Global biotechnology stocks provide serious upside potential for investors willing to commit their f...
Global biotechnology stocks provide serious upside potential for investors willing to commit their funds long-term, according to fund managers in the sector.
Still sitting on cash after the equity-raising frenzy of 1999-2000, biotechnology drug researchers have the resources to develop their product offerings without needing to solicit handouts from larger corporates. M&G Global Health fund manager Marjan Daeipour says: 'The long-term outlook for the sector remains positive ' biotechnology continues to be a key source of products for the healthcare industry, including the pharmaceutical players.'
However, she was not as upbeat on genomic or platform technology companies.
'They do not have a viable business model at the moment and we will not see the fruits of the technology for at least another 10 years, and given the current lack of funding, a lot of those companies will run out of cash and we'll see consolidation,' she says.
Daeipour says around 8% of her fund is invested in biotechnology, primarily US stocks with some exposure to the UK.
Framlington Healthcare fund manager Gareth Powell has a large weighting in biotechnology, typically holding 35% to 50% in the sector, and says external factors have contrived to make biotechnology the cheapest it has been in 10 years.
Biotechnology will be a growing area of strength in the healthcare sector in coming years, with the potential for strong market outperformance, he says. 'With economists looking at very low average equity returns over the next few years, if you can still own biotechnology companies through the critical period that it takes to get a product to market and become a revenue-generating story, the potential for return is fantastic,' Powell explains.
'Pfizer has sales of around $48bn a year. Even if you come up with one $1bn drug per year, compare that sort of relative growth to a biotechnology company that might go from $10m in research revenue to $1bn in revenue.'
Powell says potential valuation growth of that order is rare in the current market, but conceded there is likely to be some lag in achieving returns due to the lengthy drug development process.
'It will start getting exciting in 2003 and 2004, so if you can buy stocks now at these levels, it is a great time to get in,' he says. Due to their cashed-up balance sheets, biotechnology drug developers no longer need to seek large pharmaceutical company partners to make it through the last stage of product development, and hence are able to drive a harder bargain when a product is ready for production.
'They need new products because their own research and development aren't delivering enough products to maintain growth, so the power base has obviously shifted to the biotechnology companies ' pharmaceutical companies are going to have to pay up,' Powell says.
The sector has huge cash reserves.
Stocks cheap due to external factors.
Large upside potential on offer.
Macro market views not working.
Risk lies entirely within companies.
Risks cut across sectors.
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