Theme basket review: A disaster year for NextGen Medicine
Head of Equity Strategy
Summary: Our NextGen Medicine basket has had a difficult past year down 39% as interest rates have charged higher while sentiment on biotechnology has eased. In our annual review we have decided to remove two stocks, Editas Medicine and MorphoSys, and replacing them with Ionis Pharmaceuticals and 10X Genomics providing a better geographical and product mix in the theme basket. A look at the fundamentals show that our NextGen Medicine stocks have had a median revenue growth rate of 60% over the past year. However, high growth and high equity valuations have clearly been a risky journey that past year.
The frontier of biotechnology is risky
This century has been called the century of biology as the human civilization has harnessed our understanding of physics to build machines and systems to advance our society. In this century it is predicted that we will accelerate innovation in our understanding of our biology and that it will lead to breakthroughs in drug discovery and potentially lead to a future of much more personalized medicine based on our understanding of the human genome. That is the premise of our NextGen Medicine, an expression of the innovation that goes on in drug discovery, but while expectations are high the past year has also shown how risky investments in this part of the market really are.
Our NextGen Medicine basket is down 39% over the past year compared to the MSCI World Index that is down 5% in the same period. While this underperformance is big it also reflect the incredible outperformance in the previous years. Our basket has a 60% revenue growth rate over the past year highlighting the enormous growth but with high expectations come high stock price sensitivity to changes in those expectations and NextGen Medicine stocks are typically high duration assets so they have naturally responded negatively to higher interest rates. Analysts remain positive on the industry with a median price target being 66% above current market prices.
NextGen Medicine is updated
We are in the process of reviewing all our current 21 theme baskets and there two baskets already that we have left unchanged and those are Women in Leadership (because it is our newest) and the Defence basket because no new companies have entered the industry and we are satisfied with the geographical split.
Following a review of our NextGen Medicine basket we have chosen to update the basket by removing two stocks: Editas Medicine and MorphoSys. These two companies are the two smallest stocks in the basket on market capitalization and therefore the obvious rule based decision in order to make room for two new companies that we believe provide a better geographical and product split. The two new stocks entering the basket are Ionis Pharmaceuticals and 10X Genomics.
Ionis Pharmaceuticals is developing RNA-targeted therapeutics and 10X Genomics develops integrated solutions across instruments, consumables and software for analysing biological systems and their complexity. The new updated theme basket can be seen below and found in our trading platform.
|Name||Mkt Cap (USD mn.)||Sales growth (%)||R&D in % of mkt cap||Diff to PT (%)||5yr return|
|Exact Sciences Corp||13,498||33.2||5.5||62.1||320.8|
|10X Genomics Inc||10,086||75.3||5.9||110.4||NA|
|Intellia Therapeutics Inc||7,141||-57.0||2.8||64.5||657.4|
|Mirati Therapeutics Inc||6,620||501.6||6.6||79.7||2,060.4|
|Swedish Orphan Biovitrum AB||6,238||-2.3||30.9||11.0||59.6|
|Arrowhead Pharmaceuticals Inc||5,247||80.9||4.5||75.8||2,362.9|
|CRISPR Therapeutics AG||4,736||1,066.5||8.2||132.4||315.4|
|Ultragenyx Pharmaceutical Inc||4,677||67.2||10.8||105.4||-3.9|
|Ionis Pharmaceuticals Inc||4,448||-29.2||14.2||61.2||-30.4|
|Beam Therapeutics Inc||4,179||3,154.2||7.7||105.0||NA|
|Denali Therapeutics Inc||4,132||1,400.9||6.1||143.0||NA|
|Fate Therapeutics Inc||3,716||198.1||5.0||153.4||1,294.6|
|Twist Bioscience Corp||3,019||44.6||2.6||26.1||NA|
|PTC Therapeutics Inc||2,976||37.4||17.1||21.2||217.9|
|Iovance Biotherapeutics Inc||2,490||NA||9.9||118.3||125.1|
|Sage Therapeutics Inc||2,475||15,871.5||11.7||61.7||-11.5|
|Pacific Biosciences of California Inc||2,393||52.6||3.7||185.7||124.2|
|Allogene Therapeutics Inc||1,571||NA||13.9||191.7||NA|
|Aggregate / median||346,556||59.5||5.7||66.0||124.2|
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.