Covid Shined Light on Biotech, and Bulls See Even Brighter 2021

This year’s meteoric rise in biotech stocks is here to stay.

That’s according to money managers who expect fresh tailwinds after the industry climbed to records as the advancement of Covid-19 vaccines and therapies drew praise from Wall Street.

While the approval and deployment of vaccines from partners Pfizer Inc. and BioNTech SE, as well as Moderna Inc., have dominated talk by investors looking to bet on the economy’s rebound, the drug development industry has a range of other catalysts waiting in the wings.

“The outlook for 2021 for biotech is still very positive because the fundamentals are intact, innovation is continuing” and access to capital hasn’t been an issue, said Wendy Lam, a portfolio manager at Franklin Templeton. Industry success in quickly developing shots to fight the virus, “shine a light on how important the sector is for society,” she said.

Covid Shined Light on Biotech, and Bulls See Even Brighter 2021

Among the most closely tracked catalysts are the potential approval of Biogen Inc.’s experimental drug for Alzheimer’s disease, expectations for a rebound in deal-making activity, and innovations from gene therapy updates to next-generation cancer technologies. AstraZeneca Plc’s $39 billion deal to buy Alexion Pharmaceuticals Inc. showed deal making appears set to come roaring back after Covid-19 impacted appetite.

The benchmark Nasdaq Biotechnology Index has climbed 28% this year to trade at a record, and has gained more than twice that of the broader S&P 500. Industry strength, however, has been driven by smaller companies related to Covid-19 shots and therapies or earlier-stage experimental medicines. An ETF with more exposure to smaller biotechs, the SPDR S&P Biotech ETF (XBI), has jumped 54% this year.

Biotech bulls are continuing to bet on emerging platforms to treat diseases like cancer. They’re also focusing on next-generation medicines such as gene therapies or those developed using technologies like the gene editing tool Crispr. Large-cap players in the space like Regeneron Pharmaceuticals Inc., Vertex Pharmaceuticals Inc., and Gilead Sciences Inc. are ripe to outperform in 2021, according to Oppenheimer analyst Hartaj Singh.

‘Transforming Medicine’

For those who have followed the industry since it emerged as an investment vehicle in the 1980s or when it blossomed further at the turn of the century, public recognition of drug development’s value in society has been a long time coming.

Brad Loncar, chief executive officer at Loncar Investments, said the advancement seen with newer technologies like messenger RNA -- used in both Moderna and Pfizer-BioNTech’s vaccines -- are the tip of the iceberg in terms of helping patients.

“As a biotech investor, for years and years, it’s been frustrating that we have all of these amazing new technologies that are transforming medicine that the general public doesn’t necessarily see,” he said in an interview. “You see a Tesla driving down the street or use a social media app so you see the advances in tech, but not necessarily in the biotech sector.”

Euphoria for biotechnology stocks has fueled demand for both initial public offerings and secondary offerings from companies looking to beef up their balance sheets. More than $95 billion has been raised so far this year -- that’s more than double the amount raised in 2019 and the most on record, according to data compiled by Bloomberg.

One of the biggest concerns for generalist investors looking to break into the space has been the unknown impact that a new administration under President Elect Joe Biden will mean for drug pricing. Many industry specialists argue that the ongoing pandemic and broader issues like social equality will trump plans to advance drug-pricing legislation.

Concerns surrounding plans to shake-up what drug developers can charge is “not a risk you want to ignore,” said Amy Kong, chief investment officer of Barrett Asset Management LLC.

Drug pricing is “always a concern and always a risk,” but investors must weigh those worries against the drug pipelines and growth trajectory of the stocks they’re buying, she said.

“Overall, Biotech is still a great place to invest and there’s a lot going on in terms of innovation that should continue to lead to value creation ex-Covid,” said Geoffrey Hsu, a biotech fund manager for OrbiMed Advisors. “This is not a sector that is dependent on Covid to generate returns.”

©2020 Bloomberg L.P.

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