“Wisdom is one thing. It is to know the thought by which all things are steered through all things.”
The Greek philosopher Heraclitus wrote down these words circa 460 BC, or roughly 2,500 years ago. His mystic and cryptic phrases tantalized philosophers and thinkers for centuries and still have sway over us today. Like many philosophers, Heraclitus isn’t writing cryptically to fool and entertain us, but to help us understand that wisdom might involve changing how we think of things.
When we think about new ideas using old assumptions, this can often leads to us becoming unable to recognize or comprehend enormous changes that may be occurring in our own lifetime.
So, taking a step back to clear the air from this heavy thinking, what does this have to do with financial planning and investments?
The world today is different from the world that our parents grew up with, and often in ways that would have been inconceivable to previous generations. In Heraclitus’ day, there was no such thing as the stock market, and while there were investments and banks by the Renaissance, even then things were different. Investment was based almost exclusively on commodities (gold, silver, etc.) and the movement of goods.
COVID19 has brought up some interesting questions about this topic. The future of work is the topic of every other article, it seems. One of the main questions is office space. Will there be more of it or less of it? Certainly, if human behavior is going to change as a result of this pandemic, there will have to be less of it because more people will be working from home.
What about the healthcare industry itself? What about hospitals, nursing homes and other caretaking institutions? How many people understood why masks had to be purchased from China or even considered the fact that the government needed to keep masks and supplies on reserve? Who’s responsible if they weren’t replenished quickly enough?
One great example of how we think about things differently is the biotechnology sector. Disease and health have been at the top of concerns for a while now, and that has certainly brought attention to how the United States and the other countries of the world invest in future healthcare. Very few can agree on where to focus our resources, and that’s where the market comes in.
Wherever there are niches, a private market will try to find a way to solve that problem. That’s what markets do: provide. Without delving too deeply into the argument of drug costs, the fact of the matter is that private companies are constantly seeking investment in biotech because there are too many diseases and afflictions to name and each one requires a unique solution. What this means is that there is a tremendous amount of companies out there all trying to discover ways to heal those people.
The biotech sector, more than any other sector, is uniquely poised because new companies are constantly sprouting up hoping to offer solutions to problems both new and old. Cancer usually tops the list because of the widespread attention it has drawn and the many different types of cancers there are, but as a sector, biotechnology is so widespread that you can end up learning about diseases and solutions to them that affect millions of lives but that you didn’t know existed beforehand. Biotechnology companies work on providing solutions, both medicinal and technological, for everything from discomforting conditions to life-threatening diseases , and the field is so widespread that it has grown rapidly over the past few years.
The NASDAQ Biotechnology Index (NBI) was created in 1993 to catalogue and track companies that developed cures using biotechnology, or the use of organic material to create medicine. Since then, it has expanded not only its definition (to include what amounts to any type of therapy or product that could be considered medical) but also the number of stocks in the index. It grew from 72 stocks in 2002 to 223 securities today. Its market capitalization is roughly $993 billion, almost a trillion dollars.
The biotech space is fascinating because it challenges our thinking of how businesses build. We imagine that most businesses build up slowly, taking off at some point when enough people have heard about them or clients start lining up, and then there’s this sweet rising tide that carries them to the top of the S&P 500 and they are household names. I mean, most of the top earners now are businesses like Amazon or Microsoft that we have all, at some point, purchased from, directly or indirectly.
The NBI is different because not all of us are going to be using (or to be quite honest, understanding) these medicines or technologies. There’s a hope that in the creation of these medicines, none of us will even have to give a second’s thought to the worry that we or our children will be afflicted by certain maladies.
This makes the sector opportunistic but challenging. Investing in the NBI can be pretty straightforward, but what if you wanted to do more? What if you wanted to dig deep into a company and invest in it? How do you go about understanding a company in the biotech sector?
Their success is going to be almost completely reliant on their medicine and even the best doctors in the world can rarely predict when something is going to work. After all, humans are pretty new to science and sometimes our understanding is wrong or our methods flawed. This means it’s hard to be able to look at a company’s balance sheet or earnings and predict if they’re going to be successful. Sure, millions of people need this drug, but can the company make it affordable and efficient? Will it work? Will it be safe? Will it pass the rigor of Food and Drug Administration (FDA) trials? Does the company have the money to last through a three-phase trial that could take multiple years?
Part of the reason a biotech company even goes public (thereby issuing stock in the market) when they are so small is to gain capital, or funding, to help them continue their research and testing. Investing in them is part of providing that necessary capital to help them develop these technologies, but no investor wants to lose money.
The future of the biotech sector is going to be difficult to assess for investors. Emergent has been developing processes for investing in biotechnology because we love the story. We love the thought that these companies are asking for capital to help them with their research and making money while doing it. It’s a difficult venture, which is why the risk-averse temptation might be to stay far away from it.
Emergent, however, does not back down from a challenge.