Published on March 18, 2020

Following decades of academic research and behind-the-scenes progress, gene therapy has emerged as one of the most promising fields in medicine. This revolutionary technology addresses the root causes of genetic disorders, creating not only better patient outcomes but also compelling investment opportunities.

Gene therapy is among the most exciting and fastest growing areas of biotech. The industry is developing a rapidly expanding pipeline of remedies for a range of serious genetic disorders, including cancer, cardiovascular diseases, blindness, and neurological conditions, some of which were previously untreatable.

Gene Therapy: The Basics

Because gene therapy is relatively new, it is still unfamiliar to most people. In theory, the process is simple – it involves replacing defective genes with healthy ones. But in practice it is extraordinarily complicated, as the replacement happens at the cellular level.

The major benefit of gene therapy is that it is designed to permanently cure a disease, potentially with just a single dose, because it delivers replacement genes that patients are able to seamlessly integrate into their regular cellular functions.

Compared to the options currently on the market, this is a transformative proposition. The standard of care for most genetic disorders is to provide patients with recurring doses of medicine they must consume their entire life. This is both inconvenient and expensive, as these types of treatments can cost a few hundred thousand dollars per year. Needless to say, the prospect of a one-time, curative remedy is much more appealing, and it is even more exciting for patients with diseases that are currently untreatable.

Current State of the Industry

Gene therapy is still in its early stages, but it is maturing quickly. Industry analysts expect revenues to grow from ~$500 million currently to ~$5 billion in 2025, representing a 34% compound annual growth rate. Moreover, pharmaceutical companies have invested $13 billion in gene therapy technologies just since 2018.

All that capital is fueling a surge in research & development, and the FDA estimates forty new gene therapies will be commercially available by 2022. In addition, there are several hundred others in the pipeline.

Pharmaceutical firms are focusing on gene therapy not only because they anticipate strong demand, but because the economics are favorable. Gene therapy is a one-time procedure and patients are charged a lump sum, typically between $1-2 million, which allows the provider to capture the lifetime value of the treatment up front (it also saves money for the patient). Traditional treatments for genetic diseases are administered on an ongoing basis, which means the providers have to wait years to generate the same revenue.

Another benefit is that time-to-market is generally shorter for gene therapies than for typical medications. They can be approved in fewer testing cycles and with substantially smaller test populations, as the trials are effectively personalized. All participants are afflicted with the specific genetic disorder the treatment is designed to address, so it is easier to evaluate the results. Also, because gene therapies are potential cures for otherwise untreatable conditions, the FDA tends to be more lenient with the approval process.

Manufacturing Arms Race Underway

Another reason pharmaceutical firms are investing so heavily in gene therapy is that they see big potential in the manufacturing side of the business. The process of producing these treatments at scale is exceptionally complex, and companies able to solve this problem reliably and efficiently will have a significant advantage over their competition.

Most importantly, companies with their own manufacturing capability can control their production schedules and optimize their facilities for their specific needs. In addition, it creates another revenue stream, as companies with spare capacity can rent to other gene therapy firms. (There are also a handful of firms that operate exclusively as outsourced manufacturing plants and do not attempt to develop their own therapies.)

Smaller companies that do not have the staff and/or the resources to build their own facilities have no choice but to pay third parties to manufacture their treatments. This is less costly, but it can introduce significant delays and impact the consistency of the clinical trial results. In addition, outsourcing makes it much harder to protect manufacturing trade secrets.

Case Studies

The gene therapy market is expanding rapidly, but the investible universe is still relatively small as many companies are privately held. There are currently about 30 publicly traded gene therapy firms, but only a few meet our criteria. We focus on three primary factors: (1) an addressable market of $1 billion in annual sales, (2) internal manufacturing capability, and (3) evidence of successful treatment. Below are two rapidly growing companies we have invested in that meet our profile.

Uniqure (QURE)

Uniqure is a gene therapy manufacturer with multiple products in the pipeline, including treatments for hemophilia B and Huntington’s disease. We initiated our position in October 2019, and we are particularly excited about its hemophilia B therapy, which is currently undergoing a pivotal phase III clinical trial. Data from patients who were treated over a year ago suggests the therapy works as designed, and the company estimates if the trial concludes successfully the new treatment would support over $1 billion in sales. Their treatment for Huntington’s disease is still in its phase I trial, but the preclinical results were favorable.

Additionally, the company has invested heavily in its own manufacturing facilities and maintains an extensive portfolio of intellectual property, which gives it strategic value to potential acquirers.

Audentes Therapeutics (BOLD)

Audentes develops and manufactures gene therapy treatments for rare neuromuscular diseases. We initiated our position in July 2018, largely on the strength of its remedy for muscular myopathy, a deadly pediatric disease which is currently untreatable. Like Uniqure, the company has invested heavily in developing its own manufacturing capabilities, which further increased its enterprise value.

The company was acquired by Astellas Pharma Inc. in December for roughly $3 billion in cash, which represented a substantial premium above their closing share price prior to the announcement. We feel this validated our thesis about the company.

Looking Ahead

The gene therapy industry is booming, but it is definitely not yet mature. Investments in research and development continue to hit record levels, but thus far few companies have produced commercially successful treatments. We recognize the potential risks, but we are bullish on the opportunity because we believe gene therapy is a transformative technology. We specialize in finding emerging businesses that are well-positioned to capitalize on structural shifts in market demand, and in our view gene therapy is leading exactly that kind of change in healthcare.

James Callinan

Chief Investment Officer – Emerging Growth

Matthew Unger

Vice President & Portfolio Manager


James Callinan

Chief Investment Officer – Emerging Growth

James Callinan

Chief Investment Officer – Emerging Growth

Jim Callinan was the Co-Founder & Chief Investment Officer at RS Investments. He also co-founded the RS Growth Group LLC in 1996 and managed the RS Emerging Growth Fund from 1996 until 2010. In 1999 Mr. Callinan was named Morningstar’s Domestic Stock Manager of the Year.*

He served as portfolio manager for the Putnam OTC Emerging Growth Fund from 1994 to 1996 and began his career at Putnam Investments as an equity research analyst in 1987. He joined Osterweis Capital Management in 2016 and brought with him the Emerging Growth Partners, LP, a concentrated small cap growth strategy he founded at RS in 2006.

Mr. Callinan is a member of the Weatherbie Capital Advisory Board.

He is an equity owner in the firm and the Lead Portfolio Manager for the emerging growth strategy. He is also a Portfolio Manager for the growth & income and flexible balanced strategies.

Mr. Callinan graduated from Harvard College (B.A. in Economics), New York University (M.S. in Accounting) and Harvard Business School (M.B.A.). Mr. Callinan holds the CFA designation.

*Morningstar Managers of the Year are determined by a combination of qualitative research by Morningstar’s manager research analysts; risk-adjusted medium- to long-term performance track records; and performance in the calendar year.

Matthew Unger

Vice President & Portfolio Manager

Matthew Unger

Vice President & Portfolio Manager

Prior to joining Osterweis Capital Management in 2016, Matt Unger spent three years at RS Investments as a Research Associate covering small cap growth companies in the medical technology and industrial sectors. Before graduate school, Matt worked at Platte River Capital covering the medical device sector from 2008-2010.

He is an equity owner in and principal of the firm and a Portfolio Manager for the emerging growth strategy.

Mr. Unger graduated from Trinity University (B.S. in Finance, cum laude) and Southern Methodist University, Cox School of Business (M.B.A.). Mr. Unger holds the CFA designation.

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