Investment trend: chronic care to cures
Gene therapies, considered one of the fastest growth areas in biotech, look set to disrupt the healthcare sector for years to come. Amanda Birdsey-Benson and Matthew Jenkin, managers on the BNY Mellon Smart Cures Innovation strategy, explain what makes up their universe.
Long before mRNA entered our global consciousness, Mellon managers Amanda Birdsey-Benson and Matthew Jenkin were following the pioneering researchers utilising such techniques. Genetic treatments and the science behind them represent a rapidly developing field of biotechnology that will drive growth for decades, according to the duo. It is this thesis behind the creation of the newly launched BNY Mellon Smart Cures Innovation strategy.
The strategy’s universe encompasses companies developing gene therapy, gene editing and gene modulation, as well as those companies that help fuel the development of these drugs. “Genetic treatments are powered by remarkable advancements in science and represent some of the most potent drugs seen to date,” the pair say.
For many, Covid-19 heralded advancements in vaccine creation never seen before. However, while the pandemic marks the first time mRNA technology has been used as a vaccination technique, it has been studied for some time. Its debut was previously slated for trials against rare diseases, says Birdsey-Benson.
Many rare diseases, she says, have no existing therapies and as such there has been a real push from the US food and drugs regulator, the FDA, for companies to focus research in this area. Although, as Jenkin points out, rare isn’t as rare as one might think. He notes there are more than 300 million people worldwide living with one or more of the 6,000 plus identified rare diseases, noting 72% of these are genetic.
Jenkin adds: “We see this theme as biotech 2.0 – the move from chronic care to the development of cures. We think it will not just disrupt the biotech industry but will outpace the larger healthcare sector.” At the moment this sector might be focused on rare diseases but as it develops, the technologies it creates may be used against more common diseases such as diabetes or Multiple Sclerosis in the future, he says.
Over a year ahead of the strategy’s launch, she and Jenkin were running a paper portfolio, investing in what they call clinical pioneers – biotech firms attempting to demonstrate clinical proof-of-concept of a therapy. They have been analysing these alongside what the duo classify as ‘supporting cast’ companies, those with specialist expertise to help facilitate the clinical pioneers in getting their findings to a resulting treatment. This includes pipeline companies such as the provision of specialised supplies, manufacturing, filtration and purification. It is the latter bucket where the strategy is most exposed to in the production of the Covid-19 vaccines, Jenkin says, rather than in the names creating the therapies.
The smart cures strategy is typically divided across these two groups – pioneers and supporting cast – on a 60/40-40/60 split. As of 10 December the strategy was weighted 56% to the pioneers and 44% in ‘supporting cast’ companies.
Given generic therapies are largely still at the trial stage many companies in Birdsey-Benson and Jenkin’s universe can be small and currently unprofitable. Balancing between the more mature, profit-making biotechs and the small- versus mid-sized players is important, the two comment. Jenkin says on the pioneer side the companies can be small to mid-sized (classed as between US$5-20bn) but notes they will get bigger as they succeed.
Meanwhile in the ‘supporting cast’ part of the strategy, the companies can be mid-to-large caps. For larger companies, being a partner in the creation of a genetic drug is just a small part of their overall business, albeit, potentially the fastest growing part, he adds. Companies in the ‘supporting cast’ can also be quite acquisitive, making this area rife with M&A opportunities, Jenkin comments.
A growing universe
Birdsey-Benson and Jenkin, along with two other members of the strategy’s management team, analyse and curate biotech and other healthcare companies to discern the investible players in their genetics universe. At launch the strategy, which typically holds 30-40 stocks, had a universe of 154 names but the managers believe it will continue to expand as it matures.
What determines whether a company is considered for inclusion in this universe is based on their material exposure to gene therapy. For example, if a company has less than 20% of its revenue tied to gene technologies, it would have “low materiality” for inclusion in the strategy; such revenue connections above 30% would be considered high.
Yet some of the smaller companies in their universe have yet to make a profit so how can materiality be proven? Birdsey-Benson says for those it comes down to an assessment of what percentage of future revenues are likely to be connected to gene therapies and that can be based on the work they are currently undertaking.
When it comes to more mature, revenue-generating companies, Birdsey-Benson and Jenkin weigh up how advanced a clinical pioneer is in its research, given the impact it can have on its valuation. The Mellon managers say there is more value to be seen in companies at the phase three trial stage. To spread the risks based on company, and research maturity, the strategy has the lowest weighting in pre-clinical trial stages with a higher exposure to those in phase three trials.
Although their universe is global, as of December 2020 the smart cures strategy was some 80% skewed to the US. The duo say that is where they currently see the opportunities and note it is also easier to curate their universe from familiar names. As the industry grows, so too will opportunities further afield, pointing to China as a potential innovator in this field.
The universe – as of 30 September 2020
Source: Mellon as at 30 September 2020.
mRNA is used in some of the first Covid-19 vaccines. RNA is a molecule similar to DNA, only single-stranded. There are different types of RNA. Messenger RNA (mRNA) corresponds to the genetic sequence of a gene and is used by the body in the created of proteins, which in turn are used to fight illness or disease.
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
The value of investments can fall. Investors may not get back the amount invested.
Smart Cures Innovation Companies Risk: The value of securities of Smart Cures Innovation Companies may be negatively impacted by greater government regulation and risks associated with innovative, developing medical treatments and technologies, testing (trial outcomes), non-harmonised global regulatory requirements, competitive pressures and intellectual property. The strategy’s value may be subject to greater risks and market fluctuations than if it invested in a broader range of economic sectors.
Currency Risk: This strategy invests in international markets which means it is exposed to changes in currency rates which could affect the value of the strategy.
Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices.
New Fund Liquidity Risk: This strategy is not expected to hold investments which would be considered illiquid, however, while the strategy is being established, it is possible that the liquidity profile of the strategy may fluctuate.
Market Capitalisation Risk: Investments in the securities of small to medium-sized companies (by market capitalisation) may be riskier and less liquid (i.e. harder to sell) than large companies. This means that their share prices may have greater fluctuations.
Volcker Rule Risk: The Bank of New York Mellon Corporation or one of its affiliates (“BNYM”) has invested in the Fund. As a result of restrictions under the “Volcker Rule,” which has been adopted by U.S. Regulators, BNYM must reduce its shareholding percentage so that it constitutes less than 15% of the strategy within, generally, three years of the strategy’s establishment (which starts when the strategy’s manager begins making investments for the Fund). Risks may include: BNYM may initially own a proportionately larger percentage of the strategy, and any mandatory reductions may increase strategy portfolio turnover rates, resulting in increased costs, expenses and taxes. Details of BNYM’s investment in the strategy are available upon request.