Polar Capital

Investing in Biotechnology’s Growth Story

Investing in Biotechnology’s Growth Story

David Pinniger, Fund Manager / Polar Capital Biotechnology Fund

The biotechnology sector continues to deliver market-beating returns for risk-tolerant investors with long-term investment horizons. Since its inception in 1993, the NASDAQ Biotechnology Index has returned an annualised 12.8% versus the S&P500’s 9.9% (USD total return) *. Recent years have seen significant volatility for the sector - a surge of enthusiasm driven by the emergence of exciting new medicines with significant commercial potential, followed by controversy over the price of these new medicines that caused widespread concern over the ability of the global pharmaceutical industry to continue to price these new products to maintain the growth and profitability that investors have become accustomed to.

But over the past year or so, those concerns have ebbed away, in part due to political deadlock in the United States where politicians across the spectrum appear to have little appetite to directly interfere with one of the country’s most complicated industrial systems, but also perhaps more positively because the industry continues to deliver on R&D productivity, bringing exciting new medicines to both patients and healthcare systems in need of innovation. The convergence of ever better understanding of complex human biology and the emergence of sophisticated new drug discovery and development technologies is powering a phenomenal surge of innovation in biomedical research.

Last year 46 new medicines were approved for sale in the United States, one of the strongest years ever in terms of new drug approvals. But it’s not just the number that’s important – 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 larger well-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. But with success, these companies have now become much larger and 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 to allocate capital to the vibrant biotechnology sector are perhaps now to be found further down the market capitalisation spectrum, amongst those smaller companies that are either making the transformation to revenue and cashflow-generating businesses, or those still unprofitable developing potentially breakthrough new medicines. Yet for many investors attempting to pick the winners among these 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 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.

*31 Dec 1993 to 31 Jan 2018.

For further information on the Fund please visit: https://ucitsfunds.polarcapital.co.uk/UCITS-Funds/Biotechnology/Fund-Overview#


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