10.08.2017

Erste AM sees tailwind for biotechnology companies

• Market approval imminent for numerous innovative drugs
• Healthcare spending in OECD countries to increase to 9.5% of GDP by 2050
• Annual increase of 10 to 15% of sales and earnings expected for the biotech sector until 2020
• More than half of all newly approved drugs were based on biotechnology in 2016
• Financial market: increased issue activity in Q2 2017
• Biotech shares with attractive valuations

“Breather” after strong rally coming to an end

Biotechnology shares have been among the top performers in the past ten years. After the above-average performance from 2010 to the beginning of 2015, hedge funds set off a consolidation that is now coming to an end. The NASDAQ biotechnology index, the most important barometer for biotech shares, has gained 18.73% in the year to date (source: Reuters Datastream, as of 8 August 2017). Issue activity increased drastically in Q2. Harald Kober, Senior Fund Manager of the equity fund ESPA STOCK BIOTEC, is convinced that the biotechnology sector will benefit from new, innovative, and successful drug developments: “We expect listed biotechnology companies to post double-digit growth rates on average for sales and earnings in the coming years.”

Old age and drug innovations as growth drivers

The healthcare sector is regarded as one of the leading industries of the 21^st century. As a result of global population growth to 9.2bn people and the predicted doubling of the above-60 demographic by 2050, healthcare spending in the OECD countries will rise from currently 6% of GDP to 9.5% (source: OECD).

The sequencing of the human genome has revolutionised the development of drugs. In spite of many innovations and successful research, however, there are only few drugs on the market for the 1,200 rare diseases. Even in the USA, which has been in the news since President Trump took office due to political debates around changes in the healthcare system (“Obamacare”), the healthcare sector will be the biggest employer in the coming decade, as Kober explains. Many illnesses have not been fully investigated yet, and there are certainly no effective drugs available. This might soon change. For 2017, Kober expects a whole range of new drugs to be approved, for example the skin disease drug Dupixent from Sanofi, the active ingredient Ocrevus from Roche against Multiple Sclerosis, and Durvalumab, a drug used in oncology against bladder cancer from Astrazeneca.

Stock exchange valuations half the level of two years ago

“In 2016, 60% of all drugs approved had been created in biotech labs”, as Kober points out with reference to data from Evaluate Pharma. “We expect the success rate of biotech companies to rise rapidly.” This is one of the reasons why takeover activities have picked up again. “The big pharmaceutical companies are keeping liquidity for takeover moves. We can see that the issue activity in Q2 2017 more than doubled in comparison with the two previous quarters.” This could mean the long-awaited trend reversal of biotech shares has started. Kober: “While we cannot foresee the stock market performance, we definitely think there have been worse times to invest. In terms of MarketCap/Sales, the entire listed sector commands valuations only half as high as those at the most recent pinnacle in March 2015. Regular investments on the basis of a fund savings plan can hold the timing risk at bay, as Kober points out.

ESPA STOCK BIOTEC: a portfolio of top biotech companies

Investors who want to broadly cover the global biotechnology sector could for example invest in ESPA STOCK BIOTEC. The equity fund launched by Erste Asset Management in 2000 invests in a portfolio that consists of 92 listed companies mainly from the USA, which is regarded as the centre of biotechnology. Since its launch, ESPA STOCK BIOTEC has achieved an annual performance of 9.04% (as of 31 July 2017; source: www.erste-am.at)*. The fund covers all essential fields of biotechnology e.g. cancer research, personalised medicine, Alzheimer’s, cell therapy, rare diseases, and genetic research. Among the positions with the highest allocations are leading biotech companies such as Gilead, Biogen, Sarepta, Celgene, Vertex, Regeneron, and Alexion, to name but a few. Investors taking a chance on ESPA STOCK BIOTEC may enjoy significant gains, but also have to assume commensurate risks and be able to absorb high fluctuations in value.

*) Calculated according to the OeKB method. The performance data take into account the management fee, but do not take into account the one-off load of up to 4.00% due at the time of issue nor other costs that diminish performance such as account and depositary fees. Past performance is not indicative of the future development of the fund.

Warning notice in accordance with the Austrian Investment Fund Act of 2011

Due to its composition, ESPA STOCK BIOTEC may be subject to elevated levels of volatility, i.e. the fund shares may be subject to significant fluctuation either way within short periods of time.

For legal documents and more information on the aforementioned fund, please visit www.erste-am.at.

ESPA STOCK BIOTEC – (ISIN AT0000746755 T, ISIN AT0000746748 A)