Register Log-in Investor Type

News

QD view – Biotech sector is ripe for investment but collectives are the way forward

221028 Biotech

Biotechnology is an exciting and potentially rewarding sector for investment but for the private investor it is also risky and probably best addressed through collective investment vehicles. After all, development of new drugs is hugely expensive (and thus funding-dependent), scientifically uncertain and fraught with operational challenges and pitfalls. And adding to this is the fact the space is notorious for its extreme changes of investor or market sentiment that seem to oscillate between exuberance and despair.

One of the most savage bear markets in history

The biotech sector has certainly seen both of those emotions in the past three years. Since around mid-2021, the sector has experienced one of the most savage bear markets experienced in its history, if measured by either length and severity. But this itself followed an unprecedented bull market in the immediately prior 12 months as investors surged into the space as Covid vaccines first came into prospect and were later developed successfully in record time, allowing the world to emerge from a once-in-a-100 year pandemic.

To try to put some values on these movements, the XBI (the SPDR S&P Biotech ETF), one of the two most closely-followed benchmarks that track the US biotech space, peaked at a value of $174 in February 2021 but now stands at c$81 – so slightly less than half its peak value, while the IBB (the iShares Biotechnology ETF, which is similar but biased towards larger capitalisation stocks), peaked at $174 in August last year and now stands at about $126. Both of these index ETFs are now either at or below at the pre-pandemic, pre-March 2020 levels.

Big pharma is taking advantage of the contrarian opportunity

The biotech industry is of course overwhelmingly located in the US and stockmarket sentiment there tends to drive investor behaviour towards companies based elsewhere – the UK notably – albeit some cynics might say without the same levels of enthusiasm in the good times.

Another closely watched indicator in the US is the number of companies that are trading below their cash value. It may surprise the reader that there are over 230 biotech companies in the US – around a quarter of the total – that are currently trading at valuations lower than the cash reserves they hold, in some cases by a significant margin. This is at an all time high, both in terms of number and proportion of the quoted biotech universe.

To some contrarian investors, the gyrations in sentiment experienced in biotech provide opportunities to build up stakes at unprecedented valuations. These investors would certainly appear to include pharmaceutical companies, which perennially turn to the sector to supplement their own internally-generated R&D pipelines, as well as recently financial buyers. Acquisitions of biotech companies by “big pharma” are trending at or above the long-term average levels seen over the last decade.

A new investment company focusing on “overlooked” UK market

Private/smaller investors have relatively few collective investments to choose from in biotech and more especially of closed-end vehicles that QuotedData tends to cover. Excluding a few trusts that invest largely or exclusively in private companies, the closed-end options are limited to International Biotechnology Trust (LSE: IBT) and Biotech Growth Trust (LSE:BIOG) in the UK, BB Biotech (SWX:BION) and HBM Healthcare (SWX HBMN) in Switzerland and Tekla Healthcare Investors (NYSE: HQH) and Tekla Life Sciences (NYSE:HQL) in the US. However, all of these invest largely or exclusively in US companies, so there are no options that provide exposure to UK companies for example.

QuotedData is aware of one company that is looking to address an obvious gap by targeting primarily the UK space, believing that this country has many companies at that are attractive relative to the US. This is a new investment company, Conviction Life Sciences Company, to be advised by Plain English Finance, that expects to invest in UK and to a lesser extent Australian biotech and med-tech stocks. It will be interesting to see how investors react to this contrarian opportunity and whether it can deliver the anticipated returns to investors over the next cycle.

Leave a Reply

Your email address will not be published. Required fields are marked *

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…