Can Investors Both Earn Returns and End Cancer?

Global spending on cancer drugs totaled nearly $200 billion in 2022; by some estimates, this number could double by 2027. Oncology practices have received more than $44 billion in private equity financing annually since 2020, a higher number than any biotech or health science field.

With billions pouring into cancer treatments, how can investors participate in the fight to cure the disease and earn alpha for their portfolios?

The topic was discussed at a CIO webinar on Thursday. Speakers included Ross Barrett, managing general partner at Cancer Focus Fund; Marc Hurlbert, CEO at the Melanoma Research Alliance; and Amaka Uzoh, investment manager at the Memorial Sloan Kettering Cancer Center. The panel was moderated by Amy Resnick, executive editor of CIO.

The webinar can be viewed on demand here.

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Collaboration is Key

This will one day be viewed as a golden age of progress for cancer therapies, said Barrett, who pointed to the numerous recent oncology treatments and innovations in cell therapies. Part of the VC investing arm of the Cancer Focus Fund, which partners with the MD Anderson Cancer Center, Barrett collaborated deeply with the center’s researchers on screening potential oncology investments.

“We put the science on the front end, to be blindly scored by our scientific advisory board,” Barrett said of the fund’s due diligence process. Barrett then continued the market and product analysis of the due diligence process, but only once prospective investments are vetted through a scoring process reviewed by 15 key opinion leaders.

VCs should be closely collaborating with research labs, said Uzoh, a perspective gained from an academic research institution. “We do see VCs do want to get as close as possible to the researchers and take on that risk.”

Collaboration is key, according to Barrett: “With the exponential increase in progress on cancer therapies, we have to collaborate amongst academic research centers, with small biotech and with big pharma; it’s an all-hands-on deck effort.”

The COVID-19 pandemic has really reshaped the biotech industry, the panelists said. The pandemic brought a lot of capital to biotechnology and made the industry much more collaborative, Uzoh said: “COVID has really made biotech a global endeavor, has made commercialization a global endeavor, and those are things we want to invest behind.”

The Landscape for Investing in Cancer Research

A global lens is key when screening potential investments in cancer research, said Hurlbert; the Melanoma Research Alliance funds research across 20 countries. The Cancer Focus Fund’s first fund has made investments across the world: Of 10 investments made, only four are based in the U.S.

Memorial Sloan Kettering is comfortable taking on the risks of investing in biotech. The investment office of the research center has been investing in biotech since the 80s. “We’ve been very comfortable with risk for a long time, and that has really parlayed to us being comfortable taking on the risks associated with biotech,” Uzoh said.

There was a time when the investment office at MSK thought it might be better not to lean so heavily on biotech investing, according to Uzoh, but the institution’s market perspective has changed. Before COVID, MSK saw the world entering a more volatile, lower-growth period. “We need to be in the pockets of high growth,” said Uzoh, who noted that biotech is a persistent pocket of growth.

Despite the large number of cancer drugs approved and a large number going through the Food and Drug Administration approval process, there is still a large unmet need, according to Hurlbert. However, he notes that the pace of science and drug development is phenomenal: In melanoma treatment, 17 new drugs have been approved since 2014.

“Clinicians can’t keep up with the pace of what’s [in] the treatment guidelines,” Hurlbert said. “There [are] so many new treatment options, and it is exciting, but there is still more work to do.”

The Melanoma Research Alliance issues grants totaling $10 million to $12 million per year across about 40 projects, with most having a multi-year duration, Hurlbert said. At any given time, about 115 live projects are actively receiving grants from the institution.

He also noted that in the last few years, scientists have been discovering new ways to treat historically undruggable parts of cancer cells. But Hurlbert said for investors to benefit, they have to get in early: “You really do need to get in early, and at the lab level, you can no longer wait until the Phase 2 clinical trial to start investing.”

Uzoh noted that biotech companies are hungry for cash. Unlike many private tech companies, which recently have preferred to stay private, biotech companies increasingly need to go public for liquidity, engaging in IPOs after a Series B or A funding round. Driving the need for cash, the biggest cost for biotech startups is labor. “There are only so many people who have Ph.D.s and master’s degrees, and that is the highest expense,” Uzoh said.

Some of those labor costs and other costs may be outsourced to countries with lower labor costs through contract research organizations,according to panelists, but there is one line item that is continuing to increase: computing. Artificial intelligence and machine learning have become a major productivity boost to drug discovery.

“On one hand, because data is getting cheaper to store, because the models are getting more interesting, that is actually powering our ability to go after targets that we [were] seeing as undruggable,” Uzoh said.

