In the last six years, two important things have happened within the biotech sector that could make it one of the best performing areas in equity markets in the coming years, according to Stephanie Sirota, manager of the £244.5m RTW Venture fund.
Firstly, “genetic medicine actually is becoming investible,” and secondly, “a whole wave of new productivity is being unleashed,” she said.
Genetic medicine focuses on the study of DNA and the diagnosis and management of hereditary conditions.
After observing clear paths to some early-stage proof-of-concept assets that Sirota thought had a real path to working on humans, she saw promising development potential starting to emerge for drugs and technologies from both academia and early-stage, lightly capitalised private companies.
It’s in the private space where there is more activity in genetic medicine and more investment opportunities for the closed-ended fund.
“You can see the inflection of the rising number of patents, the rising number of companies, and then the number of assets in those company pipelines, married with the decline in the price of genetic information,” Sirota said.
Indeed, the first human genome was sequenced in 2001 and it cost the US government $3bn, whereas today the cost of sequencing one person’s genome costs less than $1,000.
“That in itself has unleashed and has been the driver of productivity,” Sirota explained.
By sequencing the human genome, scientists are able to find the genetic roots of disease and then develop treatments.
The manager said hundreds of new diseases are being discovered every year and that there are over 5,000 monogenic diseases – those that are controlled by or involve one gene. Of those monogenic diseases, there are only currently 400 that are being worked on by companies, industry and academia.
“So, [only] 8 per cent of this big number of monogenic diseases is being targeted right now,” Sirota said. “There’s simply not enough capital and people with the right know-how and there’s just too much supply for us and the scientific community to target every one of the 5,000.”
She describes the opportunity as a “huge backlog of supply that is just waiting.”
In the same way that 20 years ago technology and e-commerce has changed society and how the world interacts today, the scientific progress of genetic medicine could change the way humans treat disease in the future.
“We’re like where tech was 20 years ago,” Sirota added.
The RTW Venture fund, which listed in October last year, identifies biotechnology and medtech (medical technology) companies the managers think can displace the current standard of care – or create a new one – for certain conditions.
“The fund is identifying what we think are going to be transformative therapies for patients and doing that early,” Sirota put simply. “And those are the ones that are likely going to go public in less than a year and a half.”
She said the average duration to a liquidity event has been 1.1 years, with somewhere close to a four times multiple on capital invested.
However, she noted that the team is very selective, and has an established reputation as a preferred financier in the genetic medicine space.
“We don't really invest in a group of companies and hope one makes it,” explained the manager. “We are very choosy in that regard, and they know that when we invest we are going to be there for the long haul.”
Being invested throughout the public life cycle may prove to be a sensible move, given that the market capitalisation of publicly traded gene therapy companies has grown from $1.1bn in 2013 to $51.6bn at the end of 2019 and is set to continue as more genetic-based therapies are developed and approved.
“We’re coming to our investments as though we were someone making a permanent capital commitment to this asset,” Sirota explained.
This was one of the reasons why the team opted for a closed-ended investment trust structure than the more common venture capital fund.
She said: “It allows us to invest and stay invested without the pressure of having to distribute to investors because they want to capture their returns, and then [when] we have to think about raising the next vintage, it’s just this cycle that is really not helpful in optimising your long-term value capture.”
Theoretically, healthcare and the development of new medical innovations should be recession-proof. However, Sirota admitted that new medical innovations can also be a high-beta sector and therefore sensitive to money flows, making it slightly susceptible to cyclical conditions in the economy.
Nonetheless, the manager said the library of primary scientific data that the fund has collected over time gives RTW Venture fund an edge over typical biotech investors, describing the fund’s managers as “true researchers”.
“You have rising healthcare costs, you have an ageing population in the west, you have all sorts of things that should indicate a recession-proof sector,” she said.
“Everyone gets a little scared by the notion of binary outcomes in biotech, but the reality is the more work that you do, [the more] you can stack the odds in your favour. If you have enough ends you can start to predict patterns and outcomes.”
Performance of RTW Venture vs sector since inception
Source: FE Analytics
Since launch in October 2019, RTW Venture has returned 39.6 per cent compared with a gain of 22.96 per cent for the average IT Biotechnology & Healthcare peer.
The trust is not geared, and is trading at a 10.3 per cent premium to net asset value (NAV), according to the Association of Investment Companies (AIC). It charges an annual management fee of 1.25 per cent of NAV with a 20 per cent performance fee – which will be earned if the compounded rate of return of NAV per ordinary share is above 8 per cent on an annual basis.