The number of biotech companies making a profit is set to increase. Evan McCulloch, manager of t...
The number of biotech companies making a profit is set to increase.
Evan McCulloch, manager of the Franklin Biotechnology fund, says this will be driven by more approvals for new drugs.
McCulloch expects 50 new drug approvals over the next three years and he believes that should drive substantial earnings and revenue growth for the sector. 'The number of companies that are expected to turn profitable should increase from 30 in 2001 to 70 in 2004,' he says.
His prediction comes at a time when valuations in the sector have fallen and the performance of biotechnology funds has been disappointing. The FTSE pharmaceutical and biotech index underperformed the All-Share returning -27.43% against -12.49% in the year to 28 June.
Over five years to 28 June, the difference narrows to 19.63% for the All-Share and 19.38% for the pharma and biotech index.
In the three months to 17 June 2002, Framlington Biotech returned -36.6% and Franklin Biotechnology -36.4% against a sector average of -7.4%, all on a bid-to-bid basis.
Despite the poor performance, McCulloch says valuations are attractive in the sector at current levels. 'If you look at the eight largest biotech companies, they are trading at a price-to-earnings ratio of about 32 times for next year versus earnings growth of 21%,' he says.
'Biotech companies deserve a price-to-earnings multiple in excess of the earnings growth rate because the sector is not cyclical and has inherent growth potential. We are optimistic over the medium term because of the large number of drugs in the pipeline. There are 900 drugs in all phases of clinical trials and 200 in the latter stages of trials.'
Investors should not see the good run in the health sector over the past two decades as a peak, according to Caspar Rock, a member of the Framlington health team.
He believes there is evidence to suggest the future prospects for growth in the sector mean most investors should consider placing at least a portion of their assets in funds specialising in this sector.
'Our opinion is based on the ever-increasing focus on health concerns across the world and the resulting pressure on governments to ensure people get the treatment they need,' he says. 'Add in the potential of pioneering medical research and development in both the private and public sectors and the argument for health investment becomes even more convincing.' Volatility is a concern for the sector, however. But Rock says volatility has not prevented biotech stocks from being a good long-term investment.
'We believe that the volatility will reduce as more biotech companies reach profitability and acquire breadth and scale over the next decade,' he says. 'We also feel the long-term returns from the sector will be as good in the next decade as they have been in the last.'
He adds: 'The downturn in the biotech sector during December 2001 and January 2002 represented a buying opportunity for us and there is currently a biotech weighting of 37% in our healthcare portfolio.'
Many investors have taken early profits.
Volatility worries investors.
Short-term earnings not certain.
Valuations are very attractive.
Good run in health sector to continue.
New trials are due to close.
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