heard of computer hacking, now meet gene hacking. In an age of remarkable health care innovation, scientists are manipulating human DNA to find new ways to treat diseases.

They have moved from the lab to the real world with a treatment for the life-shortening disease sickle cell — the first approval based on a revolutionary gene-editing technology known as CRISPR.

“Whether it’s biotechnology or medical devices, there has always been an important moment that has changed how investors view a new technology or therapy. It could be one major success or a series of successes, and we are seeing pockets of that now across health care,” says Rich Wolf, equity portfolio manager. 

Gene editing is set to expand over the next decade

The bar chart shows the worldwide market potential for CRISPR in billions of U.S. dollars in 2023, as well as the projected market in 2033. In 2023, the potential was $2.4 billion, and in 2033 it is projected to be $32.9 billion, or 30% average annual growth.

Source: Statista. As of January 2023. CRISPR stands for "clustered regularly interspaced short palindromic repeats."

Novo Nordisk’s and Eli Lilly’s weight loss drugs, originally developed for the treatment of diabetes, are prime examples. The drugs, sold under the brand names Ozempic, Wegovy and Zepbound, could reshape industries beyond healthcare.

Meanwhile, cell and gene therapy companies are forging their own paths. These therapies can modify, replace, activate and disable genes. And rather than outright change human DNA, some companies are working on ways to moderate or fine-tune how they are expressed.

“Approvals for genetic disorders based on a single gene such as sickle cell are just the beginning for gene-editing therapies,” Wolf says. “There will be more to come, but it won’t be a linear progression. We need to see these technologies work for diseases that affect a wider patient population. There’s a lot of wood to chop before that happens, but I believe we will get there.”

The science and the share price

Biotech investing is notorious for hype not quite meeting reality. More recently, the Federal Reserve’s monetary tightening policy siphoned capital away from more speculative investments like biotech.

Many companies were also caught flat-footed as demand for pandemic-era innovations such as vaccines, dropped faster than projected, adds Wolf. “There was tremendous excitement over anything that was going to treat the pandemic, and valuations spiked in a big way. The bubble has since burst, particularly for companies with their revenue potential tied to the pandemic.”

Health care stocks appear undervalued relative to the broad market

The line chart shows relative price to earnings valuations for the MSCI USA Health Care, MSCI USA Pharmaceuticals and MSCI USA Health Care Services Providers versus the MSCI USA Index. The period shown is from January 2019 to April 24, 2024. For MSCI USA Healthcare, the relative P/E valuation was negative from January 2019 to November 2022 before briefly hitting 4.7% in December 2022 and then falling back to a range of –10.8% to –2.8% in January 2023 to April 2024. For MSCI USA Pharmaceutical, the relative P/E valuation was negative from January 2019 to April 2024, with a trough of –40.3% in February 2022. As of April 2024, the relative valuation was –9.3%. For MSCI USA Health Care Services Provider, the relative P/E valuation was negative from January 2019 to April 2024, with a trough of –46.3% in August 2020. As of April 2024, the relative valuation was –31.7%.

Sources: Capital Group, MSCI. Relative valuation is the ratio between the forward 12-month price-to-earnings (P/E) ratio of health care-related sectors and the MSCI USA Index. P/E for a stock is computed by dividing the price of a stock by the company’s annual earnings per share. A value below zero indicates that health care is relatively undervalued. As of 24 April, 2024.

Nevertheless, it is an industry that long-term investors cannot ignore. Health care spending in the United States reached $4.5 trillion in 2022, according to the Centers for Medicare and Medicaid Services, or 17.3% of US GDP. Valuations have improved for industries within health care. Since the start of 2024, investors have returned to health care stocks. And if interest rates decline, that could support continued capital flows into the industry.

When you are on the cutting edge of science, there will always be failures. Significant hurdles remain for widespread adoption of cell and gene therapies, and health care investing is a decades-long endeavour. “The framework I follow considers the potential future earnings and the probability of success. In the case of biotech, I like to start with small allocations, which I’ll add to once the technology passes the threshold of helping a larger patient population or disease,” Wolf explains.

