Biotech : there is more to come

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Daniel Koller is the lead manager of BB Biotech, Bellevue Asset Management.

Rising demand for healthcare products from ageing populations and health conscious emerging markets, along with the non-cyclical nature of healthcare, are fundamental drivers of the biotech sector. But there’s more.

The market’s enthusiasm for new drugs has boosted profits of biotech companies in recent years. This should continue through 2015, augmenting revenue growth and moving more firms towards profitability.

It also allows companies to invest more into their new product pipelines, enabling firms to make the move from one-product companies to diversified, profitable high-growth stocks. There were 41 new medicines approved in 2014 – the second highest figure since 1996.

This trend of product approvals that should ensure strong momentum in the sector in 2015 and beyond. Investors can expect updates on pipeline products throughout the year.

New products are not the only factor driving growth. Major companies in the industry have a wide range of promising new projects and partnerships through with which they can boost sales.

As these larger companies look to position themselves strategically in the market, investors should expect further consolidation in the sector. In particular, with increasing pressure from ‘biosimilars’ – essentially copies of existing biologics – pharmaceutical companies are displaying a healthy appetite for buying new products, which should keep M&A active this year.

While the heated debate on drug pricing will continue, targeted discounts and pricing studies should ensure that companies nevertheless generate fair returns for the risk and investment they have made.

There’s also the win-win factor that innovative drugs with higher cure rates and fewer side effect ultimately save healthcare systems money.

These treatments should therefore continue to enjoy strong pricing power. Antibiotics are a good example of a therapeutic area that has actually benefitted systematically from regulatory incentives.

However it is not just the big players such as Celgene and Gilead that could make billions of dollars when their respective cancer and hepatitis C drugs reach peak sales.

A handful of midcap companies are also due to release important clinical data this year on new products which are likely to replace the existing traditional treatments and become the new standards of care. A good example of this is Radius’ abaloparatide for advanced osteoporosis.

Despite Biotech having been the best performing sector since the financial crisis, we still expect further profit and revenue growth in 2015 and beyond. That said, we believe the industry’s biggest innovators with a strong pipeline of products will be where some of the most interesting investment opportunities can be found.

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