The best way to buy into the biotech boom
After a long stay in the doldrums, the biotech sector is finally coming back into the spotlight. And the good news is, it's still not too late to join in the party. If you want to profit from a trend which looks very likely to continue, John Stepek says you should avoid picking individual stocks and go for a fund.
There's a merger boom going on right now, but amid all the gloom, no one's really paying much attention.
It could be because the sector in question has had a miserable few years itself, while almost every other industry was partying. But now, at last, after a long stay in the doldrums, the biotech sector is finally coming back into the spotlight.
There has been a mass of deals in the US, while on this side of the Atlantic, a number of attractive little biotech stocks have been approached or agreed bids in the last couple of months.
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And the good news is, it's still not too late to join in the party
Biotech sector is undergoing a merger boom
It's been a great couple of months for biotech stocks. In the US, Swiss group Roche made a $43bn bid for biotech giant Genentech last month (since rejected), while Bristol-Meyers offered $4.5bn for fellow biotech ImClone.
And over here, vaccine specialist Acambis has agreed a 190p-a-share offer from France's Sanofi-Pasteur. Meanwhile both Protherics and Oxford Biomedica, a couple of other small pharma stocks, have revealed bid approaches.
I hold both Protherics and Acambis in my own portfolio, and they're stocks I've tipped in the past. However, just to demonstrate what a volatile sector biotech can be, when I last tipped Protherics in MoneyWeek in February, the shares were trading at around 50p. By the time the bid news had came around, they had slipped for no particular reason to as low as 27p at one point. They're now at around 56p but that's a lot of volatility to endure for a 10% gain or so.
What does this show (apart from that share tipping is a mug's game)? Well, while anyone who bought Protherics at the low has now doubled their money, the chances of most of us getting that lucky are low. And even if you do it once, chances are the next biotech you stick your money into will turn out to be a complete dud. As Andy Smith, manager of the Axa Framlington Biotech fund, told me last week: "I see 400 companies a year. Every one of their chief executives reckons they've got a $1bn product." That's what's known as a blockbuster in the pharma trade. But "the truth is that most drugs fail."
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Why the trend is likely to continue
However, the M&A activity is likely to continue. Big pharmaceutical companies are running out of bestsellers. As Smith points out, in 60-odd years of modern medicine, most of the "easy cures" or treatments for common conditions have been found. The pharma industry has picked all "the low-hanging fruit" and now traditional methods of finding drugs no longer produce as many good candidates as they once did.
That means attention is shifting now to management of complex conditions such as cancer, HIV and other, rarer diseases the type of diseases that biotech companies focus on. And one of the easiest ways for big pharmaceutical companies to build their presence in the sector is simply to buy up promising biotech players.
If you're really keen to punt on individual stocks, there are plenty of tips around. Shares magazine likes the look of Concateno and IS Pharma. The Times meanwhile, recommends ProStrakan. As for Smith, he reckons Shire Pharmaceuticals is worth a look, as one of the few biggish pharma stocks that has managed to build itself a solid biotech arm through some canny acquisitions.
The easiest way to profit from the biotech boom
But if you would rather earn a decent profit from a trend which looks very likely to continue, I'd suggest avoiding the stock-picking which is really just pure speculation at this end of the market and go for a fund.
You could take a look at Smith's fund, a unit trust (visit www.axaframlington.com for more details). It holds around 70 stocks, and by fund management standards he's not afraid to take big bets, with his top holding, Gilead Sciences, currently accounting for nearly 9% of the portfolio. As regular readers will know, we don't tend to be keen on unit trusts because of the higher fees, though sometimes they can be the only way into a specialist sector.
But alternative options in this case include two London-listed investment trusts, the Biotech Growth Trust (BIOG)or the Finsbury Worldwide Pharmaceutical Trust (FWP).Or you could buy an ETF such as the iShares Nasdaq Biotechnology Index (US:IBB) it's purely US-focused, but then that's where the largest concentration of biotech stocks are listed.
You can find out more on these in the latest issue of MoneyWeek, out today. And there's more on the pharma sector in general, in our recent cover story: Turning to drugs. If you're not already a subscriber, subscribe to MoneyWeek magazine.
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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