18 BARRON’S September 30, 2019
in and profit from them, too.
Themembersofourbiotechpanelinclude:Gbola
Amusa,directorofresearchandheadofhealth-care
research at Chardan Capital Markets, a boutique
investmentbankfocusedonhealth-careinnovation;
Ziad Bakri, manager of the $12.5 billion T. Rowe
PriceHealthSciencesfund(ticker:PRHSX),rated
fivestarsbyMorningstar;EliCasdin,founderand
chief investment officer of Casdin Capital, a New
York-basedinvestmentfirmfocusingonlifesciences
andhealthcare;DavidSchenkein,generalpartner
at GV, the venture-capital arm of Alphabet
(GOOGL),andco-headoftheGVlife-scienceinvest-
ment team; and Gena Wang, director of biotech
equityresearchatBarclaysandaresearchanalyst
covering U.S. small- and mid-cap biotech stocks.
Amusa,Bakri,andSchenkeinallarephysicians;
Wanghasadoctorateinmolecularandcellbiology,
and Casdin is a longtime investor in the sector.
In biotechnology, and biotech investing, hope
and hype intertwine like the strands of a double
helix.Ourroundtablepaneliststeasethemapartin
the edited conversation below.
Why have many investors soured on biotech,
and what might rekindle their enthusiasm?
Ziad Bakri: If you looked back to the period from
2011 to 2016, when biotech stocks were in favor,
you would see a number of tailwinds to the
sector. There were high-profile scientific break-
throughs and high-profile, highly successful drug
launches—for hepatitis C and multiple sclerosis,
for example. There were also some high-profile
acquisitions in the industry. At the same time,
the regulatory pendulum was swinging; the Food
and Drug Administration was getting more le-
nient and approving more drugs faster, and the
payer environment was becoming more favorable.
At the beginning of that period, biotech stocks
had low valuations, and there had been years
with a dearth of new stock issuances.
Fast-forward to today, and many of the big
tailwinds have moderated. There have been
some high-profile scientific failures—in the Alz-
heimer’s arena, for example. The payer environ-
ment is more stringent, and the regulatory envi-
ronment, while still reasonably lenient, is
getting a little tougher. There have been hun-
dreds of new biotech initial public offerings, and
the stocks no longer have a pricing tailwind.
But I don’t want to paint too bleak a picture;
things aren’t that bad. There’s still a good envi-
ronment for new stock issuance. It is a tougher
environment for larger companies trying to
replicate their past success.
David Schenkein: Two things haven’t changed.
The scientific knowledge and breakthroughs
that we’re seeing across therapeutic areas, in
both treatment modalities and our understand-
ing of the biology of disease, continue to break
open at a pretty incredible pace. Also, the regu-
latory environment is still much more favorable
than it was a decade ago.
Eli Casdin: There are lots of reasons to be ex-
cited, beginning with the dramatic innovation
taking place, a supportive FDA, and a new gen-
eration of entrepreneurs, operators, and manag-
ers born of some of the most successful compa-
nies in the space, such as Genentech, Biogen
[BIIB], Amgen [AMGN], and Gilead Sciences
[GILD]. The people behind the endeavor are the
biggest predictor of success. Science and technol-
ogy are only a part of the equation, and great
people can do a lot with mediocre assets, just as
poor managers can destroy the value of even the
best science and technology.
That said, biotech remains a market of specu-
lators and event-driven strategies. Most biotech
investors continue to focus on the next data-
driven catalyst, obscuring the longer-term
growth potential of a company. Until the sector
evolves into being viewed with a growth-like
equity mentality, as we see in tech, the volatility
in biotech stocks will continue. For example,
today one stock has fallen about 70% in pre-
market trading, and another is down 30%. This
volatility makes it hard for most investors to
maintain broad conviction, which limits the
sector’s ability to sustain momentum.
Gena Wang: I cover small- and mid-cap biotechs.
The stocks are usually high-risk/high reward,
and dramatic moves are considered normal. The
generalists are often intimidated by this. But we
have seen how scientific breakthroughs trans-
late to successful drug development, from mono-
clonal antibodies in the 1990s to immunothera-
pies today. I anticipate the next new drug-class
frontier will be gene and cell therapies. Two
gene therapies have already been approved in
the U.S. Of course, investors then want to see
how the new class of drugs will sell. A lot of
potential investors are sitting on the sidelines.
