Biotech Surge – COVID-19 Cure is Just the Start

Recent positive developments in COVID-19 vaccines have spurred a wave of market exuberance, lifting share prices of biotech companies at the forefront of the vaccine race. The broader NASDAQ Biotechnology Index has also benefited from the rally, climbing more than 23% in the calendar year to date, as have sector-related ETFs such as the VanEck Vectors^® Biotech ETF (NASDAQ: BBH). Over the same period, the S&P 500 Index is up approximately 13% (see Figure 1). 

COVID-19 and the urgency to find a cure have opened up opportunities, making the biotech sector a prospective space for investments. Investors looking to capitalize on potential growth in the sector can gain exposure via BBH. The fund, which tracks the MVIS^® US Listed Biotech 25 Index, focuses on the most liquid companies in the industry based on market cap and trading volume.

Trending Higher

Global stock markets rallied sharply since the beginning of November. Upbeat news on the development and distribution of multiple COVID-19 vaccines raised hopes that the spread of the virus may soon be contained. Moderna (NASDAQ: MRNA), whose vaccine’s clinical trials proved to be highly effective according to the U.S. Food and Drug Administration (FDA), and sector-related ETF VanEck Vectors Biotech ETF (NASDAQ: BBH) are two examples of rally beneficiaries that outperformed the S&P 500 in November (see Figure 1).

Figure 1: Biotech Outperforming S&P 500 (Total Returns, Rebased)

Source: FactSet. Data as of December 4, 2020. Past performance is no guarantee of future performance. ETF returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV.

Moderna’s share price surged over 120% in November, when it announced that its vaccine was found to be nearly 95% effective against the coronavirus; the company, one of BBH’s top 10 holdings, has applied for emergency authorization to distribute its COVID-19 vaccine in the U.S. and Europe. While Pfizer’s vaccine was the first to receive FDA approval, other drug maker’s vaccines are in late-stage trials and could be authorized in the next few months. Revenue potential could be significant for drug makers whose vaccines receive the green light.

Strong Fundamentals Underpin Future Growth

Near-term earnings tied to COVID-19 vaccine approval are clearly enticing, but long-term earnings potential in the biotech sector remain attractive, too. Demands for innovation within the industry have led companies to increase research and development (R&D) spending (see Figure 2), outpacing revenue growth to fuel future growth. R&D spending may be a good indicator of innovation. A new analysis from U.S. consultancy firm, BDO, shows that R&D spending in the biotech industry jumped 22% from 2018 to 2019, while revenues increased just 2%. This trend is projected to continue amid pricing pressures and looming patent expirations (see Figure 2). Biotech firms have also accelerated collaborations with government agencies, large pharma companies, and tech companies to share resources, data and insight in the fight against the coronavirus.

Figure 2: Annual Revenue vs. R&D Spend – Biotech Sector

Source: BDO. Data as of September 30, 2020.

Meanwhile, investor appetite for the industry looks even stronger, as funding continues to trend higher (see Figure 3). According to S&P Global Market Intelligence, biotech led the healthcare industry in investment activity from private equity (PE) and venture capital (VC) in the first half of 2020, drawing almost US$12.6B in funding, up from US$7.3B a year ago. The recent shift can be attributed to an uptick in interest in biotech companies like Gilead, Moderna and others pursuing COVID-19 vaccines and treatments.

Figure 3: Biotech Attracts Highest Investments from PE/VC and Hedge Funds in 2020

Source: S&P Global Market Intelligence. Data as of July 31, 2020.

Undoubtedly the race for a cure to COVID-19 has significantly helped the healthcare industry and the biotech sector in particular as we head into 2021. However, analysis has shown that biotech companies and venture capital investors have funded well above prior year levels, hinting at potential revenue streams well after the race is won.