AI is transforming the face of healthcare and while we are only at the early stages of this journey, the technological developments ahead could have major benefits for patients and investors.
On our latest research trip to Boston and Silicon Valley, the global epicentres of innovation for the healthcare and technology industries, we met with nearly thirty companies, many of which we hold, and returned with some key takeaways.
- Innovators are bending the cost curve of drug development – the percentage of GDP spent on healthcare is in the double digits in many economies around the world (20% in the US). This needs to come down and the value creation potential for leading companies here is vast.
- We are embarking on a gene editing revolution – the first ever gene editing therapy is now approved and on the market. These one-time therapies offer both significant potential opportunity and disruption.
- AI pioneers are building new barriers to competition – AI deployment in healthcare lags other industries, but AI pioneers are creating new competitive moats versus laggards.
Companies leading on innovation are bending the cost of healthcare and reducing the time it takes to bring drugs to market. This was a topic discussed at every one of our meetings in Boston because of healthcare’s significant financial burden – healthcare spend comprises 20% of GDP in the US, for instance. Bringing a drug to market costs c.$2 billion on average, takes over a decade, and even then, only 8% of drug candidates make it through phase three clinical trials successfully.
Over the past fifty years, we have seen the opposite trend play out in biopharma to the semiconductor industry. While compute power has roughly increased ten-fold every five years (according to Moore’s law, until Nvidia accelerated this trend and increased compute performance a thousand-fold in eight years), the amount of new drugs coming to market per $1 billion spent has been falling logarithmically, and in real terms. This phenomenon has been coined ‘Eroom’s law’ and is the inverse of Moore’s law. As such, in an industry faced by declining R&D productivity, we believe that companies leading the charge in reversing this trend and reducing the cost burden associated with bringing drugs to market will be the winners of the next decade.
Source: Recursion 2023, Liontrust
How are these companies going to achieve this? This brings us onto our next key insights. Gene editing and AI are two of the most powerful deflationary forces behind this cost reduction in our opinion.
Gene editing tools are one-time therapies - one therapy to cure either a common disease or a rare disease – and therefore have the potential to extract pharmaceutical costs out of the system, as well as giving a lifetime of productivity back to patients. This gene editing revolution has begun.
There are three main approaches to gene editing which, ordered by their stage of development, are: ex vivo (using CRISPR/ Cas9 technology to edit genes outside of the body); in vivo (editing using CRISPR/ Cas9 technology inside the body), and finally, base editing (changing the base code of the DNA). Across these modalities, a variety of gene edits can be performed – CRISPR/ Cas9 can make a single cut to DNA, leading to gene inactivation, a segment of DNA can be removed entirely, or a genetic template can be inserted alongside the CRISPR/ Cas9 machinery to enable the cell to correct a gene or insert a new gene.
Chart source: CRISPR Therapeutics
The company furthest along on in ex vivo is CRISPR Therapeutics, and has partnered with a holding of ours, Vertex, to bring the first ever gene editing therapy to market for sickle cell disease (approved in December 2023). This expansion into gene editing marks a new era of diversification for the company and is a landmark for the entire industry. Gene editing at scale has been prophesised for decades but now it has come to market and from here we expect it to move into other diseases.
We met with leading companies across each of these respective approaches to gene editing, including Vertex, Intellia and Beam Therapeutics. Across the piste we are looking at therapies either already coming to market or doing so over the next couple of years. The disruptive potential of these one-time cures has not been lost on big pharma, whose economic prospects hinge on supplying patients with repeatable drugs, and they are rapidly partnering with these pioneers.
AI deployment is still nascent across healthcare, but pioneers are building new barriers to competition. Technology platform shifts always entail time for dissemination, but healthcare has an especially complex regulatory landscape to navigate and so the majority of companies are taking a cautious approach when it comes to AI. This means, however, that those companies whole-heartedly embracing AI stand out.
Moderna, for example, is already deploying AI at scale and witnessing significant productivity gains. In just two months, Moderna created 750 custom Generative Pre-trained transformers (GPTs) in partnership with OpenAI and is leveraging them across the entire business. These AI initiatives were the driving force behind a 10% reduction in selling, general and administrative expenses last quarter.
We believe the greatest potential for AI industry-wide is in early-stage research and drug discovery – shortening the decade long pursuit of commercialisation. Early data from AI-enabled drug development platforms is encouraging, with data points showing the ability to shorten the timeline to drug candidate identification by up to 50-75% vs. the industry average. Through direct cost savings improving R&D productivity and increased probability-of-success of pipeline programs, we believe that AI has the potential to drive an inflection in Eroom's law.
Zooming out, we think that the IP advantage of these pioneers’ full embrace of AI is likely underappreciated – a faster time to patent drugs is the cornerstone of pharma economics, and AI is proving it can accelerate this process, which is creating new moats around competitors.
We look forward to seeing what the future brings for healthcare.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Global Innovation Team:
May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on a Fund's value than if it held a larger number of investments. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Global Innovation Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
