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Daily Intelligence Briefing

Tuesday, January 17, 2023

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

AI Applications on the Rise in Healthcare, Boosting Biopharma and Diagnostics Efficiency

Summary: Expectations for AI in healthcare, particularly biopharma and diagnostics, have been high for several years now. New partnerships and acquisitions may be setting the stage for a breakout year in AI-driven healthcare applications. Most notably, BioNTech, AstraZeneca, Pfizer, and other big names have been stepping up their involvement with machine learning. Neural networks that form the basis of generative AI, similar to what is being utilized by Microsoft-backed OpenAI, may soon become popular vectors of drug discovery.

Related ETFs: VanEck Pharmaceutical ETF (PPH), SPDR S&P Biotech ETF (XBI), Robo Global Robotics and Automation Index ETF (ROBO)

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Recent advances and investments in artificial intelligence (AI) have been making major headlines lately. As MRP highlighted last week, Microsoft’s potential investment of $10 billion to expand their stake in OpenAI, the creator of popular AI tools ChatGPT and DALL-E, could more than double the startup’s valuation to $29 billion. OpenAI’s suite of products, now set to go premium for use by corporations, utilizes generative AI, which produces unique images, text, and other mediums of communication from human prompts. About 175 billion machine learning (ML) parameters make up the deep learning neural network used in OpenAI’s latest model, GPT-3. To put things in perspective, Analytics Insight notes that Microsoft’s Turing NLG model, which has 10 billion parameters, was the largest learned language model before GPT-3.

Data and parameters used in neural networks and their resultant outputs can be focused on different subjects and industries. The healthcare industry, particularly biopharma and diagnostics, is a business where generative AI is expected to create major disruption in the years ahead. Per survey data published in a recent GlobalData report, The State of the Biopharmaceutical Industry – 202339% of surveyed healthcare industry professionals believed that AI would trend as the most disruptive emerging technology in the sector throughout this year. AI has been voted as the most disruptive emerging healthcare technology every year since 2020, according to Pharmaceutical Technology.

Just last week, BioNTech SE agreed to acquire British artificial intelligence (AI) startup InstaDeep for the equivalent of up to $682 million, the firm’s largest takeover deal ever. Per the Chemical Engineer, BioNTech’s acquisition will support the company’s strategy to build capabilities in AI-driven drug discovery and development of next-generation immunotherapies and vaccines.

Several months ago, Nvidia announced the launch of its BioNeMo Large Language Model (LLM) service to help researchers build new artificial intelligence (AI) models for biology, which was used to build a new generative AI model that could have a significant impact on drug discovery. Working alongside biotech startup Evozyne, Fierce Biotech notes the pair showed they could use their program to add dozens of amino acid mutations to a human metabolic protein known as PAH, changing its shape into a more efficient form and increase function of the proteins. AI accelerated engineering of proteins cold help to significantly improve the efficiency of new drug discovery.

In the realm of diagnostics, European drugmaker AstraZeneca has teamed up with Indian digital health specialist and a clinical group in the UK to test whether AI-powered technology can help radiologists detect lung cancer in chest X-rays more quickly and accurately. As PharmaPhorum writes,’s qXR software, which has been trained on more than 2 million X-rays and their corresponding radiology reports to detect and localize up to 29 abnormalities, will scan more than 250,000 images from a British hospital in an attempt to carve precious days or months off of the time it takes to accurately diagnose lung cancer in patients.

Pfizer launched a similar partnership with AI-focused Anumana in 2022, working to develop programs that can help diagnose cases of heart disease like cardiac amyloidosis, where misfolded proteins build up around the tissue. Anumana believes there is a wealth of data still to be mined from reading into the electrical activity of the heart.


MRP added LONG Pharmaceuticals to our list of themes on June 16, 2022 amid huge cash balances among pharma firms and rapidly declining biotech valuations opening up opportunity for the former to bolster pipelines with a trove of new drugs at a major discount.

Throughout the past several months, MRP has highlighted significant cash balances among many biopharmaceutical giants. Hundreds of billions of dollars are now being deployed by these companies to bolster their drug and therapeutics pipelines as the ongoing sell-off in publicly-traded biotech firms, compounded by massive layoffs and other economic disruptions to business at privately held operations, is making valuations increasingly attractive to possible big pharma buyers.

BioNTech’s recent acquisition of InstaDeep could be a sign that tie-ups between drugmakers and AI-focused tech firms could be the start of a new trend that would boost overall M&A activity in the healthcare space.

Jefferies analyst Michael Yee has estimated that the combined market capitalization of all the biotech stocks valued at under $5 billion was around $350 billion in May 2022. That compared to a combined cash balance among the top 20 biopharma companies worth over $300 billion. During the whole of 2022, M&A activity in the pharma and biotech sector recovered from a decade low of just 92 deals in 2021, rising to 109 in 2022. This sum was more heavily weighted toward the second half of the year.

The amount of cash spent on dealmaking was less than in previous years, as The Pharma Letter notes only 17 deals surpassed the $1 billion threshold (versus 28 in 2021), but that is likely related to heavily depressed valuations of publicly traded entities, as well as private ventures. Those attractive prices, combined with particularly strong cash positions of large pharma companies will allow the pharmaceutical industry to ramp up the expansion their pipelines at a favorable value.

Since the initiation of this theme, the VanEck Pharmaceutical ETF (PPH) has returned 9%, matching the S&P 500’s gain over that same period.


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