The biotechnology sector offers investors the potential for market-beating returns over the long term. Since its inception in 1993, the NASDAQ Biotechnology Index has returned an annualised 12.4% versus the S&P 500’s 9.5%*. Recent years have seen significant volatility for the sector with a surge of enthusiasm driven by the emergence of exciting new medicines with significant commercial potential. This was followed by controversy over the price of these new medicines that caused widespread concern over the ability of the industry to continue to price these new products to maintain the growth and profitability that investors have become accustomed to. Over the past year or so, those concerns have ebbed away, in part due to political deadlock in the US, but also perhaps more positively because the industry continues to successfully discover and develop exciting new breakthrough medicines for patients and healthcare systems in need of innovation.
The convergence of an ever better understanding of complex human biology alongside the emergence of sophisticated new drug discovery and development technologies is powering a phenomenal surge of innovation in biomedical research. In 2018, 59 new medicines were approved for sale in the US, perhaps the strongest year ever in terms of new drug approvals. However, it is not just the quantity that is important – the quality is improving every year and new medicines are getting much better. For example, drugs have recently been developed that intelligently harness the body’s own powerful immune system to drive late-stage cancer patients into durable remission, and gene therapy approaches have succeeded in fixing inherited genetic deficiencies to, for example, restore vision or overcome blood disorders such as haemophilia. At the same time the regulatory environment is adjusting to support and encourage this innovation, making breakthrough therapies available to patients faster than ever before.
As the industry’s renaissance has unfolded, so has the nature of the global biotechnology industry. Driving the strong momentum of the sector in recent years were the established commercial-stage biotech companies that have become well-known among the investment community as their rejuvenated growth rates and profitability captured the attention and collective imagination of investors starved of growth. With success, these companies have now become much larger and increasingly resemble their more traditional pharmaceutical company peers. The rapid commercial launches of the exciting new medicines that drove their renaissance are now moderating to a steadier pace of growth. The tricky reality for investors is that the most attractive opportunities are perhaps now to be found further down the market capitalisation spectrum, among those smaller companies that are either making the transformation to revenue and cashflow-generating businesses, or those still unprofitable but developing potentially breakthrough new medicines.
The success of the larger biotechnology companies, as well as a supportive capital markets environment, has driven investor appetite for smaller earlier-stage companies, in turn enabling several hundred of them to list on the stock market, significantly refreshing and rejuvenating the opportunity set for investment. Yet for many investors attempting to pick the winners among these earlier-stage companies is daunting – the science involved is difficult to understand and fraught with risk, the fast-moving competitive landscape complex to analyse, and the shares of the companies concerned often illiquid and share prices volatile. The use of powerful drug discovery and development technologies leveraging the insights of truly excellent scientists can result in breakthrough new medicines, but it needs a trained eye to identify the right companies and invest in them at the right time. The way to access the return potential offered by investment in these smaller companies is through actively-managed funds run by experienced specialist healthcare investment teams.
David Pinniger
Fund Manager – Biotechnology
12 March 2019
* Note: USD total return; 31 December 1993 to 28 February 2019
Disclaimer
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