Should I invest in biotech? – Fidelity International

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Home    Investing ideas    Investing ideas
Published 10 March 2022
Fidelity International

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
AMID the wreckage of 2020’s Covid-induced market selloffs, investors found refuge in a handful of sectors. These were the ‘pandemic winners’. Big names included technology companies like Apple and Microsoft, but pharmaceutical and biotech companies also profited from the widespread focus on vaccine development.
Since sky-rocketing in 2020, however, shares in biotech companies have since come crashing back down to earth. That means now could be an interesting time to explore the sector.  
Biotech companies differ from pharmaceuticals in that they focus on the innovative side of healthcare. They’re looking to develop tomorrow’s drugs to confront unmet medical needs.
The companies tend to be small and loss-making, while the vast majority of drugs they develop never make it to market. However, the possibility of producing just one successful drug means there’s potential for high reward too. 
This makes biotech a different proposition from pharma companies, which focus more on using their marketing power to see a drug through its later stages and then commercialise it.
The nature of biotech companies and the complexities of the sector mean it’s one suited to active, as opposed to passive, management. Managers who understand the sector’s idiosyncrasies and technology at the heart of its growth are better positioned to handle its volatility.
One of those is Ailsa Craig, co-manager of the International Biotechnology Trust. I recently spoke with Ailsa to hear her views on the sector:
Where many investors were left panicking at 2021’s falls, Craig kept a level head. She explains:
“The sector does go in and out of favour. We’ve seen it before a number of times over the past two decades.”
She believes that’s principally because “investors don’t fully understand the biotechnology companies and therefore can’t properly value them.”
That’s certainly what we saw in 2020. So-called ‘tourist’ investors, spurred by vocal proponents of the sector like Cathie Wood (who manages the Ark Innovation Fund), explored biotech for the first time in 2020 without necessarily understanding the businesses they were buying.
Perhaps inevitably, as the market environment changed and investors looked elsewhere, those inflated valuations soon came crashing back down again.
Despite that volatility, the “fundamentals of the sector are still intact.” She says: “there’s still huge need for new drugs, and there’s still amazing innovation coming from the companies themselves.”  
The rollercoaster in valuations is now at the favourable end for an active manager like Craig. Right now, she’s looking “to invest in the higher risk, smaller to mid-cap companies because of the recent selloffs, where we see big discounts in prices.”
For investors who are interested in this sector, the pandemic perhaps provided a lesson. These companies certainly can be volatile, but it’s all part of the course with as niche an industry as this.
If you want to learn more about biotech, you can listen to this podcast I recently recorded with Ed Monk.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. The International Biotechnology Trust invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. The shares in the International Biotechnology Trust are listed on the London Stock Exchange and their price is affected by supply and demand. This investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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