Biotech and Swine Flu
The swine flu pandemic that we confront brings home the fact that diseases occur and propagate regardless of economic conditions. In the biotechnology sector, which aspires to combat these threats to humanity, this interprets into a low correlation with broader equity markets and a comparatively isolated position versus consumer sentiment: success is appraised by the ability to prevent or mitigate disease.
This did not aid them when they were left behind during the bull markets of the past, but plays to their advantage in difficult market conditions.
The biotechnology sector’s weak correlation with the fuller equity markets arises because drug industry revenue is relatively insulated from the effects of consumer sentiment – most patients must continue to take the same amount of medication regardless of economical conditions.
Although consumer opinion is not a big concern for the drugs industry, it is flush with a plethora of unique concerns and pitfalls: right now the biotechnology industry is a hub of risk and reward. Choosing the right fund management team is essential and an in-depth cognition of the arena is a must – top funds now invariably have someone with a PhD in the Life Sciences in addition to fiscal expertise.
The best strategy for biotechnology investment funds comprises both apologetic and growth elements, although in the current financial environment, the emphasis on growth should be shifted away from the mass of small, loss-making companies that will be suffering from the sudden cash drought.
Veteran large-cap biotechs such as Amgen, Genzyme and Celgene should be the mainstays of the fund. These have the defensive characteristics of traditional pharmaceutical companies without being exposed to the time bomb of patent expirations and generic competition threatening the latter.
The best speciality drug companies will center on areas such as particular cancers or infectious diseases, and offer the potential of organic growth through their own internal development. They could also be developed – often at a significant premium – by pharmaceutical companies trying to fill gaps in their exhausted drug pipelines.
Generic drug manufacturers, who make copies of existing big brand drugs, are also set to gain market share as a raft of multi-billion-dollar selling drugs start to lose patent protection.
Although no one can ever be sure which, if any, of a company’s drugs will be sanctioned, good fund managers will ascertain these risky ventures have at least two things going for them.
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