Biotechnology and healthcare funds have been one of the worst places to invest over the past year thanks to a sell-off in stocks over worries the market for new drugs may face tougher price regulation as well as a bearish 11 months in the global equity market. 
This underscores biotech and healthcare’s reputation as a high beta play, whereby they move at an accentuated pace to movements of the wider market.
In contrast, over the past three and five years they have been one of the best places to invest 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 5yrs
Source: FE Analytics
Since the end of April 2015, the market start turning negative on healthcare and biotech and these funds have had their worst period for many years due to a host of concerns around the strength of the global economy as well as more specific worries over price controls on pharmaceuticals.
Biotech was however course for another reasonably strong year until August 2015 when investors started to panic sell, further exacerbated by Hillary Clinton’s comments that she would seek greater price controls on pharmaceuticals should she win this year’s presidential election in the US.
The OMX NASDAQ Biotechnology index is still down 28.33 per cent while the AXA Framlington Biotech fund is down 32.27 per cent since the high last April
Performance of fund and index since 27 April 2015
Source: FE Analytics
Charles Stanley Direct’s Rob Morgan, who is a long term holder of biotech, says now looks like time to buy exposure for anyone who sold out over the past year.
“I haven't bought any more, but if I didn't already have a holding I would be tempted as I think the fundamentals surrounding the sector remain intact. It's a good area to consider for monthly savings in particular,” he said.
Dominic Rossi, global chief investment officer of equities at Fidelity International says healthcare/biotech could again be one of the top areas of growth in stock markets in the coming years thanks to a recovery in equity markets looming on the cards.
“I believe we should now enjoy a period of stable growth with benign financial conditions providing the platform for a new up-leg in equites, once again led by the US stock market. A Chinese devaluation would be a risk to this thesis, potentially supplying yet another deflationary wave, but this risk appears to have materially subsided.”
“The recent bounce in emerging markets and commodities from distressed levels will most likely fade as both areas still face pressing structural challenges, which will take years to work through. Instead, I see leadership reverting to those areas least impaired by recent developments; that is the sectors with high levels of intangible assets and intellectual property, such as information technology and healthcare.”
David Pinniger, Manager of the Polar Capital Biotechnology fund, argues that with a “powerful” technology and product cycle underway and attractive valuations, now is good time to look again at the biotechnology sector.
“Biotech is a high-growth global industry that is now generating perhaps more than $100 billion in sales annually and more importantly is an industry that in recent years has made the transition to profitability.
“It is our strong belief that a powerful technology and product cycle is underway, a cycle that we believe has many years to play out. This cycle is supplying exciting new medical solutions to meet the demands of healthcare systems around the world struggling to keep up with the demographic forces of aging populations.
“It is this multi-decade innovation cycle and a constructive regulatory environment that has been the catalyst for an increase in the number of higher quality new drugs approved by the FDA in recent years.”
A new raft of drugs from the sector look set to improve the profitability of many forms whose high multiples often belied their lack of matching earnings, he adds.
“The exciting new drugs coming through in this new product phase are driving strong growth in revenues and cash flow generation for the companies concerned. The top twenty new drugs that have come through development in recent years alone are set to generate over $450bn in sales in the five years out to 2021, driving tremendous cash flows and earnings growth for the companies responsible for their development and commercialisation.”
“Further successful clinical development, regulatory approvals and M&A activity will continue to create value for investors in our view. In addition to improved research and development R&D productivity, there has been a significant amount of M&A activity in the space in recent years.”
“Amongst the larger companies with strong balance sheets we expect that their enduring quest for growth will drive further M&A activity – typically at a significant premium to stock market prices – good news for investors in the smaller target companies.”
“Valuations also look attractive amongst both the large-cap and smaller-cap companies. Larger-cap biotechnology companies are now trading at a discount to both their pharmaceutical peers and the broader market on a price to earnings multiple basis.”
