Another peculiar term saw a similar jump: Biosimilar.

Frequency of the word “Biosimilar” in conference calls

(Survey of 2,000 Firms)

frequency of word, biosimilar, conference calls, trend

A biosimilar is a close copy of a complex drug. In other words, drug companies can produce “biosimilars” that have similar effects to other drugs without needing to replicate the original drug’s closely-guarded manufacturing process. Why is this significant? Well, if you consider the many blockbuster drugs that are set to lose their patent protections over the next few years, revenue generation from biosimilars could be quite substantial.

As an investor, though, the obvious question regarding these topics is: What are the implications for the company’s stock returns?

Well, the recent performance of companies who mention the topic can provide a clue. Let’s take a look at how, as a group, firms that talk a lot about certain biotech/pharma have done:

How some medical and biotech terms are associated with positive returns

(Survey of Q1 2015 Data for 2,000 Firms)

TopicWeighted Average Return of Firms That Discuss Topic on Recent Conference Call
malignancy 7.10%
arthritis4.90%
antibody4.50%
protease4.50%
hormone4.00%
neurology3.40%

Returns as of July 15, 2015. Source is BlackRock Scientific Active Equities Group Research as of July 15, 2015. For illustrative purposes only.  Past performance does not guarantee future results.

We can also see how other medical and biotech terms are associated with weaker returns:

How some medical and biotech terms are associated with weaker returns (Survey of Q1 2015 Data for 2,000 Firms)

TopicWeighted Average Return of Firms That Discuss Topic on Recent Conference Call
pathogen-4.30%
cardiology-4.40%
lesion-4.50%
enzyme-4.80%
dermatology-6.40%
carcinoma-8.30%
genome-8.40%

Returns as of July 15, 2015. Source is BlackRock Scientific Active Equities Group Research as of July 15, 2015. For illustrative purposes only.  Past performance does not guarantee future results.

How we apply our findings

After scouring more than 2,000 conference calls every quarter, we can determine which topics are associated with positive or negative returns, implying sentiment toward them as a positive or a negative. We can then see which firms are exposed to these positive or negative trends based on whether or not management mentioned them on the call and update these insights daily. The advantage is being able to find all firms that have exposure to a topic, even if that exposure has been overlooked by the market.  There are always a few firms which come first to mind for certain topics, but investors have to dig a bit deeper if they want to uncover opportunity.

The prevalence of topics or themes can be extremely important for stock returns. Consider the internet boom and bust, the rise of mobile computing, the financial crisis and oil prices; all have, at one time or another, had massive impact on stock prices. Being able to adapt to new topics as they emerge and identify the firms that could benefit or lose out is an essential part of investing.
This is a guest post from Paul Ebner and The Scientific Active Equities Team at BlackRock.