William Blair Global Research Analysts Tommy Sternberg, CFA, and Ben Loss, CFA

EditGenetics: Improving Lives

January 11, 2021 | 30:39

Harnessing technology to solve known problems in healthcare and food is something we’ve been exploring in depth. In the first installment of our Convergence series, which examines five growth themes that are shaping the future of investing, Hugo speaks with William Blair Global Research Analysts Tommy Sternberg, CFA, and Ben Loss, CFA, to discuss what we call “EditGenetics.”

Meet Our Moderator

Hugo Scott-Gall, Partner

00:40 Host Hugo Scott-Gall is joined today by two colleagues: Tommy and Ben.
01:17 Hugo begins the episode by asking Tommy about the growth area of genetic therapy.
03:10 Tommy takes a step back to define gene therapy.
04:29 The conversation turns to surprises and the addressable market.
06:13 There is much momentum in this area, but there are also some risks to bear in mind.
07:15 Not only biotech companies stand to benefit from growth in the field of genetic therapy.
08:14 Hugo asks about liquid biopsy, another genetic growth area.
11:19 What is the value of liquid biopsy? Tommy highlights three applications: therapy section, recurrence monitoring, and early detection and screening.
13:41 Turning to Ben, Hugo asks him why food is a growth area and what solutions he sees in this sector.
16:27 Nature is not standing still, but is resisting products used to increase farming yield.
17:12 There are areas of opportunity within the food growth market, such as biologic alternatives.
18:35 What needs to be solved to move from the early stages of capitalizing on growth opportunities to genuine penetration of the areas of opportunity?
20:39 Hugo asks Ben to comment on consumption of synthetic protein.
22:35 The conversation shifts to speeding up the process of gene selection to alter food.
23:10 What are the high-impact but currently low-probability things that could happen in each guest’s industry? For Tommy, the “moon shot” is longevity.
24:45 Ben has three moon shots to share, the first being vertical farming.
26:34 The next moon shot Ben shares concerns robotics.
27:27 Finally, Ben considers a third moon shot to be the use of microbes.

Hugo Scott-Gall: Today, I’m joined by two of my colleagues, Global Research Analysts Tommy Sternberg and Ben Loss to discuss EditGenetics in the first installment of our Convergence series, which examines five growth things that are shaping the future of investing. This episode will address solving known problems and constraints with existing technology and explore new technology in healthcare, food, and biomaterials. So, Tommy and Ben, welcome. Thanks for being here. And let’s get started.

Ben Loss: Great to be here.

Tommy Sternberg: Yeah, thanks. Let’s do it.

Hugo Scott-Gall: Right. Let’s do it. Tommy, your voice was last, so I’ll pick on you first. In the work that we did around where to find growth, thinking about exactly the shape and profile of growth–across a number of industries—you spent quite a lot of time talking about the role of genetics in health and wellbeing. So, could you talk about that? And talk about gene therapy because I count myself amongst probably the majority who don’t really know a lot about gene therapy. What is it? Why is it important? And why is it one of your growth areas?

Tommy Sternberg: Yeah, absolutely, Hugo. So, when we took a look at the overall healthcare sector and some interesting growth areas for us to be further investigating, to where great companies are going to be driving lots of growth, yeah, absolutely genetics and our understanding of it really is driving multiple themes. In the area of gene therapy specifically, was a very interesting market for us. Now, for those avid listeners of The Active Share podcast, you may recall that we spoke quite a bit about gene therapies back in a previous episode that we did, “Is It Science Fiction or Is It Healthcare?”

So, back then, we introduced a number of what I’ve been referring to as new medicine modalities–so, completely novel types of medicines that are making tremendous medical breakthroughs. And we specifically introduced not only gene therapy, but also related modalities of cell therapy and gene editing. So, I won’t rehash all of those here.

But we did wanna specifically call out gene therapy on its own as this market is developing rather quickly. And there have been some significant developments since we had first introduced the topic, both on the medical development front as well as the corporate front in terms of IPOs, M&A, license agreements. So, there’s a lot of dollars changing hands here, a lot of investment in this area.

Maybe I should step back now and just briefly introduce or explain exactly what I mean when I say gene therapy. So, a gene therapy approach modifies existing genes or introduces new genes into a patient’s body, potentially leading to cures for genetic conditions. So, a common gene therapy approach would involve replacing a mutated gene that causes a disease with a corrected version, or a functional copy, of that gene.

