Life Sciences encompass all the scientific disciplines that study living organisms, including biology, biochemistry, genetics, and microbiology.
It can often be conflated with Biotechnology or Biotech which has a reputation in the investment world for being volatile.
At Federated Hermes we look beyond short-term market moves and see significant long-term investment potential among the companies that are involved in the making of biologic drugs.
In contrast to chemically-synthesized drugs, biologics can be composed of sugars, proteins, nucleic acids or complex combinations of these substances, or may be living cells or tissues. They are isolated from a variety of natural sources- human, animal or micro-organism.1
The complex biologic drugs that are taking centre-stage in pharma pipelines require different discovery and production techniques from traditional medicines. We see opportunities among a wide range of companies exposed to production, for example Contract, Development and Manufacturing Organisations (CDMOs) and consumables producers, as well as specialist tools and equipment manufacturers, who are exposed to research & discovery efforts.
In this piece we discuss why an investment into the Life Sciences sector – which sits at the cross hairs of demographic shifts, technological advancements, and societal needs – makes for a compelling long-term investment opportunity.
1. Secular drivers of growth remain intact
a) Population growth
The global population has more than tripled from an estimated 2.5 billion people in 1950 to 8.0 billion in November 2022. United Nations estimates project it to reach 9.7 billion in 2050 and nearly 10.4 billion by the mid-2080s2, while life expectancy is also increasing.
This population growth, coupled with longer lifespans, creates a larger middle class and a sizable aging population, creating more strain on health systems as elderly people will require more spending per capita.
b) Tool & equipment intensity
Developing new medicines now requires advanced tools and equipment which has raised the bar for industry standards and expectations.
With low-hanging fruit already taken, pharmaceutical companies must invest more in research and development (R&D) to be successful.
This was evidenced in the thirteenth annual report from Deloitte’s Measuring the return from pharmaceutical innovation series which estimated that the average cost of developing a drug, including the cost of failure, increased from US$1,986m in 2021 to US$2,284m in 2022.
So, while big pharmaceutical companies face higher costs and lower returns on their R&D investments, third party companies are providing support to the well-known ‘headline’ pharma names.
These companies, which provide the necessary tools and equipment to facilitate the development process, are well positioned to benefit from the increased demand.
c) Capitalising on the Biologics revolution
By capitalising on the biologics revolution, pharmaceutical companies can overcome some of the barriers posed by high R&D costs and regulatory hurdles, while also addressing the increasing demand for innovative therapies in an ageing and expanding global population.
Several new modalities illustrate the profound impact biologics are having on the industry.
For instance, mRNA vaccines have revolutionized our approach to infectious diseases, as seen with the rapid development of Covid-19 vaccines by Moderna and BioNTech.
Gene therapies have made significant strides in treating previously incurable genetic disorders while Monoclonal antibodies are playing a pivotal role in treatments in oncology, providing targeted therapy for various cancers with substantial success rates.
These examples underscore the dynamic and rapidly evolving nature of biologics, highlighting the sector’s potential for groundbreaking therapies and substantial investment opportunities.
We look beyond short-term market moves and see significant long-term investment potential among the companies that are involved in the making of biologic drugs.
2) Sector rebounding as headwinds abate
While the shift towards biologic drug production has been in play for a decade, the sector was hit by a spate of headwinds in 2023.
Higher interest rates led to a drying up of biotech funding, recession in China led to a collapse in demand there, IRA regulation changes in the US led to a pause in big pharma spending, and the post-Covid spending ‘hangover’ was still evident.
All of these headwinds are now ameliorating:
- Biotech funding was back to record levels in H1 2024
- China is providing stimulus for the sector. It forms a core of the latest 5-year plan and a national strategic priority.
- Covid headwinds have now fully faded away.
- Big pharma is spending again as the impacts of IRA are now clearer.
- The Biosecure Act is a clear positive for Western players in the value chain as well.
With clarity on these issues emerging, the challenges are subsiding and the sector is rebounding.
3) A ‘Cambrian explosion’ in drug R&D
Over the past decade advances in computing power, technology and our understanding of biology have combined to open up entirely new realms for drug research.
This has led to a ‘Cambrian explosion’ in early-stage drug discovery and the increased use of biologics to treat a variety of medical illnesses and conditions.
Unlike conventional or ‘small-molecule’ drugs, biologics can target very specific parts of the body, like certain cells or proteins. This means they can be very precise in how they treat diseases.
This precision of course requires more advanced tools and equipment – providing the companies that offer access to them with a healthy revenue pipeline.
4) Positive societal outcomes
The Life Sciences sector aligns well with the UN’s Sustainable Development Goals.
In fact, an investment into CDMOs and equipment manufacturers plays a crucial role in reducing drug discovery and delivery costs, aligning with UN Sustainable Development Goal 3: Good Health and Well-being.
While the Covid-19 pandemic and other crises have impeded progress in tackling treatable illnesses like tuberculosis and malaria, diagnostic companies are using their tools to tackle these public health challenges directly which aids the UN’s goal of promoting ‘healthy lives for all’.
Biologics have already had a huge impact on treatment for cancer, inflammatory and immunological disorders as well as infectious diseases. Research in the sector continues to advance understanding of all these areas as well as others such as gene therapy.
As the global population expands and ages, healthcare systems will be increasingly under pressure. We see biologics as a vital tool to address this challenge.
To learn more about our Sustainable Global Equity Strategy, please click here.
