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A PUBLICATION NEW PUBLICATION FROMFROM REDMAYNE REDMAYNE BENTLEY BENTLEY

SUMMER2021 SPRING 2020

THE RISE AND FALL OF BIG PHARMA

MRNA:

The future of pharma?

CRODA: THE SILENT LOCAL HERO ARMCHAIR THERAPY: Digital therapeutics

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CONTENTS

INTRODUCTION 2 A Healthcare Revolution

INSIGHT 4 The Rise and Fall of Big Pharma

MRNA: THE FUTURE OF PHARMA?

6

CRODA: THE SILENT HERO

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ARMCHAIR THERAPY: DIGITAL THERAPEUTICS

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“back in January 2020, before m heard of Coronavirus, Moderna d COVID-19 vaccine in just two da mRNA technology, the company wa virus using its genetic sequ

many had even developed their ays. Using new as able to code the uence.”

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A HEALTHCARE REVOLUTION JAMES ROWBURY | INVESTMENT RESEARCH LEAD

What was once the flagship industry of innovation and advancement is now a sector under threat from disruption. Lab coats, test tubes and bottles of reagent are being outdone by software. Traditional methods used to develop vaccines have changed to incorporate software.

The COVID-19 vaccine race has shone a light on the immense power of the mapping and manipulation of DNA molecules, A.K.A Genomics.

Throughout their history, vaccines have been incredibly arduous to develop, taking many years and undergoing numerous and time-consuming stages.

In the past, traditional “live vaccines” were grown in laboratories and required complex refining processes to get right.

However, back in January 2020, before many had even heard of Coronavirus, Moderna developed their COVID-19 vaccine in just two days. Using new mRNA technology, the company was able to code the virus using its genetic sequence (See: mRNA: The Future of Pharma). The process of genetic sequencing is not particularly new, but its recent scalability is ground-breaking for an industry that spends billions on perhaps more ‘traditional’ research and development (R&D).

apparent than ever; R&D spending is rapidly increasing, while returns on these investments is reaching unsustainable lows (See: The Rise and Fall of Big Pharma). Many of them remain too big and diverse to innovate; take GlaxoSmithKline, which on the one hand develops new drugs, and on the other sells everyday consumer products. The two do not go hand-in-hand like they once did, and the company’s vision for a breakup of the two divisions seems the only way to refocus its efforts and grow again.

Of course, the approval process can still be lengthy. It took over a year for Moderna’s vaccine to hit the shelves of inoculation centres around the world, with much of this delay down to the FDA, who had never approved an mRNA vaccine until now. This should improve as it gains wider recognition and understanding and, like many other crises, the Coronavirus has provided an opportunity for mRNA technology to prove itself, changing the way in which big pharma looks at developing other treatments and disease.

Aside from the virus itself, triage and non-drug related treatments have been flipped on their head during the pandemic. Social distancing guidelines have prevented the more ‘everyday’ therapies from being administered.

Technology, once again, has addressed this market (See: Armchair Therapy) with a new kind of healthcare solution, aptly named ‘digital therapeutics’, which has provided a radical new way of getting treatment to those unable to travel to their doctor.

So, what does this mean for the incumbents? The big pharma giants have a lot of work to do in reducing their reliance on legacy research processes.

Their decline in innovation is more

On the contrary, more diverse businesses can still play their part; Croda, a UK-listed chemicals company that is predominantly in the game of beauty products, has played a significant part in the vaccine rollout, providing a key ingredient in the delivery and storage of mRNA shots (See: Croda – the Silent Hero).

No doubt, healthcare is going through a revolution. Like many other aspects of our lives and the economy, the pandemic has accelerated the use of new technologies that were otherwise overlooked. This is just the start.

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INSIGHT THE RISE AND FALL OF BIG PHARMA BEN STANIFORTH | RESEARCH ANALYST For many years, innovation occurred in significant, sequential stages, fully challenging the status quo at the time. Take the Ford Motor Company, its first use of the production line, now a staple amongst manufacturing companies globally, completely turned on its head the way in which products are produced. Since then, however, the wave of new technology companies has caused the once systematic approach to innovation to flow into a smooth and constant process. Software companies are now charging their customers a monthly licence fee and continually improving their products year-on-year, rather than charging for individual revisions of their packages.

This trend has spilled over to almost every industry across the developed world as companies look to service the continually changing and evolving needs of their customers.

The healthcare and pharmaceutical industry is no exception.

