Biotechnology is key to returns amid growing populations

There has never been a better time to invest in the global biotechnology sector. Investors’ risk appetite has been in steady decline over recent years, leaving this traditionally high-risk sector out of favour.

Yet with growing and ageing populations, the value of innovative new drugs, diagnostics and medical devices to prevent and treat complex modern diseases more effectively has never been higher.

While pharmaceutical companies are struggling to develop major new products from internal research and development (R&D) investment, biotechnology companies are demonstrating higher success rates with superior capital efficiency.

As a result, pharmaceutical companies have in recent years
moved towards outsourcing new product opportunities, rather than investing internally in research and development. On the one hand, we have a drug industry desperate for biotechnology innovation, and paying large sums to access this innovation through high-value
licensing deals and M&A.

On the other, we have a general investment environment characterised by an unwillingness to invest in relatively early-stage medical research companies. This disconnect presents a tremendous opportunity for specialist life science investors to generate outsized returns.

But this opportunity will not be around for long, as sentiment towards the biotechnology industry is sure to change. Risk appetite is cyclical and will return, and with it, larger quantities of more speculative ‘risk-tolerant’ capital.

More importantly, a wave of major new biotech drugs is about to rejuvenate the growth prospects of some of the sector’s leading companies, bringing the sector firmly into the sights of investors who are seeking industries demonstrating real growth. The time to invest is now.

 

David Pinniger is investment manager at IBT

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