Up until July 2015 the biotech sector had enjoyed a multi-year bull market, but many of these stocks have fallen back sharply in the last few months with the NASDAQ Biotechnology Index down about 31% from its peak.
There are a handful of specialist funds operating in this area and they have all been badly affected by the sell-off, although there are signs that things could be starting to stabilise. A good example is Polar Capital Biotechnology, which has a decent record despite the recent weakness.
The $58.4m Polar Capital fund was launched in November 2013 and rose by more than 120% by the time the sector peaked last July. It has since given back around a third of those gains yet is still well ahead of its NASDAQ Biotechnology benchmark.
David Pinniger, the lead manager, is optimistic about the outlook and thinks that investor sentiment could improve due to the prospect of further M&A activity and all the medical conferences scheduled for the second quarter that will raise the profile of the various new drugs that are under development.
Many of the larger pharmaceutical companies are desperate for new growth opportunities and willing to pay big money for promising new treatments. This can be extremely rewarding for investors with exposure to the right biotech businesses as they are often snapped up at large premiums to their market prices.
Pinniger and his team of 6 specialist analysts have put together a concentrated portfolio of 40 holdings with the top 10 accounting for 57.5% of the assets. These include the likes of Celgene, Gilead Sciences, Biogen and Actelion.
Almost 80% of the fund is invested in biotech businesses with most of the rest in pharmaceuticals. Two-thirds of the portfolio is held in large cap stocks worth more than $5bn, with 11.5% in the mid-caps and the balance in small caps, which are defined as companies with a valuation of less than $1bn.
Recent commentary from the management teams of some of the larger pharmaceutical and biotech companies have led specialist healthcare investors to expect further M&A activity in the near term. This should provide a major boost to share prices in the sector, as the recent weakness has left the valuations relative to the broader market back at levels last seen before the 2011 to 2015 bull run.
Pinniger thinks that a powerful technology and product cycle is underway that is supplying new medical solutions to the demands of healthcare systems that are struggling to keep up with the problems associated with an ageing population. If he is right, this sort of specialist fund would be well-placed to deliver strong returns, although it would only be suitable for adventurous long-term investors who are willing to accept the high volatility.