Market Pulse | Pharma looks to AI to cut costs, the end of ESG and Bitcoin gets its ETF

Welcome to this week’s Market Pulse. It’s a special one for us as it is #52. We hope you’ve found the Market Pulse both interesting and educational. We have tried to use the Market Pulse to do more than just talk about recent events but also to lift the lid a little on our investment thinking and provide context around some of the key themes we’re invested in. We’re always looking for ways to improve and deliver real value to our customers so please get in touch with any feedback.

Our stories this week:

Big Pharma wields an AI sword to cut drug development costs
The end of ESG but on to something better?
Bitcoin gets an ETF..what’s next?

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Big Pharma wields an AI sword to cut drug development costs

The American prescription drug market, known for its high prices, is at a potential turning point. In contrast to many other nations where governments negotiate drug prices, U.S. pharmaceutical companies have traditionally set prices based on market dynamics[1]. However, the 2022 Inflation Reduction Act introduced by the Biden Administration marks a historic shift, allowing Medicare to negotiate drug prices directly, a move that could pressure the profit margins of U.S.-based pharmaceutical companies.

Facing potential price cuts, these companies are now looking to reduce the substantial costs associated with drug development, often exceeding $2 billion per drug[2]. A key future strategy in cost reduction could be the adoption of Artificial Intelligence (AI) in the drug development process. Demis Hassabis, head of Google's DeepMind and Isomorphic Labs, is at the forefront of this trend, aiming to halve the drug discovery timeline through AI. Isomorphic Labs focuses on AI-driven drug development and has already attracted partnerships from major players like Eli Lilly and Novartis[3].

Isomorphic Labs, however, is not without competition in the AI drug discovery field, which saw over $4 billion in investments in 2022. Yet, it might have an edge due to its use of DeepMind’s groundbreaking Alphafold technology[4]. With recent investor wariness towards large pharmaceutical firms, the integration of AI in drug development could be a crucial factor in revitalising the sector's appeal and drive future profitability.

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2) R.I.P ESG

Investor trends have a history of mirroring past performances, and this was evident in the ESG (Environmental, Social, and Governance) investment boom. Between 2020 and 2022, following a surge in ESG-related stocks, the finance world saw an influx of over 100 new ESG-labelled funds each year, fueled by eager investors and asset managers looking to capitalise on the previous year's successes[5].

Corporate leaders were also quick to embrace the ESG narrative. By 2021, over 155 companies in the S&P 500 frequently discussed ESG in their earnings calls, indicating a widespread corporate shift towards these themes[6].

However, the tide turned in 2022 and 2023 when many ESG funds began underperforming compared to the broader market. This shift led to a noticeable withdrawal of assets from ESG-focused investments[7]. CEOs, reflecting this change, significantly reduced mentions of ESG in earnings calls to just 61 in the S&P 500 by 2023. Additionally, nearly 10% of CEOs are now scaling back their ESG initiatives. Consequently, the latter half of 2023 saw only six new ESG funds launched, a stark contrast from previous years, according to Morningstar[8].

Despite these changes, it's premature to declare ESG as a fading concept. Instead, it appears to be evolving into a more refined and potentially more sustainable model. This pattern of initial excitement followed by a period of reassessment and eventual stabilisation may not be unique to ESG; it could very well be a precursor to what lies ahead for emerging technologies like generative AI. The key takeaway here is the cyclical nature of investment trends and the need for a balanced, long-term perspective in evaluating new and evolving concepts like ESG and AI.

3) Bitcoin gets an ETF..what’s next?

This week, the Bitcoin community experienced a flurry of activity, fueled by the anticipation of the first spot Bitcoin ETF. The excitement has driven Bitcoin's price up nearly 200% from its 2022 lows, culminating in a dramatic week that included the long-awaited ETF announcement – not once, but twice.

In a twist of irony, just before the SEC's official announcement, their X account was compromised, leading to a modest spike in Bitcoin's price[9]. This muted reaction after the fake post suggests the market had already factored in the SEC's approval of spot Bitcoin ETFs.

Looking ahead, our focus shifts to the UK market. While the future is uncertain, we expect Bitcoin ETFs may eventually cross the Atlantic. The possibility of including Bitcoin in UCITS (Undertakings for Collective Investment in Transferable Securities) funds remains unclear. However, the potential launch of a Bitcoin UCITS ETF in the UK raises intriguing questions, particularly about its potential eligibility for inclusion in ISAs (Individual Savings Accounts).

These developments signal a shift for Bitcoin, transitioning from a novel asset class to a more mainstream investment. This evolution mirrors a historical precedent: In 1985, David Swensen of Yale University diversified the university's portfolio by investing in the then-radical asset class of venture/private equity. Similarly, Bitcoin could be poised to become the 'venture capital' of 2024, potentially finding its way into institutional investment portfolios. While the future remains uncertain, Bitcoin's recent 200% surge indicates that the market sees this as a real possibility.

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Notices

Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.

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