by Supriya Verma
Have you ever witnessed freefall? No, I’m not talking about people falling off cliffs in movies. I’m talking about real life – the REAL world. Have you? I have, but it wasn’t a human being. It was the world’s financial markets.
On Monday Aug 24, 2015, billions of dollars were wiped off the world’s financial markets largely due to China’s worsening economic conditions. One contributing factor to the crisis is rising costs of Chinese labour with the majority of the Chinese workforce retiring and fewer millennials to replace those spots, dramatically shrinking the size of the Chinese workforce. This has led to a significant decrease in Chinese exports to foreign countries. The country’s unique “one-child-per-family” policy has also led their workforce to significantly contract in size. Shrinking workforces, rising labour costs, and consequent fewer exports have proven to be a perfect recipe for slowing down the rate of economic growth in China. Hence, China is now having to cope with transitioning from an export-based economy to a consumer-based economy – something they, and the world, are not quite accustomed to. The Asian leader has always been a major contributor to global economic growth and low global inflation for more than two decades. Now, these growth concerns have sent world markets reeling – the effects seen in almost every major financial market internationally.
So how does the biotech industry fare among this period of global economic uncertainty? Well, let’s put it into perspective. The US stock market suffered its biggest selloff in years, with the Dow Jones shedding over 1000 points in the first 4 minutes of trading – the American freefall. The S&P 500 and NASDAQ tumbled more than 10%, and billions of pounds were wiped off the FTSE 100 in London. However, the drama had began much earlier. Nineteen hours prior to the American selloff, Asia had began its own, where Japan’s Nikkei slumped over 4%, and China’s own Shanghai Composite Index crashing 8.5% – the Asian freefall. The Australian markets also ended up experiencing its worst selloff since 2007. In the history of the global economy, this was the worst international selloff since the 2008 financial crisis, wreaking havoc and mayhem around the world. Simply out, this is a perfect example of the classic “dominoes effect”. You could also consider it a “financial tsunami” originating in China, whose tidal waves engulfed all the international markets in its wake, around the world, one by one.
Over the next two weeks, the markets would volley up and down repeatedly amongst global fears of deteriorating economic growth. However, on Sept 8, 2015, markets soared back out of their respective correction zones – some even reaching record highs. Was this because of improving conditions in China? Not quite. Rather, this rally, not surprisingly, was led by the technology industry. I know some of you are thinking “Apple”, but some key movers hail from the biotechnology sector as well. After all, the tech industry doesn’t revolve around “Apple”, at least based on my definition of “tech”, which includes “biotech”.
The biotechnology sector is the perfect example of a “new industry” or a “new economy”. In other words, an industry that did not exist only until a few decades ago, yet presents as a major economic driver for many local, national, and even international economies today. As we already know, biotechnology is the use of molecular biology to solve today’s modern problems – applications ranging from agriculture to unique drug delivery systems to ground-breaking cellular therapeutics to biosensors and medical diagnostics…the list continues, and the possibilities are virtually endless. Needless to say, this is the era of what we classically call “disruption”, and biotechnology is one “disruptor” that is unquestionably meant to dominate the international world markets in the future.
Over the past three years, the S&P 500 Biotech Index has nearly tripled in value. With the usual ups and downs given the high-risk associated with the industry, the index gained 11.3% over the month of June 2015. In contrast, the NASDAQ composite was only up by 2.5% over the same time frame. Now you may be wondering what exactly has been propelling the biotech rally? Well, there are several factors, one of the most important being the US Food & Drug Administration (FDA). The world-renowned regulatory body has constantly been pushing to speed up approvals. According to Ernst & Young, the FDA approved 41 new drugs in 2014, up from 27 a year earlier. Many young biotech companies have also filed for IPOs over the last few years.
Additionally, the field of genomics, which presented many promises and insights in the early 2000s, has finally began to deliver on those promises. You might as well call this the “genomics harvest”. New drug therapies that were once known only conceptually are now becoming a reality. This in turn has led biotech firms to increase their R&D investments by approximately 20% a year. After over a decade, investors are finally being able to relish the financial fruit. Ernst & Young also states that revenues at US and European biotech firms rose 24% in 2014, while net income rose 231%.
Although drug development and biotech product development are time-consuming, the rewards are worth it. Analyzing the “temporal-revenue-risk” relationship, low-risk products requiring less time for development, and hence head to market quicker, usually generate less revenue, whereas high-risk products requiring more time for development reach markets much later, but have the potential to generate whopping amounts of revenue both to the firm and investors. This is aside from the non-monetary revenues of alleviating health problems for patients, enabling them and their families to lead healthier, happier, and dignified lives. There is no doubt that the biotech industry is integral to the health of both society and the world’s economy.
Investors recognize this, and despite global economic uncertainty, investors continue to pour cash into the sector. Although some investors find it safer to stick to the so-called “big biotech” firms that have fewer promising drugs coupled with a track record of high growth, many still do invest in smaller companies that rely on only a couple of products in the works with no clear track record, but show great scope and potential. Therefore, there is no real set “formula” for which biotech companies to invest in. In fact, there are investors that are hesitant because biotech companies rely on science, which involves long and complex approval processes, along with business models that involve “hit-or-miss” products. Additionally, there is always the feared setback of biotech companies receiving negative results in clinical trials, leading to failure of the product(s), and potential subsequent failure of the company. However, at the same time, it’s not quite wise to just sit around as spectators and watch while individual stocks and the entire biotech sector potentially doubles or even triples in value in just one year.
As a result, many investors prefer to invest in biotech ETFs and mutual funds. Although both have outperformed the market overall, biotech ETFs have proved to be stronger performers. For example, the Fidelity Select Biotechnology fund (FBIOX) has gained 27% so far for the year of 2015, which is almost triple the gains experienced by the NASDAQ composite. This story is echoed by many other biotech ETFs. Therefore, amongst market freefalls, global economic uncertainty, and dramatic swings of volatility, the biotech industry has the potential to dominate world markets and deliver on its scientific, social, and financial promises in the future, demonstrating a significant degree of immunity to some of these market effects, and proving to be a solid and unbeatable investment for tomorrow. In the meanwhile, let’s hope China can get their act together and help stabilize the world economy for those who incurred terrible losses. Looks like those investors hadn’t invested in biotech – maybe it’s time for them to give the industry a try! [This is of course aside from the temporary Hilary Clinton-Martin Shkreli drama that soon followed, sending stock markets acutely reeling again. Maybe both of them could use an MBEE from JHU!]