"The strength of the recent performance of the biotechnology sector is attracting controversy. The sector has undergone a renaissance in investor interest in recent years as a phenomenal new technology cycle is starting to drive increased levels of R&D productivity for a global pharmaceutical industry desperate for medical innovation. After a strong 2013, the sector had a good start to 2014 against the background of a distinctly nervous stock market. However, in recent weeks the sector has experienced a sharp correction, which has left many asking; “Where next for the biotechnology sector?” We believe the answer is higher.
The catalyst for the recent correction seemed to be renewed questions in the US political arena over the high price of a very potent new hepatitis drug being sold by the US biotech company Gilead. But controversy over the high prices of highly effective new biotech drugs is not new, and in many cases there is a strong value proposition that comes with highly efficacious new drugs. In our view, the correction was more technical in nature, and probably overdue.
Over the past year the IPO window for biotechnology has been flung wide open and some early-stage companies have come to market, cumulatively raising a lot of capital. A vibrant new issue market for the sector was long overdue but the quantity of capital raised combined with the performance of these and other relatively early-stage companies has had the sceptics suggesting we’re experiencing another “bubble” of irrational exuberance for the sector similar to 1999/2000.
"But even a quick check of the profoundly strengthened industry fundamentals, and of valuations versus history and versus what’s available elsewhere in the market suggests that this is far from the case. Furthermore the growth on offer – diverse, defensive and durable – is not to be sniffed at in the current economic environment. From our perspective the correction is very healthy. It shakes out fast undiscerning momentum money that has been pushing almost everything in the sector higher over recent months. A meaningful correction will force the market to become more discerning. This suits smaller, dynamic actively managed vehicles.
These recent negative headlines – and increased volatility – will likely give investors new to the sector pause, and the supply of IPO paper has also mopped up a lot of demand capacity in the near-term. But over the coming months, we expect these concerns and technical dynamics to fade in the face of strong earnings reports, positive news on exciting new biotech drugs, and M&A activity. This means the recent correction will in hindsight likely be viewed as an excellent buying opportunity. We believe we are only at the very start of a major new technology cycle for the sector which will drive the value of well-constructed biotechnology portfolios much higher over the coming years."