And just to reemphasize, what’s fascinating here is that this approach is potentially curative because it addresses the underlying cause of a particular disease that is caused by a specific genetic defect. So, you’re not just treating the symptoms here. So, gene therapies, for instance, are being investigated in genetic disorders such as sickle cell disease, hemophilia, muscular dystrophy, and various eye diseases, and even congenital deafness. So, it’s a big opportunity and we can delve into that a little bit more, Hugo, in terms of the numbers and how we’re thinking about it from an investing standpoint as well.

Hugo Scott-Gall: Why do you think, then, that the growth could really surprise? Because it seems like we talk about TAMs, total addressable markets. And it seems the addressable markets could be pretty big given some of the conditions and diseases that you’ve highlighted there. When can the surprise come? Why can’t it come sooner? What are the things that are in the way?

Tommy Sternberg: Yeah, sure. So, let’s spell out the TAM a little bit and then we can talk to where perhaps some of the surprises may come from. So, in this exercise where we looked across the sector for big and growing markets, with big–that have big TAMs, as you said, TAM here is potentially as big as $4 trillion, which is almost unheard of and hard to really wrap your head around that and how much can they truly capture. We’ll see. But first of all, how do we even arrive at that number?

So, there are about 40 million people across the U.S. and Europe alone that have a rare genetic disease. And while that patient number alone is not as large as what you would see in other more common diseases, such as cancer or cardiovascular disease–but because these rare disease treatments come with very high price points, in some cases well north of $1 million, of course it’s incredibly high but can actually be justified from a pharmacoeconomics standpoint because of the value that is being brought for these patients due to the severity of these various diseases and what it could mean for their lives.

And, of course, the ultimate bill that’s being paid, even when you sum up this at the moment, is not nearly as large as some of those other disease areas that I mentioned. But when you do the math on that–and let’s just say you use a $100,000 price point, on 40 million people, that’s an incredible addressable market that we got to. So, that’s one of the reasons why we wanted to highlight this. But also, there’s a lot of momentum in this area. So, there are still only two recently approved gene therapies on the market, and this was the same as when we discussed this over a year ago.

But the momentum continues to skyrocket. At the beginning of the year, there were over 900 ongoing gene therapy trials in the U.S. And so, we’re likely to be well north of 1,000 today. Again, thinking of that baseline of just two approved therapies out there. Now, you asked about surprises. There are both surprises–both positive and negative. So, we need to be mindful of the risks here. And in recent months, there have also been some high profile discontinuations of some clinic trials, including patients dying.

So, the development path here for gene therapy as a whole is not linear, and that’s to be expected. But certainly the promise is there and there’s plenty of investment and momentum behind this opportunity. And then, I guess, one perhaps less obvious insight is it’s not just the biotech companies themselves that stand to profit from all the development in this area, but other business models that we like are those partners that work with the drug developers to help them with various services in terms of research development and manufacturing. So, these are really important enablers of growth in this fast growing industry.

So, I think we had some surprises that we were starting to uncover this area. For instance, just how expensive and how much manufacturing space is needed to come up with the raw material, the viral vectors–which is the raw material for these gene therapies–you start to get to pretty high numbers. So, that’s been one surprise to us that is leading to some investment insights for us as well.

Hugo Scott-Gall: Great, thanks. So, I guess one other area we’d like to cover, I’d like to ask you about is liquid biopsy, which you’ve said is again a growth area. So, could you talk about what exactly it is and why you see it as a growth area–and really, how much can it grow?

Tommy Sternberg: Absolutely. So, the area of liquid biopsy is another really burgeoning growth market. There’s lots of investment in this area from big companies, small companies, public, private. And just to explain a little bit of what it is, and then we can speak to the type of growth opportunity that we’re seeing here more broadly. But the value proposition here in terms of the problem that’s trying to be solved is readily apparent.

So, most cancers are simply detected too late. So, early detection can increase cancer survival rates vary substantially, depending on the cancer type and the data you’re looking at, perhaps up to three times to 12 times of an increase in survival rates, depending on when cancer is first detected. However, for an otherwise healthy patient, it’s not going to be practical. It’s not going to be cost effective, or even really justified medically necessarily, to perform a tissue-based biopsy on various organs if there’s no medical reason to do so.

But that’s why imaging, screening–such as mammograms and other procedures, like colonoscopies–I mean, these have had massive impacts on cancer detection if you go back decades. But there’s still so much more that can be done. And that’s really the promise of the simple, blood-based test, that could detect whether you might have an early stage cancer. And the medical, as well as societal, value of such a test would be enormous.

