Life sciences companies have challenging business models.
Substantial investment is needed to get a drug to market, with development costs averaging in excess of nearly US$2.8 billion, and more than 85% of drugs fail in clinical trials. For a sophisticated therapeutic medical device, research and development costs can exceed US$100 million.
As a result of the complexity of the science, regulatory hurdles, long timelines and vast dollar amounts required to succeed, the life sciences sector has not been a comfortable investment for institutional investors who are not sector-focused or retail players, especially those wanting a quick hit. But if COVID-19 has taught us anything, it is that the world can literally come to a halt without health, and that society has been underinvesting in this important area.
With the COVID-19 crisis, scientists all over the world are looking to find a vaccine to prevent the disease as well as drugs that can treat the disease. Tests are being and have been developed to determine if one has COVID-19, and other tests are trying to accurately determine if one has produced antibodies that may or may not immunize one from re-infection. Governments around the world are pouring billions into research and development targeted at these vaccines and therapies. Otherwise slow moving and overburdened health regulatory agencies are lowering or even removing barriers and certain regulatory requirements, with speed unheard of in the past.
The silver lining is that this pandemic has shone a light on the importance of medical and health innovation.
With the goal to contain the virus and restart the world's economies working, vaccines are entering clinical trials quickly and tests are receiving health regulatory approval in a matter of days (although the FDA is now revoking some of those "quickie" approvals). Looking for medical solutions in the midst of a crisis is not ideal and the relaxation of regulatory standards creates risks, but there is no choice, as the loss of lives and loss of livelihoods that are mounting every day is staggering.
Innovation to combat future crises
The silver lining is that this pandemic has shone a light on the importance of medical and health innovation. Certainly, the regulatory flexibility and speed permitted for COVID-19 therapies, tests, devices and practices in the current crisis is not prudent or operational for non-crisis situations. But let's not fool ourselves, we have other crises on the horizon. We don't want to wait passively for another pandemic and of course, we all know the baby boomers are living longer—all good, but with that comes the increased occurrence of Alzheimer's, Parkinson's and cancer, among many other disease states.
For investors who do not have a specialized life sciences background, venture capital funds and stock indexes have been popular ways to invest in private companies and public companies, respectively.
The current crisis will also likely accelerate the focus on personalized medicine. While specific groups of people have been identified as the most vulnerable to COVID-19, we still are at a loss to understand why some in the same demographic are totally asymptomatic and others, including younger, otherwise healthy individuals are experiencing severe conditions and even death; why some are reacting well to certain therapies and others are unaffected by those same therapies. Better understanding the specific genetic makeup and the lifestyle of an individual could refine our ability to control an outbreak, treat symptoms, and possibly allow large segments of our population to work and function without interruption. The science to do all of this is upon on us—let's nurture and support it so we are not caught flatfooted again.
The regulatory barriers of the past will need to be re-evaluated to determine what is reasonable and prudent to protect patients from unsafe therapies, procedures and inaccurate medical tests, and what is unnecessary bureaucracy. Politicians, who historically have been loath to support government grants for medical research that may not produce results until after they retire, will likely have more support for investing in these longer-term wins. Donors to hospitals and other health organizations may also show expanded interest in funding medical research.
Investors who simply want to make money—well, despite COVID-19, the NASDAQ Biotechnology Index is up 3% year to date as of April 30. This compares with the S&P500 which has fallen more than 12% during the same time period. In fact, the NASDAQ Biotechnology Index has gained nearly 320% over the last 10 years, which is significantly higher than that of the S&P 500 (which grew ~120% over the same time period).
For investors who do not have a specialized life sciences background, venture capital funds and stock indexes have been popular ways to invest in private companies and public companies, respectively. More recently, groups of family offices have been pooling resources to invest in the necessary expertise to evaluate opportunities and/or are co-investing with venture capital funds. Debt financing, which was unheard of for early life sciences companies in the past, is becoming more common as well.
A push toward additional government funding and a friendlier regulatory environment could accelerate investment in science and technologies and in turn result in therapies, vaccines, devices and medical software that will keep us physically healthy and our economics operating. Let's see if we can sustain some of the same urgency applied to COVID-19 in addressing other urgent medical and health needs.
Originally published May 7, 2020.
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