How to invest in biotechnology: the healthcare sector’s high-growth area
Dr Mike Tubbs provides an overview of this thriving industry, whose latest triumphs include the Covid-19 vaccines. He examines the best investment strategies and highlights his favourite picks.
Biotechnology is a vast field – and a lucrative one for investors. It is concerned with harnessing biomolecular processes (involving lipids, cells, nucleic acid and proteins) to develop technologies and products. Over the last few decades the sector has revolutionised drug development, agriculture and aspects of green energy.
Early investors in biotech companies have done very well. Shares in Amgen (a large drug maker), for instance, have soared by a factor of 170 over the last 31 years; Genus – a UK animal-genetics group – is up 54-fold in the last two decades.
The industry’s successes include new and effective treatments for cancer, cures for serious genetic diseases and the recent development of several Covid-19 vaccines at record speed. Both the Pfizer/BioNTec and Moderna vaccines use synthetic mRNA, a technique applied to fighting cancer. It adapts the body’s natural RNA, which governs protein production in the cells.
When the vaccine, comprising mRNA and the spike protein from the surface of the virus, is injected into the body, it prompts cells to start producing antibodies (proteins developed by the body to defend the immune system) to fight the virus. The AstraZeneca/Oxford vaccine, meanwhile, uses a harmless carrier virus with extra genetic material of the Covid-19 spike protein, which again stimulates antibody production.
Going beyond drugs
Biotech stretches far beyond vaccines, however. Increased crop and farm-animal yields are needed to feed a growing world population. This drives agricultural biotechnology. There are four big agribusinesses providing crop protection, fertilisers and genetically improved seeds. These are BASF, Bayer/Monsanto, Dow/DuPont (whose agricultural part was spun off as Corteva) and ChemChina/Syngenta.
Several agricultural biotech start-ups have already been acquired by the majors, including AgraQuest and TPG Growth (both bought by Bayer) and Becker Underwood (a seed-treatment specialist),scooped up by BASF. Genus is the world leader in genetics for farm animals.
Industrial biotech includes areas such as harnessing enzymes (biological catalysts) to improve products; biomatter power facilities; biofuels; waste-to-energy facilities and the biodegradation of plastics. Novozymes is a good example of a diversified industrial-biotech company with products in enzymes (for household detergents, for example); food and beverages (baking and brewing); bioenergy (bioethanol); and agriculture and feed (animal-feed enzymes and biopesticides).
However, it is the therapeutic biotech companies that have made the most rapid progress. The past few years have seen new biotech drugs for diseases such as cancer, autoimmune diseases and inherited genetic disorders. The companies developing new drugs range from well-established pharmaceutical firms with biotech divisions to large biotech companies and a range of smaller biotechs developing specific new treatments that they usually exploit through partnerships with big biopharma firms.
The key players
The large therapeutic biotechs include Amgen (it specialises in oncology, cardiovascular, inflammation and other diseases), Biogen (multiple sclerosis and neurological diseases), Gilead Sciences (HIV, liver diseases and cancer) and Celgene (a blood-cancer specialist acquired by Bristol-Myers Squibb in late 2019). There are several large pharma groups with big biotech divisions.
Roche, for instance, took a majority stake in Genentech, the first large US biotech, in 1990 and then acquired the remaining shares for $47bn in 2009. Bristol-Myers Squibb has joined this group via its acquisition of Celgene; AstraZeneca through its 2004 acquisitions of Cambridge Antibody Technology and 2007 acquisition of Medimmune; and Johnson & Johnson (J&J) due to takeovers of Janssen Pharmaceuticals, Crucell, Actelion and others. Most other large pharma firms have made smaller biotech purchases or bought late-stage drugs from smaller biotechs.
The smaller biotechs divide into three groups: those large enough to launch their own new drugs; those that enter partnerships with large pharmaceutical firms, whose massive sales forces agree to market some or all of their late-stage pipeline drugs; and those acquired by Big Pharma.
