What to choose in the biotech market?
The biotech sector will turn up with the rise in price of securities such as Gilead Sciences
Mikhail Krylov
Director of the Analytical Department of IC "Golden Hills – Capital AM"
From the portfolios of biotechnologies and healthcare, we recommend buying not low-reliability firms, but time-tested securities of companies with a total stock value of over $ 100 billion.
The drawdown of the biotechnology index on Nasdaq by 15.6% in 2.5 months, in our opinion, is provoked by the behavior of low-liquid securities, while the upward reversal will occur due to a more actively traded segment.
There has been no increase in rates in the United States, which allows us to maintain the cost of financing for biotech startups at low levels, but sooner or later lending in the United States will become more expensive.
In this situation, companies with a well-known name in the capital markets, and in particular with a high market value, will be in an advantageous position.
Individually, the positions of large firms may still be vulnerable, for example, due to the high level of competition in the industry. In recent periods, the dependence of revenue on one group of drugs with similar side effects or on the incidence of the same virus has been particularly strong.
If you diversify investments, it minimizes the risk of monetary losses in case of local negative events, as it allows you to cover, firstly, the main competitors, secondly, potential mergers and acquisitions by large concerns, and thirdly, the most common diseases. The peculiarity of biotech companies is that they try to treat a variety of diseases with one substance, so it is easier to cover the entire market than in the industrial sector.
Of the individual companies, we can mention, for example, Gilead Sciences (Nasdaq: GILD) with a growth potential from $ 106.5 to $ 125. Net profit margin reaches 51.7%, cash – $ 8.6 billion. An impressive 2.2-fold increase in revenue in the last reporting year and a 5.2-fold increase in the value of shares over 3 years and 9 months are due to investments in the development of medicines for diseases previously considered fatal, for example, in Harvoni and Sovaldi for hepatitis C.
But investing in individual securities is much riskier than investing in a portfolio. For example, what should I do if a decrease in the incidence of hepatitis has a negative impact on GILD's financial performance? Only buying shares of companies working in other directions will help. In particular, Amgen (AMGN), which has made significant progress in the treatment of melanoma, or Neurocrine Biosciences (NBIX), which has made significant progress in the treatment of anxiety, depression, Alzheimer's, insomnia, stroke, brain cancer, obesity and diabetes.
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02.10.2015