I would understand if there might be a bit of skepticism here, particularly for anyone who’s familiar with the Theranos story, if you’ve read the book Bad Blood, or if you’ve seen the movie that profiled Elizabeth Holmes and Theranos. Right, great promise of curing everything with just a prick of your finger. But there’s a reason to be somewhat skeptical of this. But, in fact, I think what might surprise many people is we’re actually closer than most people think for this to actually become a reality.

So, just for a little bit of history here. So, the first liquid biopsy test was approved in 2016 and it was able to detect a specific type of mutation in a tumor, which is important because not all types of cancers, even if it’s in the same organ, are the same. So, when a specific type of mutation can be identified, then one type of drug might be more effective in treating that cancer, as many cancer therapies are actually developed, to target some of these mutations.

So, while this type of test was readily available as a tissue-based diagnostic, using a blood-based test has some advantages–for instance, in cases where the tissue is difficult to be biopsied. It’s also easier to repeat the test if necessary. So, just stepping back, what is the value here, then of having this blood-based or liquid biopsy available? Well, there’s three primary applications here. The first is therapy selection. So, that’s the example I just walked through.

Another application is recurrence monitoring. So, that’s actually a pretty big deal. It’s way easier to monitor recurrence for existing patients who have maybe already received treatment–to be able to do that with a blood-based test compared to a tissue biopsy. Then, you get more of a real-time, more of a longitudinal view, of where the cancer’s at and whether it is recurring. And then, of course, the biggest potential application is, of course, early detection or screening, which I mentioned at the outset.

So, Hugo, you asked about the growth opportunity, and to walk through what it means here. So, we’ve sized the liquid biopsy market today at around $600 million. It’s certainly south of $1 billion. But the total addressable market we sized at $50 billion. So, and actually, since then, we’ve seen subsequent estimates because there have been some recent activity in the space, valuing it up to $75 billion by 2035. But either way, you’re looking at a market that’s maybe 1% penetrated. And it’s already growing pretty fast.

We see the five-year CAGR around 40% or so. And that’s without having tapped into the largest segment, which is that early detection. And again, early detection is going to be–make up the vast majority of that $75 billion or $50 billion market opportunity several years down the road.

And one final point here is that, while we don’t have an approved test for early screening, again, very close here. One of the largest companies in the space is expected to have a test available on the market as soon as next year, in 2021. So, liquid biopsy, really exciting space. Lots of excitement. A lot of action. Lots of opportunity.

Hugo Scott-Gall: Great. Thanks. Well, that’s a very obvious solution to an important problem. So, on problems to solve, Ben, I’m wanna bring you in because I guess one of the growth areas you highlighted–and I guess this is a recurring growth area–but the growth in the world’s population means that we need to produce more food without increasing cost. So, could you talk about why right now that’s a particularly interesting growth area, and what are the solutions that you think are making it so attractive?

Ben Loss: Yeah, sure, Hugo. I think probably, to start off, just a little bit of historical context can give people a window into how we got to where we are today and how that informs the needs of tomorrow. So, we still have an increasing population. You see some of the developed world not increasing as much, but you still have strong growth in emerging countries. And so, while population growth may not be as strong as it historically has been, it’s still present.

But even if we were to relax that assumption, there are still very strong growth opportunities. So, starting from about the 1800s we’ve added about 7 billion people to the planet, two-thirds of which has come since 1950. So, this is quite explosive growth relative to the trajectory that we were on. And over that time period, we’ve actually seen land use for agriculture decrease. The U.S. is down roughly 12 percentage points over the last 50 years.

So, you look at those two things and you say, “Well, how do you reconcile this?” And you reconcile it by the fact that we’ve seen, on a cumulative basis since the 1950s, a 70% increase in farm productivity. Essentially, if you were to go back to the 1950s, you can draw a 45-degree line and that’s the increase that you would see in yields. And looking back from that, you would see very little improvement. So, we had this very strong increase that came with some cost that we’re learning more about each day. So, we added fertilizers. We added a series of agricultural chemicals.

And then, we learned better farming methods, better irrigation, etcetera. But now, we’re seeing that that had some cost, both on the human health side as well as the environmental side. So, now we’re looking to reformulate and rectify some of those problems. But at the same time, we need to ensure that we’re gonna have healthy and sustainable food for a global population. And then, as we look forward, the incremental growth, given the base effect from a larger population, we’re probably gonna need to see a 30% increase in farm productivity over the next several decades.

