Biotech Growth (BIOG) manager Sven Borho believes the political pressure being placed on biotechnology stocks in the US is throwing up a host of buying opportunities in the sector.
After a breakneck three-year rally, biotechnology stocks have been under a cloud ever since then-US presidential candidate Hillary Clinton fired off a tweet hitting out at ‘price gouging’ in the sector in September 2015.
Rhetoric on drug pricing was a strong feature of the US presidential campaign, and the pressure on the sector did not let up with the shock election of Donald Trump in November.
Trump sparked a fresh slide in biotechnology stocks in January, when he claimed that pharmaceutical companies were ‘getting away with murder’ in the pricing of their products.
Speaking at Biotech Growth’s annual general meeting this week, Borho, a partner at the trust’s managers OrbiMed, argued the political pressure facing the sector presented a buying opportunity, pointing to the impact of past political interventions.
He drew on the example of 1993, when then-first lady Hillary Clinton’s healthcare reform prompted a slide in the sector, which later rallied strongly following the failure to gain support for the reforms.
‘I hope history repeats itself,’ said Borho. ‘The best buying opportunities are always when politicians are involved in our sector.’
‘There’s nothing in there about drug price controls or the government negotiating drug prices directly,’ he said. ‘If you have innovation, you will still be free to charge the prices the market will bear.’
Borho said fears over political meddling had created a ‘tremendous opportunity’, with big ‘dislocations’ in biotech valuations and companies poised to unleash cash on mergers and acquisitions once uncertainties were lifted.
He pointed to large-cap biotech stocks as an example. Around two-thirds of the trust is held in large-cap stocks, with the managers having seized on a rare discount in valuations versus the wider market that emerged in mid-2015.
Borho believed that situation would quickly reverse itself, but the sector has persisted in trailing the market. ‘Boy, were we wrong,’ said Borho.
That has seen Biotech Growth lag rivals over one year and three, although still edge ahead of the index, with returns of 20.8% and 65.4% respectively.
And Borho believes cheap valuations for large cap biotech growing at three times the pace of the wider market can’t persist for much longer. ‘This is a major dislocation –it’s irrational with the prospects of these companies,’ he said.
‘Even though it was the wrong call last year, we feel really strongly being overweight these cheap large cap biotech companies is the right call,’ he said.
And if valuations do not recover, Borho believes takeovers could force the issue. ‘If the market doesn’t take care of the dislocation, mergers and acquisitions will,’ he said.
Borho argued that political uncertainty, not only over drug pricing but also the outcome of Trump’s plans to reform tax, had forced companies to sit on their hands.
‘All of this cash is sitting on the sidelines and they haven’t put it to work,’ he said. ‘As soon as this clarifies over the coming weeks, mergers and acquisitions are going to be a major driver in our sector.’