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Healthcare is a defensive growth sector. The key trend driving demand for innovative drugs is an ageing population. Even when economic growth slows and prices rise, demand for these products remains at high levels. This can provide equity investors in the sector some insulation from economic and financial market downturns.
While there have been rapid scientific advances in recent years, we are still very early in the ongoing scientific revolution and there remains plenty of unmet need to be addressed. This will continue to drive demand for innovation of new biological products from universities and within the industry hubs. These new products then create new biotech companies.
Of course, healthcare could still be impacted by negative equity market trends but its defensive nature means that it is likely to be more resilient than other more cyclical sectors.
While the majority of critical medicine sales are usually well protected from economic downturns, sales of products by biotech companies which treat serious conditions with high unmet need, such as cancer and rare diseases, are particularly well insulated.
Currency hedge
The strength of the dollar can also protect UK investors from biotechnology equity market weakness. The vast majority of global biotechnology stocks are listed in the US as companies have been attracted to the depth of financing available from US investors. In spite of a retraction in the biotech index this year in dollar terms, sterling’s weakness means biotech share price performance has, year-to-date, been flat.
If sterling should weaken further and the US listed biotech share prices remain flat, then UK biotech investors would see their investments increase in value. If US listed biotech share prices were to increase, and sterling weakens further then this would turbo boost investment returns for UK investors.
Conversely, if sterling were to recover and US listed biotech share prices remained flat or fell, then, in theory, the value of a UK investor’s investments would sink. However, as much as a strong dollar tends to have a negative impact on domestic equity markets, a weak dollar tends to drive equity valuations higher and drug prices lower, the effects of which in general counter some of the currency swings.
In other words, volatile currency moves are not necessarily a bad thing for UK investors investing in US listed biotechnology companies.
It’s not just the stock prices which are relatively insulated from currency fluctuations, so too are the cash flows of the global biotechnology companies.
Protected P&L
Once their products are approved, biotechnology companies tend to build global businesses to carry out sales and production around the world. This provides a natural hedge against currency volatility because it reduces the currency mismatch between revenue and costs.
According to data from the IQVIA Institute, the US is the biggest market for healthcare products in the world. In 2021, drug sales in the country exceeded $580bn, corresponding to about 40% of all global sales in the world and 65% of new drug sales. The UK and Europe as a unit is the second biggest market in the world, worth $210bn and about 20% of global sales [1].
Most large biotech companies with products approved not only sell across these geographies but also have production, sales and R&D facilities around the world, reducing the impact of currency fluctuations on investor returns.
So the current environment of an economic downturn and rising inflation should not affect sales of the sorts of medicines in which IBT invests, and the weak sterling can serve to dampen the impact of US stock market weakness on UK investors. Companies that do not yet have a product for sale are vulnerable to rises in interest rates designed to curb inflation, but IBT is putting particular focus on those companies with strong access to finance and a shorter timeline to profitability to mitigate this risk.
[1] - The Use of Medicines in the U.S. 2022 - IQVIA
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