Visitors could be forgiven for mistaking the offices of
crossover fund RA Capital Management, near Boston’s
theater district, for those of a technology start-up. A
gleaming white entryway, liberal use of standing desks and a
well-stocked communal kitchen are the setting for a team of
researchers, analysts and designers poring over numbers and
charts. The vibe practically screams “disruption” and
“innovation.” A closer look at a large collection of
blown glass lining the hallways reveals reproductions of
individual virus molecules by British artist Luke Jerram.
There’s
Ebola, E.coli, HIV and even avian flu. They lead to a
bright conference room dominated by a large screen displaying
slide after slide of colorful and intricately detailed maps
that may hold the keys to curing those diseases and more.
Bringing to mind Steven Spielberg’s science fiction
thriller Minority Report, RA Capital’s
39-year-old co-founder and portfolio manager Peter Kolchinsky,
who has a Ph.D. in virology from Harvard University,
manipulates a touch screen showing colorful blocks of text
distilling everything that currently is known about diseases
such as breast cancer, hepatitis C and Huntington’s
disease. His firm is invested in various drugs targeting
specific molecular mechanisms that trigger disease, but
Kolchinsky sees the real potential in the black space of
what’s unknown about these conditions. Thanks to the
confluence of increasing demand and scientific innovation,
roadblocks to understanding and treating disease that seemed
insurmountable a decade ago have turned into opportunities that
could both save lives and be incredibly lucrative for the right
investors.
About 200 miles away, in New York, Internet entrepreneur
Unity Stoakes is building a small empire of health care
technology start-ups in the former headquarters of Goldman
Sachs Group. On the 29th floor of 85 Broad Street, a chunk of
cozy, hardwood-floored offices owned by coworking-space
developer WeWork has been set aside for companies that are part
of the StartUp Health network. Since launching in 2014 the
network has grown to include 117 companies in more than 50
cities around the world that promise to do everything from
in-home dialysis treatments to medical fraud prevention through
biometrics. In a small furnished room that soon will become a
studio for recording podcasts, Stoakes, the network’s
co-founder and president, preaches the gospel of creative
destruction. Health care is the only major industry, aside from
education, that hasn’t been meaningfully disrupted and
forced to re-create itself as a result of new technology, he
says. That is changing.
Kolchinsky and Stoakes represent dual revolutions that are
propelling health care into a new era of personalized,
consumer-oriented, data-driven medicine. At the edges of RA
Capital’s maps are the treatments and therapies that will
fill health care investors’ portfolios in the months and
years to come. StartUp Health’s network comprises dozens
of companies ready to change the way doctors and individuals
communicate about, monitor and address health concerns. Not all
of these companies will succeed, but continuing advances in
science, coupled with recent regulatory, cultural and
demographic shifts (see “
The Silver Tsunami”), have created a convincing
optimism that the overwhelming trend is toward more-expedient
and successful diagnoses, treatments and cures. For investors
interested in capitalizing on this disruption, this means
looking beyond hot-button issues like drug prices and a
potential biotech bubble to the science and technology that
have transformed so much in the sector from empty promise to
reality in the past few years.
“You are seeing literally every aspect of what’s
possible be changed in terms of our health care,” Stoakes
says. “It’s not working on a linear path; it’s
working on an exponential curve.”
It took 13 years and $2.7 billion to sequence the first
human genome. Today it can be done in a few hours for a few
thousand dollars. Just three years ago hepatitis C was for many
patients a life sentence to immune system–weakening
treatments for a chronic disease; now studies of new drugs
indicate a cure is possible within three months of treatment.
Researchers are learning not only how to identify which genes
might be contributing to a patient’s disease and the
mechanisms by which they are doing it but also how to edit
those genes to alleviate symptoms and implement cures. On
November 30 researchers from the San Francisco–based J.
David Gladstone Institutes released new findings that show a
connection between the BRCA1 gene — a mutation of which is
known to increase a patient’s chance of developing breast
cancer — and Alzheimer’s. Researchers now know that
BRCA1 proteins not only cause cells to multiply, they interact
with neurons, which are depleted rather than divided. This
could lead to better prevention and treatment for one of the
most baffling brain-related diseases.
