Taking advantage of the long-term opportunities in genomics
Taking advantage of the long-term opportunities in genomics
The UK government has recently published a report setting out a plan to maintain a leading position in genomics. As highlighted in the document, genomics will play a crucial part in the future of the NHS and will be used widely in mainstream healthcare. Exploring what is at stake and what are the drivers of the genomics industry is useful to understand opportunities in this sector.
What is genomics?
Genomics is the study of a person’s genes, how those genes interact with each other and with our own environments [1]. Genes are made up of DNA and carry information for particular characteristics of human beings such as eye colour. Abnormalities in the genome can be the source of health problems (genetic disorder). Genomics gained a lot of attention in 2003 with the completion of the Human Genome Project that aimed to identify all the genes of the human genome.
“Genome UK: the future of healthcare” mentions that genomics has the potential to revolutionize the health sector. Indeed, sequencing the genome allows to determine whether an individual has a high risk of contracting a disease or to predict how it will react to a specific drug. By understanding human biology at a much deeper level genomics would enable to develop tailor-made solutions for each patient and thus to ameliorate treatments.
As shown below, genomics includes various technologies and can be employed to a multitude of cases.
CRISPR is a technology that can be used to identify a specific piece of DNA inside a cell. CRISPR technology can also alter this piece of DNA to remove some undesirable traits. The mechanism has for instance been used to reduce the severity of a mutation causing deafness in mice and could also be applied to humans [2].
Targeted therapy is a cancer treatment employing drugs to target specific genes and proteins that are involved in the growth and survival of cancer cells.
Bioinformatics deals with the application of informatics technics to analyze large quantities of biological data in order to compare genes or figure out the function of DNA sequences. Bioinformatics contributed to the success of the human genome project by quickly analyzing vast amounts of data.
Molecular Diagnostics; the process of studying molecules to identify a disease such as infectious diseases or inherited conditions.
Genomics will be driven by demographic changes
Looking at structural trends is an important element to consider when investing on a long-term horizon. Blackrock has defined megatrends as powerful forces that are shaping societies, disrupting sectors, and creating new investment opportunities [3].
Among the 5 megatrends identified by the group, demographic and social changes represent one of them. This phenomenon is partly driven by the aging population in developed countries. In Western Europe, 1 in 5 people are older than 65, this figure is expected to rise to over 3 in 10 in the next decade [4]. Developing countries will also be faced with most striking change as the proportion over 60 will double between 2015 and 2040 (Chart 1).
Genomics will benefit from this megatrend for two reasons:
- The elderlies (60 years and older) spend more on health service and are more susceptible to diseases. An aging population will increase the demand for healthcare and thus for genomics. Healthcare spending as % of World GDP has increased by more than 1% over the last two decades and the movement will accelerate (Chart 2)
- The healthcare sector will weigh more on government budget. Technologies that could revolutionize healthcare by reducing costs, including genomics, will be favored.
Genomics is about to revolutionize the health sector
While Genomics can take advantage of the demographic change on the longer term, the near-term outlook is extremely favorable.
The costs have been substantially reduced and efficiency of genomics technologies have improved over the past quarter-century. As an example, the Human Genome Project took more than 10 years to map the human genome at a price of $2.7bn. Nowadays some companies like Nebula Genomics offer genome sequencing service for less than $300, the price is expected to further decline to $100 in the coming years.
Falling prices coupled with higher efficiency makes the genomics sector attractive in comparison to traditional healthcare solutions. Some technologies already offer significant savings [7]. Demand for these products is set to grow; according to Global Markets Insights, digital genome market is expected to double from 2019 to 2025, at an annual compounded rate of 10% [8].
Other factors including increased computing power and products used by a wider audience would make products cheaper.
While technologies like DNA sequencing are already commercialized, other genomics treatments are still in the development phase. UBS Global Wealth Management estimates gene editing treatments using CRISPR are just entering the clinic and could be commercialized in the next 3 to 5 years [9]. Similarly, 10 to 20 new cells and gene therapy treatment are expected to be approved and to enter the US market per year by 2025 [10].
New technologies and treatments are likely to regularly enter the market. By incorporating the time of development before these technologies become widely used as well as technologies that are yet at a very early stage. Genomics has a clear space for grow for the next decades.
