Opportunities & threats in biotech

From M&A to pricing

The biotech sector has been going through some heavy turmoil since the start of the Covid-19 epidemic. Nonetheless, with the sector being back on track, but still being seriously undervalued versus other sectors, it is a promising sector for investors again.

Opportunities in biotech investing

Global biotech market growing 5,9% annually ($3 trillion by 2027*).
Ageing population drives growth -> 70% of medicines are consumed by 65+**.
Larger companies have lots of cash -> average M&A premium 85% (2022***).
Biotech highly undervalued -> S&P Biotech down 36% over 2021-2023.
Potential for high returns -> Annualized net performance range of Aescap Life Sciences fund since start (March 2016) +5% to +23%.
Consumers in emerging markets are gaining access to medicines -> resulting in 2 billion new users in 2050****.
Sales of medicines continues during recession -> paid for by healthcare insurers.
Pricing power of medicines in relation to inflation -> there are no alternatives.
AI speeds new medicine development process and reduces risk of failure.
Migration leads to a higher prevalence of diseases.
Innovative genetics medicines treat cause of a disease instead of symptoms.
Fast pace of innovation drives replacement of old medicines.
Better treatments are reducing the overall cost of care.
Medical breakthroughs can decrease healthcare costs. Think of the treatment of Alzheimer’s, cancer, diabetes, depression, obesity, MS, Parkinson’s, etc.

Threats in biotech investing

Risk that one or more medicines will fail in R&D.
Complex industry, interpreting clinical data versus competition is for experts only.
Many stakeholders (doctors, patients, payers) with all their own priorities.
Most people do not know that medicine prices are based on health economics studies, not on greedy CEOs).
Patent risks -> companies are depending on their patents to protect their position in the market.

Don’t miss out!

A specialist biotech investor can exploit the opportunity of the sector best and manage threats (eg. through diversification) to acceptable levels. The opportunity to invest in companies that bring medicines to the market that will replace existing ones (often 20+ years old), is enormous. Better medicines are the best solution to control the increasing cost of care for people suffering from diseases such as Alzheimer’s, cancer, diabetes, MS and Parkinson’s.

The cash positions of the larger companies are excellent, enabling M&A of the smaller companies which share prices have seriously decreased over the last years in a response to increasing interest rates. With an average acquisition premium of 85% (in 2022), this makes biotech even more interesting.

Risk and upside between companies differ largely

With over 1.000 listed biotech companies in the EU and US combined, selecting a portfolio of winners is not for everybody. A poor decision could lead to a significant loss on investment. Hundreds of listed biotechs are still at a very risky stage. If nothing else, the Aescap funds find them too hazardous to invest in. Our funds, for instance, avoid investing in companies that:

Don’t have proven medicines on the market or in development.
Lack adequate funding.
Have management that does not act in the interests of shareholders.
Do not meet our ESG objectives.

Maximum 25% of our assets under management is invested in companies that have some risk of temporarily going through a downturn, but we certainly don’t want to risk a company to fail completely.

More information?

We would be delighted to personally update you on the developments in the sector. Give us a call at +31 (0)20 570 29 40 or send an e-mail to José Geurten (Head of Investor Relations). Or read more about our funds.

Sources

* United Nations
** Grand View Research
*** GlobalData, Juni2023
**** United Nations World Population Prospects 2022