Biotechnology has experienced extraordinary growth in recent times and came to popular attention as companies raced to find vaccines and cures for COVID-19. While investing in this area has obvious appeal from a social and moral perspective, it can also be a highly lucrative space as a growth investment in a portfolio.
Healthcare and biotechnology
Biotechnology specifically refers to technologies that use biological processes, capturing companies that focus on research, development, manufacturing and/or marketing of products based on biological and genetic information. The different types of biotechnology include biological drugs, vaccines, immunotherapy, gene therapy, orphan drugs and genetic engineering.
Biotechnology is predicted to be valued at more than US$833.34bn by 2027, compared to US$447.92 billion at the end of 2019¹, and will continue to grow, driven by the growing global population and the need for affordable, effective treatments and vaccines.
Biotechnology will also be a beneficiary of population aging, particularly in Western countries. The reason for this is that an increase in the volume of older citizens is likely to have an accompanying and proportional increase in the volume of age-related diseases such as cardiovascular disease, dementia or arthritis, all requiring treatment².
Gilead is one example of a company with prospects in this space. Gilead is already well-known for its highly effective HIV treatments but is also targeting US and European approvals to market a drug called Filgotinib to treat rheumatoid arthritis³.
In a demonstration of the growth in this industry, this year alone, 30-35 biotechnology companies are anticipated to go public, raising approximately US$3.5 billion.
The healthcare sector as a whole is likely to see greater investment as a result of the COVID-19 pandemic. For example, national health spending growth in the US is expected to average 5.4% annually through 2028, reaching US$6 trillion a year. Biotechnology will also be a beneficiary of this increased investment.
Why consider biotechnology in your investments?
Investment and value from biotechnology is expected to grow in the coming years. While the trend already existed due to continuous tech improvements and the needs of a growing population, the COVID-19 pandemic has created a new spotlight on this area which may accelerate its growth.
Australian investors are likely to already be exposed to this growth segment in the concentrated domestic market. However, they may be missing exposure to the US, which dominates the global market for biotechnology.
Biotechnology could be considered part of a sector allocation to healthcare, or investors might view it as a thematic investment. You can find more information about thematic investing and using it in your portfolio in our latest whitepaper.
Ways to invest in biotechnology
There are a range of ways to access the biotechnology industry.
Investors could consider direct shares in biotechnology companies or alternatively consider managed funds. Direct shares can be a high-risk approach due to the high failure rates of drug testing and long periods of development (i.e., long periods where there may be no or a limited return on investment). There’s also the element of chance – has the investor picked the winner? It could take years to know.
Managed investments, be it actively managed funds or passive options like ETFs, can assist in managing risk by spreading it across a larger number of companies. Investors could choose to invest by taking a sector approach and investing in a fund focusing on broader healthcare, or look at industry-specific options focusing on biotechnology. ETFS S&P Biotech ETF (ASX Code: CURE) is one such example that offers broad exposure to US biotechnology.
