Biotechnology has been seriously declining, but now may be a good time to buy
Nowadays, analysts are so critical of the market that it is difficult for active fund managers to find mispriced stocks to beat index funds. Biotechnology is one of them, and now is a good time to invest in this field.
Considering that the potential of most biotechnology companies does not lie in their current income or valuation. The key is whether they will test positive for a potentially heavy drug, and then whether the US Food and Drug Administration will approve the sale of this drug. It is difficult to see this by looking for quantitative screening of companies with low valuations, or by ordinary Wall Street analysts who have been trained to read profit and loss statements and balance sheets.
Andy Acker, the manager of the Janus Henderson Global Life Science Fund with the best performance, explained the importance of professional knowledge in this field: "There are 10 senior investment experts in our medical team, and their experience adds up to more than 140 years, including 3 doctors and 1 medical doctor. They are here to help us really distinguish between drugs that may be effective and drugs that may not be effective."
Today, this kind of expertise is crucial. After two brutal years in this industry, the widely diversified Standard & Poor’s Biotechnology Exchange traded fund has dropped by more than 50% from the peak of $174 per share in February 2021 to $83 per share. Biotechnology declined in 2021, because after the coronavirus crisis in 2019 caused all health care stocks to soar in 2020, a large number of unstable biotechnology initial public offerings (IPOs) appeared and then collapsed. But the increase in interest rates in 2022 will only make things worse. Many biotechnology companies need to borrow money to maintain their research business during the drug development stage.
But now, the valuation is very attractive, the interest rate may be close to the peak, and there are many opportunities-if you can find the right stock.
Ake said: "Last year was a year of positive data, and this year may be a year of new product release." "The FDA has 75 new drugs waiting for approval. Therefore, this year may be the year with the largest number of new products approved in history, because the previous record was 59 drugs in 2018. "
Aker mentioned Sarepta Therapeutics(SRPT), which has a gene therapy for muscular dystrophy, which is the first of its kind and is expected to be approved by the FDA in May this year. He said: "(muscular dystrophy) is a huge unmet medical need affecting children." "Patients usually get into wheelchairs in their teens and usually die in their 20s." The company’s share price has risen by 59% in the past 12 months, while SPDR Standard & Poor’s Biotechnology ETF has fallen by 8%.
However, Aker is not willing to sound the alarm for the whole biotechnology field: in the biotechnology field, "90% of drugs that started clinical trials in humans eventually failed," he said.
Prosperity and depression of biotechnology
After two brutal years, small biotech stocks are about to recover.
Skilled management and the wide dispersion of biotech stock returns are one of the reasons why AlphaCentric LifeSci Healthcare lost only 0.8% when the whole market collapsed in 2022. In 2023, the fund rose by 13%. Manager Mark Charest holds a doctorate in chemical biology from Harvard University and is the co-inventor of eight drug patents. His consulting firm LifeSci Fund Management is also a business subsidiary of LifeSci Partners, a biotechnology/pharmaceutical consulting group.
A key driver of chararest’s outstanding performance is to know what kind of biotechnology companies big pharmaceutical companies want to acquire. He said that although he did not only consider mergers and acquisitions when investing, "in the past 30 mergers and acquisitions in the field of biotechnology, we have 16 cases with a turnover of more than 250 million US dollars."
One company that chararest thinks has acquisition potential is BioCryst Pharmaceuticals(BCRX), which has already obtained approval for a drug to treat hereditary angioedema, a disease characterized by severe swelling. "(Biocryst) will earn more than $250 million this year," Charest said. He believes that the company already has a commercial product, and its share price is still very low after last year’s sell-off, which may lead to acquisition.
Other health care managers believe that the acquisition will continue to boost the performance of the best small biotechnology companies, because the patents of many blockbuster drugs are about to expire, such as Humira, an anti-inflammatory drug from AbbVie, and keytruda, Merck’s best-selling anticancer drug. Kyle Rasbach, senior analyst of Eventide Healthcare and Life Sciences Fund (ETAHX), said: "The entire pharmaceutical industry is facing a large number of patent cliffs." "Therefore, the demand for innovation is very high."
Eventide mainly focuses on small biotechnology companies. But most active fund managers like Aker also include other types of health care companies in their portfolios, such as insurance companies, medical equipment manufacturers and hospitals.
Both strategies have advantages and disadvantages. In the past two years, diversified health care funds such as T. Rowe Price Health Sciences (PRHSX) of Janus and Health Science Opportunity of BlackRock (SHSAX) performed better than pure funds such as Eventide, Fidelity Select Biotechnology (FBI OX) and Franklin Biotechnology Discovery (FBDIX).
Ziad Bari, the manager of the $15.4 billion T. Rowe Price Health Science Fund, invests about 30% in biotechnology in his portfolio, but more traditional pharmaceutical companies also have the same investment, accounting for 16%. He believes that the current valuation of biotechnology companies is "reasonable" and expects more M&A activities, but he said that it takes some "striking clinical trials and great commercial success to lead to a real bull market."
When this happens, the small biotechnology fund will win again.
This article comes from: financial circles