August 24, 2023
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In time, the synthetic biology revolution will disrupt large swathes of the global economy. For now, the most compelling investment opportunities are linked to the technology’s transformation of healthcare.
Of the long-term trends that will shape the future of our world, few hold the transformative promise of synthetic biology. Its potential is such that comparisons with the industrial revolution do not risk hyperbole. It enabled the rapid development of the Covid-19 vaccine and explains the meat-free burger in your favourite fast-food outlet. And yet we appear only to be at the beginning of this journey. Few corners of today’s economy will remain untouched by its evolution. For investors, this will create opportunities as well as risks across multiple sectors and industries. Some incumbents will be disrupted, whilst others will thrive. New winners and sources of profit will emerge. Understanding synthetic biology is therefore essential for any long-term investor.
But what exactly is synthetic biology? A quick search of the internet throws up a myriad of definitions. Confusingly, there are also multiple words in use that mean broadly the same thing – molecular biology, computational biology, bioengineering, biotechnology, among others. For the purposes of this article, we use synthetic biology as an umbrella term for a range of technologies and techniques that aim to manipulate biology for a variety of ends.
We believe that the ground-breaking innovation of recent decades has created powerful tailwinds that are supporting durable investment opportunities.”
Fundamentally, we stand on the cusp of an acceleration in the evolution of synthetic biology because of the convergence of our ability to read, write and edit genetic code with exponential strides in computer power, big data and artificial learning. As this coming together drives down costs and more technologies become commercially viable, synthetic biology’s impact will only grow. Whilst much of this disruption lies many years in the future, we believe that the ground-breaking innovation of recent decades has created powerful tailwinds that are supporting durable investment opportunities.
The biologics revolution
By far the most widespread application of synthetic biology to date has been in healthcare. The development of biologic drugs has revolutionised the treatment of a myriad diseases and previously untreatable conditions. Unlike traditional chemically synthesised small-molecule drugs, biologics are produced from living organisms or contain components of living organisms, such as proteins, tissue, DNA, or cells. Biologic ‘modalities’ include vaccines, blood products, monoclonal antibodies, gene and cellular therapies, and peptides.
The development of biologic drugs has revolutionised the treatment of a myriad diseases.”
More targeted and with less side effects than chemically synthesised drugs, biologics have become the primary growth engines of the world’s large pharmaceutical companies, with R&D spend and investment pivoting accordingly. Biologics now outnumber chemically synthesised drugs in the top 100 pharmaceutical products and it is likely they will soon constitute a majority share of the wider drug market.
When considering the biologics opportunity, the mind understandably turns first to the pharmaceutical companies. Valued at $370 billion, this is already a vast market and one that will continue to grow as incipient modalities come into the mainstream, marking another stage in the biologics revolution. In just one area alone, mRNA, the rate of innovation is remarkable.
The roll-out of the Covid-19 vaccines in 2020 sparked a significant breakthrough in the adoption of mRNA technology from a commercial, regulatory and societal perspective. Its successful application signalled the potential for the technology to be used to treat a range of previously untreatable diseases and genetic defects, as well as offering alternatives to existing treatments that may not be highly efficacious and/or have debilitating side effects.
Today, proposed mRNA therapies continue to proliferate. Current pipelines include therapeutics targeting latent viruses, such as HIV, and rare metabolic diseases. Others aim to restore the growth of blood vessels in the heart and improve the treatment of cystic fibrosis. Cancer is also very much in scope, with the potential to leverage mRNA technology to create so-called ‘personalised cancer vaccines’, which seek to treat cancer or slow its progression. Whilst many of these therapies are still admittedly in the very early stages of development, mRNA promises to be a significant and complementary addition to our already formidable medical arsenal.
The Covid-19 vaccines in 2020 sparked a significant breakthrough in the adoption of mRNA technology.”
Despite this dizzying pace of innovation, a degree of caution on the part of investors is warranted. The pharmaceutical industry is not always an inherently attractive industry from an investment perspective. The process of developing new products is not only hugely expensive, but also fraught with the risk of failure. Patent cliffs create revenue challenges, whilst points of genuine differentiation between the big pharma players are often rare. Once-novel technologies eventually become commoditised, available to all for future innovation.
These challenges apply as much to synthetic biology as they have done historically to the development of chemically synthesised drugs. This demands that investors adopt a highly selective approach. The long-term winners in this space are likely to have durable competitive advantages, such as a clear leadership position in a specific technology or a deeply entrenched position in a large and growing therapeutic area.
Digging deeper into the value chain
Where there is arguably more clarity around the biologics opportunity is in other segments of the healthcare value chain: companies that are directly exposed to the growth of the industry but not necessarily the risks around drug discovery and patent cliffs that dog the pharmaceutical companies. The ‘picks and shovels’ of the biologics revolution for example, whether that be gene-sequencing instruments or the tools used in the production of biologics, so called bioprocessing.
One area with a particularly compelling long-term narrative is the contract development manufacturing organisation (CDMO) industry. CDMOs are integral to bioprocessing, which is characterised by significant complexity due to the fact that its base materials are inherently variable living organisms. Even seemingly minor changes to the bioprocess can have a major impact, whilst every end-product is different to the one that came before and will function differently in the body. This complexity and variability means that bioprocessing is not only expensive but also risky, and helps to explain why pharmaceutical companies are increasingly keen to outsource manufacturing to specialist CDMOs.
One area with a particularly compelling long-term narrative is the CDMO industry.”
Carrying echoes of the semiconductor foundry industry, where players such as Taiwan Semiconductor provide outsourced manufacturing services to chip designers, CDMOs offer outsourcing services to global pharmaceutical companies throughout the lifecycle of a drug, from development and small-scale production for clinical trials to commercial-scale manufacturing.
For the pharmaceutical companies, enlisting the support of a trusted CDMO makes a great deal of sense. Not only does it outsource the complexity and capital intensity of bioprocessing to an expert third-party, but it frees them to focus more on their core competency of drug discovery. CDMOs also assume the growing regulatory and testing burden. Whereas the manufacturing process for a chemically synthesised drug might be subject to 40-50 quality control tests, a biologic can face more than 250.
Selecting a CDMO is a significant strategic decision. Technical competence, operational flexibility, risk management capabilities, and a proven track record of delivery and compliance are key considerations. But once a trusted relationship is established, it tends to last. Only rarely will a customer switch CDMO, providing the latter with a stable and recurring revenue stream.
Estimated to be worth US$184 billion in 2021, the CDMO market is predicted to grow to US$290 billion by 2027. Outsourcing penetration is thought to be currently in the region of 30-40% although the figure is considerably higher for new biologic modalities given innovation is driven primarily by small biotech firms that have no interest in building a manufacturing capability. In effect, the CDMOs sit at the nexus of two of the most powerful long-term growth trends in modern healthcare: the rise of biologics and the consequent growth of outsourced drug manufacturing.
A paradigm shift
Whilst long-term investors should always be alert to the illusory appeal of ‘in vogue’ subjects, there are some trends that have profound long-term potential. Synthetic biology is one such trend. It has already changed dramatically the healthcare landscape, and in the years ahead it will transform further swathes of the global economy. There is disruption and obsolescence on the horizon for sure but, as is always the case, these powerful forces will be accompanied by significant opportunities for investors.
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