Introducing Next Generation Medicine basket

Equities 10 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  The biotechnology industry has outperformed the general market since 2004 and is generally perceived as being on the forefront of the future of medical treatments. The industry has evolved over many stages and recent technologies such as cell and gene therapy have matured to a degree where investors can now see the commercialization potential. This future has been turbocharged by the Covid-19 pandemic paving the way for the new mRNA technology to deliver a breakthrough vaccine in record time. Investors are now driving high demand for these new advanced biotechnology companies.


Beginning last year, we discussed many different themes starting with the green transformation which we defined as one of the most important ones in the coming decade. However, the green transformation theme as become extremely expensive, something we look at in the soon to be published Q1 Outlook. Throughout 2020 we also discussed bubble stocks, e-commerce and ‘misery industries’. Starting this year, we introduced our Commodity Sector basket as we believe reflation will be the most important theme over the next 12-18 months.

Explanation of theme and the selected biotechnology companies

Today we are launching our next theme called NextGen Medicine containing companies which are working on the next generation of medical diagnostics and treatment, such as analysis of DNA and RNA, immunology, and within cell and gene therapy. The use cases are spanning widely – ranging from treating rare genetic disorders or skin diseases to fighting cancer and viruses with a new and improved line of defense.

We have selected 30 companies for this theme with a global selection universe of biotechnology companies but filtered on the percentage of institutional ownership. Our hypothesis is that high percentage of institutional ownership is a validation as this category of investors has more access to knowledge about these frontier treatments and can thus more informed decisions. This filter has unfortunately removed many Asian biotechnology companies. We have also filtered on cash and equivalents relative to free cash flow, and if the latter is negative we can calculate what we call a burn rate, which is essentially how many years of funding the company has left under current operations. We have removed biotechnology companies with relatively stressed funding situation. Finally, we have sorted on market capitalization in USD and also tried to balance the list across various treatment technologies and geographies although the US is heavily concentrated in this theme because the country has a deeper financial market for absorbing these types of risks.

NameDomicileMkt cap in USD mnR&D in %12M Rev in USD mnBurn rateInsti %
Illumina IncUS54,9471.23,239NM106.4
Moderna IncUS51,3041.4247NM58.6
Seagen IncUS33,4922.41,864NM90.3
Genmab A/SDK29,1321.51,656NM56.5
Exact Sciences CorpUS24,6320.61,3213.589.8
BioNTech SEDE24,6231.01222.2NA
Grifols SAES17,7511.86,039NM51.1
CRISPR Therapeutics AGCH14,7741.6775.779.1
Argenx SENL13,2172.0546.253.1
Mirati Therapeutics IncUS10,9182.6121.7103.1
Fate Therapeutics IncUS10,3850.9184.5102.6
Natera IncUS10,2580.83623.2115.3
Invitae CorpUS9,2932.42451.686.9
Ultragenyx Pharmaceutical IncUS9,0964.02154.3116.7
Twist Bioscience CorpUS8,8170.5901.9107.3
Denali Therapeutics IncUS8,7582.4242.889.6
Arrowhead Pharmaceuticals IncUS8,2971.6882.974.1
Iovance Biotherapeutics IncUS7,4902.701.4117.2
Pacific Biosciences of California IncUS6,8690.980NM89.4
Galapagos NVBE6,6698.957410.854.7
Beam Therapeutics IncUS6,5521.400.971.5
Swedish Orphan Biovitrum ABSE5,8672.61,649NM115.9
Sage Therapeutics IncUS5,3265.772.2116.4
Abcam PLCGB5,2920.9328NM130.5
Intellia Therapeutics IncUS5,2662.7626.499.5
Editas Medicine IncUS4,7732.8924.392.0
PTC Therapeutics IncUS4,6739.43584.4116.5
Allogene Therapeutics IncUS4,5444.202.4115.2
CareDx IncUS4,3421.0169NM109.2
MorphoSys AGDE3,6933.6339NM76.2

Table explanations: R&D in % is the 12-month R&D expense in % of market cap, Burn rate is the number of years the company can sustain current negative free cash flow (NM means not measurable and is used for those with positive free cash flow), Insti % is the institutional ownership of the floating shares (those that are tradeable, so if all shares are not publicly available then the ratio can be above 100%) in %.

The long-term drivers of this theme are the maturing of promising technologies within cell and gene therapy, monoclonal-antibody therapy, and small-molecule therapy, which will attract the necessary funding to complete all trial stages of the treatment development. Ageing populations in the developed world will drive demand for treatments of many diseases ranging from cancer to brain disorders. These new treatments also have the possibility of having fewer side effects compared to the old pharmaceutical drugs. Gene editing holds the possibility to make antibody therapies to work better and in general many of these companies likely represent the future of medical treatment and thus they will most likely become acquisition targets of major pharmaceutical companies.

Performance, selection bias, and survivorship bias

The biotechnology industry was for many years viewed as a pure lottery ticket. Great ideas but many were too expensive to pursue relative to the risk capital available and many disappointing trial data made it unattractive to investors. In the period 2004-2010 the biotechnology industry lived a boring life (see chart) with little outperformance or investor attention. But starting in 2011 and 2012 a new class of biotechnology companies entered public markets with better results and increasingly more interesting technology. More mature biotechnology companies such as Gilead Sciences saw enormous growth rates in its hepatitis C treatment. This started a positive feedback loop of strong returns in public markets creating more risk appetite in the venture capital market and the industry enjoyed a spectacular bull market in the years 2011-2015. In the following years from 2016-2019, the industry entered a new ice-age period driven by slowing growth by the mature biotechnology companies and many bad FDA reviews in clinical trials. But the Covid-19 pandemic brought renewed attention to biotechnology but more importantly the smaller more advanced and next generation biotechnology companies using mRNA, gene editing technology, and antibody drug conjugates. The companies that we feature in our inspirational list, but there are so many more interesting companies that we could not add, so we encourage investors to research wider in the hunt for good long-term potential winners.

Source: Bloomberg

Our NextGen Medicine basket has done well up 897% since December 2015 compared to 78% for the MSCI World. Past performance is no guarantee of future performance, and in this basket since we sort on market cap and the segment has experienced a strong bull market, we explicitly select recent winners. This naturally creates a selection and survivorship bias in the basket. Investors should therefore focus less on the long-term returns of the basket and more about the overall theme and what will drive it in the future.

The NextGen Medicine basket has an interesting outlook, but the high growth expectations come with valuations. The basket has a price-to-sales ratio of 22.4 and non-measurable price-to-earnings ratio as most of the companies are not profitable. The price-to-book ratio is 9 making it one of the most expensive segments in the entire equity market. The future does not come cheap these days.

Biotechnology is a very high risk

The risks associated with the theme are the high valuations which is dominating the biotechnology industry in the beginning of 2021. High valuations correlate with high expectations which can be difficult to meet and on average high valuations have historically meant lower future returns. Furthermore, companies in the research phase have high event risk around trials for approval of their products, which leads to potentially large single day drops in individual biotechnology positions. Other biotechnology companies are also trying to solve the same diseases and the ones that gets an approval for a treatment first often gain the momentum and most of the market value. A short-term risk for some of these biotechnology companies is manufacturing delays due to Covid-19. Historically, the biotechnology industry has gone through long periods of low or flat returns, so investors getting exposure to biotechnology stocks should have a long-term horizon.

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992