Although the sector is at an early stage, markets have already started pricing in genomics opportunities.
Chart 4 plots the returns of a few Genomics stocks. ARK Genomic Revolution is an active equity ETF targeting companies that are expected to benefit from technological, scientific developments and advancements in genomics into their business. The value of the ETF has soared in 2020 (+180%), highlighting the increased attention towards genomics companies. Other stocks like Twist Bioscience or Invitae Corporation skyrocketed last year, mainly driven by technologies used to fight the Covid-19 [11].
While the healthcare sector was under spotlight in 2020 due to Covid 19, its relative underperformance versus the other stocks on the chart indicates that the genomics sector performance hasn’t been only explained by the pandemic crisis.
Genomics stocks have performed strongly. As these technologies are expected to soon transform some industries the momentum would accelerate. Cathie Wood (founder and CEO of ARK Investment Management) has recently declared “We actually think the next FANG stocks are in the genomic age” [12]. Even if genomics stocks may not have the same impact as Amazon or Google they have a solid potential for growth.
However, growing sectors also face considerable risks. An analysis of the main challenges of the genomics sector is needed to better analyze investment strategies.
Regulation is an important factor. As genomics technologies are mostly employed for health purpose, authorities need to make sure that the products are safe enough. Technologies could take years before being approved by authorities and commercialized. Other obstacles such as data privacy, public opinion, ethical issues could hinder growth in the sector.
Second and more important: high returns are partly justified by the high risk profile of these companies. Innovation is central to genomics; companies are thus spending large amount in R&D to develop technologies. Most companies are making losses or are conducting research on technologies that haven’t been effective yet. Also, competition is high in certain technologies and some segments might not create enough profit for companies to prosper. While 80% of rare diseases have a genetic component, a large share of these diseases would be too rare to produce and commercialize treatments.
While a few companies would successfully grow; many other firms wouldn’t be profitable enough and would go bankrupt in the coming years.
Recommendations in genomics
Although the sector is not riskless, genomics outlook is positive. Demographic change, the ability to revolutionize the health sector, technologies that will gradually enter the market represent the driving forces. To avoid investing pitfalls in genomics, a few aspects need to be considered.
One should invest with a long-term horizon in mind. Investing over a 5-year period would be a minimum as some of these technologies would enter the market and reach profitability by this time. An even more reasonable choice would be a horizon of 20–30 years so that genomics technologies become widely used and disrupt the health sector.
Investing on individual stocks would be risky as the probability of going bankrupt is high. It would be wiser to diversify and invest on active ETFs specialized on genomics. While some stocks would go down, the leading firms would have market values multiplied (e.g. Twist Bioscience or Invitae) and would greatly raise the value of the portfolio. A few examples would be ARK Genomic Revolution ETF (AKRG), Franklin Genomic Advancements ETF (HELX) or Global X Genomics & Biotechnology ETF (GNOM).
Alternative strategies would be to target ETFs that are partly focused on genomics like iShares Genomics Immunology and Healthcare ETF (IDNA). As big pharma and biotech companies are increasing their investments in genomics, the healthcare and biotech sectors would benefit from genomics advancements while limiting the risks given the large size and diversification of these firms. Lastly, using options such as calls with a high strike price (or put with a low strike price) on ETFs would take advantage of the high volatility of genomics companies at a relative low price.
As the sector is at an early stage, one needs to keep an eye on how these technologies would influence other sectors.
Alexandre Popa is a Research Associate for Macro at the London School of Economic’s Investment Research Group, reading Finance and Economics
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Links:
[1]: A Brief Guide to Genomics. NIH. Link
[2]: Gene editing staves off deafness in mice. Nature. Link
[3]: Megatrends in action. Blackrock. Link
[4]: Megatrends: Demographics and social change. Blackrock. Link
[5]: World population aging report. United Nations. Link
[6]: Future of Humans. UBS. Link
[7]: Molecular diagnostics save lives and money, EIB. Link
[8]: Digital Genome Market. Global Market Insights. Link
[9]: Future of Humans. UBS. Link
[10]: Longer term investments. Genomics therapies. UBS Link
[11]: ARK Genomic Revolution ETF. Link
Other stocks with a solid performance can be seen in the holdings of the ETF.
[12]: Are Genomic Stocks The Next FANG Stocks? Yahoo finance. Link
