One of the few winners on the back of the Covid-19 pandemic, the case for investing in biotechnology is a strong one.
These companies are helping us live longer by bringing new drugs to market to tackle the likes of cancer, heart disease and obesity.
The tailwinds are immense – biotech companies differ from pharmaceuticals in that they focus on the innovative side of healthcare, with the sector now responsible for the top 10 selling drugs globally.
Covid has brought the sector centre stage, but in reality the pandemic has been a catalyst for highlighting the longer-term growth in biotech.
From 2011 to 2021, the Nasdaq Biotechnology Index more than trebled in number to 373 US-listed biotechnology companies valued at more than US$1.65tn from 119 companies with a combined capitalisation of US$355bn.
Detractors say biotech is heavily driven by sentiment and tends to move in quite extreme cycles, depending on whether it is in favour or not.
Drug pricing tends to be a constant political football that comes up every few years (around US elections) and can dent the whole sector.
For this reason biotech funds can be volatile and tend to be high-beta vehicles – although there can also be periods where their performance differs greatly from the wider stock market.
We have seen this in the past couple of years when the sector has significantly underperformed global equities (2 per cent versus 15 per cent).
Will 2023 be a strong year for the sector?
But there is hope on the horizon in 2023 as attractive valuations, coupled with strong data and an improving regulatory environment, offer support to these longer-term tailwinds.
Janus Henderson portfolio manager Andy Acker says biotech delivered a significant amount of positive clinical trial data in 2022 for diseases such as Alzheimer’s, pneumonia and dry age-related macular degeneration – a leading cause of blindness in the elderly.
He says this could feed into a stronger 2023 – we could see a number of new approvals and launches – with the Food and Drug Administration having some 75 potential new drug approvals pending this year.
“One thing that we did see last year was that because we had just been through an 18-month bear market in biotech, many of the valuations in this sector were extremely depressed.
"And so then, when a company came out with positive clinical data and investors could appreciate the market potential of those drugs, we saw very substantial stock reactions.
"Because the valuations were so depressed and because the innovation was so high, I think that made for a very attractive risk/reward," he says.
To put this into context, a drug typically goes through three trial phases before being considered as an effective medical treatment.
The average probability of success (to approval) is about 10 per cent at phase one; around 20 per cent at phase two; and around 50 per cent at phase three – however there are marked difference in each therapeutic area.
It is also important to note that regulators like the FDA have sped up the approval rate – for example, Moderna’s vaccine was able to progress from understanding the genetics of the virus to human trials within a record 63 days – it historically takes around four years.
