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Exploring New Frontiers in Healthcare Investing

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Disruptive, groundbreaking, transformative and related adjectives have long been part of the investing lexicon. Those words have a place in the healthcare sector, particularly in the biotechnology space.

Over the years, scores of biotechnology companies of varying sizes have broken new ground in treating diseases including Alzheimer’s, cancer, diabetes, hepatitis and Parkinson’s, among others. Today, many of those markets remain growing, lucrative and profitable. However, there is an increasing number of unmet medical needs that many large-cap biotechnology companies are only slightly involved with or not participating in at all, at least not yet.

Some of these markets could prove to be massive in the years ahead with industry analysts and researchers forecasting some jaw-dropping compound annual growth rates (CAGRs). The market for peanut allergies, one of the most common food-related allergies, is a prime example. Symptoms range from minor (itchiness, sneezing and swelling) to severe cases involving cardiac arrest and potentially fatal anaphylaxis.

To this point, the Food and Drug Administration (FDA) and the European Medicines Agency have not officially approved treatments for peanut allergies.

Related: Prepping For Another Wave Of Biotech M&A

Inside The Opportunity

Earlier this year, shares of Aimmune Therapeutics Inc (AIMT) rallied after the company said its Phase 3 PALISADE efficacy trial of AR101 met the primary endpoint. That treatment has Breakthrough Therapy Designation for peanut-allergic patients ages 4–17, according to Aimmune.

Past attempts at treating food allergies have usually been given to patients via injection, but if approved by the FDA, Aimmune’s treatment would be the first to be administered orally.

“Aimmune’s biologic drug, AR-101, aims to expose patients to controlled doses of peanut protein,” reports Xconomy. “The company developed a proprietary mix of the protein and pharmaceutical-grade ingredients that comes in a capsule or a packet that can be opened and mixed with food.”1

As the chart below confirms, there is a growing need to treat food-related allergies

Another New Frontier

Another example of an unmet medical need is nonalcoholic steatohepatitis (NASH). The global market for NASH is potentially huge. By some estimates, that market, in revenue terms, was just $729 million in 2016 but could grow at a compound annual growth rate of 46.1% through 2025.2

Related: An Emerging Theme In Thematic Investing

Madrigal Pharmaceuticals, Inc. (MDGL) is one of the companies working on a NASH treatment. The company’s MGL-3196 recently showed encouraging results in a Phase II clinical trial. There are large- and mega-cap players involved in the NASH space, stoking speculation that some of those companies could partner with or acquire smaller companies.

Some market observers believe “investors with tolerance for risk could do well to buy shares in several small-cap and micro-cap companies with promising NASH drugs in early development,” reports Reuters.3

The expected CAGR for the NASH market is stunning.

Accessing Unmet Medical Ideas 

The ALPS Medical Breakthroughs ETF (SBIO) provides investors with a basket approach to mid- and small-cap biotech companies, several of which are addressing unmet medical needs, including the aforementioned companies. The fund’s underlying index, the Poliwogg Medical Breakthroughs Index (PMBI), requires member firms to have enough cash to survive for two years at current burn rates, an important trait for companies waiting on FDA approvals.

*Aimmune Therapeutics Inc (AIMT) was a 1.24% holding in SBIO as of 6/1/18
* Madrigal Pharmaceuticals Inc (MDGL) was a 2.56% holding in SBIO as of 6/1/18
1 Source: Xconomy Feb. 20, 2018 https://www.xconomy.com/san-francisco/2018/02/20/aimmunes-peanut-allergy-drug-hits-study-goals-fda-filing-planned/
2 Source: Research And Markets Feb. 12, 2018 https://www.businesswire.com/news/home/20180212005608/en/Global-Non-Alcoholic-Steatohepatitis-NASH-Market-2017-2025–
3 Source: Reuters April 24, 2017 https://www.reuters.com/article/us-health-liver-nash-insight/nash-the-next-untapped-pharma-market-gives-investors-many-options-idUSKBN17Q0D5
Important Disclosure & Definitions
This material must be preceded or accompanied by a prospectus. Please read it carefully before investing.
Standardized performance for the ALPS Medical Breakthroughs ETF (SBIO) can be found here. Current holdings for SBIO can be found here.
Shares are not individually redeemable and the owners of shares may purchase or redeem shares from a fund in creation units (blocks of 50,000 shares) only.
This fund may not be suitable for all investors. There are risks involved with investing in ETFs including the loss of money. The Fund is considered non-diversified and as a result may experience great volatility than a diversified fund. The Fund’s investments are concentrated in the pharmaceuticals and biotechnology industries, and underperformance in these areas will result in underperformance in the Fund. Investments in small and micro capitalization companies are more volatile than companies with larger market capitalizations.
Companies in the pharmaceuticals and biotechnology industry may be subject to extensive litigation based on product liability and similar claims. Legislation introduced or considered by certain governments on such industries or on the healthcare sector cannot be predicted.
Companies in the pharmaceuticals industry are subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting. The profitability of some companies in the pharmaceuticals industry may be dependent on a relatively limited number of products. In addition, their products can become obsolete due to industry innovation, changes in technologies or other market developments. Many new products in the pharmaceuticals industry are subject to government approvals, regulation and reimbursement rates. The process of obtaining government approvals may be long and costly. Many companies in the pharmaceuticals industry are heavily dependent on patents and intellectual property rights. The loss or impairment of these rights may adversely affect the profitability of these companies.
The development of new drugs generally has a high failure rate, and such failures may negatively impact the stock price of the company developing the failed drug. Biotechnology companies may have persistent losses during a new product’s transition from development to production. In order to fund operations, biotechnology companies may require financing from the capital markets, which may not always be available on satisfactory terms or at all.
Cash burn: Burn rate is normally used to describe the rate at which a new company is spending its venture capital to finance overhead before generating positive cash flow from operations; it is a measure of negative cash flow. Burn rate is usually quoted in terms of cash spent per month.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
Poliwogg Medical Breakthroughs Index – The Poliwogg Medical Breakthroughs Index is designed to capture research and development opportunities in the pharmaceutical industry. PMBI consists of small and mid-cap pharmaceutical and biotechnology stocks listed on US
One may not invest directly in an index.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Medical Breakthroughs ETF
SMB000211 12/31/2018
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