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Four investible themes for the future of genetics

By Lydia Greasley, Investment Analyst, EdenTree Investment Management
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Genetics is a growing area of research, fuelled by scientific and technological advancement, that offers great promise in de-coding complex, difficult to treat diseases and in understanding why some individuals respond to treatment where others do not. The answers lie in our life code – DNA.

For responsible investors committed to health and wellbeing in the widest sense, there is scope to improve the efficacy of treatments, reduce drug waste and power the discovery of new drugs for unmet medical conditions. Below, we explore the core markets associated with the life code and discuss exciting examples where we see sustainable investment opportunities across the value chain.

The research building blocs

Genetic research is thriving. This is due to two key enablers. First, the cost of genome sequencing, which determines an organism’s complete DNA sequence, has fallen significantly. Second, data storage has increased in capacity and shrunk in physical size and cost – the 3.2 billion bases in the human genome produce close to 4GB of data, which requires considerable storage to sequence.

Given the fast pace of development, competition and constraint on R&D, most pharmaceutical companies cannot afford to build out specific research expertise internally. Instead, they seek to partner or acquire from the flurry of small and mid-cap specialist companies with strong patent portfolios that emerged typically as university spin-outs. These partnerships, which combine specialist knowledge with pharmaceutical scale and expertise, present an attractive investment opportunity to inform drug development. Horizon Discovery, for example, uses its in-depth knowledge of genetic editing to create targeted genetic cohorts for drug discovery and testing. It partners with large pharmaceuticals, including AstraZeneca to research personalised cancer therapies.

Sequencing is key

Sequencing is the engine for genetic research and discovery. The first full genome took about four years and cost billions of dollars to sequence; now it can cost less than $1,000 and takes about a day. Estimates of the potential sequencing market vary widely between $20-200bn, with a range of players competing in the space. However, some of the most compelling investment opportunities can be found outside the market leaders, in niche players.

For example, through intellectual property commercialization company IP Group, we can access Oxford Nanopore. IP Group’s largest holding is renowned for producing inexpensive portable sequencers, which use different underlying technology than peers’ and read in real time. These devices, ideal for infield sequencing, were used to understand the infectious agent in the 2014-2016 West African Ebola outbreak, generating results within 24 hours. Other potential applications include biometric security, food safety and superbug detection. IP commercialisation companies are a good way to access these innovative early-stage companies, spreading the high risk often associated with them.

Diagnostics drive efficiencies

Gene sequencing has progressed diagnostic capabilities, greatly improving patient outcomes, particularly in life-threatening conditions such as cancer. Companion diagnostic tests look for specific genes, rather than reading the full sequence, to identify patients most likely to benefit from a particular treatment, as well as those at high risk of serious side effects. Early and accurate detection removes needless trial-and-error approaches, creating economic efficiencies and, most importantly, improving patient outcomes. We view it as a robust long-term investment theme.

Erbitux, licenced to Merck KGaA, is a treatment for advanced bowel cancer, which attaches to growth receptors found on cancer cells, stopping growth. However, research has shown for someone with a mutant KRAS gene, the treatment is ineffective; this applies to approximately 40% of those with bowel cancer. As a result, patients are tested for a normal KRAS gene before the expensive course of treatment, significantly increasing efficacy and economic value.

Precision improves patient outcomes

Genetic research and sequencing are also enabling the personalisation of drugs. The number of patients that find prescribed drugs ineffective remains shockingly large, but targeted drugs have the potential to reduce this ‘hit and miss’ nature. In addition, new gene therapies offer hope to ‘cure’ genetic diseases where previous approaches could only abate symptoms. As a result, precision-targeted drugs may act as a ‘disrupter technology’, threatening the traditional ‘blockbuster’ drug business model. With a higher probability of being effective, even within a smaller subset of patients, they can be charged at a premium. Moreover, retesting drugs that were ineffective for the masses opens a new pipeline of possibilities.

The space is dominated by large pharmaceutical companies, such as Novartis, and start-ups that could boom or bust. Novartis has developed Kymriah, the first regulatory-approved CAR-T therapy, which trains a patient’s immune system to recognise a protein found in most blood cancers and kill the cancer cells. The treatment costs approximately $475,000 per patient and is seen as a ‘miracle cure’, with 83% of patients, mostly children with hard-to-treat blood cancers, achieving complete remission after three months.

The value of an investment can fall as well as rise as a result of market and currency fluctuations, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. If you are unsure which investment is most suited to you, the advice of a qualified financial adviser should be sought. EdenTree Investment Management Limited (EdenTree) Reg. No. 2519319. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, United Kingdom. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association. Firm Reference Number 527473.