Circadian Rhythms and Healthcare Investing - A Differentiated Outlook

Summary

Circadian rhythms- the 24-hour routines that control our cells- offer a compelling analogy to economic cycles in the healthcare sector. The pharmaceutical industry is sculpted by patent cliffs, whilst the biotech industry is driven by partnerships with blue-chip Pharma. Both exhibit industry-specific cycles which interact with macroeconomic conditions, just as circadian biology is sensitive to external conditions. We present a novel framework for understanding healthcare market dynamics, suggesting an event-driven strategy built around this differentiated lens.

Circadian rhythms in healthcare investing 

The Pharmaceutical clock 

Pharmaceutical revenues are driven by the sale of pharmaceuticals protecting by patents, which provide temporary manufacturing and distribution exclusivity. A patent cliff describes a loss of exclusivity, allowing generics and biosimilars to enter the market. A company may lose up to 90% of its revenue from a drug post-exclusivity; although this varies depending on the exact product.

At the company-level, this sets up a cyclical revenue pattern. In the industry, when several companies face patent cliffs at the same time- often a product of herd behaviour in R&D practices- a rhythmic pattern of growth and erosion emerges. This is the ‘Circadian Rhythm’ of the pharmaceutical industry: a predictable and internally driven cycle that interacts with macroeconomic factors such as interest rates. 

The Biotech Rhythm 

Biotech cycles are behavioural, driven by the reliance of early-stage firms on interest and investment from blue-chip Pharma. This sets up the following cycle: 

 - Despair --> Recovery --> Euphoria --> equilibrium --> correction...  

This cycle defines the M&A activity (which also explains the inverse correlation between interest rates and biotech equity performance) that drives forward biotech. When blue chip pharma is desperate to fend off patent cliffs, it looks eagerly at biotech; examples include the following: 

• Pfizer-BioNTech (mRNA COVID vaccines). 

• Merck-Moderna (cancer vaccine in clinical trials). 

• Bristol Myers Squibb-Karuna ($14B acquisition). 

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This too is a biological cycle, driven by financing patterns, blue-chip pharma interests and scientific breakthroughs. 

Macroeconomic modulation 

Just as human biology is fine-tuned by external factors such as light and temperature, these economic cycles are modulated by macroeconomic forces: 

• Pharma: Higher interest rates inflate the cost of capital and erode operational margins, suppressing pipeline reinvestment. Low-rate environments fuel innovation and M&A. 

• Biotech: Biotech’s reputation as a high-risk industry creates a sensitivity to macroeconomic conditions; investors are hesitant to invest during periods of volatility and high interest rates. Favourable conditions fuel investor appetite.  

  
  

Crucially, these forces influence the timescales and amplitudes of these cycles, but don’t create them. A pharma company facing a patent cliff is at risk of decline, regardless of macroeconomic conditions. Its ability to respond (via M&A, capital restructuring and pipeline changes,) may, however, vary with macro factors. 

An integrated market model 

We propose the following framework: 

• The pharmaceutical industry is shaped by patent-driven revenue cycles, which itself catalyses M&A activity in Biotech. Both layers exist independently but are heavily influenced by macroeconomic factors, such as interest rates.  

  
  

This rhythmic interaction- between patent exclusivity, financing needs and innovation is analogous to a circadian rhythm; self-propagating yet reactive to the macroeconomic reality. This creates a degree of predictability. 

Investment implications: A Rhythmic Event-Driven Strategy 

Understanding and pre-empting these rhythms offers a differentiated edge in healthcare investing, summarised in the table below:

Table 1: Event-driven Circadian investing

Scenario	Strategy
Falling interest rates improves financing conditions and catalyses M&A activity.	Go long on promising medium-cap biotech firms likely to be acquired by blue-chip pharma.
Blue-chip pharma companies early in their patent cycles likely to enjoy a long exclusivity runway with strong free cash flow generation.	Go long on large Pharma companies at the beginning of their patent cycle.
Pharma firms nearing patent cliffs and lacking M&A activity.	Go short on weaker Pharma entities.

This investment strategy integrates micro (drug patent cycles), meso (industry behaviour) and macro (interest rates and liquidity) factors into a coherent approach that bears potential to generate absolute returns and Alpha. All through the lens of circadian biology. 

Conclusion 

Our proprietary view of the healthcare industry reveals an under-appreciated rhythm that governs cash flows, investor sentiment and market value. This is investing at the intersection of science, structure and macroeconomics- a differentiated lens that may capture asymmetric returns across both Pharma and Biotech, two of the most complex yet opportunity-rich sectors of investing. 

DISCLAIMER: This is not investment advice nor intended to inform investment decisions, all content is property of Scalpel capital and for proprietary exploration of interests. Scalpel Capital and our team bears no responsibility for your investing decisions and results therefrom.