Investing in Biotechnology's Growth Story

The biotechnology sector continues to deliver market-beating returns for risk-tolerant investors with long-term investment horizons. Since its inception in late 1993, the NASDAQ Biotechnology Index has returned an annualised 12.5% versus the S&P 500’s 9.5% (US$ total return). Recent years have seen significant volatility for the sector – a surge of enthusiasm driven by the emergence of exciting new medicines with huge 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 kind of growth and profitability that investors have recently become accustomed to.

But over the course of 2017, 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 desperate 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 innovation cycle in biomedical research, and driving strong growth in an era where many global industries are struggling to deliver just that.

In 2017, year-to-date, investors have seen more than 30 new medicines approved in the United States, which is on track to be 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 better. 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 the character of the global biotechnology industry has evolved. Driving the strong momentum of the sector through the years of 2013 -15 were the larger well-established commercial-stage biotech companies that have since become well-known among the broader 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 largely become the image of 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 sector are perhaps now to be found further down the market capitalisation spectrum.

The tricky reality for investors is that the most attractive opportunities to allocate capital to the sector are perhaps now to be found further down the market capitalisation spectrum.

We believe better opportunities are now to be found amongst those mid-cap and small-cap companies that are either making the transformation to revenue and cash flow generating businesses, or those still unprofitable and pursuing the development of drug candidates that could one day offer significant medical breakthroughs. Yet for many investors, attempting to pick the winners in this part of the sector is just too daunting – the science and technology involved is difficult to understand and fraught with risk, the commercial opportunity often intangible, the competitive landscape complex to analyse, and the shares of the companies concerned often illiquid and share prices volatile. But the way to access the return potential offered by investment in these smaller companies is through actively-managed funds run by experienced specialist teams who are constantly evaluating investment opportunities in the sector on daily basis.