As we take a closer look at the opportunities in the biotechnology industry, investors can focus on healthcare developments posed to support rapid growth through a targeted exchange traded fund investment strategy designed to capitalize on innovation in the sector.
“We believe healthcare innovation offers long-term alpha potential,” Matthew Cohen, Head of Principal ETF Specialist Team, Principal Global Investors, said in the recent webcast, How to Gain Exposure to the Next Generation of Healthcare.
Cohen argued that healthcare innovation might be a great thematic satellite investment opportunity to enhance an investor’s overall equity portfolio. Healthcare innovators can complement your core equity allocation with a high-growth satellite, blend with your small-mid cap allocation for more exposure to a disruptive sector, and focus the small-mid cap allocation to areas that are leading the way in the new economy.
Amanda Mahoski, Research Analyst, Principal Global Equities, underscored persisting demand for innovation that will keep producing results for investors over the long haul. For example, overarching themes like an aging population, growing health economy, and the fight against chronic and rare illnesses will continue to fuel demand for innovative healthcare services.
About 10,000 people per day will turn 65 through the fiscal year 2030. From the fiscal year 2018 through 2022, global healthcare spending is expected to increase at a compound annual growth rate of 5.4%, compared to a 2.1% projected global GDP. Meanwhile, the cost of care for those with chronic conditions today has increased to $1.1 trillion, or 10x more expensive than non-chronic patients. Additionally, over 7,000 rare genetic diseases have been identified with less than 5% reeving an FDA approved treatment process, which leaves a lot of room for further developments and opportunities for growth.
Small-to-mid sized companies are increasingly the source of therapeutic innovation, Mahoski said. The percentage of FDA new drug approvals sponsored by major biopharma companies is falling – 67% of new FDA drug approvals were sponsored by major biopharma back in 2013, but that has fallen to 32% by 2018.
Consequently, small- and mid-sized biotechs have increasingly become attract merger and acquisition targets. For example, big global companies spent a total of $253.9 billion in upfront transactions to acquire smaller companies with attractive new drug lines in 2019.
Jeffrey Schwarte, Portfolio Manager, Principal Global Equities, also argued that a broad fund product that holds multiple biotech names would be a better way for investors to capture positive outcomes through the FDA approval process. Not all new drugs are approved so that a wide net can help investors better capture potential breakthroughs. For example, only 63% of new drugs pass through the Phase I to II trials, 30.7% of those pass through the Phase II and III trials, 58% of those pass through the Phase III to NDA/BLA process and 85% go through NDA/BLA to approval. Overall, only 9.6% of new drugs can successfully go through Phase I to FDA approval.
“Given unpredictable, high rates of clinical trial failure, a broad-based, basket approach can reduce downside risk while potentially capturing upside alpha,” Schwarte said.
Consequently, investors can look to something like the Principal Healthcare Innovators Index ETF (Nasdaq: BTEC) to access early-stage small-capitalization healthcare companies. These are primarily biotechnology and life science, which have the potential to create cures for cancer, develop new medical technologies, or spearhead other medical advances. Additionally, the ETF provides access to specialized healthcare solutions, bringing an efficient, systematic approach to identifying and selecting smaller healthcare companies that many investors neglect.
Financial advisors who are interested in learning more about developments in the healthcare industry can watch the webcast here on demand.