Rising earnings to pave the way for long-term outperformance

I am pleased to present International Biotechnology Trust’s factsheet for September 2019.

Throughout the month of September, global equities continued to be affected by a multitude of macroeconomic factors. A mix of Brexit, trade wars, US political uncertainty and escalating tensions throughout the Middle East all weighed down on the market. On a more positive note, central banks around the world continued their dovish tones with respect to interest rates and the potential increase of quantitative easing.

Looking forwards, it is clear that healthcare will be a central topic in next year’s US Presidential election, particularly with respect to the Democratic Party. However, just how aggressively the party will campaign on the topic won’t be clear until mid-2020, when the party will announce the winner of its nominee race. Of the two front-runners, Elizabeth Warren is known for her left-leaning views, one of which is to switch to a single payor system, while Joe Biden’s more centre-ground stance means he is less inclined to overhaul the country’s complicated healthcare structure.

So, for a combination of the reasons outlined above, biotech sector valuations are almost exactly where they were in January 2019. Thankfully, the earnings growth outlook is more positive. The current P/E 2020E multiple for companies in the NASDAQ Biotechnology Index is 13.2 at the time of writing, despite the US political situation. Part of the reason for this is because while biopharma sector sales used to be defined by success of a treatment in the US, in recent years the market has become much more global. We now see growth in geographies outside of the US and even Europe, with Asia, Africa and Latin America playing an ever more important role. What’s more, we believe future earnings erosion will decrease as the sector is increasingly underpinned by complex biological products. Usually, once the patent for a treatment expires, cheaper generic versions of the treatment are quickly produced, eroding the earnings of the original manufacturer. However, these complex biologics are more difficult to produce and have prohibitively high launch costs, so we don’t expect biotechnology companies to face the same steepness of generic competition that the pharmaceutical companies of yesteryear faced. Finally, as I have outlined on a number of occasions in the past two years, the sector benefits from a strong tailwind. In the next five years, global sales are expected to grow at 5% per year. Assuming earnings grow at an even faster rate, it is easy to see why we believe in the long-term outperformance of the biotechnology sector.

Thank you for taking the time to read our factsheet.

September Factsheet (click link to open)