So, very strong demand for the industry. And so, this has created what I’m talking about as a sort of dual mandate. So, it’s continued to increase productivity but in a healthier way for the people on the planet. And then, running in conjunction with this, is the fact that nature isn’t standing still. So, we’ve seen bugs, fungi, etc. develop resistances to a lot of these products that have enabled this explosive growth and yield. And so, even if we were to put aside these other concerns, we are seeing natural resistance develop and we’re gonna need to combat that somehow.

And you can look at Roundup, or glyphosate, as it’s known, which is a pretty common example that people see as one area where crops are starting to develop significant resistance to. So, this mandate creates a lot of opportunities that we see. And so, this is across a $5 trillion global market. I know Tommy talked about $4 trillion. This is a little bit bigger. And so, when you look across these opportunities, this is a very prominent theme that we see a cross the sector.

So, one area is these biologic alternatives. And this can be either a full-on replacement of chemicals or it can be a supplement to something that’s already in place. And the predominant way that this has manifested itself in the market is through coatings on seeds. And these can do a whole host of things, to protecting the crop from insects or disease, requiring less chemicals, or it can do things like enhancing nutrient uptake, which is gonna require less need for fertilizers. And that’s gonna result in better yields and ultimately a healthy planet because those fertilizers generate a lot of emissions in their production process.

So, very strong growth there. And this is–also can be harvested across the animal market. So, the protein chain, where we’re using a lot of these biologic alternatives along with combating antibiotic resistance, which is similar to the crop resistance we talked about–but just optimizing the gut health of animals to make the yield conversion from feed to protein optimal. So, there’s a lot of challenges here. There’s a lot of solutions that are coming. But this is still very much in the early days.

Hugo Scott-Gall: And, again, what are the things that need to be sold? What are the impediments to make us move from early days to some kind of genuine penetration?

Ben Loss: Yeah, so, there is just this sort of nature of the industry. So, we generally have one growing season a year, outside of a couple select markets. And farmers are, by nature, a conservative group of people. So, it takes time to really convince them of new solutions. But we are seeing that come into the market. If you look across the biologic segments of a number of companies that are reporting growth between 20-50%, most of them–so, it is happening. But this is coming off of a small base. If you look at certain markets there, every acre of some crops does have a biologic product of some sort.

But now that we’re seeing more of this crop resistance, as well as legislation coming forward as we learn more about the harmful effects of a number of these chemicals, that’s gonna really cause an inflection point. And so, companies that are well positioned with products in these areas are–should do quite well. The other thing–and this connects with why these are attractive businesses is it’s not enough to just know that there is a microbe, or the bioproduct of the microbe, the enzyme, that is useful. But it’s very hard to produce consistent scalable quantities of this.

And so, that’s part of the challenge here. It’s not just like fermenting your favorite beer. There’s a lot that goes in–involved with this as well as making sure that the microbes stay alive to get to where they need to get to and that they’re still in sufficient quantities and they can survive transport and various other environmental impacts. So, there’s a lot around that that continues to need to improve to be able to produce the quantities that we’re gonna need across the farm complex.

Hugo Scott-Gall: Great. So, related to this demand for more food, can we talk a little bit about synthetic protein and how you think the market for protein will change in terms of organic versus synthetic? And again, what are the other barriers? What is stopping synthetic protein becoming a much bigger part of that mix?

Ben Loss: Yeah. So, I think consumer taste does play a role in this. But when we look at the challenges of growing meat, there’s a lot of scientific breakthroughs that still have yet to occur there. It’s quite tricky to replicate the bone and other structure that we see within an organism and exporting that outside and growing the muscle tissue around it. I think we have a sense of how the muscle component of it works, but it’s that other part that seems to be holding us back.

And then, obviously, these are still gonna require resources to grow and figuring out how to properly source that, either if it’s from the natural process of a cow out on pasture versus importing that into the lab. There’s just a lot of technical challenges to overcome. But one area–and this ties into some of what Tommy was talking about–is biologics as it relates to seeds and this CRISPR technology. I’ll spare you what the acronym actually means because I oftentimes forget myself.

But basically, what we’re seeing here is the ability to take what we’ve been doing for generations–which is naturally selecting for the traits that we see as desirable. If you look back several thousands of years ago, the strawberry that we would see back then, or the stalk of corn that we would see back then, would be unrecognizable. This has all been done by generations of us selecting for traits that are optimal for what we’re trying to achieve.

And so, CRISPR is basically a way of just speeding up that process, taking thousands and millions of years and condensing it down into very short periods. So, this is another very interesting way of getting about this problem. And it does–in many ways, it’s talking more about silencing and the removal of genes from the existing organism rather than inserting new ones in, which is what much of the GMO debate has been about.

