More than just high risk/high reward
Importantly, the sector is evolving to the point where investors could look to it as more of a core holding in the future.
In addition to blockbuster drugs, more recently we have seen the likes of advanced therapeutic modalities, such as RNA-based drugs, as well as gene and cell-based therapies investigated with a reasonable amount of success.
This blossoming of the sector has also seen its construction change significantly.
Back in 2018, around 80 per cent of the industry consisted of companies with a market cap of less than $1bn (£14.8bn), many of which were relying on a single drug being approved to survive.
Now there is a number of large-cap lower-growth companies, which are both highly profitable and cash generative, as well as a number of mid-caps, which are either at/approaching profitability and are strong commercial entities.
AXA Framlington Biotech manager Linden Thomson says that alongside growth, the sector also offers a number of defensive characteristics.
She says: “Commercially they are typically less dependent on economic cycles, as there will always be a need for medicines and healthcare as well as breakthrough drugs to treat existing or new conditions.
"We are seeing this now as biopharma companies report robust quarterly financials in more challenging economic conditions.”
There is also a level of intellectual property protection – if a drug does pass testing it is patented, meaning it rarely faces competition at launch.
The other point I would highlight is many large pharmaceutical firms have started looking in more detail at these firms with a view to potential merger and acquisition activity.
It is hard to ignore the positives. The long-term trends of ageing populations and a rising middle class mean new drugs will be both in demand and affordable in the future.
The sector is also showing signs of maturation – making it a more attractive core holding in challenging periods. There will be major opportunities for talented active managers.
You could argue there are some similarities with the tech sector in the past. We will see companies fail and there will be challenging periods – but ultimately, if you can stomach the risk, the long-term rewards are there: a 730 per cent return over the past 20 years is testament to that.
Funds to choose from
AXA Framlington Biotech – the sector specialist
While the sector is evolving at a rate of knots, it continues to be led by high-end science.
It requires a specialist, focused team with skills, experience, and a network to keep up with these changes. That is exactly what manager Linden Thomson and her team offer.
