Investing in the vaccines of tomorrow: the case for biotechnology

ETF Securities Australia

Technology may typically be thought of in terms of computers and communications but its use in the sphere of biotechnology is saving lives and changing how we treat diseases. While investing in this area has obvious appeal from a social and moral perspective, it can also be a highly lucrative space as a growth investment in a portfolio.

Healthcare and biotechnology

Biotechnology is a sub-industry of the healthcare sector, which is typically divided into two spheres:

Pharmaceuticals, biotechnology & life sciences
Health care equipment and services

Biotechnology specifically refers to technologies that use biological processes, capturing companies that focus on research, development, manufacturing and/or marketing of products based on biological and genetic information. The different types of biotechnology include biological drugs, vaccines, immunotherapy, gene therapy, orphan drugs and genetic engineering.

While it may sound like a newer industry, biotechnology has a long rich history – the creation of penicillin is in fact a form of biotechnology. The continued improvements in technology over time have also benefitted the biotechnology industry, enhancing the ability to access and use biological processes which we may not have even been aware existed in the past. For example, DNA sequencing has revolutionised our ability to diagnose certain health concerns in individuals. Genome editing is a newer technology which may transform how we treat or cure genetic diseases.

Demand is only likely to continue, not just on the basis of the permanent need for treatments and vaccines for existing and yet to be identified diseases, but also because of the ability to improve the way in which we treat. Imagine a world where any illness you have can be treated with a drug specifically designed to work with your genes and therefore minimise negative side-effects and reduce recovery time? This is a future that biotechnology is working towards.

A growing industry

It is no secret that biotechnology has experienced extraordinary growth in recent times. Even in Australia, the fact that CSL Limited toppled Commonwealth Bank and BHP this year to become the largest company by market capitalisation is an indication of the growing importance and value of biotechnology (1).

Biotechnology is predicted to be valued at more than US$729bn by 2025, compared to US$295bn today (2), and will continue to grow, driven by the growing global population and the need for affordable, effective treatments and vaccines to support treatment in the population.

Biotechnology will also be a beneficiary of population ageing, particularly in Western countries. The reason for this is that an increase in the volume of older citizens is likely to have an accompanying and proportional increase in the volume of age-related diseases such as cardiovascular disease, dementia or arthritis, all needing treatment (3).

Gilead is one example of a company with prospects in this space. Gilead is already well-known for its highly effective HIV treatments but is also targeting US and European approvals to market a drug called Filgotinib to treat rheumatoid arthritis (4).

In a demonstration of the growth in this industry, this year alone, 30-35 biotechnology companies are anticipated to go public, raising approximately US$3.5bn (5)

The COVID-19 pandemic may assist in accelerating the growth in biotechnology. Biotechnology companies have been at the forefront in seeking vaccines and cures for COVID-19. There are currently 11 potential COVID-19 vaccines in clinical evaluation (that is, undergoing testing) and a further 128 in pre-clinical evaluation (6). Moderna is an example of a major biotechnology company running clinical testing currently. It was the first company to start human trials and anticipates entering phase 3 trials with 30,000 participants by July (7).

The healthcare sector as a whole is likely to see greater investment as a result of the COVID-19 pandemic. For example, national health spending growth in the US is expected to average 5.4% annually through 2028, reaching US$6tr a year (8). Biotechnology will also be a beneficiary of this increased investment.

The US at the centre of biotechnology

Australian investors tend to have a concentrated domestic exposure to biotechnology given the dominance of players such as CSL, Cochlear or ResMed but may be missing the growth and diversification offered overseas. The US in particular is positioned as the global centre of biotechnology.

The US biotechnology industry is valued at 113.3bn (9), approximately 14x the size of the Australian biotechnology industry (10).

The reason for the US dominance in this field is due in part to the world-renowned US Food & Drug Administration (FDA) approval process and also to the size of its customer base.

Any companies seeking access to distribute their products in the US market need to submit to FDA evaluation and in turn, many companies have sought to base themselves there for easier access to the process and for easier distribution and marketing to US consumers.

A lucrative and risky industry

Australian investors can consider the US biotechnology industry as a diversification measure, along with exposure to a high growth segment internationally.

Biotechnology can be a high-risk industry, with high costs for drug development and high chances of failure. The rewards for successful trials can also be immense.

To put this in perspective, in any given year, 54% of clinical phase 3 trials typically fail for a range of reasons (11), with average costs for developing a drug estimated at more than US2.1bn (12). The trials and approval process can take years, often 10 years or more, with less than 12% reaching approved status with the FDA (13).

Biotech and healthcare companies then derive revenue from approved products using patents, which last approximately 20 years from the date of application (but also require maintenance fees and in some cases, can be extended) (14). This means generic, cheaper versions from competitors cannot be sold in this period, allowing a company an effective monopoly over a particular form of treatment in that time. Of course, once this patent expires, competitors can enter, so companies will continue research, development and testing on a permanent basis in the hope of finding the next major treatment they can generate revenue from.

Another source of return for this industry is from a high rate of merger and acquisition activity. Smaller and mid-size biotechnology companies are often targets for larger firms, wanting to expand with complementary capabilities they might not previously have had. It’s a mutually beneficial relationship, providing smaller and mid-size companies with the capital they need to finance development and testing.

Mergers and acquisitions for biotechnology was valued at US$23bn in 2019 (15). Pre-COVID-19, activity was tipped to step up in activity for 2020, with oncology, cardiovascular/metabolic disease, immunology, infectious disease and central nervous system disorders anticipated to benefit (16).

Why invest in biotechnology?

Investment and value from biotechnology is expected to grow in coming years. While the trend already existed due to continuous tech improvements and the needs of a growing population, the COVID-19 pandemic has created a new spotlight on this area which may accelerate its growth.

While Australian investors are likely to already be exposed to this growth segment in the concentrated domestic market, they may be missing exposure to the US, which dominates the global market for biotechnology.

Ways to invest in biotechnology

There are a range of ways to access the biotechnology industry. Investors could consider direct shares in biotechnology companies or alternatively consider managed funds. Direct shares can be a high-risk approach due to the high failure rates of drug testing and long periods of development (i.e., long periods where there may be no or a limited return on investment). There’s also the element of chance – has the investor picked the winner? It could take years to know.

Managed investments, be it an actively managed fund or passive options like ETFs, can assist in managing the risks by spreading it across a larger number of companies. Investors could choose to invest by taking a sector approach and investing in a fund focusing on broader healthcare, or look at industry-specific options focusing on biotechnology. ETFS S&P Biotech ETF (ASX:CURE) is one such example that offers broad exposure to US biotechnology.

Efficient access to US biotechnology

ETFS S&P Biotech ETF (ASX:CURE), offers investors exposure to US biotechnology companies engaged in research, development, manufacturing and/or marketing of products based on genetic analysis and genetic engineering.

For more information on investing in biotechnology please hit the 'CONTACT' button below.

Footnotes