The Stethoscope with Dr. James Aw
Investors across OMERS and Oxford explore the key factors that will help shape the biopharma sector in the year ahead and how they plan to capitalize on this innovation-driven growth.
In my role as Chief Medical Officer at OMERS, I wear many hats. One of the most interesting parts of my job is spending time with investors at OMERS and Oxford who manage healthcare portfolios across the asset classes where we invest. I find these meetings invaluable as it provides a feedback loop where I can tap into the latest research and learn about new technology before it hits the market. In turn I can provide real life insights to our investors from a clinician point of view, which helps them make informed decisions that generate stable returns for our more than 600,000 members.
Investing in this space makes sense for OMERS and Oxford. The industry is constantly evolving with new technologies, treatments and therapies that require the support of private partnership to ensure advancement of this critical research and development. It is a resilient industry that is less susceptible to economic downturns, but healthcare has its own unique challenges that need to be tackled by bright minds – many of whom work right here at OMERS and Oxford.
Recently I made it a priority to bring these investors together on a regular basis to have conversations about the latest trends and opportunities in the rapidly evolving healthcare landscape. My ultimate goal is that in these conversations we can continue to identify the ‘grey space’ that will help support future investment opportunities for the organization.
Below you’ll find highlights from my conversation with Rob Missere, Managing Director, Life Sciences, Christie Chen, Director, Investment Oxford US and Geoff Clark, Principal, Global Equities, who all contribute to pushing our healthcare investment strategies forward, from different corners of the organization.
Dr. Aw: There are many reasons why investing in healthcare makes sense for OMERS and Oxford. What does the healthcare investment strategy look like in your world?
Geoff Clark, Principal, Global Equities (GC): The mandate of the Global Equities group is to invest in high-quality publicly traded companies, that outperform our benchmark and generate consistent and stable returns for OMERS. Our permanent capital pool allows us to take a long-term view, which is different than many institutional managers. This is one of our competitive advantages as we have the ability to see through cycles to generate above market returns. We are also very deeply researched in the sectors where we invest. Our team is able to cut through the noise, identify the themes and debates that matter, and invest in quality businesses that should perform better over time.
As it relates to healthcare, we have exposure to a number of areas including biopharma, managed care, medical devices, and life science tools. Biopharma makes up about half of our healthcare focus and given the current rapid pace of innovation it is a very exciting place to invest.
Christie Chen, Director, Investment Oxford US (CC): At Oxford, we provide the critical real estate infrastructure to enable biotech and pharmaceutical companies to do what they do best. Our platform prioritizes exposure to both research and development (R&D) lab space, as well as Good Manufacturing Practice (GMP)-compliant biomanufacturing assets in premier innovation markets in North America, the UK and Europe. Our goal is to be a true partner with our customers and grow and scale with them. We offer an end-to-end mix of spaces, accommodating businesses new and established, scaling and built.
Oxford began investing in life sciences around 2016, when we entered the space via our Credit strategy. Through that investment we were able to learn a ton about the operations side of the business, including tenant profiles etc. and build up our team’s expertise and capabilities. We made our first equity investment in 2019 and since then have scaled our business. Our portfolio now includes high quality income producing properties as well as developable land with over several million square feet of available density.
Rob Missere, Managing Director, Life Sciences (RM): When my team thinks about investing in healthcare it is almost exclusively biopharma. Over the last 6-7 years we have been focused on building out a diversified portfolio of pharmaceutical assets that we believe can provide a reliable source of uncorrelated and differentiated return for OMERS by investing in drug royalties
Drug royalties arise via collaboration agreements between parties involved in drug development. For example, a university or biotech company that is doing research with the goal of discovering new drugs, may not have the resources to fully develop and commercialize a promising asset. These institutions may enter into a licensing agreement with large cap pharma companies, who are looking to complement their own research and development. This happens all the time – it’s a very compelling way for people to share innovation and to ensure drug candidates get the investment needed to ultimately make it to market. For the right to utilize the technology in their research efforts, a pharma company will typically agree to pay a percentage of any future net sales resulting from the technology. Although the majority of license agreements don’t lead to an approved drug due to the high failure rates in drug development, for the minority that do, these royalty entitlements can become extremely valuable assets.
