The biotechnology industry has emerged in the last 10 years as an exciting opportunity for investors, and this breakthrough has manifested how fast the sector can generate billions in revenues with the inclusion of new technologies.
We wanted to analyse some of the best biotechnology equity funds to invest as per Morningstar total returns 5 years annualised. We have selected the funds from Polar Capital, Bellevue AM , Pictet and Candriam, and asked their fund managers and analysts to send us some insights and strategies to include.
Best Biotechnology Equity Funds
Source: Morningstar 11/08/2021
Polar Capital Biotechnology Fund
David Pinniger, Fund Manager, Polar Capital Biotechnology Fund
Biotech: A vibrant future building on a decade of growth
The Polar Capital Biotechnology Fund aims to achieve long-term capital appreciation by investing in companies developing and commercialising exciting, breakthrough medicines for a range of serious life-threatening diseases. Our experienced investment team aims to create a well-balanced portfolio of investments in companies at various stages of development, using different technologies to develop new medicines.
Since launch, the team has invested in cutting-edge medical innovation where they believe the stock market is under-appreciating a company’s potential to transform medical research or clinical practice should one of its new drugs, diagnostics or research tools be successfully developed and commercialised.
With a relatively concentrated portfolio of around 50 companies, the team aim to invest sufficiently in their best ideas for them to have a positive impact on performance. At the same time, they are careful to mitigate downside risks should these companies encounter the normal setbacks and delays that are associated with the high-risk nature of biomedical research and innovation. Aware of the high-risk nature of the underlying investments, the structure of the fund is relatively simple with the view that if the team is investing in companies developing and commercialising truly ground-breaking new medicines and high impact innovation, that can create value for investors irrespective of the background stock market environment.
Indeed, over the past 10 years or so, the biotechnology industry has emerged as an exciting growth story for investors. An ever-improving understanding of complex human biology and the emergence of sophisticated new drug development technologies are producing hundreds of better medicines. Using exciting new tools and techniques, scientists are creating more precise and powerful medicines to address the root cause of disease, rather than merely addressing the symptoms, which is better for patients and healthcare systems seeking to deliver healthcare more efficiently. Over that same period, stock markets have been buoyant, and the biotechnology industry has benefited from companies being able to raise substantial sums of capital to invest in drug discovery and development – the industry’s collective R&D pipeline has never had such breadth and depth.
More recently, the pandemic has been a spectacular case study of what the industry is capable of, with the successful development of medicines, molecular diagnostics, and of course highly efficacious and safe vaccines at previously unimaginable speed. That success has driven investor appetite for radical new and potentially transformative biotechnologies such as mRNA, cell and gene therapies, and gene editing which hold the promise of effectively curing life-threatening diseases. Towards the end of last year, this generated bubbles of investor exuberance and excess valuation; this year, however, with broader market appetites changing this exuberance has faded almost as quickly as it arose and, with valuations now moving down towards more sensible levels, it is once again looking very interesting for investors.
While the industry has never been as vibrant and well capitalised as it is today, the speed and intensity of medical innovation has also never been higher, which requires a professional, cool-headed approach to investing. As a team of experienced healthcare investors, we believe we can allocate capital at the right time, to the right people using the right science to develop valuable new medicines that in turn can generate strong returns for our investors.
Candriam Equities L Biotechnology
Rudi Van Den Eynde, Head of Thematic Global Equity
Candriam Equities L Biotechnology is a fund that invests globally in companies that develop drugs for various diseases. The fund may also invest in molecular diagnostics and scientific equipment companies. Given the history of innovation in the U.S. biotechnology sector, the majority of the fund is invested in U.S. companies.The investment process is based on a thorough understanding and evaluation of the clinical data of “investigational stage” drugs, i.e., those being tested in human clinical trials.
To understand and judge drug characteristics and clinical data, the team also consists of people with scientific backgrounds who calibrate the clinical data sets in the context of existing drugs for that disease, but also compare investigational drugs with other compounds developed by other companies, including big pharma.
Drug development has become a very competitive field and extensive knowledge and access to databases are needed to truly understand the future commercial opportunity offered by a new drug.The fund continues to invest in both large, well-established companies and younger, research-stage companies. The shares are held for long periods of time as drug development is a long process, but obviously competitive positioning and new clinical data is constantly monitored and the position size is tailored to this news flow, but also to the share price as biotech companies can have erratic price movements which can create additional opportunities.
As we have been seeing in the market there has been a clear rotation from growth stocks to value stocks. However with the current monetary policy prevailing in the major economies of the planet, cash levels of companies have never been as high as they are today and balance sheets are strong.
The IPO market has been extremely active, especially for the biotech and oncology sectors in the United States (47 IPOs in the biotech sector and 19 in the oncology sector so far this year).
The FDA has approved numerous drugs and we are seeing a clear upward trend in the approval of new drugs, especially in the biotech and oncology sector.o Innovation remains the critical factor necessary for continued scientific progress in this sector, and the most innovative companies will undoubtedly be the clear long-term winners in this sector.
