Biotechnology: a growth opportunity in a value disguise

Biotechnology: a growth opportunity in a value disguise

Growth and value investing

The investment industry has its own peculiar language, definitions of, and buzzwords for things. We have sympathy for clients and their advisers who are routinely expected to understand words or phrases that in ‘investment-speak’ almost inevitably mean something altogether different from the more straightforward language they are used to.

A good example of this is the somewhat confusing distinction between ‘growth’ and ‘value’. Fund managers talk about why they prefer growth or value stocks, risk-managers consider whether there is a bias towards one or the other in portfolios and academic researchers kicked the whole business off by using statistical techniques in an attempt to determine which of the two perform best over the long-term. If you had listened to the academics over most of the last 15 years, you’d be considerably less wealthy. Their definition of value has meaningfully underperformed.

The stocks, better thought of as actual businesses, which form the foundation of the portfolios we manage have a clearly identifiable tailwind behind then that should allow them to grow their earnings over the medium to long term. For Whitman there has to be some reason to believe that the business or industry in question is going to actually expand.

In this regard we are growth investors, and it precisely because they possess this characteristic that we consider the business or industry to be valuable. Whether they are expensive or cheap is a separate question forming part of our wider assessment of ‘value’. There is no easily discernible fault-line running between the two concepts-both are important.

Innovation is critical for big pharma

Most of the time these stocks properly reflect the well understood investment case but occasionally investors are presented with an investment opportunity that has a well-understood growth tail wind behind it, but which investors are no longer prepared to pay-up for. We think the biotechnology industry ticks both boxes. The fact is that everyone is living longer, wants a higher quality of later life and is generally prepared to pay for it, or at least expects the state to pay for it. 

Biotechnology is a specialist area that requires serious expertise and whilst ordinarily we would buy the actual stocks in biotech companies, this opportunity is better accessed through a third-party manager. Furthermore, many of the most exciting opportunities in this area are not listed on the stock exchange and the best way to have exposure is through an investment trust. Over the last few months, we have met several experts in the field who have made the investment case to us very clearly.

The global-multinational pharmaceutical companies are, as a group, facing a patent cliff where their blockbuster therapies of yesteryear are going to be subject to competition by generics. Consequently, they will need to buy replacement revenue from somewhere and biotechnology firms are a remarkable source of innovation and growth.

We have seen several transformative deals already in 2023 that have been lost in the noise about interest rates, recession, Silicon Valley Bank etc. etc. These are valuable businesses that have fallen significantly since Feb 2021. In fact, as a group they only performed worse in the aftermath of the tech bubble, a casualty of which they are oft forgotten.

Should investors find themselves in a world of lower returns then opportunities like this should not be missed.

Latest News & Insights
The Relentless Rise of Passive Investing
The relentless rise of passive investing
Several prominent markets commentators, including financial journalist John Authers and hedge fund manager David Einhorn ...
Read More
Our focus on high quality companies with leading franchises
Our focus on high quality companies with leading franchises
We believe it is important to have a strict investment process and invest with a ...
Read More
Whitman Insights 2024 Nuclear
Can nuclear help with the energy transition?
The nuclear age might not be behind us after all The 2024 Academy Awards ceremony ...
Read More
Scroll to Top