As big pharmaceutical companies have struggled with sluggish corporate structures and a serious lack of innovation despite record R&D budgets, brand new medical technology firms (or medtech for short) have emerged to take advantage of significant opportunities, often in niche areas, where they can dominate the market. This has led to a surge in not only the number of medtech IPO’s but also their valuations, as investors look to transfer investment from old economy assets to exciting and innovative businesses capable of producing strong shareholder returns while also providing a social good.

Large pharmaceutical companies were once all the rage amongst the investment community, however. Firms that were able to pass multiple drugs through clinical trials were rewarded with virtual monopiles within the segment in which they operated,

THE AVERAGE DRUG DEVELOPMENT PROCESS STEP 1 DISCOVERY AND DEVELOPMENT

STEP 2 PRECLINICAL RESEARCH

STEP 3 CLINICAL RESEARCH

STEP 4 FDA REVIEW

STEP 5 FDA POST-MARKET SAFETY MONITORING

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Research for a new drug begins in the laboratory.

Drugs undergo laboratory and animal testing to answer basic questions about safety.

Drugs are tested on people to make sure they are safe and effective.

FDA review teams thoroughly examine all of the submitted data related to the drug or device and make a decision to approve or not to approve it.

FDA monitors all drug and device safety once products are available for use by the public.

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However, it is not simply internal inefficiencies that have worked against such companies. The pharmaceutical industry has become increasingly controlled as regulators look to ensure the efficacy and safety of new drugs. A study in 2016 showed that the average time from U.S. Food & Drug Administration (FDA) application to approval of a drug was, at the time of its publication, 12 years, with the average estimated cost of bringing a drug to market from initial inception now exceeding US$1bn. The lengthy approval process and increasing cost of development has meant that companies have been forced to concentrate their R&D efforts across a smaller range of drugs, increasing the irretrievable financial damage dealt to the firm if a drug were to fail approval. This, coupled with the fact that large pharmaceutical companies are often known for, and in essence tied into, paying large dividends, it leaves little room for innovation and in fact encourages management to all but eliminate risk taking by continuing to squeeze sales of their current drug portfolios.

Since the rise of the technology sector in the early 2000’s, new fledgling healthcare companies have led the charge in implementing the use of technology into their business models in order to tackle the rapidly evolving global healthcare market.

Many such companies, now operating in the newly established medtech segment, have helped turn the sector from a purely secondary provider of finished goods in the form of drugs and medical devices, to a blended secondary and services sector, providing a wide range of expertise and products for consumers and businesses.

The medtech industry, and its services segment especially, has flourished since the start of the pandemic. Companies such as Teladoc Health (See: Armchair Therapy), who provide virtual healthcare and telemedicine services, have helped improve patient accessibility and connectivity with doctors and nurses during a time when face-to-face consultations have been kept to a minimum.

traditional pharmaceutical companies. While the latter have scrambled to either create a COVID-19 vaccine, with some more successful than others, or encourage sales of their usual drugs, the medtech industry has been able to leverage their technological business models to better serve their customers during this time and, ultimately, reward investors. Companies such as Teladoc were already operating within a growing market and tackling the problem of poor rural access to healthcare professionals, but due to their agile business models they have been able to continue to tackle the changing nature of patient problems, even during a pandemic.

As for big pharma, the question of both its relevance in today’s society and its ability to thrive long-term, remains. Many would argue that such companies have missed the boat, failing to invest R&D Dollars into innovative and growing areas of the market, leaving many medtech companies now either too large to purchase or unwilling to partner, afraid of being swallowed up and forgotten by upper management and happy with their growth trajectory. Coupled with shareholder demands in the form of buybacks and hefty dividends, it does not paint a rosy picture for the established pharmaceutical companies. The lack of early innovation and inability to now pivot means that 22.2 have been now for they are effectively stuck in place, as many years, producing mediocre returns at best while their medtech rivals continue to grow, flourish and innovate.

“

A study in 2016 showed that the average time from FDA application to approval of a drug was, at the time of its publication, 12 years, with the average estimated cost of bringing a drug to market from initial inception now exceeding US$1bn.

“

essentially providing a licence to print money. During the late 90s, big pharma companies were producing revolutionary lifesaving drugs, pushing their share prices sky high and rewarding investors. However, many such companies have failed to advance with the times and often rely on the cash cows of their incumbent drugs to maintain large-scale shareholder payouts, all the while ignoring high-growth segments of the market.

