Our thinking Quick reads Investing in biotech
Public markets
March 2018
4 min read

Investing in biotech

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The word “biotech” can easily deter investors. It conjures memories of half-understood science classes, endless clinical trials, and indecipherable formulae. But this clouds the reality that this is a market sector in many ways much like any other, a theme we explore throughout our new sector report on biotech.

This year the sector is well-placed to take advantage of recent rule changes announced as a result of the Government’s Patient Capital Review[1].

The increase in tax-advantaged fundraising limits for knowledge-intensive companies will benefit almost all early-stage biotech companies. It is also possible that the curtailing of tax-advantaged products offering “capital preservation” and the resultant shift up the risk spectrum may increase the focus on higher-risk growth sectors such as biotech.

Some of the main things to look out for when considering investing in biotech are:

Biotech does not mean the same thing to everyone

What is biotech? The word biotech is relevant to many areas including agriculture, healthcare, the environment and industry. In the tax-advantaged space, the term predominantly refers to healthcare, with terms like medtech, life sciences, healthtech, and therapeutics used by managers either interchangeably with biotech, or as discrete subsectors used to explain the vast array of investment opportunities available in this “biotech” space. However it is important for any investment to be evaluated on its own merits beyond the label assigned to it as the best companies may be blends of subsectors or have carved out their own niche.

Biotech is not ‘Big Pharma’

Investors may be deterred from looking at biotech by images of large, established pharmaceutical companies spending billions developing a product only for it to fail, or by headlines accusing drug companies of huge price hikes. Such attention-grabbing news stories are not indicative of the vast majority of the careful, innovative work being undertaken by companies across the biotech sector. For every high-profile media case there are thousands of smaller UK companies delivering antibodies to research labs, creating healthtech apps for consumers, or new medical devices and implants for hospitals. Headlines and profits do not always correlate.

The sector exhibits positive trends

The Biotech sector as a whole benefits from some promising trends: our report argues that healthcare spending is likely to continue to grow over the next 20 years. The NHS is a huge potential customer to sell products to, and life-changing technologies can often (unlike in other sectors) create their own demand, as loud public lobbies champion their wider use. Furthermore, at the top end, big pharmaceutical companies are increasingly cash rich and patent hungry – good news for finding a buyer when the eventual time for an exit comes. The two above factors, combined with longer life expectancy and the rapid economic expansion in countries like India and China, mean that demand for biotech projects will remain strong.

Generalist vs specialist is important

Tax-advantaged products can be logically compartmentalised into generalist and specialist offerings, each of which have trade-offs that must be considered. For example, a specialist biotech investment team should be far more experienced with investments of this nature and will have the contacts and skills necessary to help bring a product to market. Countering this however, is the sector-specific concentration risk in a specialist fund that a generalist product may minimise despite not necessarily having as extensive sector expertise. Furthermore, investors do not need several advanced university degrees to understand these investments. Looking beyond the science, these investments function similarly to any other business-to-business or business-to-consumer offering, or employ technology easily within their intellectual grasp.

In our latest sector report, we provide an overview of the biotech sector considering its key economic drivers and its misconceptions. Then the report turns to the biotech industry from a tax-advantaged viewpoint, discussing how the investee companies are classified and what investors in this sector should consider when making an investment in this sector.

[1] Financing Growth in Innovative Firms: Consultation Response, HM Treasury, November 2017

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