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Large-cap biotechs to blaze a trail

Last updated: 19:01 30 Dec 2013 AEDT, First published: 20:01 30 Dec 2013 AEDT

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It promises to be a bumper 12 months for the global biotechnology industry with the big blue-chip research firms continuing to deliver.

Globally, biotech has been the top performing sector for the past three years, meaning investors have been rewarded for all those lean years before the upswing. 

In the US, the closely followed S&P Biotechnology Select Industry Index is up 38% and has advanced more than 1,500% since its inception in 2011.

Here in the UK, the gains have been more modest by comparison.

The pharmaceuticals and biotechnology index has added a fifth to its value in the past year.

However, this is heavily weighted to the three mainstream pharma giants: AstraZeneca (LON:AZN), GlaxoSmithKline (LON:GSK) and Shire (LON:SHP). 

So, it isn’t a particularly good benchmark for the performance of the smaller biotech segment.

The Biotech Growth Trust, one of the UK’s only listed funds that invests in the sector, is probably a better proxy.

It is has risen 50% in the year to date, and is up 300% in the last three years as the sector has outperformed.

Port Erin Bio Pharma (LON:PEBI) is another investment company that has done incredibly well in the last 12 months – although it only follows a hand-picked 20-25 stocks.

Investors who bought shares in the company, which is chaired by millionaire former fund manager Jim Mellon, would now be sitting on a 122% profit.

The top performing UK biotech was GW Pharma (LON:GWP), which is developing a cannabis-based multiple sclerosis treatment. It has gone up 191% in the past year.

Not far behind is Summit (LON:SUMM), which is developing a treatment for C.difficile and Duchenne Muscular Dystrophy, followed by Retroscreen Virology (LON:RVG), a clinical services and research firm.

The outlook for the industry, meanwhile, is the most exciting it has been for many years, which bodes well for investors.

The large-cap biotechs are expected to blaze a trail – achieving what the big pharma companies singularly failing to do; namely bringing through the next generation of blockbusters.

According to research from Credit Suisse there is a “perfect storm” of new biotechnology products that have either just launched, or are about to.

This point is endorsed by OrbiMed Capital, which reckons we may be seeing in the age of the “mega blockbuster” thanks to the research and development work of the biotechs.

OrbiMed is the investment manager of the Biotech Growth Trust, and in its latest presentation it reveals the regulatory environment has become a little easier.

The powerful US Food & Drug Administration is leading the way in the world’s largest market for drugs by accelerating approvals for treatments in areas of unmet medical needs.

It has also adopted a breakthrough therapy programme to significantly accelerate development time lines for treatments that are deemed to be a major medical advance.

Roche’s Gazyva, for chronic lymphocytic leukaemia, became the first with breakthrough therapy designation to receive FDA approval.

OrbiMed reveals that on its analysis big biotechs represent “compelling value”. 

The growth profiles of the top four American firms is impressive, yet they are valued at an average 15.9 times projected 2015 earnings.

This is only a modest premium to mainstream big pharma, which is facing all sorts of challenges including patent expiries and an inability to replace top selling drugs.

Credit Suisse, in a note to clients, said the large biotechnology firms have scope for earnings per share upgrades.

For the mid and small-cap companies, there should be a trickle-down effect on valuations, analysts reckon.

However, they don’t expect the uplift to happen uniformly across this particular part of the biotech sector, and the message for the stock-pickers is be selective when fishing through the minnows.


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