Investing in Biotech
Biotech stocks have been on a tear in 2013. Initial public offerings or IPOs, totaled $1.7 billion in the first half of the year, greater than in 2011 and 2012 combined. The Nasdaq Biotech Index, a measure of industry performance, is up over 42% year to date. According to Deutsche Bank, consensus for annual earnings growth in the biotech industry over the next 3 years is estimated at 21 percent, compared with 9 percent for the S&P 500. In 2012, the FDA approved 39 drug therapies, more than in any year since 1996.
Mergers and acquisitions in the industry have had a significant impact, up more than 30% over last year, as larger pharmaceutical companies, contending with expiring patents and competition from generics, seek to acquire smaller firms to access new drugs. Following Actavis’ $8.5 billion purchase of Warner Chilcott, and GlaxoSmithKline’s $3 billion acquisition of Human Genome Science, Amgen, the world’s largest bio-tech company, announced a deal in August to buy cancer drug maker Onyx Pharmaceuticals Inc. for $10.4 billion, or approx. $125 per share. This would be the fifth largest biotech acquisition in history and would provide Amgen with Kyprolis, a strong entry in the multiple mylenoma drug segment, with anticipated sales of over $2 billion. Amgen’s last big purchase, Immunex, in 2001, brought with it Enbrel, a rheumatoid arthritis drug that has become one of Amgen’s biggest moneymakers.
According to a global survey of the industry released at the BIO 2013 conference, however, the big gains are increasingly concentrated in a small number of companies. While overall industry revenue increased 8% and net income increased 32%, this was heavily weighted by the success of a few of the large, dominant companies like Amgen, Biogen-Idec, Bio-rad and Gilead, all of which have revenues in excess of $500 million. The majority of smaller biotech firms posted flat or lower revenues. Larger firms also increased their spending on research and development while smaller firms pulled back slightly. Venture capital raised in the industry has been flat for the past few years, at about 5.7 billion per year.
The smaller firms, which typically drive the new discoveries in the field, are facing new pressures. Health insurers, including Medicare, are imposing higher standards when evaluating the cost effectiveness of new drugs compared to current treatments. In a rapidly evolving health care environment, the criteria for making these decision in the future is unclear, and that can present a challenge to an industry which must reasonable project sales and profits for drugs and therapies that may take a decade before coming to market.
While it can be richly rewarding, investing in biotech requires a strong stomach and a high risk tolerance; the road from research to successful development and approval of a new drug is fraught with peril. It is estimated that for every ten companies with a drug in phase one clinical trial, only one will actually prove successful in bringing a drug to market. For the investor seeking a stake in an individual company, lots of due diligence including screening for robust R&D spending, good partnerships or joint agreements with larger firms, multiple drug pipelines, experienced management and access to financing and cash on hand, is a must. For many investors, however, using a traditional mutual fund or exchange traded fund with a focus on biotech represents a more diversified approach.
While there are many funds that focus on biotech, one of the largest traditional mutual funds investing in the industry is Fidelity Select Biotechnology Fund (FBIOX.) Five star rated by Morningstar, this no load fund has a $2,500 minimum investment, an expense ratio of .81%, and has posted returns of 36.5% last year, 18.18 % in 2011 and 28.9% through mid-year 2013. Like most biotech funds FBIOX is extremely concentrated; its top five stocks, Gilead Sciences, Amgen, Celgene, Biogen and Vertex Pharmaceuticals, represent over 47% of the fund’s holdings.
Another alternative would be the exchange traded fund, ishares Nasdaq Biotechnology (IBB) rated four star by Morningstar, with expenses of .48%. IBB is only slightly less concentrated than Fidelity; 38% percent of assets are invested in its top five holding. IBB’s largest stock position is Regeneron, with Gilead, Amgen, Celgene and Biogen rounding out the top five. Regeneron, headquartered in Tarrytown, NY, has a market cap of $25 billion, with several strong therapies including EYLEA, an injectable treatment for neo vascular age related macular degeneration, ZALTRAP, an injection for intravenous infusion for the treatment of colo-rectal cancer, and ARCALYST, a subcutaneous injection for the treatment of Cryopyrin associated periodic syndromes. IBB is up 26.77 % for the first half of 2013, following a 32.13 % gain last year and 11.72 % in 2011.
Steven Weber is the senior investment advisor for The Bedminster Group, a Registered Investment Advisor providing portfolio management, estate, and financial planning services. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. Mention of companies and funds does not constitute recommendation, and the opinions expressed are solely those of the authors and do not necessarily reflect those from any other source.