As headwinds subside, the Sustainable Global Equity team at Federated Hermes reveal why they believe investment into the Life Sciences sector looks compelling for the long term.
Life Sciences encompass all the scientific disciplines that study living organisms, including biology, biochemistry, genetics, and microbiology.
It can often be conflated with Biotechnology or Biotech which has a reputation in the investment world for being volatile.
At Federated Hermes we look beyond short-term market moves and see significant long-term investment potential among the companies that are involved in the making of biologic drugs.
In contrast to chemically-synthesised drugs, biologics can be composed of sugars, proteins, nucleic acids or complex combinations of these substances, or may be living cells or tissues. They are isolated from a variety of natural sources- human, animal or micro-organism1.
The complex biologic drugs that are taking centre-stage in pharma pipelines require different discovery and production techniques from traditional medicines. We see opportunities among a wide range of companies exposed to production, for example Contract, Development and Manufacturing Organisations (CDMOs) and consumables producers, as well as specialist tools and equipment manufacturers, who are exposed to research & discovery efforts.
In this piece we discuss why an investment into the Life Sciences sector – which sits at the cross hairs of demographic shifts, technological advancements, and societal needs – makes for a compelling long-term investment opportunity.
1. Secular drivers of growth remain intact
a) Population growth
The global population has more than tripled from an estimated 2.5 billion people in 1950 to 8.0 billion in November 2022. United Nations estimates project it to reach 9.7 billion in 2050 and nearly 10.4 billion by the mid-2080s2, while life expectancy is also increasing.
This population growth, coupled with longer lifespans, creates a larger middle class and a sizable ageing population, creating more strain on health systems as elderly people will require more spending per capita.
b) Tool & equipment intensity
Developing new medicines now requires advanced tools and equipment which has raised the bar for industry standards and expectations.
With low-hanging fruit already taken, pharmaceutical companies must invest more in research and development (R&D) to be successful.
This was evidenced in the thirteenth annual report from Deloitte’s Measuring the return from pharmaceutical innovation series which estimated that the average cost of developing a drug, including the cost of failure, increased from US$1,986m in 2021 to US$2,284m in 2022.
So, while big pharmaceutical companies face higher costs and lower returns on their R&D investments, third party companies are providing support to the well-known ‘headline’ pharma names.
These companies, which provide the necessary tools and equipment to facilitate the development process, are well positioned to benefit from the increased demand.
c) Capitalising on the Biologics revolution
By capitalising on the biologics revolution, pharmaceutical companies can overcome some of the barriers posed by high R&D costs and regulatory hurdles, while also addressing the increasing demand for innovative therapies in an ageing and expanding global population.
