Gut feeling: the microbiome investment case - Heptagon Capital – Production

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the…

Gut feeling: the microbiome investment case

Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.

Executive summary: The human microbiome is in us and on us. Humans are not just individuals but ecosystems carrying trillions of bacteria. The scientific understanding of our microbial ecosystem is developing, but by working with our bacteria, we may be able to achieve a range of improved healthcare outcomes, resulting in better physical and mental health. With just one in three therapeutic drugs effective today, a growing population and increasing resource stress, the development of microbial solutions matters. The industry is still highly nascent today, but could more than double in size by 2025 to at least $600m. The longer-term potential is significantly higher. Several healthcare and food ingredients businesses have already begun to invest in the area. Expect more.

We have an intimate relationship with bacteria, whether we like it or not. Scientists and researchers are only now beginning to realise the importance of our microbial systems even though the history of the microbe is an illustrious one: if humans have populated the earth for around 250,000 years, then consider that microbes have existed on this planet for at least 3.4bn years. The human microbiome (in other words the bacterial ecosystem each of us carries) accounts for around 3% of our body mass, with the microbes we carry outnumbering our human cells by a factor of at least ten. As we get to know the better 40 trillion microorganisms that live in our intestines, mouth, skin and elsewhere in the body, they may well turn out to be our allies. Many businesses are already beginning to grasp the significance of the opportunity.

Evolution has always aligned the interests of hosts and bugs. This is evident in many species. In exchange for the raw materials and shelter, the microbes that live in and on people protect their hosts. Correspondingly, they are integral to a host’s wellbeing. In a healthy, symbiotic, state the microbiome plays an integral role in human health, helping the body to digest food, resist pathogens, regulate the metabolic system, develop and regulate the immune system and synthesise essential nutrients and vitamins. Put another way, optimal health depends on our own bacteria. Therefore, by editing the microbiome, health outcomes can potentially be improved.

Three main factors are driving increased interest in the field of the microbiome: improved sequencing techniques; cheaper and better data storage; and an increasingly supportive external environment. Take sequencing first. The cost of sequencing and analysing a genome or microbe has fallen from ~$10m a decade ago to less than $1,000 today. What took ten days to do then now takes less than four hours to complete (per the US National Institute of Health). During this period, the United Nations has also been integral in driving the Human Microbiome Project, an initiative designed to identify and characterise microorganisms found in both healthy and diseased humans. Over 200 scientists have been directly involved in the project. Some individual countries (such as the UK and Brazil) have also established their own microbiome databases. Within the last five years, some 180 peer-reviewed research papers have been published on the topic of the microbiome.

Most research has centred on gastrointestinal disease and metabolic disorders since the largest colonies of microbes reside within our digestive systems. New breakthrough insights are being made into emotional elements (autism, depression, stress and anxiety), cell proliferation and cancer (of the colon, stomach and bladder in particular) and immune maturation and functioning (arthritis and allergy).

Scientific progress is fuelling major private investments in a range of related areas spanning the use of bacteria from the microbiome as a therapeutic to treat disease, to new drugs for targeting the microbiome directly. The healthcare industry is primarily leading the charge, although there is also significant interest from the food and beverage industries too. Thought of more broadly, microbial solutions can have a meaningful impact not just on human health, but also on animal and plant health. Countless studies are underway, and the examples below illustrate the current state of progress in some key areas:

• Inflammatory bowel disease affects a large percentage of the population (~70m people in the US alone). Fewer than one third of these achieve remission with current therapies. Modulation of the microbiome may address the drivers of inflammation and the movement of cells in the gut. Early stage products are being reviewed by the FDA, the US food and drugs regulator.
Clostridium difficile (or C.difficile) is an infectious disease caused by toxin-forming bacteria resulting in diarrhoea, abdominal pain, fever and nausea. It is the leading cause of hospital-acquired infection each year, killing around 30,000 Americans annually (per the Americas Centers for Disease Control and Prevention). Scientists at the University of Alberta have successfully treated C.difficile by faecal transplants (i.e. stools from healthy patients) with ‘good’ bacteria establishing itself in the gut and competing with the C.difficile (or ‘bad’ bacteria).
Severe allergic reactions to food (eggs, cow’s milk, peanuts, wheat etc.) have increased by over 350% in the past decade with food allergies having become the fifth-leading cause of chronic illness in America (per the US Census Bureau). Many experts believe that this is a function of less exposure to bacteria because of antibiotic over-usage in the food chain and by humans for the management of illness. Several food and beverage companies are hence developing probiotic products (especially dairy-based) that seek to reverse the impact of antibiotics by nurturing bacteria. Others in the scientific community believe that there may be a link between heavy grain consumption and attention deficit hyperactivy disorder and are working on solutions to this end.
Obesity studies by the Washington University School of Medicine have analysed the gut bacteria of fat and thin Americans and found them to be different. After ‘swapping’ these bacteria in mice, the fat mice became thin and vice-versa. Further studies are underway.

