Daniel Koller is the lead manager of BB Biotech, Bellevue Asset Management.
Rising demand for healthcare products from ageing populations and health conscious emerging markets, along with the non-cyclical nature of healthcare, are fundamental drivers of the biotech sector. But there’s more.
The market’s enthusiasm for new drugs has boosted profits of biotech companies in recent years. This should continue through 2015, augmenting revenue growth and moving more firms towards profitability.
It also allows companies to invest more into their new product pipelines, enabling firms to make the move from one-product companies to diversified, profitable high-growth stocks. There were 41 new medicines approved in 2014 – the second highest figure since 1996.
This trend of product approvals that should ensure strong momentum in the sector in 2015 and beyond. Investors can expect updates on pipeline products throughout the year.
New products are not the only factor driving growth. Major companies in the industry have a wide range of promising new projects and partnerships through with which they can boost sales.
As these larger companies look to position themselves strategically in the market, investors should expect further consolidation in the sector. In particular, with increasing pressure from ‘biosimilars’ – essentially copies of existing biologics – pharmaceutical companies are displaying a healthy appetite for buying new products, which should keep M&A active this year.
While the heated debate on drug pricing will continue, targeted discounts and pricing studies should ensure that companies nevertheless generate fair returns for the risk and investment they have made.
There’s also the win-win factor that innovative drugs with higher cure rates and fewer side effect ultimately save healthcare systems money.
These treatments should therefore continue to enjoy strong pricing power. Antibiotics are a good example of a therapeutic area that has actually benefitted systematically from regulatory incentives.
However it is not just the big players such as Celgene and Gilead that could make billions of dollars when their respective cancer and hepatitis C drugs reach peak sales.
A handful of midcap companies are also due to release important clinical data this year on new products which are likely to replace the existing traditional treatments and become the new standards of care. A good example of this is Radius’ abaloparatide for advanced osteoporosis.
Despite Biotech having been the best performing sector since the financial crisis, we still expect further profit and revenue growth in 2015 and beyond. That said, we believe the industry’s biggest innovators with a strong pipeline of products will be where some of the most interesting investment opportunities can be found.
Radius is a good example of a mid-cap biotech company that could introduce a new standard of care for a serious and costly disease – severe post-menopausal osteoporosis.
This leads to devastating fractures that are often life changing and potentially fatal. Radius’ drug, abaloparatide, has demonstrated to be better than the current treatment.
Radius owns 100% of abaloparatide rights and plans to file for approval this year.
Another one is Isis Pharma, a mid-cap biotech company with a pipeline of over 30 compounds based on its revolutionary antisense technology. Many of these compounds are addressing diseases with no treatments available.
Isis leverages its pipeline by partnering certain compounds to provide non-dilutive funding and keeps other compounds internal.
Finally we like Incyte’s lead product Jakafi that is on the market for patients with myelofibrosis and is well on its way to becoming a $1bn product in the US and Europe.
Following positive data from a Phase II trial on pancreatic cancer patients, we await trials on other solid tumours which could further expand the market opportunity.
Other compounds that are earlier in development include an IDO inhibitor with potential to be part of the multi-billion market for novel immunotherapy agents for cancer.