A good example of the first category is Vertex Pharmaceuticals, whose shares rose from $79 in early 2017 to $211 in May 2021; one growth driver was the launch in 2019 of its drug Trikafta for cystic fibrosis. It generated sales of $1.2bn in Q1 2021. MorphoSys, the antibody company, is an excellent example of the second group. It develops antibody drugs, which it commercialises in partnership with big pharmaceutical firms. It has 16 antibody drugs in 45 clinical trials with 12 Big Pharma partners.
MorphoSys’s first US-approved treatment was Tremfya, a treatment for psoriasis and psoriatic arthritis. It was launched four years ago. Examples of the third group include Gilead’s acquisition of Kite Pharma for $11.9bn to strengthen its cancer pipeline.
How a picks-and-shovels approach can pay off
The term “picks and shovels” was coined during the Californian gold rush when most money was made by firms supplying picks, shovels and other mining equipment rather than by prospectors, only a small proportion of whom found worthwhile amounts of gold. In this context, picks-and-shovels companies are those providing biotechs with the tools to carry out research and development. They tend to be lower-risk investments, since biotech researchers need these tools regardless of whether their projects are successful.
Excellent examples include Illumina and Abcam. Illumina is the market leader in next-generation DNA and RNA genetic-sequencing equipment, which can sequence either selected parts of a genome (the genetic material in an organism), or the whole genome. The widespread use of genomic sequencing results from the massive reduction in sequencing costs facilitated by technological advances. The first human genome was sequenced in 2000 and cost $2.7bn. Today a whole genome can be sequenced for $1,000.
Next-generation sequencing has wide therapeutic applications ranging from cancer and reproductive health to genetic and rare diseases and vaccines, notably Covid-19-variant sequencing. Illumina has an agreement to acquire full ownership of cancer-testing group Grail for $8bn.
Grail has developed a multi-cancer blood test that can identify different types of cancer at an early stage using tumour-genome analysis. This promises to revolutionise the early diagnosis of cancer and dramatically raise the chances of a cure.
Abcam, one of the largest companies on Aim, London’s junior market, provides the antibodies, other proteins and consumables (such as biochemicals and reagents) used in biotech research. It has an excellent website selling both its own and third-party antibodies to global customers, causing it to become known as the “Amazon of antibodies”. Abcam provides a detailed technical data sheet for every product so customers can select the best antibody or protein for their research project.
Picking cores and satellites
Since biotech is a broad field, investors usually want some exposure to the main areas of biotech, such as therapeutic drugs, picks-and-shovels companies and possibly agricultural, and/or industrial biotech. This is best achieved using a “core-and-satellite” approach, where the core comprises substantial, established and profitable companies often paying dividends. Satellites consist of smaller, higher-growth companies with the prospect of faster, but riskier, capital growth. The relative sizes of the core and satellite proportions will depend on an investor’s appetite for risk.
A biotech portfolio is likely to consist mainly of therapeutic biotech companies. When assessing these it is not sufficient just to look at recent financial results, since the company might make most of its profits from one successful drug facing increased competition or patent expiry. It is also important to analyse each company’s new drug pipeline to ensure that it has the potential to grow profitably in future.
So which companies have nurtured healthy pipelines? If we look at the top-ten drugs of 2019 by worldwide sales, we see that six are for cancer and two for immunology (diseases such as rheumatoid arthritis and psoriasis fall into this category).
Research group Evaluate Pharma’s estimate of what the top-ten bestselling prescription drugs will be in 2026 lists the bestselling one from Merck, the next two from Bristol-Myers Squibb, the fourth from Gilead and one each from AbbVie/J&J, Pfizer, AstraZeneca, Sanofi, Vertex and Novo Nordisk. Worldwide sales of cancer drugs in 2026 are estimated to be $311bn, with the next largest disease area being anti-diabetic drugs, with $67bn in global sales. These are followed by immunosuppressants with $61bn, vaccines ($56bn) and anti-rheumatics ($50bn). This shows the importance of having a portfolio well stocked with promising cancer drugs.
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