Biotech’s long-term outlook remains strong amid COVID-19 volatility

The Net Asset Value (NAV) of the Trust hit an all-time high as at the end of April of 724.21p on Friday 24th April. In May, we have had new all-time highs for both NAV and share price. How can this be possible in the middle of a global pandemic with grand scale economic fallout?

The biotech sector has seen a five-year period of consolidation, the sector may be ripe for a period of outperformance in short to medium term.

Then why now? In part, it may be that the sector has the characteristics of being defensive and a safe haven in times of economic turmoil, because of its strong underlying fundamentals and relatively stable and predictable income and earnings. In addition, the run up to this year’s US Presidential election has evolved in a favourable way, with Biden now the probable candidate to be officially nominated as the presidential candidate for the Democratic party. Biden is believed to be less of a threat to the healthcare industry than the other potential candidates. Moreover, a more positive sentiment towards the healthcare sector has emerged, thanks to the impressive effort by the industry to develop drugs and vaccines to tackle the COVID-19 pandemic.

However, the most important driver of the sector is that it is currently in an increased innovation cycle. This unmatched progress in scientific knowledge and understanding drives the development of new products and consequently the top line sales and valuation of the sector. At the end of the day it is revenue and income that count as well as the visibility of such future earnings. Consequently, in our opinion, the current positive sentiment around the healthcare sector will not go away any time soon.

Figure 1: Nasdaq Biotechnology Index (USD)

Source: Bloomberg

Figure 2: Price/earnings multiple for the World Health Care Index (MXWO0HC Index) at an historical average

Source: Bloomberg

Our conclusion is that the long-term outlook remains strong, underpinned by the increased innovation cycle. In the short term, there is a risk that the sector, like many other sectors, could suffer a shock related to market sentiment around the pandemic, but if this were to happen, we would expect it to rebound in time, and possibly faster than other sectors as has been the case in the first quarter of 2020.

Ultimately, the pandemic will end one day, especially if our sector discovers a successful vaccine and distributes it globally, which we hope will happen sooner rather than later.
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