“Forgive me my nonsense, as I also forgive the nonsense of those that think they talk sense” – Robert Frost.
Robert Frost’s genius is always appreciated at Emergent Financial Services, and the reasons I decided to use the quotation above for today’s blog post about the Biotechnology sector are 1) because it’s great, I mean, why not use it? and 2) because while everyone is scrambling around to dig up that great “election pick” or trying to guess who will end up on top of the legislative or coronavirus scramble, there are still some areas of investment that make sense no matter what. One of them, we believe, is the biotechnology sector.
While biotechnology originally designated a science using organic material for industrial or other purposes, it has broadly come to describe the sector of the economy consisting of biotechnology and pharmaceutical companies. Most of these companies, as we’ve covered before, focus on life-saving medication and technologies. One of the most essential and overlooked aspect of the whole COVID19 pandemic is that there are more diseases out there other than the pandemic and the flu. People, as sad as it is, still get sick. They get cancer, they get Crohns, they break their legs and need surgery. There are blind and deaf and other handicaps that still persist in the modern world and a modern global capitalist system is still fighting to build a market that focuses on helping those souls as best as they can.
As far as an investment goes, the Nasdaq Biotechnology Index (NBI), since its inception, still outperforms the S&P500 Index and the Health Care Sector Index (IXV), which tracks healthcare services but also includes insurers and retail pharmacies.
The NBI was launched for the first time in 1993, a modified market-cap weighted index, that rebalances quarterly and is reconstituted every December (meaning big changes are coming up and worth investigating. You can rest assured your Emergent Financial Services team will be on top of that!). The NBI’s story of growth is also quite interesting. In 2002, they held around 72 securities. That number today is roughly 223. It also outlines how much more interest there is today in building companies that solve these medical puzzles.
As far as the diversity crowd goes, this next fact should also be a pleaser: the NBI only has a 0.70 correlation with the S&P 500 index. What does that mean in layman’s terms? It means that the NBI doesn’t exactly follow the S&P 500 index up and down, but often does its own thing. Many biotechnology companies are going to sink or swim without relying on S&P 500 earnings reports or investor sentiment following ‘the market.’ After all, why would they?
If the FDA approves a drug for use in treating a type of cancer that was previously much more difficult to treat, it doesn’t matter if the economy or market is slumping or booming, the company will likely find success in the subsequent years from having discovered and being able to develop the drug/therapy.
And before we lose sight of ourselves by just focusing on the money, as they say, what is the purpose of a market in general? Why do we even have a stock market? Econ 101 just tells us that it’s a place where capital-excess meets capital-deficiency in a mutually beneficial agreement. So where better to put your capital than in an area of the economy that focuses on helping others? Certainly, that sounds like a win-win scenario.
This is where the catch comes in.
There are challenges to investing in biotech. How do you know which company will have their drugs approved by the FDA? How does the average investor know what will work and what won’t? It’s even more difficult a question than examining the business model of businesses like Costco or Amazon who have clear directions and strategies that can be evaluated. After all, businessmen can understand business.
Many have no idea when it comes to medicine. Just listening to close friends who are in the field can sometimes make you dizzy. The amount of effort and knowledge it takes to be in the healthcare and biology sector can be overwhelming and unless you want to take the time to specialize in the industry, you may feel lost when examining the biotech sector. So, what to do?
There is an answer to the question that we at Emergent are constantly monitoring.
The answer is…
Well, maybe you should reach out and find out! After all, a chef never reveals his secret ingredient…