Throughout 2020 and into 2021, ultra-low interest rates and the slew of Covid-related research drove investor enthusiasm for healthcare, allowing the industry to raise record levels of capital.
Amid the euphoria, however, investors still need to balance opportunity against risk.
General enthusiasm for the vaccine rollout has sent some valuations soaring – all this in a market where industry research shows that 90% of drugs fail to move beyond clinical trials. Investors, therefore, will need to be selective, balancing valuation with downside risks.
Despite the hype, there’s no denying that innovation has had a powerful impact on biopharma revenues and this is where institutional investors will need to look first. Last year, sales of biotech blockbuster drugs neared $300 billion, about 50 times the amount from 20 years ago.
An increasing number of these new drugs target patients with previously unmet medical needs. A case in point is Tepezza, which was approved by the FDA in January 2020 as the first treatment for thyroid eye disease. Prior to the adoption of the drug, patients need to undergo multiple invasive surgeries.
Ultimately, it became one of the most successful rare disease launches in medical history, with sales of $820 million, crushing consensus expectations of just $27 million.
Even more remarkable was the fact that all of this growth occurred at the height of the pandemic when normal medical care was suffering deep disruption.
According to figures from Bloomberg, the biotech sector represents one of the best opportunity-sets going forward. Relative to the general equity market, the healthcare sector trades at a discount, with a forward price-to-earnings (P/E) ratio of 16.3 compared to 22.9 for the S&P 500 Index.
Stocks of profitable biotech companies are even cheaper, with an average forward P/E of 11.1. In 2020, 100 companies were added to the Nasdaq Biotechnology Index, which requires firms to have a minimum market capitalisation of $200 million.
This is an excerpt from an article in the Summer 2021 issue of FinanceAsia