Elsewhere, research projects centred on the animal community are being conducted into how bacteria can improve milk production and rumen health in cows and how they may reduce infant mortality in piglets. Some have even suggested that a deeper analysis of the microbiome may be used by forensics experts as a way of gaining more information into corpses.

The addressable market for microbial solutions is potentially immense given the large unmet needs. Only one in three drugs is currently effective in treating overall illness (per the World Health Organisation). Moreover, consider that the world is having to deal with increasing resource scarcity. Global food production will need to increase by 70% over the next 30 years to support a growing world population. Meanwhile, healthcare spend between now and 2050 will need to rise by 5% annually (data from the United Nations and the World Health Organisation respectively).

We are still, however, at a very early stage of development. Most people in the scientific and medical communities understand the importance of the microbiome, but it remains hard to make the conceptual leap to how much of this phenomenology can be practically commercialised. The Chief Science Officer of one biotech active in the field whom we met recently highlighted that understanding the microbiome is proving “much more complex” than previously assumed, while the Chief Finance Officer of another relevant business highlighted that “there is still a lot of science to do” on the microbiome since there are “no rules” yet on how the industry may evolve. Moreover, the Chief Executive of one of the largest food producers currently developing probiotic products highlighted that they often “stumble upon” relevant bacterial strains and then work to commercialise them.

Researchers and developers need to answer two key questions: first, to understand which specific microbes are most effective for achieving desired health outcomes; and next, how to work with them. Transplanting whole microbiomes, adding microbes that are deemed effective and/or subtracting bad ones are all approaches currently being considered. At the same time, the regulatory environment is still at a very nascent stage. While regulators have generally been reluctant to allow food and beverage companies to make product claims relating to microbial benefits without proven scientific evidence, the regulatory environment for businesses working on microbial solutions for rare diseases has been much more supportive.

There is, unsurprisingly, no consensus on how to size the microbiome market, particularly since the global market value for a drug that could effectively treat a rare disease affecting 15,000 people is typically estimated at around $1bn. However, estimates from a range of consultants put the microbiome market at around $250m today, but growing at a compound annual growth rate of at least 20%. This would result in a market value of $600-900m within five years (based on estimates from Markets & Markets, Statistics Market Research Consulting and Transparency Market Research). These figures may be highly conservative, particularly given that some reports have suggested that the market potential for probiotic food supplements could be worth at least $2bn on a standalone basis (per Global Markets Insights and Kiasco Research).

Given the evolving nature of the industry, investors who wish to gain exposure to the theme need to consider whether the best approach is via private or public businesses. An additional consideration is whether to gain exposure via healthcare/pharma plays or via innovative food producers. At the heart of any discussion about the microbiome lies the importance of sequencing and analytics. Illumina (capitalised at ~$42bn) is the leading player in this field. Within the large-listed pharma arena, Bristol Myers Squibb, Merck, Regeneron and Sanofi appear to have taken a lead in developing projects (and/or partnerships with other smaller businesses) relating to the microbiome. Meanwhile, Seres Therapeutics and Synlogic (capitalised at $355m and $240m respectively) offer pure-play exposure to the microbiome and have projects currently at various stages of regulatory approval. Private businesses active include C3J Therapeutics, EpiBiome, Metabiomics, Microbiome Therapeutics, Rebiotix and UBiome among others. Within the space of food ingredients, Christian Hansen, a Danish-listed business with the world’s largest strain bank of cultures and enzymes (used primarily in the production of dairy products) has been more active than many of its peers. Danone, Kerry Group and Nestlé are all seeking to establish a greater presence in the field too. Although still early days, and with major hurdles clearly to be overcome, it seems to be the ‘gut feeling’ of many that the microbiome industry will only grow in importance.


Alexander Gunz, Fund Manager, Heptagon Capital

Disclaimers 

The document is provided for information purposes only and does not constitute investment advice or any recommendation to buy, or sell or otherwise transact in any investments. The document is not intended to be construed as investment research. The contents of this document are based upon sources of information which Heptagon Capital believes to be reliable. However, except to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to the accuracy or completeness of this document or its contents and, Heptagon Capital, its affiliate companies and its members, officers, employees, agents and advisors do not accept any liability or responsibility in respect of the information or any views expressed herein. Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Where this document provides forward-looking statements which are based on relevant reports, current opinions, expectations and projections, actual results could differ materially from those anticipated in such statements. All opinions and estimates included in the document are subject to change without notice and Heptagon Capital is under no obligation to update or revise information contained in the document. Furthermore, Heptagon Capital disclaims any liability for any loss, damage, costs or expenses (including direct, indirect, special and consequential) howsoever arising which any person may suffer or incur as a result of viewing or utilising any information included in this document. 

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