Hugo Scott-Gall: Great. Thanks, Ben. So, I wanna ask both of you the moon shot question. By that, I mean, what are the high impact but currently low probability things that could happen in your respective industries? So, Tommy, you go first. Give me something whacky. Give me something that right now feels unlikely and a bit out there, but just could, just might happen.

Tommy Sternberg: Yeah. I mean, one area that I’m interested in that’s not super close, or high on our radar screen, but could perhaps accelerate as potentially–in terms of the innovation, and maybe even in investment–from an investment standpoint as well is longevity. And the use of artificial intelligence machine learning combined with the raw power of genome sequencing, as the cost has come down substantially, the speed has gone up. The advent in the use of CRISPR and other gene editing technologies that Ben mentioned–applying all these things, and other interesting discoveries around certain cells that don’t necessarily die as quickly as others.

And looking into those to slow down the aging process, I think, is a fascinating area of research. We’re still in early days, but who knows? At some point in the coming years, when–we may see breakthroughs in that area. So, I think that’s an interesting area–sort of a moon shot–to pay attention to.

Hugo Scott-Gall: Ben? Can you match that?

Tommy Sternberg: He’s not only gonna match it. He’s gonna one-up me, I’m sure, just based on the–I throw out a $4 trillion TAM. Ben throws out a $5 trillion TAM. Don’t think that didn’t go unnoticed.

Ben Loss: Yep. Yep. I was waiting for that response. So, I think there’s three moon shots that are worthy of inclusion.

Hugo Scott-Gall: You’ve got three to Tommy’s one.

Tommy Sternberg: That didn’t take long. That didn’t take long. Just right away. Boom. Three to one.

Ben Loss: Next time, it’ll be nine. So, the first one, I would say, is vertical farming. So, I think this is gonna be a nice buffer, or just compliment, to all of the biologic revolution, use of CRISPR, better seeds, etc. that can ensure that we don’t have any sort of food shortages. So, when you think about vertical farming, what would the advantages be? It would be controlled environment, be close to the demand centers, and it would offer continuous production because, obviously, it’s indoors and you don’t have to worry about seasons.

This is also interesting from a big data–sensors, advance materials. There’s gonna be a lot of neat innovations that need to happen there. It’s not like it’s gonna overwhelm traditional agriculture. It’s likely gonna be limited to certain crops–mostly it’s things like lettuce and similar crops. But that’s certainly an area to watch. So, you could say, “Well, why aren’t we doing more of it now?” Because it costs a lot of money to replicate the sun, which is free when you’re outside. So, as renewable energy costs come down, those vertical farms becomes closer and closer to in the money. So, I think that’s something to watch.

And then, another piece would just be–we’re seeing this across a number of industries, but robotics. And so, obviously, as I talked about before, nature plays this game where it’s fighting back against the things that we try to do. This will be true on the biologic side as it has been in the synthetic side. But it’s gonna be quite hard for weeds to evolve a way to get around a metal sphere or fork that’s walking through the rows and spearing them and taking them out of commission.

You can find some fun videos online about various robots and working through that. And so, there’s gonna need to be a lot of innovation for those camera modules, etc. to be able to recognize weeds and other harmful things versus the crop. But that’s one way to get us back to organic farming, but without a lot of the cost.

And then, the third piece, I would say, is we talked a lot about microbes and their use on animals and plants. But then, their potential on the human side. So, thinking about this as bugs, as drugs kind of thing. This could be a next frontier in medicine where we finish the human genome and now we’re thinking about the human microbiome, which is essentially all the bacteria that live inside us for mutual benefit, evolving and thinking about human beings as a system.

So, we’ve already seen good evidence of certain microbes and their ability to basically alleviate peanut allergies. But there’s a lot of promising data cross a whole host of things, including cancer. So, I think that’s something that’s certainly an emerging trend where you’re seeing a lot of R&D dollars go into therapies across this area. So, there’s my three moon shots.

Hugo Scott-Gall: Thank you for that. I must admit, when I was growing up, I used to think farmers were farmers. Little did I know they were horizontal farmers. But thank you both very much for sharing just a few of your insights around where to find growth. Really interesting stuff, funky stuff. I think Ben wins on the moon shots. But with that, I’m gonna say thank you to you both and thank you for listening.

Ben Loss: Thanks for having us.

Tommy Sternberg: Thanks, Hugo.

Meet Our Moderator

Hugo Scott-Gall, Partner

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