The biotechnology or ‘biotech’ sector is one of the hardest sectors to invest in. Biotech investing is for the robust investor seeking high risk/reward on a roller coaster. It’s not for the risk averse.
It is possible to make money provided you (or your wealth manager) know the biotech market well and are able to pinpoint a solid company with earnings potential.
Biotechnology is cutting edge science, the manipulation of living organisms to produce commercial products for example, genetic engineering, new chemicals, new bacterial strains, pharmaceuticals.
It also covers agricultural tech, such as pest resistant grains, and has marine links via the search for control of noxious water-borne organisms.
Understanding the complexities
Even with the advantages of the internet, for non-scientists understanding what these companies do exactly, and what is their market, is complex.
Much biotech business is medical, full of up-to-the-minute research to develop treatments for many different human conditions. There are 10,000 diseases and so far the world has supplied treatment for only 500 of them. Global demand for better health, as the population lives longer, grows by the minute, as do the investment opportunities.
Famed fund manager Neil Woodford has invested 10% of his Woodford Equity Income fund into biotech, thereby endorsing the sector.
He says, “We are on the cusp of some extraordinary breakthroughs in the UK’s life sciences industry and I am very excited about the long-term value opportunity.”
Biotech researcher. Source Google Images.
The vocabulary alone gives you an idea of the scale and risks of biotech’s medical mission, seeking innovative therapies for cancers, also arthritis, psoriasis, multiple myeloma, ulceritic colitis, immune inflammatory disease, diabetic foot ulcers, Alzheimer’s disease, Crohn’s disease, and on and on.
Even if you narrow down a short list of promising biotech stocks there could be factors that you, and even the company itself, didn’t think would arise.
Many companies can’t keep all the plates spinning - the financing, the stiff competition, new regulation, the research pipeline, the drug trials and the drug administration’s decisions around the world.
Small companies are very small compared with the big ones
Small firms based in the UK such as Sinclair-Pharma, Motifbio, Alliance Pharma, Dechra Pharmaceuticals and Genus don’t have the financial and marketing clout like the big firms - AstraZeneca, Pfizer, Roche, Merck, GlaxoSmithKline, Hikma, Takeda, Novo Nordisk, Otsuka and Bayer.
However, there are healthy signs of smaller firms making efforts to diversify to bring in incomes. Given that only 10% of drugs going in for a first clinical trial reach approval for use, it’s not surprising that so many don’t make it. There is always the hope for the investor that a biotech company will be taken over.
One of the reasons why biotech is high risk is that there are many - 1,000 of them in North America alone, mostly unquoted. They all fight for funding, recognition and research success with their specialities often overlapping.
These small companies have it tough. For years they often have minimal earnings. They need investment funds to put into drug research and development, so austerity all round is a constant. Their clinical trials may, and do, fail and so damaging their reputation.
The market is always braced for failure
One long term fan of biotech companies’ sums up the realities of putting money into biotech: “You have to accept it’s a bit of a lottery. I became interested, for about five years, in a British form, Ixico, which concentrated on a drug to help Alzheimer’s. In the end its drug trials didn’t come right, so I lost out.”
Despite the risks, when selecting which biotech stocks to buy, a small, carefully selected biotech firm or two, a biotech fund or a biotech ETF can be worthwhile in a balanced portfolio.
Advisers fear losing their clients’ money so they tend to steer them in the direction of funds which spread the risk. Investors in any kind of biotech company say they get a buzz out of helping the world solve its health problems.
Go for a fund or ETF and reduce risk
Cut risk by investing in Biotech Growth investment trust, AXA Framlington Biotech Growth fund, and in the US, Polar Capital Biotech.
Peter Hughes, fund manager for AXA IM Framlington Equities comments: “Take a look at research into Alzheimer’s. Biogen has shown very promimising early data from a phase 1b trial of aducanumab and advanced quickly into late stage trials.
"Phase 3 results are expected in the next couple years. It is worth noting that aducanumab could be the best selling drug ever, if it succeds in these trials.
“In contrast, Eli Lilly’s recent trial failure with its Alzheimer’s work, highlights the demands of succeeding in biotech, even with an established company.”
Gloves on, head down in a biotech lab. Source Google Images.
What affects share prices in the sector?
The results of drug trials, which can take years, are eagerly awaited. Good results can boost the whole company and its shares.
In July, the UK gene and cell therapy firm Oxford Biomedica received a boost when it was learnt that the US’s FDA Advisory Committee recommended the firm’s CTL019, a receptor T cell therapy, for approval.
What makes a biotech stock buck the sector trend?
On top of good research results, a shrewd collaboration or a takeover can boost share prices tremendously.
What makes a share price weaken?
Apart from bad results, another firm’s good results in a similar field, or a good deal, can be a depressant. Also, a market impression that the firm has lost its way, with doubts about its ability to deliver, is bad news for company credibility and the share price.
What to look for in company accounts?
Apart from the obvious alarm bells such as level of debt, level of earnings per share and poor results, it's good to look out for in biotech companies' annual reports any reference to risk.
BTG’s 2017 annual report stated: “A number of risks relate to numerous objectives. These include: failure to execute business plans, increased competition, supply chain disruption, legal or intellectual property disputes; failing to meet the Group’s legal, regulation and compliance obligations….
“Failure to secure adequate levels of reimbursement or regulatory approvals, or failure to attract, retain and develop staff with the requisite skills and expertise to deliver the strategy, or higher than expected cost of sales, or overheads, could materially adversely impact revenue growth.”
Some can be more specific that this. As one analyst put it, “We do our own due diligence on companies, of course, but it is helpful and interesting to read what is a concern to the business itself.”