Investors put biotechnology under the microscope as Coronavirus bites
As the world grapples with a new strain of Coronavirus never before seen in humans, we are reminded of the vital role of biotechnology in fighting disease.
Chinese scientists had isolated the Coronavirus and posted its genetic sequence online within two weeks of the virus being reported to the World Health Organization, allowing biotech companies to start making copies they could use in research.
An innovative and high-growth sector using cutting-edge science to bring hope to patients, biotech deserves a place in every diversified portfolio.
What is biotechnology? Put simply, it’s the application of technology to living organisms to create products which solve problems.
Biotech is used in agriculture, industry, environmental and waste management, and has become an increasingly important source of innovation in healthcare and medicine.
‘the application of technology to living organisms to create products which solve problems’
Biotech addresses unmet medical needs in order to improve human lives, creating new drugs and using processes such as DNA sequencing to help us better understand genetic diseases and gene therapy to cure them where previously no cure was possible.
Even before Coronavirus, the legislative backdrop for biotech has been positive for some time; the US Food and Drug Administration (FDA) is approving more new drugs than ever – last year it gave the green light to 48 new drugs, while in 2018 the figure was 59, the highest ever2.
This supportive regulatory environment for biotech companies has led the number of drugs in development to triple over the last 15 years3, yet valuations among biotech companies have remained stubbornly depressed in recent years compared to other S&P industrial sectors.
‘valuations among biotech companies have remained stubbornly depressed in recent years’
Some of the leading lights in the space include Gilead Sciences, known for its HIV and hepatitis drugs; and Biogen, which specialises in neurological conditions and is working on treatments for Alzheimer’s.
Other names include Acadia, BioMarin and PTC. PTC develops drugs for rare genetic conditions including spinal and muscular atrophy.
Acadia is known for commercialising a drug to treat psychosis related to Parkinson’s disease, while BioMarin is involved in gene therapy trials and is expecting to gain approval for a new drug this year.
Many of these companies are investing in groundbreaking areas such as cell-based therapies, where living cells are transferred into patients, and gene editing, a form of genetic engineering where DNA is changed or deleted before being replaced in a genome.
A lively M&A environment
The sector is a hotbed of activity, with a mix of young, small- and mid-cap companies working on research and development of new drugs they can patent and larger ones doing the same.
‘the lifesaving drugs and experimental therapies the sector produces deliver a social good’
Merger and acquisition activity is rife within biotech, as big companies buy up smaller, more nimble innovators at a premium and quickly use the power of their global networks to distribute newly-patented drugs.
Bristol-Myers Squibb’s recent $74bn purchase of Celgene shows that even mega caps can be a target if the price is right4. This makes the sector a fertile hunting ground for investors searching for capital growth.
Biotech is a ESG compatible sector, as the lifesaving drugs and experimental therapies the sector produces deliver a social good.
Companies only make money on their new drugs in the 10 years or so until their patents expire, then the drugs become widely available as cheap generics which copy the brand-name products.
They also typically reinvest a lot of their profits back into research and development to find ways to treat a wide range of conditions.
A trust to control volatility
All that said, there are some concerns investors could legitimately raise: biotechnology is known to be a volatile space, and valuations have neared bubble territory in the past.
‘biotechnology is known to be a volatile space’
Looking at valuations now, some of the larger names are trading on 10 to 13 times earnings, which compares favourably to the S&P 500 Biotechnology index and the S&P 500.
Absolute valuations on smaller biotech companies have flatlined for the last five years, suggesting bubble fears have receded.
However, there are options for investors here. One investment trust we would highlight is International Biotechnology Trust (IBT) which has done a great job at controlling volatility.
Its maximum drawdown compares favourably with the returns it has produced under the tenure of Dr Carl Harald Janson of SV Health Managers, once named by Bloomberg as the world’s best biotech manager.
Backing him up is an investment team with a combined 85 years of experience in healthcare and life sciences and a broader team of experts at SV Health Managers LLP, so they are well placed to invest successfully in this complex sector.
Access to unlisted stocks
IBT has a 66-strong portfolio of listed companies, alongside a smaller collection of unquoted stocks, which would otherwise be impossible for ordinary investors to access.
This allows it to spread risk effectively and tap into opportunities from across the biotech spectrum.
Uniquely for a biotech fund, it also gives investors both capital growth and income with an annual 4% yield drawn from capital.
The Coronavirus pandemic looks set to continue for some time yet, and biotech companies will be working on solutions. But there are other important themes also driving the sector, including an ageing (and richer) population demanding better healthcare provision.
Find out more in our second article in this series.
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