Thanks to growth resulting from new medicines and diagnostics, the biotech sector is developing at a pace that is decoupled from the economic environment. One indicator of the rate of innovation is the fact that today, one-in-two cancer diseases can be successfully treated or controlled. Biotech will continue to benefit from the absence of patent expirations – a major issue for pharmaceutical companies – and a focus on premium products in areas of high medical need.
More than 60 per cent of all new medicines come from biotech companies and over 1,300 products are currently in clinical testing. Meanwhile, research and development spending has levelled off while drug approvals have improved.
In 2012, biotech stocks easily outperformed the broader indices. The Nasdaq Biotechnology Index rose by 32 per cent, outperforming the S&P 500 by 19 percentage points.
Performance of indices in 2012
Source: FE Analytics
The sector is still attractively valued though and double-digit growth rates can be expected for 2013.
Earnings per share (EPS) are likely to increase by 12 to 20 per cent for large caps and by 15 to 30 per cent for smaller companies. For 2014, the sector trades at around 17x EPS versus only 13x for the S&P 500.
The sector’s fundamentals are attractive on several fronts: a promising new product cycle, a solid US pricing environment and a cooperative food and drug administration.
Products in the biotech sector and their subsequent manufacturing processes are well protected by patents that still last for many years.
M&A activity will continue to boost growth as large companies with robust valuations look to stock up their pipelines. With so many products in clinical trials, the market for collaborations is also very good, with full pipelines signifying sustained, superior growth.
The biggest driver of outperformance has been strong earnings visibility. Among others, the following factors are driving the upside: higher-than-expected pricing; lack of generics competition; new genetic profiling tools; and stronger organic demand trends
The large number of products awaiting approval promise good growth opportunities over the medium- and long-term. A number of global drivers will further support these opportunities, which include long-term demographic trends and growth in emerging markets.
An ageing population in the industrialised nations is increasing demand for medicines. The rising prevalence of age-related conditions has facilitated demand for a greater understanding of the human genome as developed economies learn to support growing patient populations.
In emerging markets, wealth creation is establishing and expanding healthcare systems and driving increased levels of demand for biotech products. We estimate future global sales growth of up to 20 per cent per year or even higher.
The biotech industry is in good shape. In the coming months, steady demand trends for therapeutic franchises, a solid US pricing environment – which has supported recent price hikes – and a weaker dollar will drive performance.
A full product pipeline, favourable macroeconomic tailwinds and double-digit growth-rate estimates indicate a strong outlook.
Nathalie Flury has headed up the JB Biotech fund since its launch in Janaury 2008. She has returned 148.16 per cent since then, although the fund has fallen short of its NASDAQ Biotech benchmark.
Performance of fund vs benchmark since launch
Source: FE Analytics
The fund, which has an ongoing charges figure (OCF) of 1.92 per cent, is domiciled in Luxembourg, but can be bought in the UK.
In the IMA unit trust and OEIC universe, biotech and healthcare funds have dominated the performance tables in recent years. Among the best performers over three and five years include AXA Framlington Biotech and the Pictet Biotech fund.
Biotech trusts have also performed very well, including the likes of The Biotech Growth Trust.