This comes despite a continuous and significant rise in global R&D spending, with the US pharmaceutical R&D market alone rising from US$2bn in 1980 to US$71.4bn in 2017. The kicker here, however, is not the increased expenditure, it is the severely declining returns from their R&D spend. A Deloitte study showed that between 2010 and 2019 the R&D returns from 12 selected large cap biopharmaceutical companies has steadily declined from 10.1% to just 1.8%. This highlights the lack of efficiency within an industry that relies on steady R&D productivity enhancements with a positive return on investment in order to drive future revenues and create value for shareholders.

In fact, the COVID-19 pandemic is the perfect example of why medtech companies are far better positioned in the market than

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MRNA: THE FUTURE OF PHARMA?

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The Coronavirus pandemic has had an impact on the world like nothing we’ve ever seen in our lifetime.

The ways in which we live, work, socialise and communicate have all changed, perhaps for good, and the true adaptability of the human nature has been tested.

In normal circumstances, it would take 10-15 years of research before a vaccine is made available to the public. However, it took less than 11 months for the Pfizer-BioNTech vaccine to be developed and be given emergency use authorisation (EUA) in the United Kingdom.

From working remotely to social distancing, entire industries have changed the way they operate due to the effects of the virus. There are many lessons to be learnt from the response to the pandemic, but one industry that has arguably advanced its way of working is the vaccine industry.

This particular vaccine, unlike the Oxford AstraZeneca effort, is a messenger RNA (mRNA) vaccine. mRNA serves as a code that tells the body how to generate the necessary antigens. These antigens are then recognised by the immune system, meaning it is prepared to fight the Coronavirus if the patient contracts it in actuality.

Unlike viral vector vaccines like the Oxford AstraZeneca jab, no actual virus is needed to create an mRNA vaccine, meaning that it can be produced at a much faster rate.

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Previously, mRNA vaccines were far from the success story they are today. It was first suggested in studies as recently as 1989 and 1990 that mRNA could prompt human cells to produce virus-fighting proteins. In 1994 it was shown that RNA could be used as a vaccine to combat pathogens in mice.

Almost written off as a pipedream, it wasn’t until 2005 that mRNA vaccines were developed to work in humans. However, no mRNA vaccine was licensed for use in humans until 2020 in the fight against Coronavirus. mRNA’s use in the Pfizer and Moderna COVID-19 vaccines, two of the world’s front runners, has boosted the profile of mRNA vaccines in what has been heralded as a revolution in molecular biology.

By tweaking the genetic code of the mRNA, ultimately instructing the body to produce different antigens, scientists may be able to use the technology to combat any number of diseases in the future, including ones that, thus far, we have been unable to defeat.

The journal Nature reported in October 2019, before the first official COVID-19 case was discovered, that BioNTech had utilised mRNA technology to develop a vaccine for 13 patients with advanced-stage melanoma, a form of skin cancer.

Each patient was given a personalised vaccine to match the genetic profile of their unique cancer. All 13 patients “showed elevated immunity against the mutated bits of their tumours,” according to Nature. As a result, each patients’ risk of developing new metastatic lesions was reduced significantly.

As well as Coronavirus, mRNA vaccines are being researched to combat a range of viral diseases. Nature reports that prophylactic, or disease preventing, vaccines have been developed for use against influenza and rabies, each producing the antibodies required to defeat the viruses in healthy volunteer patients. However, it was found that the antiviral effects of each vaccine faded after less than one year, meaning that more work is to be done in order to provide long-term immunity.

The appetite to develop mRNA vaccines for additional diseases is clear, and the time and capital invested in the cause shows this. In 2012, Moderna, the US-based developer of the most recent COVID-19 vaccine to be rolled out in the UK, raised US$40m from venture capitalists despite being years away from mRNA tests on humans while, in the same year, AstraZeneca agreed to pay Moderna US$240m for the rights to dozens of mRNA drugs that hadn’t yet been developed.

In 2018, Moderna opened a US$110m clinical development manufacturing plant to advance the company’s pipeline of mRNA-based medicines. At the time of the plant opening, the firm had 21 programmes in its mRNA pipeline, including potential treatments for different forms of cancer, rare diseases, infectious diseases and even heart failure.

Now that the world’s first mRNA vaccines have been officially licensed for use in humans, the future of this ground-breaking scientific discovery looks promising, and with countless diseases still without cures, could we be on the brink of a new age of medicine?

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There are many lessons to be learnt from the response to the pandemic, but one industry that has arguably advanced its way of working is the vaccine industry.

