What's Next For Biotech?
- We continue to see opportunities in the biotechnology industry, despite year-to-date outperformance vs. the general market(See figure below), and are watching the space closely.
- Three key themes driving our investment thesis for biotech and in particular biopharma are: (1) new drug discoveries from improved R&D processes, (2) new markets that arise from the COVID-19 response and (3) demographic changes that will drive drug adoption.
As investors adjust to new and ever-evolving realities given COVID-19, they may want to look to companies at the forefront of solving the crisis. As a result, the biotech industry had outperformed the general market by more than 16 percentage points, as of May 29th (See figure below). Investors have long favored the industry and have been willing to pay more per dollar of earnings than the broader market. Over the last ten years, biotech’s relative 12-month forward price-to-earnings multiple, based on the Nasdaq Biotech Total Return Index, has averaged 308% of the S&P 500’s but grew to 575% of the S&P 500 Index, as of May 29th. In other words, price-to-earnings multiples for biotech have grown faster than the S&P 500’s.
Despite this outperformance we still think biotech appears attractive over the long term as the industry’s secular drivers of growth continue to accelerate.
Source: Bloomberg as of May 29, 2020. Genomics & Immuno Biopharma represented by the NYSE Factset Global Genomics and Immuno Biopharma Index, Biotech is represented by the Nasdaq Biotechnology Total Return Index, Tech is represented by the Dow Jones U.S. Technology Index, and S&P is represented by the S&P 500 Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
The biotech industry is growing rapidly and due to its diverse nature, we see future growth supported by a wide range of sources. While over 50% of the industry’s revenue is linked to healthcare products, the biotech industry on the whole covers companies using living organisms or molecular and cellular techniques to provide chemicals, food and services that meet human needs.
Against that backdrop, we see three strategic themes driving our investment thesis for biotech and especially biopharma, which makes up more than 25% of the pharmaceutical industry and is the fastest growing part of the industry. These include:
- New drug discoveries: As the Boston Consulting Group notes, the biopharma industry has built new capabilities allowing it to leverage data and analytics, enabling enhanced drug discoveries. As R&D productivity has increased FDA drug approvals have also increased. Between 2000 and 2010 FDA drug approvals were around 30 per year. This increased to around 50 per year between 2014 and 2019 as the genomics revolution helped drug developers understand the intersection of biology and disease. As we look forward, additional scientific and technological breakthroughs are in the works as an array of innovations are being transformed into new therapeutic tools. Furthermore, expiring patents are creating the opportunity for new entrants and new innovation.
- COVID-driven demand growth: Despite, and in some cases because of the current coronavirus pandemic underway, we expect secular and structural trends to continue to arise and potentially reshape the biotech industry as biotech should be at the forefront of finding a potential vaccine to the coronavirus. Furthermore, the industry is at the epicenter of providing the path to the new norms that are emerging from COVID-19. Initially this includes testing and critical medical devices but over time it should also include vaccines and therapeutics. As the industry adjusts to focus on coronavirus solutions and as governments, regulators and healthcare systems work together to avoid future risks, we expect secular and structural trends to continue to arise for biotech. The industry is at the forefront of finding vaccines and therapeutics, providing new norms and developing or testing critical medical devices that could potentially reshape our lives.
- Demographic changes: The global biopharmaceutical market is projected to grow by 8.7% through 2025. Driven by a variety of factors, including the aging population and resulting medical needs, a surge in prevalence of chronic diseases, and the increased adoption of biopharma globally, the demand for biopharma has increased meaningfully. We expect this trend to continue as the acceptance of biopharma continues to accelerate with effective cures treating previously untreatable diseases.
From a more granular perspective, the largest biopharmaceutical market is currently North America, and more specifically the United States, due to the increasing prevalence of chronic diseases. With per capita health expenditures rising (see chart below) and anticipated to increase this stronghold is expected to continue. Prior to the coronavirus pandemic health spending in the U.S. was projected to grow 0.8 percentage points faster than GDP per year from 2018-2027.
Current U.S. health expenditure per capita continues to rise
Source: Centers for Medicare & Medicaid services; www.cms.gov as of December 17, 2019
We believe investors should continue to monitor biotech going forward. We see the sector being fueled by a combination of the evolving biopharma ecosystem, the demands resulting from COVID-19, continued innovation productivity and the medical needs that biopharma solves. Although biotech has outperformed the broader market year-to-date, we believe the long-term investment thesis remains intact.