Big Pharma is in a rut. The industry keeps spending more and yet making fewer scientific breakthroughs.
But help is on the way.
Last week, GlaxoSmithKline (GSK) announced a radical change in R&D spending. The British drug giant will refocus on data analytics, and the link between the immune system and human disease.
It is harbinger of things to come. It is also a big opportunity for investors.
GSK is trying to catch bigger trends. By studying the genetic profiles of patients with diseases, scientists are starting to understand what makes humans ill in the first place.
Meanwhile, information technology is accelerating at an exponential rate. Every day, researchers use advances in machine learning and artificial intelligence to see patterns in data that were invisible only decade ago.
Too often, we believe these advances are limited to self-driving vehicles or automated factories. In reality, this progress applies to a wide variety of sectors.
Drug discovery is especially ripe for disruption because it has not evolved in decades.
In “The Future Awakens,” a November 2017 research study by the Deloitte Center for Health Solutions, analysts see big changes not even five years from now.
They posit that, by 2022, medicine will be predictive, preventive (based on risk), personalized and participatory.
It is a wild vision of the future …
• Computational biologists in hoodies and jeans will build personalized drug treatments based on what they know about the patient’s individual genomic makeup.
• And behind the scenes, data scientists will use AI to look for previously unseen biomarkers in algorithmic models.
It is a view that dovetails with a recent GSK promotional video. The company is promising to use genetic insights, its growing understanding of the immune system and data analytics at scale.
They want to deliver the next generation of scientific breakthroughs and, in some cases, cures.
GSK took an important step in that direction with a new $300 million investment in 23andMe, a personal genomics company based in Mountain View, Calif. To date, this Silicon Valley company has collected genomic information for 5 million people — a huge data hoard.
The companies will initially collaborate on a Parkinson’s research project. (Just yesterday, actor Alan Alda revealed he was diagnosed with Parkinson’s disease three years ago.)
There is a pragmatic angle, too …
Drug discovery is costly and imprecise. A 2013 study, published by Nature Review Drug Discovery, found that only 10% of medicines in development ever reach patients.
Using genetics — and coupling it with data analytics to define viability — GSK can drastically reduce the number of programs that go forward.
In this case, less is more. Better risk-taking means better profitability.
According to Morningstar, on average, shares of major pharmaceutical companies have a return of 16% during the past 12 months.
Investors are catching on. A new era of profitability is on the horizon.
However, the best way to play this trend is not big pharma. It is the companies that build the machines and processes to collect genomic information.
Illumina Inc. (ILMN) has been one of my favorite stocks for a long time. With 70% market share, the San Diego company makes best-in-class DNA sequencers used by pharmaceutical companies, academic and clinical research organizations. It had sales of $2.75 billion in 2017, up 14.8%.
The stock has been a rocket, up 37.8% in 2018, and 71.2% during the last 12 months, pushing the market capitalization to $44.2 billion. Longer-term, this is a great investment. Short term, the trailing price/earnings multiple is a fat, expensive 78.
A better near-term play in the sector is Thermo Fisher Scientific Inc. (TMO). The Massachusetts company makes specialty diagnostics. It also makes analytic and image analysis software. These are used by drug companies, government, universities and research laboratories. It is a business that was worth $20.9 billion in 2017, up 14.5% over 2016.
Like Illumina, the Thermo gear is considered best-in-class. The company is also strengthening its competitive advantages with an aggressive acquisition policy. In June, the company bought the electron microscope software unit of Roper Technologies (ROP).
Although Thermo Fisher stock recently broke out to a new high, the company still trades at a reasonable price-to-earnings ratio of 39. Shares are up 21.7% this year, and 31.3% during the past twelve months.
The pharmaceutical sector is on the verge of a major change in the way drugs are discovered. The opportunity for investors to get ahead of that transition is exciting.
Jon D. Markman