I bet you’ve never heard of Dystrophic Epidermolysis Bullosa (DEB). It’s a rare disease where a person’s skin falls off! Areas that are often rubbed, like your elbow from sitting at a table or your thighs from wearing pants, become a constant battle. It’s painful, and patients suffer from frequent infections. The US spends about $400,000 per patient each year trying to repair the damaged skin, only to see a new patch fall off. Doctors can turn to antibiotics, steroids and skin grafts, but because this is a genetic disease, the underlying issue remains.
You can imagine the enthusiasm when a genetic therapy trial showed patients re-growing their skin. That’s right – after being treated, they grew new skin. As farfetched as it sounds, genetic therapies are just beginning to deliver on long-held promises like this.
We want exposure to these disruptive technologies for our investors, and we’ve been increasing our allocation to the biotech sector. We think we are at the forefront of an opportunity that will redefine the treatment landscape for patients and create massive value for shareholders.
At a time when investors have come to expect lofty returns, let me put some numbers behind “massive value.” The average biotech is a small-to-mid cap company with a valuation of <$500 million – $10 billion. The market opportunities they are pursuing can exceed $100 billion a year, like asthma, or lung cancer, or heart disease. In fact, patients spent over $30 billion last year on one class of oncology drugs (and still ~1/3rd of patients died). If one of these ~$4 billion companies were to succeed in curing a disease, it could very quickly grow to more than $10 billion in sales. At a reasonable 6x sales multiple, or $60 billion, the stock would be worth 15-fold more!
The multi-billion-dollar question is, which of these small companies will turn into the next behemoth and redefine the treatment of disease? We like companies that have demonstrated a working technology in one disease that might apply to another larger disease. For instance, while there are about 3,000 patients in the U.S. suffering from the skin disease DEB, we know the company’s technology worked because it re-grew skin. They took pictures of the progress each day, so you can see it for yourself – the technology works.
What gets us excited is they’re trying to use the same technology to treat acne scars and wrinkles, $20 billion and $40 billion opportunities respectively. Imagine if a small $1 billion company were to offer a cure for wrinkles. Not Botox, which uses the poisonous Botulinum toxin A to block the signal from nerve cells to muscles, thus allowing you to relax your face and remove wrinkles. No, this is the body’s self-made collagen naturally rejuvenating the skin. Medical advancements like this are contributing factors we look for when researching biotech companies for our models.
We believe our investors benefit from exposure to biotech, as a sector and the individual companies within it. Biotechnology is disrupting a landscape dominated by pharmaceutical giants. The centuries-old-large-cap stalwarts of the world are scrambling to acquire these new technologies to stay relevant, which we see as another validation of our thesis
For decades we’ve understood the genetic causes of over 7,000 diseases. We can diagnose them, describe them, fund patient care, but we’ve never been able to cure these diseases. In the past five years, a handful of these treatments have been approved and are being used in health care today. Usage is rather limited, side effects are concerning, and price tags are sky-high. Over the next five years, we expect to see more than 100 FDA-approved genetic therapies. We expect adoption to increase as side effects diminish and prices drop into the couple-$100,000s range. In 30 years, we think medicine as you know it will be completely redefined.