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RTW: Investing across Healthcare - [Business Breakdowns, EP.184]
Business Breakdowns
Deep Dive
Why is healthcare investing considered unique compared to other sectors?
Healthcare investing is unique due to the three-phase lifecycle of drugs: a decade-long period with no revenues but high capital intensity, a strong revenue phase with relative pricing power and easier forecasting, and a rapid revenue decline phase. This lifecycle requires constant reinvention and is heavily reliant on deep public capital markets, leading to a high number of small public companies and a venture capital-like environment in public markets.
Why are there few founder-led giant companies in the healthcare sector?
Developing a drug is an extremely challenging endeavor, akin to landing a spaceship on the moon. Founders typically focus on one or a few drugs, and once successful, it's more efficient to hand over distribution to large multinationals. This industry structure makes it difficult for founder-led companies to grow into giants.
How does RTW Investments structure its team to handle the complexities of healthcare investing?
RTW Investments has built a large, sub-specialized team with over two dozen people holding terminal scientific degrees. The team includes experts in various scientific areas and functional roles, ensuring deep domain expertise and collaborative decision-making.
What are the benefits of being a public-private investor in the healthcare sector?
Being a public-private investor allows for easier management team familiarity and access to scientific data that public investors cannot access. It also positions investors to benefit from the high reward potential that often materializes after a company goes public, combining research advantage and reward potential.
What are the key constraints that could slow down the explosion of innovation in healthcare?
Key constraints include the human management challenge of building a team-oriented, sub-specialized investment firm, the shortage of management talent in the industry, and regulatory changes like the IRA that impact the financial incentives for developing certain types of drugs.
How does the healthcare sector's PR problem impact the industry?
The healthcare sector has a PR problem because the revenue phase, which looks better than other industries, overshadows the high failure rates and long, capital-intensive development phases. This leads to public and regulatory scrutiny, especially regarding out-of-pocket costs for drugs, which are often directed at drug companies rather than the broader healthcare system.
What role does M&A play in the healthcare sector, and how does it impact smaller companies?
M&A is critical in the healthcare sector as it allows large companies to replace expiring patents and small companies to access distribution. It is necessary for the success of both, ensuring that drugs reach patients efficiently and that investors have exits to recycle capital into new innovations.
What is the current outlook for the biotech sector in 2024?
The biotech sector has been in a bear market for the last three years, but with innovation booming and valuations low, there is significant opportunity. RTW Investments sees this as a good time for tactical investments and is very active in the space.
- Three phases of drug investment: long development, strong revenue, rapid decline
- High capital intensity in development phase
- Biotech heavily reliant on US capital markets
- Challenges for large pharma companies to maintain dominance
Shownotes Transcript