We are in the business of buying these royalty assets. For the seller, a royalty monetization can provide the capital needed to address its immediate funding needs, including making further investments in R&D. For us as an investor, the return characteristics of these royalty streams are attractive. We get exposure to the top-line performance of high-quality pharmaceutical assets in a unique, cash-yielding return stream. For a long-term investor like OMERS, this is a highly attractive asset class.
We have been active in this space since 2017 and our Life Sciences portfolio currently holds ~25 royalty assets, the majority of which have been on the market for several years, with established sales histories and well-defined safety and efficacy profiles.
Dr. Aw: All three of you mentioned biopharma as a key component of your investment strategy. With FDA approvals up at the end of 2023, this year could potentially shape up to be another big one for biopharmaceutical companies. As an investor, does this excite you?
RM: Look, I’ve been doing this for many years and this space has always been an exciting place to invest. I don’t see that changing. 2023 may have been a record year, but for the last decade or so we’ve seen pretty good drug approval rates on average, which is fueling more investment in the space and creating more opportunities for investors like OMERS.
The market must constantly evolve in order to tackle challenges in human health and within our healthcare systems. The discovery and development of new technologies is bringing innovation at a faster pace than ever before, but the cost of developing new drugs is going up as well. Given how capital-intensive the drug development process is, collaboration between players in the space is increasing. This leads to more licensing activity and, ultimately, more royalty investment opportunities for us over time. So yes, we are definitely excited about the market opportunity in front of us.
GC: There is a lot of excitement around some of the newer blockbuster drugs, and the excitement around the GLP-1 class of drugs specifically has transcended traditional biopharma circles. In the U.S., there are several GLP-1 drugs that have been approved for type 2 diabetes and some of these drugs are seeing success in obesity management. You’ve likely read about this in the media – it’s a very hot topic. GLP-1s certainly have the potential to be the biggest drug class in the world and I don’t believe this is a controversial view. This drug class has been around for over a decade, but the current generation of GLP-1s have seen refinements in efficacy and convenience, which have opened up this secondary weight loss market. But the question remains will all this hype translate to outsized returns for biopharma? In my view, I think markets have gotten ahead of the long-term opportunity and a lot of this excitement has already been priced in, so valuations for biopharma companies with GLP-1 exposure are quite high. There are still many unknowns, so this is certainly an area we continue to track as a team.
Looking ahead – I don’t expect a particularly good or bad year for biopharma as a subsector. As a defensive sector, pharma benefited in 2022 as investors were worried about macroeconomic conditions, and valuations increased. Expectations were largely brought back to normal levels in 2023 and that’s roughly where we are now. From a public equity investment perspective, we don’t expect a banner year for biopharma returns as valuation levels offset some of the narrative and hype around a few themes.
CC: While it’s true FDA approvals were up at the end of the year, like many industries we saw a bit of a slowdown due to the rise in interest rates. I would bifurcate between the biotech market and the real estate market. Biotech typically leads the real estate market by 12-18 months, and we are starting to see some green shoots on the demand side with the recent VC funding trend and the uptick in public market activity.
Over the next year, we are focused on value creation within our own portfolio and continued execution of our business plan. We are also looking for new opportunities that would generate outsized, risk-adjusted returns to complement our existing portfolio. This space requires patience and long-term investment – not just from a capital standpoint – but a strong infrastructure, team and talent. Part of our value proposition is we are in it for the long term. We approached this sector very diligently and cautiously, which is why we led with Credit first and why we spent years analyzing the sector before making our first equity investment. We are thesis-driven and have carefully constructed our portfolio to ensure we are prudent with how we deploy our members’ dollars.
Dr Aw: Geoff, you mentioned GLP-1s in your last points, but there are advancements in other areas like gene splicing, precision medicine and targeted therapies for cancer which may lead people to believe we are in the heyday of the blockbuster drug era. What is your view on this take?
GC: Science advances so there is always something around the corner. We’ve seen big themes that take hold and the examples you shared are relevant today. Currently I’m spending a lot of my time researching antibody-drug conjugates (ADCs). People are generally aware of the idea of chemotherapy, but ADCs allow chemotherapy to specifically target cancerous cells. This specificity allows for higher dosing while reducing damage to healthy cells. From an investor point of view, this could be the next big oncology drug class as many checkpoint inhibitors face patent expiry towards the end of the decade. Pharma often gets a bad rap – but there is no denying the incredible advancements made over the last century that have led to humans leading healthier and longer lives.
