By Guest Blogger Doug Rowat
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Biotechnology always gets a bad rap.
Whether it’s the smug face of “pharma bro” and price gouger Martin Shkreli, the evil biotech laboratories in Hollywood movies such as Logan, or simply the fact that the Nasdaq Biotechnology Index is 60% more volatile than the S&P 500, the biotechnology sector tends to frighten many.
But relax. The pharma bro is safely in prison serving, hopefully, another five years, cyborg-villain Donald Pierce and all the other baddies at Transigen Laboratories got what was coming to them in Logan, and volatility can always be controlled through diversification.
In other words, investing in the biotechnology space should be viewed with caution but not fear.
And lately, it’s been a great place to be invested. Driven by the strong economy, solid R&D pipelines and record levels of M&A activity (represented best by last year’s blockbuster US$74 billion deal between Bristol-Myers Squibb and Celgene) the biotechnology sector advanced an impressive 25% in 2019. Though biotechnology hit the Covid-19 brick-wall in March 2020, as did every sector, it didn’t take the market long to realize that the best hope for an effective Covid-19 treatment likely lay within the biotechnology sector’s research pipeline. This year the sector’s up another 14% y-t-d, making it one of the best places to be invested in 2020.
And the good news continues. M&A activity has again picked up, including the announcement this week of a US$21 billion acquisition of Immunomedics by Gilead Sciences, signaling renewed sector confidence. And Credit Suisse, in a research note, also just this past week, emphasized its positive sector view stating bluntly that “Biotech will likely be the solution to the pandemic”.
Further, we also had another bullish industry report released earlier this month from Fior Markets, which forecasts that the global biotechnology market will nearly double from US$448 billion in 2019 to US$833 billion by 2027. Other forecasts have the sector eclipsing US$1 trillion in similar timeframes.
While biotechnology has obvious promising applications for infectious diseases, there are also opportunities in all sorts of other areas including gene therapy and regenerative medicine. Treatments for a variety of diseases ranging from hepatitis B and Alzheimer’s to stroke and cancer are also showing great promise in clinical trials. Interestingly, applications in the agricultural space also represent growth drivers for the sector.
The sector also has other advantages. Biotechnology products are considered necessities, so manufacturing slowdowns that plague many other industries at the moment are unlikely to impact the supply chain for biotech. And many of the core fundamentals that support the broader health care sector, such as an aging population, also support the biotechnology sector.
While the more immediate prospects for biotechnology are obvious given the Covid-19 world that we live in, the long-term track-record for the sector also shouldn’t be overlooked. The Nasdaq Biotechnology Index has returned 18% annually over the past decade, for example. And finally, from a technical perspective, the Index’s recent breakout from a long-consolidating ‘wedge’ pattern is also bullish.
Nasdaq Biotechnology Index: Bullish breakout from well-established ‘wedge’ pattern
Source: Bloomberg, Turner Investments
However, given its higher risk, the biotechnology sector must be approached carefully and exposure only added within an otherwise well-diversified portfolio. But, if you’re patient, we believe that it’s a good place to be over the long term.
Unlike the federal prison in Pennsylvania where Mr. Shkreli currently resides.
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.