For all these reasons, we remain constructive and positive on the sector as we expect stocks to trade on the basis of stock-specific news, without too many global events to influence in the short term.
Tazio Storni, Portfolio Manager
In the medium and long term, the health theme should behave well
Healthcare industries account for 10 to 15% of the global GDP in advanced economies, which will increase in coming decades. It is a theme driven by the confluence of powerful megatrends, including technological innovation and individualization. We must bear in mind that the world is ageing and age-related diseases are increasing. To this adds that people, as wealth increases, focus more on health.
It is a very fragmented, high-growth universe, with approvals of new drugs being the catalyst. In fact, two-thirds of 7,000 drugs in development are biotechnologically sourced.
The fact is that, in this Covid-19 health crisis, these industries have shown a cooperative attitude to provide medicines, develop therapies and treat patients, implying that they are part of the solution. Some of the collaboration is expected to be useful and sustained. The manufacturers of new vaccines may be winners, but not in the way people think. What can really remain is the creation of technological validation platforms.
In any case, we estimate opportunities related to the wave of innovation. It is the case in oncology, where drugs are already designed to target mutations in a particular patient’s cancer, as well as rare, often genetic, diseases with advances in gene therapy technologies. Recently the U.S. agency has approved the first drug for Alzheimer’s, from Biogen,. In addition Intellia has shown data that may open a new area in curative medicine.
But, with the rotation towards more cyclical shares, the performance of global biotechnology has been shown to be significantly worse than the general market, especially among small and medium-sized capitalization companies. The big ones have held up better, mainly because of news related to vaccines against Covid-19, as well as regarding gene editing.
The fact is that governments, regulators, insurers and the industry need to find a middle ground that allows an effective management of drug costs without the risk of stifing innovation. This implies an opportunity for innovative business models. In fact, the system is slowly approaching a value-based model, which involves paying for results. It is used in some countries and more and more voices in the U.S., the largest market for prescription drugs, are calling for a similar system. This will shift the focus towards highly effective treatments. But we don’t think the current U.S. Congress can approve an aggressive change in drug prices.
In the medium and long term, the health theme must continue to behave well, being key the selection of companies with a deep capacity for innovation and a solid strategic vision. 350 of 40,000 listed companies have at least 50% of their business value related to this theme. Together with fundamental analysis and scientific and clinical data, we consider the severity of an unmet medical need, as well as the patient access to the drug. Aside, we integrate ESG data in the weights determination. This investment contributes especially to the United Nations Sustainable Development Goal “Good Health and Well-being” by 2030.
Bellevue Funds (Lux) BB Adamant Biotech
Dr. Lukas Leu, Analyst, Bellevue Asset Management
Biotech Industry: At the Forefront of Innovation
The development of vaccines against COVID-19 in record time is a highlight in the history of drug development. For investors, this breakthrough has shown how quickly the biotech sector can generate billions in revenues with new technologies. But the sector’s power to innovate and grow goes far beyond the delivery of vaccines.
Medical progress is unstoppable
In the US, the world’s largest healthcare market, the number of new drugs approved has been in an uptrend for years. From the regulatory side, accelerated approval procedures support the rapid development of these new therapeutic approaches to market maturity. This is especially true for drugs for life-threatening diseases for which there are no or inadequate treatments.
Decoupled from the economic cycle
With the ageing of the world’s population, the global drug market is growing independently of the world economy. On the one hand, the medical demand is aimed at the growing number of people who suffer from “widespread diseases” such as diabetes with increasing prosperity. On the other hand, new therapeutic approaches for previously hardly treatable diseases such as cancer or Alzheimer’s disease open up the option of at least slowing down the course of the disease and thus containing the long-term costs of inpatient treatment. For this reason, the medical demand is not even temporarily flattening out, but will continue to rise in the coming years parallel to the demographic development.
New therapeutic approaches in the pipeline
More than half of all newly approved drugs come from the laboratories of biotech companies. These companies are at the forefront of new technologies that serve as the basis for drugs against cancer, genetic or viral diseases. These therapeutic approaches include the various forms of gene therapies and gene editing. Gene therapy may soon help to cure aggressive forms of cancer or severe genetic disorders. That prospect is a bright ray of hope for severely ill patients. It is also inspiring the companies investigating these new treatments and attracting the attention of the investment community. Modern gene therapy is quickly emerging as a crucial technology in today’s medical world.
Valuations in the reasonable range
In contrast to companies from other high-growth markets such as e-commerce, e-mobility or renewable energies, biotech stocks are neither overpriced nor overheated. On the contrary: biotech stocks continue to trade at the lower end of their long-term average valuation.
Risks should not be neglected
Despite a fundamentally excellent environment, investors should not ignore the risks of individual investments. The development of new medical products is not a one-way street; setbacks and failures are part of the business. This makes a diversified investment approach all the more important. The BB Adamant Biotech (Lux) Fund is well-positioned to profit from the milestones that are expected to be reached in 2021. It offers daily liquidity at net asset value across all share classes. The portfolio is globally oriented, with a focus on attractive mid-caps through a diversified portfolio of 40 to 50 stocks.
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