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After watershed year for biotechs, diversification is key
2020 was a watershed year for biotech companies around the world. The combination of urgent need, commitment and massive government support saw the huge benefits of research and development on show, when not one but multiple companies produced vaccines for the Coronavirus.
Extensive coverage of the sector generated huge enthusiasm for it, with many stocks up as much as 50% over the 12-month period. But as Kanish Chugh, head of distribution at ETF Securities notes, this has been the case for some time. According to Chugh, the S&P Biotechnology Select Industry Index has gained 22.9 per cent a year over the last five years.
Despite the growing popularity and interest in the sector, Chugh has a word of caution for investors, noting that, at times, “it is a high-risk, high-return market,” and it must be “approached in the right way.” A closer look at the S&P/ASX Small Ordinaries is evidence of this fact, with some companies spiking up to tenfold in a short period of time on little more than positive trial results.
It is clear that buying direct stocks in the sector is fraught with risk and in some cases little access to information. Being predominantly R&D-driven companies, smaller biotechs are rarely profitable, meaning they rely on the continued access to capital and generally have long development periods for their treatments.
This, according to Chugh, is a reason why investors should consider taking a managed or more diversified approach to investing into the sector. He notes the growing range of products allowing investors the opportunity to manage their risk by “spreading them across a larger number of companies” but also including the broader healthcare sector, not just biotech.
Launched in 2018, ETF Securities S&P Biotech ETF (ASX: CURE) tracks the S&P Index noted above, seeking to invest into a portion of around 150 individual companies. The ETF capitalised on the huge demand for the sector in 2021, delivering a return of 48.7 per cent for the 12 months to January. The ‘modified’ equal weight fund includes exposure to a number of global leaders, including Novavax and Gilead Sciences, alongside more niche players including Exelixis.
Australians are spoiled for choice at the top end of the biotech or healthcare spectrum in Australia, with global leaders like CSL (ASX: CSL), Cochlear (ASX: COH) and Resmed (ASX: RMD) stalwarts in many portfolios, but the drop off after these is quite fast. The US by comparison accounts for 75 per cent of the global biotech industry according to Chugh.
