Do Biotechs Have More Upside?

April 22, 2014 11:56 AM
By Lord Abbett Editorial Staff

Lord Abbett has identified three encouraging trends for the sector.

Forty-three years after President Richard Nixon launched a national “war on cancer,” millions have died, millions have extended their lives with new and improved treatments, and billions of dollars have been made by investors in biotechnology and pharmaceutical companies on the front lines.  A case in point is the NYSE Arca Biotechnology Index (BTK), which has a high concentration of companies with cancer compounds in various stages of development, is up 295% in the five years through April 17, 2014.

Is all the good news priced into biotech stocks?  Or do the long-term fundamentals justify continued bullishness?  

The accompanying chart illustrates the index’s dramatic rise. Behind the growth over the past five years lies a story of genomic breakthroughs, targeted molecules, and expansive immunotherapy.  Some of the companies in that index were acquired at a substantial premium.  Some sold the rights to their innovative technologies or partnered with large pharmaceutical companies.  Others had the wherewithal to ride the long road of regulatory approvals and watch their stock price rise to lofty multiples of sales and/or earnings, if they had any.  Some still don't.

After a Strong Five-Year Run, Biotech Stocks Have Taken a Breather
Cumulative returns in the NYSE Arca Biotechnology Index (BTK), 4/20/09-4/17/14

Source: Bloomberg.
The NYSE Arca Biotechnology Index (BTK) is an equal dollar weighted index designed to measure the performance of a cross section of companies in the biotechnology industry that are primarily involved in the use of biological processes to develop products or provide services. Such processes include, but are not limited to, recombinant DNA technology, molecular biology, genetic engineering, monoclonal antibody-based technology, lipid/liposome technology, and genomics. The BTK Index was established with a benchmark value of 200.00 on October 18, 1991. The BTK Index is rebalanced quarterly based on closing prices on the third Friday in January, April, July, October to ensure that each component stock continues to represent approximately equal weight in the index.


While biotech stocks have sold off recently after reaching record high valuations, prompting some investors to trim their positions, Deepak Khanna, Lord Abbett Partner and Portfolio Manager, is encouraged by three factors:

  1. Young biotech companies with promising drug candidates in clinical trials have the ability to raise cash in the capital markets.

  2. Research and development has become much more adept at turning out commercial drugs, or at least drugs that prove effective in clinical trials.

  3. The industry has only scratched the surface of targeting drugs to smaller patient populations based on vast amounts of genomic data.

Of course, Khanna has no illusions about the diseases for which there is still no cure—lung, breast, and pancreatic cancer, for example.  What drives his optimism, however, is the pace of innovation which continues to accelerate.

"The players may change; the leaders may change; but now the tools for drug discovery—mass spectrometers, liquid chromatography systems; nuclear magnetic resonance systems, and the like—are more precise than ever," he said. "And the combination of an aging population; improving detection and diagnostics; more research-savvy physicians; and more educated patients should be highly positive for this sector for the next five to seven years."

What is your view of the prospects for these stocks? Tell us in the Comment section, below.

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