The Biotechnology Boom

The biotechnology revolution over the past twenty years has seen significant advances in medicine, transformed diagnostics, and facilitated a greater understanding of complex genetics and the in-depth workings of health and disease. Innovative, more targeted drugs are saving lives, giving hope to patients with conditions that previously had no treatments at all, and are providing cleaner and more efficient fuels and manufacturing processes that are transforming economies and helping to protect the planet. This innovation has been driven by the biotechnology boom. The remarkably rapid and world-wide response by the industry to the COVID-19 pandemic, in terms of vaccine development, diagnostic tests and effective medicines, has further highlighted the critical role this sector plays in global health. Nonetheless, the security of the market needs consideration.

 

Biotech in the UK was already surpassing the wider market before COVID-19 and has been one of the few economic sectors to have avoided the market crash brought about by the pandemic (Figure1); its relative performance has continued to be resilient. AstraZeneca, a pharmaceutical giant and a key player in the race for a vaccine, has become the most valuable company on the London Stock Exchange, with a market capitalisation of 136.48 billion GBP in October, compared to 117.26 billion USD in the same period of 2019.

 

Figure 1: 2020 has seen a 21% fall, the second-worst quarter on record. Refinitiv.

 

There is a constant demand for healthcare, which is frequently paid for by governments and insurance companies instead of consumers. For example, the UK Government invested 5.1 billion GBP in R&D between 2016 and 2018, according to the BioIndustry Association. Thus, as populations age and middle classes continue to inflate, the demand for innovations in healthcare will be overwhelming. This provides the Biotech sector with longevity and security from the unpredictability of economic cycles, such as experienced after the onset of COVID-19. Further, global spend on medicines is set to reach 1.1 trillion USD by 2024, according to IQVIA. Thus, investors should be considering biotechnology in their growth portfolios.

 

Industrial biotech alone has the potential to reduce CO2 emissions by up to 2.5 billion tonnes per year, according to WWF, therefore meeting the public and investors’ new desire for sustainability. Additionally, investors are increasingly asking for evidence of companies’ environmental, social and governance guarantees (ESG), in which Biotechnology scores very highly and can contribute toward the future of investors’ ESG goals.

 

On the other hand, while Biotech can be highly rewarding, it also entails high risks. The multi-national race for a COVID-19 vaccine has highlighted this: AstraZeneca shares dropped by 6% when their vaccine trial was put on hold due to adverse-side-effects in September. Speed is considered crucial in securing higher pay-off for the product that reaches the market first, however, when scientists become too concerned by financial incentives and quick financial returns, the health risks increase. The R&D process is also considered highly capital-intensive, funded by successive venture-capital input, typically at each stage of the process. Earlier investors risk being diluted if they cannot maintain their equity stake through the process, as more investors join in later rounds and the amount of capital required at each stage increases.

 

The UK’s Association of Investment Companies ranks Biotechnology and Healthcare as the top-performing investment company sector of the last decade. It generated a remarkable 491% return from 2010 to 2019, compared to 198% for an average investment company over the same period. Clearly, biotechnology has huge potential for growth as it transforms the modern world and will continue to do so after the COVID-19 pandemic.

 

By Josie Grist

Sector Head: Hermione Scott

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