Page 26 - DIY Investor Magazine | Issue 40

BOUNCING BACK TO RUDE HEALTH
April 2024 26
IBT is well positioned to exploit the attractive
valuations on offer in the biotech sector...by Jo Groves
DIY Investor Magazine · Investing in cyclical sectors can make for a white-knuckle
ATTRACTIVE VALUATIONS
ride on occasions but can also reward patient investors with
significant gains over the longer-term. Indeed, investors in the
Despite its recent bounce, the sector is still trading well below biotech sector keeping the faith through its post-pandemic
long-term average valuations, as shown in the chart below. downturn have enjoyed a 25% rise in the Nasdaq Biotechnology
Index (NBI) over the last four months, which may well signal the
The average price-earnings ratio for the last two calendar years green shoots of a sustained resurgence in the sector.
was 19, compared to an average of 26 and 30 for the 2010- 2015 and 2016-2021 periods respectively. The biotech sector is At the outset, we should distinguish between sector
also trading at a lower valuation than the wider S&P 500 Index, fundamentals and investor sentiment. The sector fundamentals
despite typifying the innovative, high-growth attributes that have have remained strong, thanks to a number of secular growth
fuelled the outperformance of many of the tech companies over drivers.
the last year.
One such driver is the demographic timebomb of an ageing population, with the number of over-65s forecast to increase by 150% to hit 2 billion by 2067, according to the UN.
Add in the growing prevalence of chronic diseases and the burgeoning middle class in emerging economies and it comes as little surprise that global healthcare expenditure is set to soar over the coming decades.
The biotech sector is also at the forefront of new treatments, harnessing the power of technology in the development of ever more effective and individualised therapies, including previously untreatable diseases.
According to healthcare consultancy IQVIA, the biotech sector currently accounts for 80% of drugs in the development pipeline and large pharma companies continue to rely on smaller biotech companies to plug patent expiries in their product suite, prompting a record high in M&A.
‘THE SECTOR FUNDAMENTALS HAVE REMAINED STRONG, THANKS TO A NUMBER OF SECULAR GROWTH DRIVERS’
The S&P 500 Biotech sector is currently trading at a price- earnings ratio of 17.0 compared to 20.6 for the S&P 500 (as at 04/03/2024), yet both have similar forecast earnings growth of around 9% in 2024, according to Yardeni.
‘STILL A SUBSTANTIAL NUMBER OF BIOTECH COMPANIES WHICH ARE TRADING AT A VALUE LOWER THAN THE VALUE OF THE CASH THEY HOLD IN THE BANK’