Investing in the Biotech sector arguably carries higher implications for the future of mankind than any other. The capital acquired by pharmaceutical companies is invested into scientific development of drugs designed to combat the world’s most lethal diseases. Such is the importance of developments in medical science, pharmaceutical companies have become incredibly aggressive, with many large firms acquiring smaller ones in order to be the first to clinch scientific breakthroughs. But the biotech industry, like all industries, wants and needs to make money.
According to Table 1, over the past five years, market growth in the Biotechnology and Healthcare sector has been spectacular and has outperformed any other by some distance. Figures up to 29 February 2016 showed an average cumulative return of 173.5 per cent, compared with second-placed Japan Equities, which delivered 76.6 per cent. Three-year data tells a similar story, with Biotechnology and Healthcare achieving 74.5 per cent growth. The next best performing annualised sector, Property – Direct UK, achieved 54.9 per cent.
As with any investment, spectacular returns are generally accompanied by extensive risks and the past three and six months tell a different story. Over these periods, Biotechnology has outperformed only two of the 47 sectors on FE, with an average loss of 10.7 per cent over three months and 12.4 per cent over six.
With this in mind, is Biotechnology experiencing a small setback to reflect ongoing global market volatility, or are there deeper issues at hand? If so, could they impact the growth of the sector for years to come?
Richard Penny, manager of the Legal & General UK Alpha Trust, explains that biotech stocks are particularly vulnerable in volatile market conditions.
“At it’s very best it is a risky trade because the individual projects are risky. They don’t have dividends by any stretch and they often need follow-on financing. So, if you get a market setback as we’ve had, then usually they are subject to a big correction,” he says.
In January 2016 alone, the iShares Nasdaq Biotechnology ETF dropped 21.02 per cent, as global stocks dipped towards a potential bear market.
Tim Jaksland, innovation analyst at Carmignac, suggests several external factors are affecting the sector short-term. He says, “One of them is overall macro developments. Biotech is still seen as a high-risk, high-beta sector. In general, when markets perform poorly, Biotech is performing poorly, so we are seeing some of that at the moment. The other factor is that healthcare in general is under pressure from the US election, where there is a lot of talk about pricing, so that is affecting the whole sector, including the biotechs.”
US and Shkreli
