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Investing in biotech

Written by Hans Oudshoorn | 6 minutes
WED 16-09-2020

An increase of almost 2,900 percent? It happened this year with the shares of Novacyt, a British-French biotech company. On January 30, the share was still trading at around € 0.20, but the day after it started a strong advance: on February 17 it had already stood at € 2.675 for a while, on April 9 the share was already trading at € 5.98. The reason? The launch of a molecular test for the novel coronavirus. For a long time, there were doubts about the survival of the biotech company, but nowadays it has a positive reputation and the stock enjoys the full attention of investors. It is an example of the sometimes sudden advance of biotech players.

With the global aging population, the coronavirus and the associated attention for the sector in mind, and the many questions I have recently received from investors, colleagues and friends about the investment options within the biotech theme, I want to help you on your way with this article.

What is Biotech?
Biotech - short for biotechnology - is a sector concerned with the technological application of biological knowledge. Or in a broader sense: technology used to make products with the help of biological processes.

We don't think about it every day, but it has been around for a long time. Consider, for example, making cheese (brie and camembert) or special beers in which yeasts and molds are used to impart flavour. The breeding of plants and the development of new (raw) materials - such as Kaumera Nereda® Gum - also are biotech.

Now that many companies worldwide are 'on the hunt' for a corona vaccine, many biotech investors are thinking of another relevant contribution from the sector: conducting scientific research into, and the development and production of medicines. And medicines always will be in demand. Not in the least because of the growth in the number of seniors worldwide.

Steady growth in the number of seniors worldwide
A major study by the United Nations (UN) shows that the international organization expects the number of people in their sixties to grow steadily from 1 billion in 2017 to about 2.1 billion in 2050. The UN also sees the life expectancy of the world population increase from about 65 years now, to more than 72 years in 2050. Of course, expectations differ per region, but the trend is increasing everywhere.

Increase in expected health care expenditure
An important reason for this trend is the worldwide attention for hygiene (washing hands) by, among others, Unicef. Their efforts in the field of clean drinking water and providing access to a toilet also contribute to the initiated development of 'aging'.

However, for this growing group of elderly people, the need for health care and medication use increases later in life. And that has challenging consequences. For example, the OECD has calculated that health care expenditure as a percentage of Gross Domestic Product of all OECD countries together will increase from 8.8% in 2018 to 10.2% in 2030. In addition to this expected increase, total GDP is also likely to increase.

Expansion of biotech sector
The expected increase in health care expenditure is similar to the development of the biotech sector. Grand View Research - an American and Indian research firm headquartered in San Francisco - has calculated in their ‘Market Analysis Report’ (you can request the report) that the size of the market was US $ 369.62 billion in 2016 and size of US $ 727.1 billion by 2025. In short, a clear expansion for this market with an expected annual increase of about 7.4%. And that offers opportunities for investors.

How can I invest in biotech companies?
You can, of course, buy Dutch shares of Galápagos, Kiadis Pharma or Pharming. Or from the British-French Novacyt (listing in Paris), the Danish Genmab or the American Biogen. However, investing in individual shares is generally riskier than diversified investing through, for example, an investment fund. Especially in the knowledge that promising drug candidates are sometimes delayed or even ultimately not approved by authorities. And therefore, not put on the market. It is therefore often the case that stock prices of biotech companies fall sharply or - worse - companies fail to reach the finish line. In short, price risk is a point of attention and diversification is therefore essential.

During my research, I came across an interesting investment title to emphasize the portfolio and to respond to the expected growth of the biotech sector: the iShares NASDAQ US Biotechnology UCITS ETF (ISIN IE00BYXG2H39).

The Ishares fund has over 200 US stocks. Currently, the fund has investment titles such as Amgen, Vertex Pharmaceuticals and Regeneron Pharmaceuticals - all US companies - in its portfolio.

The running costs are approximately 0.35% per year respectively. The iShares fund is available in euros and dollars. They can both be traded via the Saxo platform. The iShares euro title through the Frankfurt Stock Exchange and the dollar variant through the London Stock Exchange.

What else? Ishares invests in stocks that score well on sustainable entrepreneurship and have a smaller CO2 footprint than their peers. Overall, the fund receives three globes for the Morningstar Sustainability Rating™

The dividend is approximately 0.5% -1.5% on an annual basis and is automatically reinvested.

And the main risks? You obviously run market risk. When financial markets are under pressure, you will experience that too. There is also a currency risk. The fund has many overseas companies in its portfolio.

In summary, the fund is interesting for long-term investors who are willing and able to bear equity risk and who want to add a portfolio accent by investing in an interesting growth market with essential diversification.

The value of your investment may fluctuate. Results achieved in the past are no guarantee for the future.

 

Author

Hans Oudshoorn

Hans Oudshoorn is investment trainer at BinckBank. He wrote the Dutch book 'Beleggen voor Dummies' and writes columns in several Dutch newspapers such as DFT, FiscAlert and NRC Handelsblad. 

The information in this article should not be interpreted as individual investment advice.  Although BinckBank compiles and maintains these pages from reliable sources, BinckBank cannot guarantee that the information is accurate, complete and up-to-date. Any information used from this article without prior verification or advice, is at your own risk.  We advise that you only invest in products that fit your knowledge and experience and do not invest in financial instruments where you do not understand the risks. 

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