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Why biotech stocks are having a solid year

Why biotech stocks are having a solid year

Several big-picture trends continue to lend support to the biotechnology industry amid regulatory uncertainties, according to Evan McCulloch, director of equity research for Franklin equity group.

Rapid advancement in life sciences, surge in medical breakthroughs, improved efficacy in health care treatments and an increase in drug approvals by US Food and Drug Administration (FDA) are revitalising the biotechnology industry.

‘On the whole, we are seeing significant innovation in gene therapy, gene editing, oncology and other areas that harness the power of the body’s immune system to fight cancer,’ McCulloch said.

‘We are positive on genomics in general, and we think gene sequencing will be an important way to deliver medicine, treatment and cures in the future,’ he added.

Aided by improving fundamental sentiment, biotechnology – an important growth area in pharmaceuticals – stocks have outpaced the broader US equity market so far this year to end-July.

Despite a lack of price hikes, pharmaceutical companies reported solid earnings and guidance. Healthcare stocks, meanwhile, generally enjoyed above-average returns and ranked third in performance among the 11 major equity sectors.

‘We saw most health-care companies top their quarterly earnings and sales forecasts this summer (June to August), beating all other sectors including technology, and their earnings expectations have gone up since June,’ McCulloch said.

Meanwhile, concerns about the ageing US equity bull market, downturn in emerging-market assets as well as earnings misses of some big technology companies have pushed some equity investors towards the more resilient industries within the healthcare sector.

McCulloch manages the Franklin Biotechnology Discovery fund, which is registered for sale for investors in Singapore, Hong Kong, and other markets in Asia.

The fund invests principally in equities of biotechnology companies and discovery research firms – including small to mid-sized companies – located in the US and other countries, and to a lesser extent in debt securities of any type of issuers worldwide.

Drug approvals

In 2018, the biotech sector is on track for another strong year of FDA drug approvals, which numbered 34 on a year-to-date basis as of August 30.

Of late, the increased number of drug approvals from the FDA has also revitalised the biotech space, which relies on new drug innovation to propel growth.

The FDA continues to work closely with the biotech and pharmaceutical industries, and it seems more committed than ever to fast-tracking important new drugs through clinical trials and toward final approval.

Drug-price legislation

McCulloch said political pressure on drug-price legislation isn’t waning, especially with US midterm elections around the corner.

‘But we believe it is going to be very difficult for the Trump administration to control drug costs in a draconian way,’ he said.

‘In our view, investors shouldn’t fret too much about the possibility of mandated drug pricing until the conjecture abates and a credible plan is put forth.'

Despite all the political rhetoric about drug pricing, the commercial landscape in healthcare continues to be favourable for innovative drugs that deliver value to patients.

When breakthrough drugs get launched, healthcare plans generally will pay for them due to strong patient demand.

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