In normal circumstances, it would take 10-15 years of research before a vaccine is made available to the public. However, it took less than 11 months for the Pfizer-BioNTech vaccine to be developed and be given emergency use authorisation (EUA) in the United Kingdom.

“

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HISTORICAL VACCINE DEVELOP ROUTINE VACCINE PRO 1796

Development of first smallpox vaccine

1885

Louis Pasteur creates first live attenuated viral vaccine (rabies)

1909

Calmette and Guerin create BCG, first attenuated bacterial vaccine for humans

1896

Typhoid

1700s

1800s

1900

1870

Louis Pasteur creates first live attenuated bacterial vaccine (chicken cholera)

2008

1910

1920

2004

2003

1900s Cholera

Human papillomavirus HPV for girls

2007

2006

2005

2008 2006

Combined Hib/MenC

2013

Source: Public Health England

Children’s Influenza

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2013

2009

Rotavirus

2010

2009

Pandemic Influenza

2011

2012

2013

2013

Shingles

2014

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PMENT AND INTRODUCTION OF OGRAMMES IN THE UK 1950

1962

BCG

1956

1942

live s

1940

1968

Inactivated Polio

Diptheria

1930

Live oral polio

Measles

1960

1950

1970 1970

1961

1957

Rubella

Tetanus

Pertussis

2000

Seasonal influenza over 65s

1980 1988

2002

2001

2000

MMR

1990

1994

Adolescent tetanus and diptheria

2015

2020

Meningococcal B

COVID-19

2015

2016

2017

2018

2019

2020

2019

Human papillomavirus (HPV) Universal Programme

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CRODA: THE SILENT HERO The list of global vaccine providers is staggering; the likes of Pfizer-BioNTech, Oxford-Astrazeneca, Moderna and Novavax are names regularly hitting the headlines. With the corporate success of such names intrinsically linked to the effectiveness and efficiency of their respective vaccines, it is not surprising to see wild swings in the share prices of these companies.

and widespread drug development. Touching on the former, the group produces biostimulants to improve the yield and quality of crops, creates ingredients for crop protection, and makes a range of bio-based, renewable ingredients out of corn, which act as a substitute for petrochemicals.

While this organic growth is undoubtedly cheered, Croda is certainly not immune to mergers and acquisitions activity.

However, one company which has crept under the radar, Over the past 12 months, the chemicals group has agreed to and is benefiting from the extraordinary technological purchase Spain’s Iberchem for €820m, Parfex SA for €41.8m, developments in life science and the wider Avanti Polar Lipids for £188m and, more recently, the French biotechnology/pharmaceutical sector, is cosmetics company Alban Muller for €25m.

Croda International.

Investors should look at the history books before they start to worry; the company has a long Yorkshire-based Croda is a highly history of acquisitions, from Sederma in “...from a fundamental diversified chemicals company 1997, which specialised in anti-ageing perspective, Croda stacks-up with tentacles stretching into this skincare ingredients, to Uniqema in well against its rivals; over a high-growth and constantly 2006, which together have fashioned evolving arena. The group is a leading chemicals and personal five-year rolling period, the a leading global manufacturer care conglomerate. While this UK company has delivered of polar lipids, which lies at area of the business has struggled a superior operating margin the crux of the technology during the COVID-19 crisis, the needed to produce the Pfizerpent-up consumer demand which with lower leverage and is BioNTech RNA vaccine. is patiently waiting to be unleashed offering investors a wellPfizer’s COVID-19 vaccine should provide a tailwind to sales in covered, albeit skimpy, was the first time this RNA this division. technology had been distributed dividend. ” globally, potentially opening the The Iberchem-Parfex deals propels Croda’s floodgates to a wave of new vaccine reach in the fast-growing fragrances and treatments over the coming years. flavours market, while the purchase of Avanti, a specialist in lipid-based technologies, will work towards This development is expected to supercharge revenue growth, achieving the company’s top priority; namely, to expand its with Croda already revising the sales expectations from drug delivery business. the contract for the BioNTech/Pfizer vaccine to £89.5m in 2021, 25% higher than earlier estimates. The possibility of In addition to the above, from a fundamental perspective, annual booster shots could generate a lucrative, recurring, Croda stacks-up well against its rivals; over a five-year rolling and contractual revenue stream for the foreseeable future. period, the UK company has delivered a superior operating Furthermore, Croda is set to benefit as the European Union margin with lower leverage and is offering investors a wellgrapples with the potential loss of the Johnson & Johnson and covered, albeit skimpy, dividend. The shares have performed AstraZeneca vaccines given the uncertainties and worries robustly over the past 12 months, and are up c.40%, and with surrounding the possible side-effects of the jabs. The EU has the growth prospects in store, the 37x Price-Earnings multiple agreed to buy an additional 50 million doses from Pfizercan be somewhat warranted.

