THIS IS AN ADVERTISING FEATURE

The result of the U.S. election has reduced some of the uncertainty around the outlook for the biotech sector. Leading up to the election, investors felt jittery about the potential impact of the Democrats making a clean sweep - i.e. winning the Presidency, the House and the Senate. However, the odds are currently in favour of the Senate remaining Republican, reducing the likelihood of major healthcare reform.

Healthcare investors do not have much to fear from a Biden/ Harris administration. Biden is a centrist candidate and is in favour of building upon the existing Affordable Care Act (Obamacare), rather than introducing a universal healthcare system or ‘Medicare for All’, which is viewed unfavourably by the healthcare and biotech sectors.

One of the changes proposed by Biden is a ‘public option’. This would provide cover for anyone without health insurance. Another change suggested by Biden is to decrease the age that individuals qualify for Medicare from 65 to 60. Both proposed changes would increase the number of people who have access to healthcare by increasing the government’s healthcare spending budget.

An increase in the number of people who can access healthcare insurance is expected to have a beneficial impact on biotech companies as there would be a larger number of people eligible for their drugs. However, this expected advantage needs to be balanced with the potential negative impact of other potential changes such as increased U.S. corporate tax or drug price controls.

Healthcare reform low on the agenda

The biotech industry has been instrumental in the battle against Covid-19, with innovation at the heart of its solution. Once Covid-19 was identified, the virus’ genome was sequenced within a week. With the help of biotech companies, Covid-19 antibody tests were quickly manufactured and deployed and a number of vaccine candidates are already in development and have announced positive results. This has created a positive sentiment towards the sector and means that controlling drug prices is less likely to be a priority for Government.

On the evening of the election, healthcare stocks rose sharply in response to the likely continued political gridlock. Political gridlock means the current system continues without significant changes. It is easy for investors to conclude that this would leave the biotech industry out of the firing line.

Navigating uncertainty

2020 has been a difficult year for global equity markets. The uncertainty caused by Covid-19, compounded by the uncertainty caused by the U.S election, has made the positioning of an investment portfolio challenging.

In response to the initial stages of Covid-19, the Investment Managers at International Biotechnology Trust decided to reduce the risk in its portfolio, by reducing the Trust’s exposure to volatile names and reducing gearing.

At the height of the pandemic lockdowns in March, during the market sell-off, the Trust re-invested some of its cash in profitable and revenue generating biotechnology companies with visible earnings streams.

Companies with a revenue pipeline tend to be defensive and relatively immune from economic downturns. Medical needs, and a demand for drugs, continue regardless of the state of the economy. Any decrease in the share price of these companies is viewed as being the result of overselling and these companies were expected to recover first.

It wasn’t just biotech stocks which were hit by the sharp, short-lived market downturn - so too was the Trust. As a result, the Trust bought back its shares to reduce the gap between the share price and its net asset value per share.

With the outcome of the U.S. election reducing some of the uncertainty for the sector, biotech investors will be able to focus less on short-term tactics and more on long-term trends.

Rapid advance

The industry’s reaction to the Covid-19 crisis highlights the healthcare revolution. Developing vaccines over such a short timespan would have been impossible a decade ago. But rapid technological advances have made it possible for scientists to respond quickly to a global healthcare crisis.

These technological advances will not just allow us to bring Covid-19 under control, but are also expected to find better ways to treat other unmet medical needs, e.g. cancer.

As 2020 draws to a close, the uncertainty which has dragged most of the year is starting to dissipate. Drug producing companies are unlikely to see material changes to pricing because of the U.S. political gridlock emerging from the election. With several vaccine candidates showing promising results, investors can see an end to the Covid-19 crisis and focus once again on the solid long-term drivers of this sector.

Important Information and Risk

The following article is written by the Investment management team of International Biotechnology Trust plc.

The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The value of your investment and any income from it may go down as well as up and is not guaranteed and investors may not get back the full amount invested. Past performance is not a guide to future performance and exchange rate changes may cause the value of overseas investments to rise or fall.

Investors should bear in mind that investment in biotechnology shares can be subject to risks not normally associated with more developed markets or stocks. Investing in the biotechnology sector carries some particular risks and investment in International Biotechnology Trust plc (“the Company”) should be regarded both as long term and as carrying a high level of financial risk.

In addition, there is no guarantee that the market price of shares in investment trusts will fully reflect their underlying NAV and it is not uncommon for the market price of such shares to trade at a substantial discount to their NAV.

The Company’s portfolio companies are subject to change and should not be construed as research or investment advice. Similarly, any reference to a specific company does not constitute a recommendation to buy, sell, hold or subscribe in any company or its securities.

This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and SV Health Managers and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly.

The information and opinions expressed within this article are subject to change without notice. This information has been issued and approved by SV Health Managers LLP and does not in any way constitute investment advice.

Product details, including a Key Information Document, and the possible effect of charges on an investment, are available on request.

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account. AJBell logo

Issue Date: 21 Dec 2020