In the severe market correction induced by the COVID-19 pandemic, one sector stood out with a positive performance year to date: biotechnology.
As of April 21, 2020, the large cap sector of biotech was up 1.64% thanks to a very quick rebound from the March lows. Such positive market action is probably due to a convergence of factors among which better valuation metrics at the beginning of the year compared to other sectors, less perceived impact from the economic dislocations of the virus and a possibly more favorable political environment.
The last point is an important one not only in terms of explaining current action but also for future evaluations. The current pandemic has raised the perception that biotech and pharma are key allies in this modern warfare against invisible enemies such as viruses and global diseases. Pharmaceutical research is increasingly important in a world that is facing more insidious threats than in the past. When we combine this growing perception about the sector with the Democratic Party’s choice of a centrist such as Biden as a Presidential candidate, it is reasonable to think that the future political landscape for biotech and pharma will be more benign than in past electoral cycles.
Such development strengthens the case for the formation of a long-term upside cycle after five years of consolidation. The last peak occurred in mid-2015 after a strong up cycle which began in 2011. Besides the more favorable social view of the sector, what makes biotech very interesting is the increasing ability to combine traditional research with the power of big data. Such synergy is what initially lead us to the space a couple of years ago. The intertwining of these two approaches has opened up the door to new techniques and vastly accelerated the process of hypothesis, testing, validation of many therapies. Accelerating such cycle and increasing the probabilities of positive outcomes comes at a good juncture as many large pharmas are in need to rejuvenate their pipelines. The threat of COVID-19 may also result in a generally more streamlined process by the FDA for approvals of new therapies.
Digging deeper into the current research, we can identify significant advancements in many areas such as gene therapy, gene editing and novel approaches to cancer treatment with an ability to tailor treatments to specific pathologies rather than having to rely solely on blanket approaches such as chemotherapy.
An additional potential positive that may emerge from these volatile times, is the ability of pharma to leverage its medical and commercial resources to help bridge gaps in the delivery of care. Large pharmaceutical companies have resources that can be repurposed to help with the COVID-19 emergency but that in the process can also help establish more effective ways to deliver care in the longer term. One such case is the large set of data of local healthcare ecosystems that each company owns and that could be retooled for new missions.
Investing in biotech and pharma requires a dedicated approach as one is often dealing with small, unprofitable research companies with a capital raising model that differs from typical companies in other sectors. Mergers and acquisitions is also one defining element of a biotech strategy, as large companies gobble up smaller players to reinvigorate their pipeline or acquire dominant positions in specific areas. A long-term and diversified approach is also required to mitigate the superior volatility that usually defines the space.
In conclusion, investing in biotech requires passion, a long-term vision and a dedicated strategy modeled on the idiosyncrasies of this unique universe.
Please feel free to contact THALASSA CAPITAL should you want to investigate this topic further.