The growth in the value of pharmaceutical and biotechnology companies this year is experiencing unprecedented dynamics. Gainy brokers analyzed the drivers of this growth and biotech stocks’ risks.
For example, the XBI Biotechnology SPDR ETF has become an interesting investment for more speculative investors not only in large but also in smaller promising American companies, as a direct investment in selected traditional biotechnology giants. A comparison of the dynamics of the S&P 500 index and the above-mentioned ETF fund shows an increase of more than 22% since the beginning of the year, compared to the fall of the S&P 500 index by about 1% during the analyzed period.
- The most famous companies developing vaccines against coronavirus are German CureVac and BioNTech, British AstraZeneca, American Moderna, and Gilead. Last week, the focus was on the data of the initial trials of the vaccine, produced by the British company AstraZeneca. News of a “strong” immune response to a vaccine developed by Boston-based Moderna sent its share price up 16% over the past week. After the US regulatory authority granted it “reliable” status, the German drug BioNTech also rose in price.
- Moderna and BioNTech use lab-created molecules that encode protein molecules on the surface of the virus to stimulate the body’s immune response. The proof-of-concept will facilitate the development of other vaccines against cancer and other diseases in the companies’ portfolios.
- Pfizer, which has teamed up with BioNTech, intends to make money on vaccines. Moderna also demands that its investors, including those who participated in a $1.3 billion capital raise in May, be rewarded for the risks involved in producing the vaccine before it is approved.
It is simply impossible to find a company and hope that it will not only invent a medicine but also pass all the tests unless you have secret information about the company. The signals of companies on the market are unclear, as insiders either sell shares or these companies issue new shares at a current value that is far from their intrinsic value. However, investors are not yet benefiting from investing in the shares, as it is unclear what the company’s insiders are doing. Moderna’s CEO recently stated that he sees a “high probability of success” in developing a vaccine against COVID-19, which was later confirmed by the information that the vaccine produced neutralizing antibodies in the blood of all test participants. On the other hand, this year the same person sold shares worth about $21 million, and other insiders sold shares for a larger amount.
According to WHO (World Health Organization) estimates, more than 100 vaccines against coronavirus are currently being developed in the world. The hype and massive investment by governments in the biotech sector will pass at some point, and the question is whether governments will continue to fund the sector at the same level or whether it will return to normal. According to studies, which surveyed healthcare executives and investors, more than 90% of respondents said they expect governments to continue investing in mitigating the effects of the pandemic after it subsides. Interestingly, healthcare spending in the world’s largest economy, the United States, currently accounts for 18% of the GDP and is expected to grow in the coming years.
If the trend of the mentioned ETF fund continues to grow, it is possible that a bubble will form not only in the mentioned fund but also in the entire biotechnology sector. When speculative stocks related to the virus grow, they increase their holdings in the ETF fund, as a result of which money automatically flows back into these stocks, pushing them to even greater growth. If the above scenario is realized, the biotechnology industry will remain the focus of investors’ attention in the future.
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Among the attractive areas for investors are biotechnology and healthcare. These two segments account for more than 60 percent of the total investment volume of 280 million euros.
Venture capital investments prevailed by the number of transactions. This is how investments in startups at an early stage of development are affected. For example, last year, the Nation 1 fund invested in Vitadio, a company that introduces the latest technologies in the treatment of diabetes. Another fund, Credo Ventures, invested in a cybersecurity startup Resistant AI.
Investing in biotechnology is generally considered risky. Although the potential return on investment is huge, a high percentage of investments are written off. This is mainly due to external and legislative factors in the field of drug development. The system encourages the search for very narrowly defined treatments for rare diseases, but failure in clinical trials is highly likely because the target is too small. A slightly different perspective on these opportunities is offered by the field of longevity or the research and development of treatments that target the aging process itself.
There are an almost unlimited number of end indications to which this applies, so if a clinical test for one of them fails, you can easily “switch” to another indication. And if the product also falls into the sphere of so-called cosmeceuticals – medicines used in cosmetics – the situation is even better. Regulation in this area is less, faster, and cheaper and users of the product also see the effects of treatment much earlier.
Biotechnology uses knowledge from biology, for example, in the development of drugs and pharmaceutical technologies. Biotechnology stocks are highly speculative and usually show intriguing price movements.
Rather, it is more important to assess the chances of whether a given drug will be successful and whether the eventual yield will be sufficient. The costs of researching new drugs are very high. In addition, the process of their approval is very long.
Therefore, it is influential to monitor the financial condition of the company and pay attention to the annual expenses. Investors looking for biotech stocks typically hope that their chosen company will develop a unique drug or be acquired by a larger biotech company.
Large biotech and pharmaceutical companies can accelerate their growth by acquiring smaller players in the market. This way, they can take drug development into their own hands without having to go through the lengthy development and research process themselves. Small biotech stocks are almost always a good candidate for a takeover.