Gbola Amusa: We’re going into an election year,
and that creates additional uncertainty—and more
volatility. In past election cycles, biotech stocks
suffered at times on worries about coming legisla-
tion, such as the Medicare Prescription Drug
Benefit or the Affordable Care Act. But therapeu-
tic-company fundamentals didn’t change as much
as some feared after enactment of these and
other policies. Biotech investors should remember
that the worst-case scenario for U.S. health-care
policy is adopting something that looks more Eu-
ropean. Europe historically has devoted a higher
percentage of its health-care spend to drugs, be-
cause drugs save costs elsewhere in the system.
In theory, even a European-style outcome might
increase the relative emphasis on drugs, with low-
value drugs seeing heavy price pressure and
high-value ones being more resilient.
My advice is to focus on disruptive innovation
and drugs that save costs. For drugs like Zol-
gensma [a gene therapy for treatment of spinal
muscular atrophy in pediatric patients] there is
no good substitute. Yes, drugs like Zolgensma
can cost up to $2 million, but if a company is an
innovator and there is no good substitute for its
product, the company is effectively a monopolist
with pricing power, even when drug pricing is a
concern. I’m not saying biotech stocks won’t fall
on political uncertainty. It’s more that if they do,
it is often a good opportunity to load up on the
most disruptive companies. Similarly, avoid com-
panies whose business model is to grow by bor-
rowing money to buy non-innovative drugs and
then boost prices. Examples of products that can
save the system costs are a new class of thera-
peutics called prescription digital therapeutics.
These are FDA-approved prescription programs
to treat medical conditions. Think of it this way:
Many chronic-use drugs have a 35% to 50% one-
year compliance rate. Prescription digital thera-
peutics can improve compliance and thus save
future health-care costs.
How can nonspecialists identify the industry’s
disruptive innovators?
Bakri: It is difficult to differentiate among early-
stage opportunities. We look for therapies that
have achieved some level of proof of concept,
whether in terms of survival benefit or other
clinical benefit. If they are without competitors,
that is the holy grail. Recently, there has been so
much innovation that multiple companies are
coming to market to treat the same conditions.
When that happens, you see price competition.
The migraine space is a good example.
You’ll pay more for proof of concept, but the
risk is diminished. If a company has a good man-
agement team and a platform that suggests the
science that produced its first product can pro-
duce more than one drug, that’s even better. But
they don’t have to do it again. AveXis had one
successful product [Zolgensma] and got acquired
by Novartis [NVS].
Schenkein: I am super-optimistic about novel
therapies, particularly cell and gene therapies.
But one challenge is to figure out manufacturing
and access. It is one thing to be able to deliver
these therapies in an academic medical center in
New York or Baltimore or Boston, but in
smaller centers around the world, the technol-
ogy still requires a fair amount of heavy lifting.
Casdin: There are investment opportunities
around that statement. We’re an investor in
BioLife Solutions [BLFS], which offers a di-
verse set of gene- and cell-therapy tools, includ-
ing products for freezing, thawing, and deliver-
ing cells and tissues. There are a lot of lower-
volatility investment opportunities in the biotech
ecosystem. Investors typically think about ther-
apeutics, but there are a lot of companies and
technologies that support the therapeutics.
Which new therapies excite you most?
Schenkein: I’m a hematologist and medical on-
cologist. There has been an incredible change in
the past two decades in our ability to under-
stand the biology driving individual diseases.
Instead of lumping patients into a large group
based on where in the body a tumor shows up,
we are now better able to understand that lung
cancer, for instance, is probably 50 different
diseases, and design more precise therapies for
individual patients. This involves capturing more
“I’m not saying
biotech stocks
won’t fall
on political
uncertainty.
It’s more that if
and when they
do, it is often
a good
opportunity
to load up on
the most
disruptive
companies.”
Gbola Amusa
t
Picks
Regenxbio...............................
RGNX
$33.
uniQure
QURE
$41.
Krystal Biotech
KRYS
$40.
MeiraGTx
MGTX
$16.
The Medicines Co.
MDCO
$50.
Kodiak Sciences
KOD
$14.
Gbola Amusa
Director of Research;
Head of Healthcare
Research
Chardan Capital Markets
Note:Pricesasof9/26/
Source: Bloomberg