Biotechnology companies seek to develop a change in cells or to duplicate the specific functions of cells so that they will perform certain tasks within specific controlled parameters. The range of applications for this technology is vast, and includes using biologics to develop products to cure human diseases and improve life conditions as well as modifying the genome of seeds with the aim of adding lacking substances such as vitamins or improving performance under certain environmental conditions.
Newly available technologies mean the biotechnology sector is possibly on the verge of a new secular growth trend. Companies in this sector have high potential for innovation and value creation, and overall, they offer more attractive business opportunities than the traditional pharmaceutical companies. On a worldwide basis, the traditional drug market grows by about 7% per annum, while the biotechnology sector is expected to experience double-digit growth in coming years.
Overall the future of the sector is extremely bright. On the one side there is an ever increasing commitment to developing products which address a wide range of infections, including the more complex orphan diseases, while on the other hand there is an ever-growing demand for such products by an ageing population and wealthier middle class. However, biotechnology companies excel in a much more complex environment than other enterprises. Finally, the question of product pricing raises concerns about end-user availability as biotechnology products tend to be sold at much higher prices.
There are also higher risks associated with these investment opportunities; the principal, being the public controversy around the morals and ethics of using modified genomes. Furthermore, the product failure rate in Phase II and III product tests is relatively high compared with the traditional pharma companies.
The reason is:
With the strengthening of the sector, biotechnology companies have been performing extremely well in recent quarters. This outperformance has occurred both in absolute and relative terms. Given the fundamentally strong biotech sector, good investment conditions should extend for the coming years, one can expect biotech stocks generally to continue their rally. And given the market is expected to stay buoyant through the next few quarters, a number of biotech stocks have the potential to outperform the general market. The patent-heavy biotech companies offer both attractive valuations and relatively good upside potential; the lesser known companies could over a longer timeframe produce significantly above average returns on invested capital (EV/IC).
And the winners are:
Our key favorites in the sector are Amgen, Biogen, Gilead, Celgene, Alexion, Regeneron, Vertex, and Neuralstem. These biotechnology companies offer high ROIC and high potential growth rates; however, for most of these companies, investors have to pay a substantial premium, which reflects the strong company fundamentals and positive outlook.