Biontech in 2020’s second quarter and is in talks to purchase up to 1.8 billion more doses over the next two years.

It is poignant that the same company which supplied oils for camouflage and gun cleaning during the Second World War, The company also delivered record results in its life sciences is now on the frontline fighting the invisible enemy that is division, which has witnessed growing activity in agriscience COVID-19.

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DIVIDEND YIELDS 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Croda CRODA

Symrise SYMRISE Div Yield (%)

Givaudan GIVAUDAN

Div Cover (x)

Ashland Global ASHLAND GLOBAL

FCF Yi eld (%)

5 YEAR PERFORMANCE - TOTAL RETURNS VS MSCI UK 300

250

200

150

100

50

Croda International PLC - Total Returns 0 22/04/2016

22/10/2016

22/04/2017

22/10/2017

22/04/2018

MSCI United Kingdom IMI - Total Return 22/10/2018

22/04/2019

22/10/2019

22/04/2020

22/10/2020

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ARMCHAIR THERAPY: DIGITAL THERAPEUTICS As a result of COVID-19, healthcare systems across the world encountered a monumental challenge – how to provide treatment for those affected by the virus yet maintain levels of care for existing patients.

The constraints this placed on healthcare systems gave way to a search for solutions, which ultimately accelerated the adoption of digital therapies that enabled patients to receive similar standards of treatment remotely.

This is otherwise known as digital therapeutics – an umbrella term for products delivering evidence-based therapeutic interventions to patients, driven by highquality software programs to prevent, manage, or treat a medical disorder or disease. It’s role in developing the healthcare industry has been fuelled by the pandemic, however, the case for digital therapeutics has evolved over the last decade as the use of technology and artificial intelligence (AI) became intertwined with our daily lives. The technological advancements in the space have produced increasing evidence that digital therapeutics are effective, and with the cost of bringing a drug to market estimated to be as high as US$2.9bn while return on investment nears 0% (See: Insight: The Rise & Fall of Big Pharma), the potential for a cost-effective, convenient and scalable method of treatment for billions of patients worldwide is disrupting the healthcare industry.

Within this ten-year period, 77% of digital therapeutics trials conducted were sponsored by academia, which has dominated research across all therapeutics apart from respiratory, where 50% of trials have been sponsored by industry. Research into digital therapeutics has, therefore, mainly been driven by academics, yet as the industry grows this is likely to shift towards the established players and help to drive innovation further. The highest percentage of trials have been conducted in psychiatry (25%) – with strong evidence supporting the efficacy of digital cognitive behaviour therapies in this area – followed by cardiovascular (11%), endocrine (10%), addiction (10%), neurology (8%), and respiratory (7%).

Such trials have been vital in progressing digital therapeutics, as the contradiction between fast, disruptive tech and the need for evidence-based health solutions meant there were a number of regulatory hurdles to clear before wide-spread adoption could be considered. One of the main problems thus far has been the lack of medical professionals using digital therapeutics platforms, but regulatory changes and increased levels of consumer demand should help to solve this. In March last year, the US introduced regulations working towards this goal, enabling healthcare providers to practice across state lines while also permitting providers to prescribe controlled substances remotely without a prior in-person exam.

Investments in digital therapeutics companies in the United States have grown by an average of 40% a year over the past seven years, but the industry is still at an early stage, estimated to grow tenfold in the next three to four years, with a projected market value of US$9bn by 2025.

Most successful digital therapeutics companies so far have been start-ups, but as the evidence behind the effectiveness of the technology and demand from consumers increases, big players in the pharma industry are searching for acquisitions or products of their own. One of the first and largest providers of digital therapeutics is a company called Teledoc, which offers members 24/7 access to medical services through phone and video consults. The US’ largest telemedicine company grew its subscriber base significantly last year and acquired Livongo in an US$18.5bn deal. Livongo is a data-based health coaching programme for several areas including diabetes management, weight management and behavioural health.

The two companies estimate that revenue synergies of US$100m will be achieved after two years, and US$500m by 2025, highlighting the demand both companies expect for digital therapeutics in the future. The convenience of online health check-ups no doubt has a positive impact on public health and will reduce costs in healthcare, but whether consumers opt to use these services once we return to normal life will be an interesting scenario to monitor.

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