RM: That’s an interesting question. The industry definition of blockbuster drug used to mean a product that generated $1 billion in sales, but with some of these new technologies we are beginning to treat a smaller population of patients, with highly specific therapies. The jury is still out on whether we will end up seeing more blockbuster products or less. But every market is different. To Geoff’s earlier point, the GLP-1 market opportunity is incredible with the potential for multiple use cases, but in the oncology space, where a lot of research and development dollars are going, we are treating more narrow forms of cancer. Our strategy allows us to invest across a wide spectrum of drugs, including those that don’t meet the blockbuster criteria. You could have incredible innovation in a drug that generates less than $1 billion in sales because it treats a smaller patient population. This is still a win for patients and absolutely a place we would still invest.
CC: I don’t know if I’d call it the heyday, but the continued innovation and the ability of industry to build upon new discoveries never ceases to amaze me. This innovation will continue to transform healthcare and life sciences – I don’t see that changing. But there are many trends that are fueling this growth and innovation. For example, when Moderna had the mRNA vaccine developed as a treatment for COVID-19, very quickly they were able to parlay that into a series of new RNA based drugs that are now used to treat Cancer and other diseases. Similarly, as Geoff mentioned, GLP-1s are now being investigated for possible treatment of diseases beyond Type 2 diabetes and obesity.
Another strong example is generative AI In healthcare. The discovery process is typically a long, costly and labour-intensive one, but AI has the potential to improve the efficiency and effectiveness of how we develop drugs. It is a tool to help scientists – allowing them to spend more time on strategy and innovation. Obviously, there are limitations at this moment in time and also many ethical considerations, but AI-enabled drug discovery is here to stay.
Dr. Aw: We’ve covered a lot of ground today, but before we wrap this conversation, I’m interested in learning more about why you feel healthcare is a compelling place to invest.
CC: It’s important to remember we are a global business and while each market has different dynamics, the beauty of our platform is not only the synergies across our global offices, but across the OMERS and Oxford platform. We have partnered with the OMERS Life Sciences group and also OMERS Ventures to stay on top of new trends, underwrite key targets, and regularly share expertise to ensure we are making the right investment decisions. We play to each other’s strengths and leverage each other’s know-how which allows us to be better relative value investors.
In my day to day, I encounter such inspiring work. We try our best to create enabling environments for our customers, including the platforms, amenities, and services they need to grow. We have a unique relationship with our tenants. Through our real estate transactions, we provide alternative liquidity and creative capital solutions by freeing up liquidity on these biotech companies’ balance sheet. It’s things like this, including the social value created in the communities where we invest, that excite me to come to work every day.
RM: Totally agree, Christie. Within OMERS Life Sciences, the money we invest in commercial drug royalties often gets recycled back into early-stage R&D. It’s a great way to support the broader drug-development ecosystem, without assuming all the risk associated with early-stage drug development.
it’s also fascinating from a science perspective. We have invested in some highly successful drugs that have dramatically changed the quality of life for patients suffering from debilitating diseases. Playing even a small role in financing this type of innovation is incredibly rewarding from a personal standpoint. But as an organization, we also get to invest in great science while providing the capital required to fuel further innovation in the pharmaceutical industry. What is more exciting than that?
GC: I’m an investor first and cover a few sectors with my work, but healthcare is my favourite area to cover. It is such a complex universe and there are many idiosyncratic opportunities that you don’t always see in the other areas where we invest. To echo Rob’s point, the science is always interesting, but there is also the aspect that we are doing work that contributes to the greater good, not only in public equities but across OMERS and Oxford.
Sharing insights across the different groups has been invaluable and is a great benefit of working at a place like OMERS. There is almost always crossover in our work. We each have our niche, but once you pool all this information together it helps make complicated work less complicated. So, I really thank you Dr. Aw for helping bring all the minds together to ensure we are always connected, sharing insights and collaborating together. There is so much depth and breadth across our businesses and appreciate conversations like this that help us all do a better job on behalf of the members we work for.