The mid-term elections set to take place in the US in November could create an attractive entry point in the biotech sector, with a renewed focus on drug pricing likely to cause short-term volatility.
This is according to Lydia Haueter, senior investment manager of the Pictet Biotech fund.
Data from FE Analytics shows the MV US Listed Biotech 25 index fell 16.14 per cent between 18 and 28 September 2015 in dollar terms after then US presidential favourite Hillary Clinton pledged to take on what she called “price gouging” in the specialist drug market. While the market eventually rallied following Donald Trump’s surprise victory, it has been subject to further sharp corrections after the new president tweeted his own plans to bring drug prices down.
Performance of indices 18/09/2015 to 28/09/2015
Source: FE Analytics
Haueter predicts the sector will be the victim of similar attacks in the coming months but said investors should simply look upon any subsequent corrections as buying opportunities.
“With the mid-term elections, the rhetoric on drug pricing is going to come back for sure,” she explained.
“So there could be volatility in the sentiment and this could create attractive entry points, because in the long term I don’t think it has any effect basically, nothing is changing in the fundamentals of these companies, it’s a lot of noise.”
Haueter is not the only one who has cast doubt on the ability of the US government to harm the fundamentals of biotech firms.
Close to $25bn was wiped off the value of the S&P 500’s top pharmaceutical companies in January 2017 after Trump accused them of “getting away with murder” just a week before his inauguration as US president. However, Carl Harald Janson of the International Biotechnology Trust pointed out the impact of his tweets on share prices are subject to the law of diminishing returns.
“Someone has called wolf many times,” Janson said. “Since then, Trump has tweeted many times and each time the market has reacted less and less. Nobody listens any more when he says the wolf is coming.”
This suggests increased rhetoric about drug pricing around the time of the mid-term elections may not create the attractive entry point Haueter has spoken of. The manager admitted she is not in the business of market timing, adding: “In the short term, maybe now is a bad time. With mid-term elections coming up, maybe that is a better entry point, I don’t have the crystal ball so it is hard for me to tell if that is true.
“[But] I will always say, biotech is not a short-term game. If you want to go into biotech, over four years you are going to make money, I am sure of it; but this sector is driven by sentiment and the moves are quite visceral, so if you have a horizon over one year, I cannot tell you that you are going to make money. If you have a horizon of four years, I am sure you will because this is true growth, true innovation, true value that is generated.”
In the event that Haueter is wrong and there is greater regulation of biotech, she said this is unlikely to harm its long-term fundamentals. The manager pointed out the FDA takes a more collaborative approach to the industry than it has done in the past, with much better communication leading to a record year for drug approvals in 2017.
Where the regulator is seeking greater powers is in the quest for greater transparency and showing where the money goes – a move she admitted “will shake up the industry for sure”.
“It will put pressure on exploitative drug pricing,” she continued. “In the UK you have NICE and it is a good example of how to add economic value. I am not sure it is the perfect system yet but it’s a start and I think that in the US, these organisations are going to become more and more important.
However, she said it is not the companies she invests in that will suffer.
“If they shed light on the whole system – so if we see who is getting paid and who is getting kickbacks – only true innovation and true value will get paid. You cannot just milk your old cash cows, you need to show something for what you have.”
Haueter said that greater transparency could help improve the reputation of biotech firms and pointed out that some of the most innovative companies in this sector are often unfairly maligned when the press tries to oversimplify complex pricing structures.
For example, she said that a drug from Gilead called Harvoni slashed the long-term cost of treating patients with hepatitis C (HCV), yet in many ways it became a victim of its own success.
“If you have HCV you can have it for years and years, but at one point your liver signals are going to go way up,” she added.
“The doctor is going to look at your liver and say ‘you have fibrosis, it is really bad’. You can get liver cancer and you may die. So the cost of that may be a couple of hundred thousand dollars, whereas Gilead’s treatment is 12 weeks – it costs $40k, but you are done, out of the door.
“People got really mad at Gilead because it made a huge amount of money upfront – but you had this huge pool of patients so you had massive sales in the first couple of years and then this quickly dropped off because they all get cured. People didn’t do the maths across the whole time.
“So Harvoni really didn’t get the credit it needed. It’s a really good drug, it’s short and it cures more than 99 per cent of patients. That’s what the future is going to be.”
Data from FE Analytics shows the Pictet Biotech fund has made 212.28 per cent over the past decade, compared with 139.44 per cent from its MSCI World benchmark and 398.65 per cent from the MV US Listed Biotech index.
Performance of fund vs indices over 10yrs
Source: FE Analytics
It is $1.5bn in size and has ongoing charges of 1.2 per cent.