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25 November 2020

Innovation Boosts US Biotechnology Sector

Biotechnology is a sector not typically in the spotlight, however, since the COVID-19 crisis, biotech stocks have become a hot commodity. In fact, biotechnology has been one of the handful of sectors that has significantly outperformed the overall US market with a one-year return figure for the NASDAQ Biotechnology Index 18.7% higher than that of the S&P 500, at 36.79%.

This impressive performance came before the news of three promising Coronavirus vaccines being developed. Pfizer, Moderna, and now the University of Oxford, all revealed that their vaccines offered at least 90% protection against the virus. As a result, the industry is now firmly in the limelight and, with news of these vaccines and potential distribution continuing to emerge, this is only set to continue into the new year and beyond.

Biotech stocks have therefore generally performed well, fuelled by COVID-19 vaccine speculation; however, this short-term spike in interest does not detract from the long-term structural growth drivers within the industry that have helped to provide strong growth in the past. Biotech is one of the few sectors to, by its very nature, constantly adapt to changing circumstances, helping to provide future growth as new diseases are discovered and current ones mutate. However, this is not to say that the industry is reliant on new drugs for new diseases. Pre-existing drugs for pre-existing health conditions often provide a ‘cash cow’ element to their businesses, helping to fund the research and development of new drugs, as well as helping to provide consistent returns to shareholders.

However, while the sector does provide some exciting characteristics, investors should, as always, use exposure to such sectors as a way of diversifying their portfolios. While a sectoral specialism can provide strong upside, it is important to not rely solely on one or two areas of the economy. Having said that, one way to gain diversified exposure to the biotech industry could be through the Polar Capital Biotech fund. The team at Polar Capital have produced a well-rounded portfolio of biotech equities that cover a wide range of sizes and stages of drug development, culminating in a five-year return of 109.52%. The portfolio currently allocates c.40% towards small and mid-cap stocks, providing investors with exposure to high-growth firms with significant long-term potential.

Those looking for an investment trust vehicle to gain exposure to the industry, may consider the Biotech Growth Trust (BIOG). Similar to the Polar Capital fund, the Biotech Growth Trust has performed extremely well since inception, beating the NASDAQ Biotech Index by 238.2% since inception in 2005. The managers of the trust have also recently been keen to press that investments in Asian biotech firms potentially provide some interesting opportunities for long-term growth and, while Far Eastern firms only account for 7.5% of the portfolio currently, we would expect this to increase in the coming future.

This article was taken from the Autumn 2020 issue of the publication, 1875. To sign up for our investment publications please visit www.redmayne.co.uk/publications.

Please note that investments and income arising from them can fall as well as rise in value and you may lose some or all the amount you have invested. Past performance and forecasts are not reliable indicators of future results or performance. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the companies mentioned.
Innovation Boosts US Biotechnology Sector
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