The biotech sector is in the spotlight as companies race to develop a vaccine to fight the spread of the coronavirus. But when it comes to investing in this part of the market, fund managers say it pays to think beyond Covid-19.
“This is the sector people look at as the way out of the crisis,” says Lydia Haueter, manager of the three-star Pictet Biotech fund. “A vaccine would be the holy grail solution. Antivirals are other option, but their production is not that easy.”
Against a backdrop where a vaccine can cure not just the spread of Covid-19 but can help limit the severity of a global recession, it is unsurprising that some funds are benefitting from this focus on healthcare. Those funds backing the right businesses have outperformed the market, particularly during March's stock market sell-off.
The Silver-Rated Worldwide Healthcare investment trust (WWH), is up more than 16% year to date. A key contributor to its performance is CanSino Biologics (CJH), a Chinese company that focuses on premium vaccines in the private market in China, where vaccine safety is a major public health concern. Its share price moved higher on speculation it would start a development effort to produce a coronavirus vaccine and re-rated even higher when the company confirmed clinical trials had started.
Looking Beyond the Noise
Of course, for a vaccine to be developed, there are many things that need to be taken into account from social distancing to side effects. That’s why Haueter hasn’t added any new positions to her portfolio based on their involvement with coronavirus. “We like companies for other reasons, like Turning Point Therapeutics (TPTX), which has a platform where it can make very targeted cancer medicines or Sarepta Therapeutics (AB3A), which has a best in class gene therapy program for Duchenne muscular dystrophy,” she says. Instead of Covid-19 focused companies, she has been adding to her investments in firms focused on oncology, auto-immune diseases and inflammatory conditions.
Companies active in vaccines include the likes of Moderna (MRNA), Johnson & Johnson (JNJ), Merck & Co (MRK), Sanofi (SNY), Novavax (NVAX), AstraZeneca (AZN). “But we can’t say who will be successful and some of the technologies are very novel and will have to prove their safety first,” adds Haueter.
Meanwhile, Ailsa Craig, co-manager of the four-star rated International Biotechnology Trust (IBT), sold some of her investments in January to raise cash; fearing a pandemic would emerge and the stock market would fall as a result, she wanted to keep some powder dry - though she has since reinvested the money.
Several companies in her portfolio have started developing both a vaccine and treatments. Gilead (GILD), for example, has suggested its drug Remdesivir as a Covid-19 treatment, as it reduces the number of days patients are hospitalised. "It’s not a cure or game changer and we don’t really know how the company is going to monetise the assets," she says.
“We’ve used the hype around this story to reduce down the position as shares rallied, instead of buying into it," she adds. Haueter also likes the stock but agrees the impact of the drug on the company's bottom-line is difficult to assess.
Craig adds: "Vaccines tend to be quite hard to profit from and we are not chasing the Covid-19 names. Instead, we’ve been buying more of the companies we already have in the portfolio and looking for drugs that treat medical needs with high pricing power”.
She likes areas such as oncology, which is in strong demand and where drugs can be highly priced. Another appeal is that ompanies specialising in specific areas of the field can end up with a monopoly position, she says, pointing to Danish cancer treatment company Genmab (GMAB) as one example: “There is no other company out there in the market that does what Genmab does.”
Elsewhere, she likes Neurocrine Biosciences (NBIX), whose drug Ingrezza targets tardive dyskinesia (a movement disorder caused by antipsychotic drugs), Horizon Therapeutics (HPR), whose drug Tepezza cures a rare eye disease, and Acadia Pharmaceuticals (DR6), whose drug Nuplazid is used to treat Parkinson’s disease psychosis.
And even if she isn't buying into the Covid-19 trend, Craig thinks the attention may be helping the sector come back into favour with investors: “We are optimistic," she says, "It’s looking up".
Haueter adds: “There is myriad research going on [beyond Covid-19], new product cycles that look very promising, new launches and medicines that are hitting the markets. It’s a good sector to be in, not correlated with the markets, driven by innovation and where demand is only accelerating."
