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The biotech sector has languished behind equity markets as a whole over much of the past three years since investors deserted it following the correction that took place in 2021. The sector valuation tends to run in cycles from boom to bust and back again, but this last downturn was the longest in the sectors’ history. The five year performance for the Nasdaq Biotechnology Index, the leading benchmark for the sector is flat. Looking at the performance, one could be forgiven for assuming that the sector has little to offer. In fact, the opposite is true.
The global healthcare industry benefits from several fundamental tailwinds that look capable of driving structural growth for many years, if not decades, into the future. Many of these relate to demographics, where the increasingly complex demands of a global population that is growing older, richer and sicker, are driving rising demand for healthcare services in general and underpinning a particularly strong secular growth story in biotechnological innovation.
Older…
Due to advances in medicine, and generally healthier living conditions, life expectancy across the world has vastly improved in recent times, reaching an average 71.0 years in 2021, compared to just 66.1 years at the turn of the century[1]. The gains in life expectancy have been greatest in the developing economies of Africa and Asia, but this has been a global phenomenon with the populations of North America and Europe also now generally living for longer. As a result, the global population of over 65s is projected to increase to 2.5 billion by 2100, up from 650 million in 2017.
[1] Source: Our World in Data
…Richer…
Meanwhile, as living standards in the developing world rise towards those of the developed world, the demand for better access to medicines and health services compels governments to spend a greater proportion of their GDP on healthcare. As the chart below suggests, healthcare spending tends to increase as countries become richer.
…Sicker
Although the globally aging population is undoubtedly a societal positive, old age naturally predisposes humans to diseases. After the age of 50, biological wear and tear begins to take an increasing toll on the human body, requiring increased consumption of healthcare resources. Cancer, cardiovascular diseases and dementia are among the high profile ailments that are commonly associated with age, and all of them require drug-based treatments.
In combination, we should expect the fact that the global population is growing older, richer and sicker to drive robust growth in demand for pharmaceutical products in the years ahead. This should represent one of the most reliable – and investable – trends of the investing world in the decades to come.
Currently, the US is the largest healthcare market in the world by far. In 2022, the US spent 16.6% of GDP on healthcare, compared to the OECD average of 9.2%[1]. Per capita health expenditure in the US is expected to increase from $13,413 in 2022 to $20,425 in 2031, an annualised growth rate of 4.3%[2]. Healthcare spending growth in emerging markets, however, is expected to be even stronger, driven by faster growth in the elderly population and continually improving economic standards. This is evidence that healthcare is a genuinely global growth industry – and, over time, we should expect the healthcare spending rates in the developing countries to rise substantially to match the rest of the world.
Necessity is the mother of invention
Improving living standards and increasing life expectancies clearly bring with them many societal positives but, with budget-constrained governments ultimately on the hook for at least a proportion of the rising cost of healthcare provision, there are also challenges to overcome.
Fortunately, the confluence of advances being seen across scientific and technological disciplines is fuelling an unprecedented wave of innovation from the healthcare sector, with biotechnology companies leading the way. New therapies may carry a high individual price tag, but the cost saving associated with keeping a patient out of hospital or long-term care is often a multiple of that price. Considering that drugs typically constitute just 10-20% of total healthcare costs[3], a new therapy that can delay the onset or slow the progression of a disease can have huge cost saving implications for society, keeping a patient out of advanced hospital care, improving quality of life, while lowering the financial burden for relatives. Moreover, after ten or so years, the drug patents expire and these highly innovative drugs become available to society at a fraction of the original price, freeing up healthcare providers’ budgets to pay for the next generation of drugs. It is a conveyor belt system designed to stimulate constant innovation and ultimately benefits patients.
The impact of ongoing biotech innovation is clearly evident in the data for new clinical trials and novel drug approvals. More clinical trials are being registered than ever before – nearly 40,000 trials were initiated in 2023 alone, which is a new annual record. In turn, we are seeing a higher number of regulatory approvals for new drugs. The US Food and Drug Administration (FDA) approved more than 50 novel drugs in 2023, the second highest annual total ever seen, and the vast majority of new drugs are originally generated in biotech companies rather than in the R&D departments of pharmaceutical companies.
This wave of innovation is also delivering a constant supply of new investment opportunities in biotech companies with exciting products that can meet the evolving needs of patients globally. At IBT we invest in some of the most innovative companies we can find from within an increasingly diverse sector. Selective investment in biotech businesses which focus on high unmet medical need, with attractive valuations, outstanding technology and significant future earnings potential are the keys for unlocking value in the sector.
A sector with such strong fundamental tailwinds deserves to be better appreciated by the investment community. We anticipate that these global demographic trends will underpin outperformance from the healthcare sector in the years ahead. Within healthcare, we believe biotech should do even better.
[2] Source: Petersen-KFF Health System Tracker
International Biotechnology Trust plc Risk Considerations
Capital risk / distribution policy: As the Company intends to pay dividends regardless of its performance, a dividend may represent a return of part of the amount you invested.
Concentration risk: The Company's investments may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the Company, both up or down.
Currency risk: The Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that such investments could be lost, which would result in losses to the Company.
IBOR risk: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative reference interest rates may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may impact the investment performance of the Company.
Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.
Valuation risk: The valuation of some investments held by the Company may be performed on a less frequent basis than the valuation of the Company itself. In addition, it may be difficult to find appropriate pricing references for these investments. This difficulty may have an impact on the valuation of the Company and could lead to more volatility in the share price of the Company, meaning the price may go up and down to a greater extent.
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