StemCell Therapy

Technology may typically be thought of in termsof computers and communications but its use inthe sphere of biotechnology is saving lives andchanging how we treat diseases. While investingin this area has obvious appeal from a social andmoral perspective, it can also be a highly lucrativespace as a growth investment in a portfolio.

Biotechnology is a sub-industry of the healthcaresector, which is typically divided into two spheres:

Biotechnology specifically refers to technologiesthat use biological processes, capturing companies that focus on research, development, manufacturing and/or marketing of products based onbiological and genetic information. The differenttypes of biotechnology include biological drugs,vaccines, immunotherapy, gene therapy, orphandrugs and genetic engineering.

While it may sound like a newer industry, biotechnology has a long rich history the creation ofpenicillin is in fact a form of biotechnology. Thecontinued improvements in technology over timehave also benefitted the biotechnology industry,enhancing the ability to access and use biologicalprocesses which we may not have even beenaware existed in the past. For example, DNAsequencing has revolutionised our ability to diagnose certain health concerns in individuals.Genome editing is a newer technology which maytransform how we treat or cure genetic diseases.

Demand is only likely to continue, not just on thebasis of the permanent need for treatments andvaccines for existing and yet to be identifieddiseases, but also because of the ability toimprove the way in which we treat. Imagine aworld where any illness you have can be treatedwith a drug specifically designed to work withyour genes and therefore minimise negativeside-effects and reduce recovery time? This is afuture that biotechnology is working towards.

It is no secret that biotechnology has experiencedextraordinary growth in recent times. Even in Australia, the fact that CSL Limited toppled Commonwealth Bank and BHP this year to become thelargest company by market capitalisation is anindication of the growing importance and value ofbiotechnology (1).

Biotechnology is predicted to be valued at morethan US$729bn by 2025, compared to US$295bntoday (2), and will continue to grow, driven by thegrowing global population and the need for affordable, effective treatments and vaccines to supporttreatment in the population.

Biotechnology will also be a beneficiary of population ageing, particularly in Western countries. Thereason for this is that an increase in the volume ofolder citizens is likely to have an accompanyingand proportional increase in the volume of age-related diseases such as cardiovascular disease,dementia or arthritis, all needing treatment (3).

Gilead is one example of a company with prospects in this space. Gilead is already well-knownfor its highly effective HIV treatments but is alsotargeting US and European approvals to market a drug called Filgotinib to treat rheumatoidarthritis (4).

In a demonstration of the growth in this industry,this year alone, 30-35 biotechnology companiesare anticipated to go public, raising approximatelyUS$3.5bn (5)

The COVID-19 pandemic may assist in accelerating the growth in biotechnology. Biotechnologycompanies have been at the forefront in seekingvaccines and cures for COVID-19. There arecurrently 11 potential COVID-19 vaccines in clinical evaluation (that is, undergoing testing) and afurther 128 in pre-clinical evaluation (6). Moderna isan example of a major biotechnology companyrunning clinical testing currently. It was the firstcompany to start human trials and anticipatesentering phase 3 trials with 30,000 participants byJuly (7).

The healthcare sector as a whole is likely to seegreater investment as a result of the COVID-19pandemic. For example, national health spendinggrowth in the US is expected to average 5.4%annually through 2028, reaching US$6tr a year (8).Biotechnology will also be a beneficiary of thisincreased investment.

Australian investors tend to have a concentrateddomestic exposure to biotechnology given thedominance of players such as CSL, Cochlear orResMed but may be missing the growth and diversification offered overseas. The US in particular ispositioned as the global centre of biotechnology.

The US biotechnology industry is valued at113.3bn (9), approximately 14x the size of the Australian biotechnology industry (10).

The reason for the US dominance in this field isdue in part to the world-renowned US Food & DrugAdministration (FDA) approval process and alsoto the size of its customer base.

Any companies seeking access to distribute theirproducts in the US market need to submit to FDAevaluation and in turn, many companies havesought to base themselves there for easieraccess to the process and for easier distributionand marketing to US consumers.

Australian investors can consider the US biotechnology industry as a diversification measure,along with exposure to a high growth segmentinternationally.

Biotechnology can be a high-risk industry, withhigh costs for drug development and high chances of failure. The rewards for successful trials canalso be immense.

To put this in perspective, in any given year, 54% ofclinical phase 3 trials typically fail for a range ofreasons (11), with average costs for developing adrug estimated at more than US2.1bn (12). The trialsand approval process can take years, often 10years or more, with less than 12% reachingapproved status with the FDA (13).

Biotech and healthcare companies then deriverevenue from approved products using patents,which last approximately 20 years from the dateof application (but also require maintenance feesand in some cases, can be extended) (14). Thismeans generic, cheaper versions from competitors cannot be sold in this period, allowing a company an effective monopoly over a particular formof treatment in that time. Of course, once thispatent expires, competitors can enter, so companies will continue research, development and testing on a permanent basis in the hope of findingthe next major treatment they can generaterevenue from.

Another source of return for this industry is from ahigh rate of merger and acquisition activity. Smaller and mid-size biotechnology companies areoften targets for larger firms, wanting to expandwith complementary capabilities they might notpreviously have had. Its a mutually beneficial relationship, providing smaller and mid-size companies with the capital they need to finance development and testing.

Mergers and acquisitions for biotechnology wasvalued at US$23bn in 2019 (15). Pre-COVID-19,activity was tipped to step up in activity for 2020,with oncology, cardiovascular/metabolic disease, immunology, infectious disease and centralnervous system disorders anticipated to benefit (16).

Investment and value from biotechnology isexpected to grow in coming years. While the trendalready existed due to continuous tech improvements and the needs of a growing population, theCOVID-19 pandemic has created a new spotlighton this area which may accelerate its growth.

While Australian investors are likely to already beexposed to this growth segment in the concentrated domestic market, they may be missingexposure to the US, which dominates the globalmarket for biotechnology.

There are a range of ways to access the biotechnology industry.Investors could consider direct shares in biotechnology companies or alternatively consider managed funds. Direct shares can be a high-riskapproach due to the high failure rates of drug testing and long periods of development (i.e., longperiods where there may be no or a limited returnon investment). Theres also the element ofchance has the investor picked the winner? Itcould take years to know.

Managed investments, be it an actively managedfund or passive options like ETFs, can assist inmanaging the risks by spreading it across a largernumber of companies. Investors could choose toinvest by taking a sector approach and investingin a fund focusing on broader healthcare, or lookat industry-specific options focusing on biotechnology. ETFS S&P Biotech ETF (ASX:CURE)is one such example that offers broad exposure toUS biotechnology.

ETFS S&P Biotech ETF (ASX:CURE),offers investors exposure to US biotechnology companies engaged in research, development, manufacturing and/or marketing of products based on genetic analysis and genetic engineering.

For more information on investing in biotechnology please hit the 'CONTACT' button below.

Footnotes

Read this article:
Investing in the vaccines of tomorrow: the case for biotechnology - Livewire Markets

This entry was posted on June 27, 2020 at 9:43 pm and is filed under Biotechnology. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. |