Biotech: underrated new companies

Financial markets have yet to fully realize the growing importance of small- and mid-cap biotech companies with innovative product pipelines.

Many investors believe that biotechnology is not a particularly attractive sector today. The Nasdaq Biotechnology Index, the benchmark index for the biotech sector, has fallen nearly 20% in the past 12 months. Although a few industry heavyweights, such as Moderna or Regeneron, posted sizable gains, most small- and mid-cap biotech stocks are trading significantly lower than a year ago. The 40% losses in the S-Network Medical Break-throughs Index (PMBI) and the S-Network Healthcare Innovation Index (PHIX) reflect this trend. Both of these indexes include only small- and mid-cap biotech and pharmaceutical stocks that have at least one drug in FDA Phase II or III clinical trials.

The current downward trend, however, is explained by the rise in inflation and above all by the rotation of the sector, which is moving away from growth and towards value. This development has affected the biotechnology sector uniformly. Biotechnology companies which still have to finance their development without having made a turnover with an authorized product are particularly penalized. With rising interest rates, future earnings are less valued by analysts due to the resulting higher discount rates. The entire biotechnology sector is thus indiscriminately sanctioned by stock market investors. However, many small and mid caps are well financed in the medium to long term and have a much better capital base than in the past.

From a fundamental perspective, small and medium-sized biotech companies could benefit the most from a general rally in biotech stocks. According to a study by the IQVIA Institute for Human Data Science, 65% of all active ingredients in clinical development worldwide in 2021 will be studied by biotechnology companies with annual sales of less than $500 million and whose annual R&D budget is less than $200 million. In 2016 again, the share of these companies classified by IQVIA in the category of emerging pharmaceutical companies was less than 50%. Another figure from the study shows how clearly these biotechs have evolved: for 76% of their developed products, the companies filed their own applications for authorization in 2021. This clearly proves that these companies have obtained great financial independence. and are therefore able to market their products on their own, without a partner, which translates into higher potential earnings.

A well-filled pipeline

Across the biotech sector, small and mid-cap companies are becoming increasingly successful in commercializing their pipeline of discoveries as pioneers of next-generation therapies. First and foremost are cell and gene therapies, gene editing and mRNA technology, which have made a major breakthrough with the COVID-19 vaccines from Moderna and BioNtech. Around 800 clinically active substances can currently be attributed to these new approaches. From a fundamental point of view, small and medium-sized biotechs are therefore very well positioned. The price-boosting news stream is here, as a large number of clinical study results and authorization decisions are expected this year, particularly in areas such as oncology, neurology and diseases. rare genetics.

BB Biotech’s equity portfolio should benefit exponentially. At three years, we estimate that the annual turnover of investment companies should more than double. The lion’s share of product approvals are for cancer, metabolic and neurological diseases (Charts 1 and 2). Our portfolio companies, Alnylam and Ionis, each await an approval decision in 2022 for a treatment aimed at reducing symptoms of hATTR amyloidosis, an inherited disease that causes protein buildup and severe damage to organs in the body. . There is currently no effective treatment for this disease. Pricing power is therefore high.

Expected future revenue growth of portfolio companies

Biotech underrated new companies

Source: Bellevue Asset Management research, Bloomberg, May 2021

In the field of oncology, Arvinas is on the verge of achieving a major breakthrough with its new technology platform for molecules that break down disease-causing proteins and primarily target molecules deemed untreatable by therapeutic approaches. traditional. This year, the pivotal clinical study for the most advanced product, ARV-110, intended for the treatment of prostate cancer, should be launched and Arvinas wishes to obtain an accelerated authorization procedure from the American authorities. Arvinas is launching two other phase III clinical studies with its pharmaceutical partner Pfizer for the active ingredient ARV-471 in metastatic breast cancer for which previous treatments have not worked. Relay Therapeutics is another pioneer in our equity portfolio. The company uses artificial intelligence (AI) and machine learning (ML) to identify the most promising clinical products. Specifically, Relay models and analyzes the movement of proteins on screen in early clinical trials to study interactions between drugs and their targets and uses this information to identify the molecule with the best efficacy profile.

The feeling is getting better

As more positive news from the biotech sector increases, investor interest in this sector should pick up. Sentiment is already starting to shift slowly in favor of the biotech sector as a whole. According to a recent RBC Capital Markets survey of investors, 66% of respondents expect the biotech sector to outperform this year. In the second half of 2021, the percentage of respondents who considered biotech stocks to be undervalued was 49%; it is now 64%. And 58% of respondents said they plan to increase their exposure to biotechnology.

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Biotech: underrated new companies


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