Biotech charges forward

Health care companies are racing to define how diseases are treated. Cell and gene therapy companies — including Vertex Pharmaceuticals, Gilead Sciences and Amgen — are going after the same diseases that weight loss drugs are targeting in the kidney, liver and heart, as well as cancers, autoimmune disorders and others.

Companies are developing cell and gene therapies for many diseases

Alt text: The image is a table listing pharmaceutical companies working on cell and gene therapies and the various diseases they are targeting. AstraZeneca, which is based in the United Kingdom and has a market capitalization of U.S. $233 billion, has target indications including rare diseases and metabolic disorders. Novartis, which is based in Switzerland and has a market capitalization of U.S. $233 billion, has target indications including rare genetic diseases. Roche, which is based in Switzerland and has a market capitalization of U.S. 168 billion, has target indications including hemophilia, Huntington’s, spinal muscular atrophy and ophthalmology. Amgen, which is based in the United States and has a market capitalization of U.S. $144 billion, has target indications including oncology and rare diseases. Pfizer, which is based in the United States and has a market capitalization of U.S. $143 billion, has target indications including single-gene defects, neuromuscular and hematologic diseases. Vertex, which is based in the United States and has a market capitalization of U.S. $102 billion, has target indications including cystic fibrosis, sickle cell disease and blood disorder beta thalassemia.

Sources: Capital Group, MSCI, Drug Discovery & Development. Company examples include constituents of the MSCI All Country World Pharmaceuticals, Biotech and Life Sciences Index that fall within the top 15 largest companies by market capitalisation and have gene editing and cell engineering candidates in current development as of March 10, 2023. Market capitalisations as of 25 April, 2024.

In the case of cell therapy, cells are modified outside the body and then infused into patients. One specific type is commonly known as CAR-T, which has gained approval to treat certain blood cancers. CAR-T stands for chimeric antigen receptor, with the T referring to a type of immune cell modified to find and destroy cancer cells.

Current CAR-T treatments use a patient’s own cells and are limited by the long, complex journey involved for patients, manufacturing challenges and high costs. “Treatments may become more accessible and safer as scientists develop off-the-shelf techniques derived from unrelated donor cells,” says biopharmaceuticals and biotechnology analyst Christopher Lee. “Additionally, I believe companies will go beyond using T-cells and incorporate other types of cells over the next decade.”

Another area of cell engineering is focused on modifying stem cells to replace missing or defective cells. For example, Vertex aims to cure Type-1 diabetes by transplanting insulin-producing cells into the pancreas, a program currently in human clinical trials.

Yet another promising innovation is RNA-interference (RNAi). This technology allows companies to create highly specific therapies that turn off the production of proteins that cause disease. Biotech company Alnylam is currently developing programs in areas such as heart failure, hypertension and Alzheimer’s.

“The idea that you’re not irreversibly changing the DNA is compelling, but like most health care innovation, safety is paramount,” says equity analyst Judith Finegold, who focuses on US-based biopharmaceuticals.

Every patient population has a different risk profile. “There are programs underway to irreversibly gene edit your liver to treat high cholesterol, and in 15 years that could be the answer, but we need to really understand the safety profiles for drugs because having high cholesterol is not a death sentence,” she adds.

Rich Wolf is an equity portfolio manager. He also has equity investment analyst responsibilities covering U.S. medical technology companies and REITs. He holds a PhD from the California Institute of Technology and a bachelor's degree from Princeton.

Christopher Lee is an investment analyst at Capital Group with research responsibility for U.S. pharmaceuticals and biotechnology. He has 15 years of investment industry experience, and has been with Capital Group for eight years. Prior to joining Capital, Chris worked as a portfolio manager/analyst at Franklin Templeton. He holds a doctor of medicine degree from Columbia University-College of Physicians and Surgeons and a bachelor's degree in molecular biophysics and biochemistry from Yale University. Chris is based in Los Angeles. 

Judith Finegold is an equity investment analyst at Capital Group with research responsibility for biotechnology and pharmaceutical companies in the US. She has six years of investment industry experience and joined Capital in 2021. Prior to Capital, Judith worked as a research analyst and portfolio manager at Fidelity International. Before that, she was a doctor within the NHS. She holds a PhD from Imperial College London, an MBA from INSEAD and a degree in medicine from the University of Cambridge and University College London. Judith is based in London. 

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