Biotechnology equities could see a torrid performance over the next 12 months following on from its recent correction according to Charles Stanley Direct’s Rob Morgan, who thinks 2016’s US election could prompt a nasty bout of volatility.
Biotech has been the best market in terms of total returns for several years delivering sky high returns as the demand for exposure to early stage drug and healthcare firms has ramped up in tandem with innovations in gene therapy and other areas.
The likes of AXA Framlington Biotech, Candriam Biotechnology and Pictet Biotech have soared over the past four years or so until recently when the market sharply dropped.
Performance of funds over 4yrs
Source: FE Analytics
The Nasdaq OMX Biotechnology index suffered a fall of 25 per cent between 22 June and 30 September but has since made a partial recovery.
Performance of index since 22 July 2016
Source: FE Analytics
The falls were prompted by comments from prospective democratic presidential candidate Hillary Clinton, who she would seek to put greater controls on the price of pharmaceuticals after the price of niche cancer and AIDS drug was ramped up more than 5,000 per cent overnight by an activist investor.
Clinton’s comment’s which initially came in the form of a tweet (shown below) and was enough to prompt the first wave of selling, were followed by a plan she laid out to increase government oversight of drug pricing.
However to do this she would need to first win the Democratic Party’s nomination, the Presidential run-off and also passing a law through Congress.
Morgan, who currently has a small holding in AXA Framlington Biotechnology, says there could be further pain for the sector due to concern over the influence of the US political scene in the run up to the presidential election.
“2016 could be challenging for biotech [with the] US presidential run up causing volatility so I would be wary here,” he said.
However, Morgan is not selling his own exposure as he says he prefers to avoid ‘market timing’ and expects to hold the fund for between 10 and 20 years over which time he expects decent returns.
“It is fair to say I’m not buying any more right now,” he added.
Biotech’s recent volatility and broader fall makes only a dint in its longer term gains and it clearly has a higher beta, meaning it has been shown to rise and fall more than the wider equity market.
However, it has spelled trouble for more recent investors. Star Manager Neil Woodford who runs the highly popular CF Woodford Equity Income fund and Woodford Patient Capital Trust took a sharp hit from his substantial bets in biotech during its sell-off.
Woodford Patient Capital took the hardest hit from its US biotech holdings. The largest detractor to performance was Northwest Biotherapeutics.
Woodford had built a 28 per cent stake in the firm which has fallen 63 per cent since June. The falls followed rumours that the clinical trial of an oncology treatment would be halted by the firm and the stock was later negatively reviewed in analysts’ notes.
Woodford Investment Management have called for an independent investigation regarding the further “unfounded” allegations of impropriety at the firm.
Of course this is just one stock and Woodford’s other bets such as Alkermes and Prothena have made back their losses since June.
FE Alpha Manager Woodford (pictured) said: “What I have said all along, and reiterate today, is that with some early-stage investments not everything will go well.”
“There will be bumps in the road and some won’t make it to a successful destination.”
“It is too early to pass judgement on Northwest but we have hit a bump in the road that needs to be addressed.”
While the sell-off has been a clear blow to Woodford’s trust which is down 13.37 per cent since 22 July, the fund is up 4.74 per cent having only briefly entered negative territory since this date.
Performance of fund, trust and index since 22 July 2016
Source: FE Analytics
David Pinniger, manager of the Polar Capital Biotechnology fund says despite the worries that currently surround biotech stocks there is a substantial investment case within the broader market.
“When it comes to the biotechnology sector, we remain excited about both the quantity and quality of powerful new medicines coming through the industry’s R&D pipeline.”
“Despite recent concerns we believe innovative new medicines that materially enhance the prospects of patients with serious life threatening diseases will continue to command strong pricing power given their overall value proposition to the healthcare system.”
“This gives us confidence in the sustainability of revenue and earnings growth, as well as cash flow generation, for the sector over the coming years.”