Finding Investment Opportunities in Healthcare Innovation

Finding Investment Opportunities in Healthcare Innovation

Craig Blessing: Hi, I’m Craig Blessing, client portfolio manager for International Equities at Thornburg. With me today is Emily Leveille, a managing director and portfolio manager for Thornburg Equity Team.

Emily, I know that one area of focus for the investment team recently has been innovation and health care, a lot of which is coming from outside the U.S. Take care to explain.

Emily Leveille: Hi, Craig, thanks. You’re right. There is a ton of innovation in the healthcare space, and we think it’s being driven primarily by these big societal challenges that we face as we age and get wealthier. So, there’s a couple of different ways to get exposure. First, there’s the companies developing the drugs themselves. This can feel like a risky proposition given the often binary nature of outcomes for drugs and development. But we think that by focusing on potential cures to some of these structural megatrends, focusing on companies with strong track records of development and drugs that can have second or third lives through product extensions, we can increase our odds of generating excess return in the space.

And then secondly, there is ways to gain exposure through investing in the picks and shovels of the industry. So, these are the businesses that are helping the pharmaceutical companies actually develop and manufacture these drugs.

When we look at the global pharma landscape, we’re particularly interested in potential solutions and cures to what we call some of these structural megatrends. Why is this? We think these trends will sustain growth for many, many decades to come. There are three that we find really relevant right now chronic disease, aging and care for pets.

These are huge and growing markets. So just to give you a sense. Novo Nordisk Estimates that they have treated about a million patients on Wegovy for obesity and there are 100 million people with obesity in the United States alone and nearly a billion people globally. The health costs to society from this are huge, especially when we consider the co-morbidities like kidney disease and heart disease, as well.

So companies that can address these issues can generate tremendous value for stakeholders. So we want to invest in the companies with exposure to some of these structural megatrends. But we also think that we want to look for companies that have a strong track record of R&D platform development. Companies like AstraZeneca and Novo Nordisk, they’ve been able to leverage drug discoveries and expand indications or develop adjacent drugs.

So AstraZeneca has done this with Tagrisso extending the life and increasing the size of the addressable market by targeting an increased number of lung cancers. Novo Nordisk has done this with GLP-1s. So initially GLP-1s were indicated for diabetes that obesity now to cardiovascular disease, kidney disease and potentially other areas of treatment.

Craig Blessing: So that’s really interesting about the pharma part of the industry. So, in pharmaceuticals are there picks and shovels as well and what are they?

Emily Leveille: Yeah, absolutely, Craig. So, as I mentioned, there’s ways to get exposure and through the pharma companies, the companies actually developing the drugs. But then there’s also the picks and troubles of the manufacturer of the drug manufacturing industry.

So, this part of the value chain really limits your exposure to that binary event risk. While allowing participation and attractive compounding industry growth. Manufacturing a drug is highly complex. It’s a very complex process and it also has very significant regulatory barriers to entry, which makes it unique and different from other types of manufacturing.

There are really three parts to bringing a drug to market: The first is the research. Then there’s the development of the drug and manufacturing of the drug. In the in the research part, the key step is running trials. So you have contract research organizations like ICON. These companies help big pharma businesses design and run these highly complex global trials and bring products to market faster and more efficiently.

Then you have the development and the manufacturing part, and those two are sort of intertwined. As I mentioned, this has always been complex, but it’s actually becoming more complex. And the reason for that is the types of drugs that are coming to market. They are larger molecule biologic drugs, and these are more complicated to manufacture and develop than on simple chemical drugs.

So, in this space, Lonza is a clear leader in biologic development and manufacturing. They are what we call a CDMO, a Contract Development Manufacturing Organization. You can think of them like the TSMC of the pharmaceutical industry. So, as I mentioned, manufacturing a biologic drug is different and more complex than manufacturing chemical drug. Think of the difference between a pill and an injectable drug. It requires different capabilities and technologies to synthesize a chemical drug in a very simple recipe versus to grow a biologic drug. And then within that manufacturing process, you have specialized tools and equipment specific for the processing and manufacturing and refining of biologic drugs in that space. Companies like Sartorius are leaders.

Yeah, so in summary, we think we’re in this incredible moment of innovation and health care and pharma, and it’s really being driven by the need to address these growing societal challenges like chronic disease and aging. We think we can gain exposure and generate excess returns really in two ways through the pharma companies themselves. And then within pharma, we look for companies exposed to these megatrends and with a proven ability to develop new drugs and also leverage those drugs for an expanding number of indications. And then the second way is through investing in the picks and shovels and within the picks and shovels. We want to look for the leaders in the most complex processes as process complexity and regulatory barriers increase.

Thank you, Emily, and thank you to all of you for listening.

If you’d like to hear more on this or related topics or investing, please visit our website at www.thornburg.com/insights. And thank you for listening.

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