Biotech Has Suffered A Hard Fall. You Might Want To Consider Buying Now.

Today's market has been so thoroughly scrutinized by experts that there are few places where an active manager may locate undervalued equities to outperform an index fund. One of those fields is biotech, and this is a terrific time to invest in it.

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Remember that the majority of biotech businesses' potential isn't represented by their existing profitability or values. The question is not whether or not a prospective blockbuster drug will pass the tests; rather, it is whether or not the Food and Drug Administration will approve the drug's sale. Quantitative screens looking for companies with low valuations or the typical Wall Street analyst skilled in reading income statements and balance sheets are unable to quickly identify such.

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Indicating the value of specialized knowledge in the industry, Andy Acker, manager of the top-performing Janus Henderson Global Life SciencesJAGLX +0.70% fund (ticker: JAGLX), says, "We have 10 senior investment professionals [on our healthcare team] with a combined experience of over 140 years, including three Ph.Ds and an M.D. who are here to assist us in effectively distinguishing between medications with a high likelihood of success and those with a high likelihood of failure.

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That level of knowledge is essential today. After two harsh years for the industry, the widely diversified SPDR S&P BiotechXBI +0.30% exchange-traded fund (XBI) is down more than 50% from its February 2021 peak of $174 per share to $83 per share. Biotech fell in 2021 as a result of an excess of shady biotech initial public offerings that failed after the Covid scandal drove up all healthcare stocks in 2020. But as interest rates climbed in 2022, the situation only got worse. When developing new drugs, many biotech businesses must take out loans to fund their ongoing research operations.

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And now. If you can locate the proper stocks, values are favorable, rates may be about to peak, and there are plenty of possibilities.

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According to Acker, last year was a year of promising results from pharma clinical trials, and this year may see the introduction of new products. "The FDA is debating whether to approve 75 new drugs. In light of the fact that the previous record was set by 59 pharmaceuticals in 2018, this could be the year with the highest number of new product approvals ever.

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"[Muscular dystrophy] is a big unmet medical need that impacts children," says Acker, citing Sarepta Therapeutics (SRPT), which is developing the first gene-therapy treatment for the condition. "Patients often end up in a wheelchair in their teens, and typically will die in their 20s." Shares of the company is up 59% in the previous 12 months, while SPDR S&P Biotech ETF is down 8%.

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Acker cautions that "90% of the medications that begin human clinical development ultimately fail" in the biotech industry. Yet, he is cautious to lay the blame at the feet of the entire industry.

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AlphaCentric LifeSci HealthcareLYFIX -1.21% (LYFIX) was able to lose only 0.8% in 2022, despite the fact that the market as a whole crashed. This achievement was made possible thanks to skilled management and the broad range in returns across biotech stocks. The fund is up 13% in 2023. Management Mark Charest is a co-inventor on eight medicinal patents and holds a degree in chemical biology from Harvard University. The biotech/pharmaceutical consultancy group LifeSci Partners, which also owns his advisory firm LifeSci Fund Management, is a business partner of LifeSci Partners.

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Understanding the types of biotech startups that major pharmaceutical corporations are looking to purchase is a major factor in Charest's performance. Although he doesn't make investments primarily with mergers and acquisitions in mind, he claims that his company has controlled 16 of the last 30 biotech M&A deals with takeover values larger than $250 million.

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BioCryst Pharmaceuticals (BCRX), a business that already has a medication licensed for the ailment known as hereditary angioedema, which is characterized by extreme swelling, is one that Charest believes has acquisition potential. This year, [Biocryst] will generate more than a quarter of a billion dollars in revenue, according to Charest. He believes that the company's existing commercial offering plus the fact that it is still selling at a discount following last year's selloff may result in an acquisition.

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The performance of the best small biotech companies, in the opinion of other healthcare executives, will continue to be driven by acquisitions as many blockbuster medications, including the best-selling anti-inflammatory drug Humira from AbbVie (ABBV) and the cancer drug Keytruda from Merck (MRK), have patents that are about to expire. Kyle Rasbach, a senior analyst for the Eventide Healthcare & Life SciencesETAHX +0.47% fund, claims that "we have enormous patent-cliffs exposure across the pharma business" (ETAHX). "Thus, there is a tremendous necessity to gain innovation."

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Eventide primarily targets startups in the biotech industry. Yet, like Acker, the majority of active managers include hospitals, insurers, and manufacturers of medical equipment in their portfolios.

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Both strategies have benefits and shortcomings. healthcare funds with a wide range of investments, like Janus JHG +0.11%'T. Throughout the past two years of volatility, Rowe Price Health Sciences (PRHSX) and BlackRock Health Sciences Opportunities (SHSAX) fared better than pure plays like Fidelity Select Biotechnology (FBIOX), Eventide, and Franklin Biotechnology Discovery (FBDIX).

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Managing director of the $15.4 billion T. Although more conventional pharma, which accounts for 16% of Rowe Price Health Sciences' portfolio, intersects with biotech to a degree, 30% of his holdings are in the latter. He believes that the valuations of the biotech industry are "reasonable" right now and anticipates an increase in M&A activity, but he adds that "high-profile clinical trials and big commercial successes to lead to a real bull market" are necessary. When that occurs, the small-fry biotech funds will triumph once more.