But there is one consequence: AI and its associated computing costs are expensive. “So we’re paying attention to what is the compute cost, and how is that connecting to cash runway, and how does that translate to a company wanting to go public earlier?” she said.

The panelists also cautioned that it can be easy for investors, even sophisticated ones, to be burned on biotech investments. Barrett says to stay away from biotech startups that are not process driven or tied in with key opinion leaders. “In an inherently high-alpha asset class, those that seek to de-risk the process will be the ones that win,” which could take form through AI, creative financing or affiliation agreements.

Barrett stressed the need for investors to be present at all stages of a company, acknowledging that there is a need at the pre-clinical level, but investors should also be active all the way to an initial public offering.

“You’re going to have different investors,” Barrett said. “Some people want to give a donation, some people will want to [put] at risk capital, some people want to allocate to a hedge fund, but without [it] all, it won’t work.”

Medical Technology and the Fight Against Cancer

How Memorial Sloan Kettering Funds Its Cancer Fight

Tags: Amaka Uzoh, Cancer Focus Fund, Marc Hurlbert, Melanoma Research Alliance, Memorial Sloan Kettering, Ross Barrett

China used to dominate the MSCI Emerging Market Index, with a 40% weight as of 2020. Today? Its share has shrunk to 25%, still the leader, but nearer to the levels captured by other EM powerhouses, such as Taiwan (19.4%) and India (19.2%).

It turns out that those other EM nations have enjoyed big economic and market increases that have compensated for the woes in China. The Shanghai Composite is up a mere 0.25% this year, while Turkey’s exchange has risen 49%, Taiwan’s 27.5%, India’s 11.6% and South Korea’s 5.3%. The overall MSCI EM index is up 7.5% this year through Thursday.

For 2024 through June 30, emerging markets climbed 20% without counting Chinese stocks, but 9.8% with China included, MSCI found. Over the past five years, the China-excluded index beat the full roster by almost two percentage points yearly. Five countries constitute 80% of the EM index’s weight: China, India, Taiwan, South Korea and Brazil.

“China has not participated” in the EM surge, said Tim Hayes, chief global economist at Ned David Research, in an interview about his report on the subject. To be sure, the EM index’s 2024 performance lags behind that of the S&P 500, which is up 16.2% as of Thursday’s close.

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The problem with China is its continuing post-pandemic economic funk, reflected in its equity market. Troubles in its overbuilt property sector, which triggered a debt crisis, and low domestic confidence dog its equities’ returns. Chinese stocks have lost more than $4 billion in value since 2021. So, more broadly, as of the 15 years ending June 30, the EM index rose 9.8% annually, but excluding China, it was ahead 20%, MSCI noted.

How times have changed. In the previous decade, China’s high growth juiced its stocks and was the propellant for the EM index. In 2019, for instance, the index rose 18.4%, but if China were excluded, results were two percentage points lower.

U.S. pension funds and endowments have energetically invested in China for years, a study by the Future Union, an advocacy organization, pointed out. It found that public pension funds in 43 U.S. states held investments in China and Hong Kong, as of mid-2023. Over the previous 36 months from summer 2023, for instance, the California Public Employees’ Retirement System made 80 EM investments, worth an total of $7.86 billion.

Things may be changing, though. The Teacher Retirement System of Texas recently decided to reduce its EM allocation to 1% of its assets from 9% and to remove China from its benchmark. The fund indicated it feels developed markets will do better than emerging ones in the future.

Nonetheless, in mid-July, the NDR report stated, MSCI emerging market indexes “have accounted for eight of the top nine performers over the past 21 days, all outperforming the U.S.” and the MSCI All Country World Index. Chinese stocks were down 4% over the same period, the report noted.

Thus, the emerging markets have shown greater breadth, with the exception of laggard China, the report observed. The 24 EM components of the ACWI, it said, are “above its 50-day moving average and ha[ve] been reaching record highs, with 8% of the markets at one-year highs and none reaching new lows.”

According to the Ned Davis report, declining interest rates globally should fuel EMs, which need to borrow a lot. The bellwether 10-year Treasury’s yield is down half a percentage point since its yearly high in April, when inflation fears still prevailed. The outlook on inflation now is for a continued cooling.

Meanwhile, several EM central banks have cut interest rates over the past year, with more expected soon, per S&P Global. Eight of them have cut over the past year, Ned Davis wrote. China, though, has not reduced its rate (3.5%) since 2015. Many other EMs are below China’s level. Taiwan, for example, is at 3.1% and is anticipated to reduce that further soon.

Ned Davis’ model, its report indicated, “currently calls for maintaining the overweight exposure” to the MSCI EM index, with a caveat: “It’s advisable to exclude China from that exposure.”