“We’re just now starting to see the fruits of
genomics,” says Michael Ringel, global leader of research
and product development at Boston Consulting Group, who is
studying ways of valuing new methods and outcomes of health
care. “The depth of understanding of disease is opening up
whole new avenues of treatment.”
Provider- and consumer-focused technologies that may sound
to some like science fiction — helmets that can detect
concussions in real time, pill bottles that tell your doctor if
and when you’ve taken your medication — are now in
use, and scientists have the capability to do even more. At the
same time, individual consumers are becoming increasingly
interested in and capable of tracking their own health. The
implementation of the Patient Protection and Affordable Care
Act (ACA) has shifted more of the cost of care onto patients as
insurers lean on high-deductible plans, giving a new generation
of consumers already caught up in a culture of wellness
additional incentive to tune into their own health.
“This market is bigger than any company I can
imagine,” says angel investor Esther Dyson, who has been
funding wellness-related entrepreneurs since early 2007.
The U.S. health care market pulls in about $2.8 trillion in
annual revenue, according to PricewaterhouseCoopers, and health
care indexes have long outperformed the broader S&P 500.
Though the ACA has had its stumbles, it has added more than 10
million people to the U.S. health care system through exchanges
and an additional 12 million through Medicaid expansion, and
the bulk of the changes the ACA has made to the system are
likely to remain in place regardless of who succeeds Barack
Obama as president. But 2015 was undeniably difficult for
health care investors. Stocks in the sector — especially,
traditional drug companies and biotechs — had a volatile
year, thanks in large part to a growing chorus of objections to
drug pricing practices.
In September a young former hedge fund manager named Martin
Shkreli became the face of the U.S.’s drug cost problem
when his company, New York–based Turing Pharmaceuticals,
made headlines for raising the price of an old toxoplasmosis
drug by more than 5,000 percent overnight. Hillary
Clinton’s response on Twitter, calling the move outrageous
and promising a plan to stop such “price gouging,”
sent health care stocks tumbling. The S&P 500 Health
Care Index dropped 5.8 percent in one week. Major biotech
players BioMarin Pharmaceutical and Biogen both lost more than
6 percent in one day.
Turing didn’t pull down the market single-handedly. At
about the same time, Laval, Canada–based Valeant
Pharmaceuticals International came under fire for its own
pricing practices and its relationship with a network of
specialty pharmacies that allegedly pushed only Valeant’s
drugs. The company’s stock fell 71 percent between
September 18 and November 17.
Most health care investors, no matter how smart they were,
felt the blow from this sell-off. One of Greenwich,
Connecticut–based Viking Global Investors’ funds
— the Viking Long Fund, which had about 43 percent of its
assets invested in health care — lost 7.9 percent in the
third quarter. The hedge fund firm owns almost 5 million shares
of Valeant. But even those not invested in Valeant felt the
contagion: Dublin-based Allergan lost 13 percent in the last
week of September, and Teva Pharmaceutical Industries, an
Israel-based drugmaker, fell more than 10 percent that same
week. In a letter to investors at the end of October,
Glenview Capital Management founder and CEO Larry Robbins,
whose hedge fund firm owned both Allergan and Teva, admitted
that its health care positions had “failed to protect your
capital, and mine.” Glenview, which also was hurt by a
drop in shares of Chicago-based pharmaceuticals company AbbVie,
was down 13.5 percent for the first nine months of 2015,
according to an HSBC Hedge Weekly report.
The past year’s experiences showed that even a bet on a
company with solid fundamentals and a pipeline of
evidence-based therapies or technologies can be subject to the
dips and dives of the volatile market. Investors who remember
the biotech bubble of 2000 or got hurt in the recent market
stumble may not want to jump into these turbulent waters now.
But for those with access to, and a good understanding of, the
science just beyond the headlines, the opportunities may be too
hard to pass up.
“The ’90s were really a stepping stone,” says
Oliver Marti, who manages CCI Healthcare, the team at Stamford,
Connecticut–based Columbus Circle Investors responsible
for the firm’s $1 billion health care strategy. “Over
the past few years, we’ve started to see a lot of the
companies whose pipelines hadn’t fully matured entering a
new product cycle that I think was underestimated by Wall
Street.”