Biotech stocks occupy the fastest-growing sector within the medical industry. These businesses use novel methods of developing new treatments for vast array of diseases that conventional pharmaceuticals aren’t capable of helping.
In fact, some scientists have described biotech as the future of medicine. And consequently, analyst forecasts predict the biotech sector alone will grow by an annualised rate of 15.8% until 2028, reaching $2.4trn! That’s more than three times bigger than the current $752m market size.
Needless to say, this presents a massive growth opportunity for those willing to invest in biotech stocks. But this growth doesn’t come without its risks. So, let’s explore exactly how these businesses work and the threats a biotech investor needs to know about.
What are biotech stocks?
Biotech stocks are a small but rapidly expanding segment of the healthcare industry. These businesses operate similarly to pharmaceutical companies. They both research new treatments and medicines for diseases, run clinical trials to prove efficacy and safety, and then eventually bring their product to market after regulatory approval.
However, the key differential in biotechnology is the approach to developing new treatments. Traditional pharmaceuticals use chemicals as the basis for new drugs, whereas biotech uses living organisms such as bacteria and enzymes. As crazy as that sounds, it’s opening many new avenues and solutions for treating genetic diseases and developing highly effective vaccines.
The development pipeline for biotech stocks
The drug development pipeline for biotech stocks has five steps:
Scientists identify a potential drug candidate for treating a specific disease. Typically, firms prioritise treatments with ample market opportunities and little competition on the market or in development.
2. Preclinical trials
Once a candidate is selected, non-human lab testing begins. This can be done using in vitro (in test tubes) and/or in vivo (in animals such as mice) testing.
3. Clinical trials
If preclinical trials show encouraging results, human trials begin with qualifying patients recruited from hospitals and other medical institutions. This is the longest part of the process and where most drugs fail.
- Phase 1 – Initial small-scale study where, on average, 60 closely-monitored patients receive different doses. The goal is to determine the highest effective dosage that does not cause severe side effects.
- Phase 2 – Assuming Phase 1 is successful, Phase 2 expands the study to around 120 patients. The goal is to uncover evidence of the drug candidate actually working while simultaneously isolating the optimal dose.
- Phase 3 – This is the longest part of the clinical trial process and can take years to complete. The goal is to prove the effectiveness of the treatment compared to existing drugs. Studies are expanded to include an average of 600 patients. However, patient numbers can venture into the thousands depending on the drug. Phase 3 trials are most commonly run as randomised, double-blind studies. Some patients receive an existing drug and/or a placebo, while other patients receive the new treatment being tested.
4. Regulatory approval
If Phase 3 trials reveal strong evidence of high efficacy and safety, biotech stocks then file for approval from drug regulators such as the MHRA in the UK and FDA in the US. This process can take anywhere between 6 and 10 months and may require the company to perform further clinical trials if insufficient evidence is provided. If the regulator grants approval, the firm can offer its product on the open market and begin Phase 4 trials.
- Phase 4 – Drugs with regulatory approval still need to be monitored when offered to patients. The goal is to determine whether any long-term health impact occurs that would not have been detected during Phase 3 trials.
After regulatory approval is granted, biotech groups still need to convince doctors and health insurance companies to offer the new drug to patients. This is where sales representatives come into the picture. And dethroning an existing treatment even if it’s not as effective can be a challenge.
This product pipeline can span decades. And statistically speaking, over 90% of drug candidates never make it to market. That’s why most biotech shares develop multiple drugs at the same time. Like prudent investors, these companies are diversifying their investments.
But running multiple trials at the same time is a highly capital-intensive process. Consequently, most young biotech businesses have to continuously issue new shares to raise the necessary funds. This causes significant equity dilution. It’s also common to see larger players acquiring younger companies when a drug candidate shows a lot of promise.
Top biotech shares in the UK
Here are the top biotech stocks on the London Stock Exchange in order of market capitalisation:
|AstraZeneca (LSE:AZN)||£156.3bn||One of the largest pharmaceutical companies in the world, specialising in a diverse range of diseases|
|GlaxoSmthKline (LSE:GSK)||£88.46bn||The global leader in vaccines, tackling some of the most challenging diseases today, including malaria and HIV|
|PureTech Health (LSE:PRTC)||£492.9m||Discovers, develops, and commercialises new treatments targeting underserved brain, gut and immune diseases|
|Oxford BioMedica (LSE:OXB)||£466.9m||Provides a proprietary drug development platform for larger pharmaceutical companies to develop gene and cell therapies at a significantly lower cost|
|Avacta Group (LSE:AVCT)||£311.4m||Early-stage drug developer and diagnostics business creating a new and improved chemotherapy solution|
AstraZeneca is one of the largest pharmaceutical companies and healthcare stocks in the world. Given its access to vast resources, the group develops new treatments for a wide range of diseases. The list includes cancer, cardiovascular, renal, respiratory, immunology and other rarer conditions.
The company already has a diverse portfolio of products on the market and its vaccine against Covid-19 made it a household name. Looking at the current project pipeline, AstraZeneca is researching 183 drug candidates, with 16 in late-stage development and two under regulatory review.
- Market Cap: £156.3bn
- Average Daily Volume: 2.33m
- HQ: Cambridge, UK
- Cash/Debt: $6,398m/$30,781m
GlaxoSmithKline is a global leader in vaccines and pharmaceutical treatments targeting cancer, HIV, immuno-inflammatory, and respiratory diseases. The company has established research teams and manufacturing facilities worldwide, providing a global distribution network, particularly across the US, Europe, and Asia.
With over 1,500 active partnerships with external pharmaceutical organisations and governments, GlaxoSmithKline stands out among the crowd of healthcare stocks. It’s worth noting that the group also has a consumer healthcare division for over-the-counter products. However, Glaxo is in the process of spinning this off into a standalone entity, enabling the group to become entirely focused on developing new treatments.
- Market cap: £88.5bn
- Average daily volume: 9.02m
- HQ: Brentford, UK
- Cash/debt: £4,335m/£24,173m
PureTech Health is a mid-stage biotech business with a focus on creating new therapies for diseases with limited or no existing treatment options. The firm specialises in medicines related to the brain, gut, and immune system. It has two drugs with US and European regulatory approval, along with a further 16 in clinical trials and 27 candidates being investigated.
Beyond researching and developing its own treatments, management has built up a significant equity interest in other biotech groups. In total, it has a stake in eight different companies, three of which have commercial products and a further three in the final round of clinical trials.
- Market cap: £492.9m
- Average daily volume: 267.4k
- HQ: Boston, US
- Cash/debt: £468m/£52m
Oxford Biomedica is a rising gene and cell therapy business specialising in viral vectors. In oversimplified terms, the company re-engineers existing viruses to deliver improved genetic material into patients’ cells.
Management is using this technology to develop its own treatments. However, management also outsources its capabilities to other drug developers via its LentiVector platform.
This drastically reduces the cost of developing gene and cell therapies. So, it’s not surprising that pharmaceutical titans like Bristol Myers Squibb, AstraZeneca, and Novartis are all active customers. These customers pay ongoing milestone fees throughout development, as well as a royalty on sales for any drug that makes it to market. However, it’s worth noting that most of the current drug pipeline using LentiVector remains relatively early stage.
- Market cap: £466.9m
- Average daily volume: 223.76k
- HQ: Oxford, UK
- Cash/debt: £109m/£9.34m
Avacta is an early-stage biotech firm specialising in the fields of diagnostics and therapeutics. Its diagnostics division created a proprietary platform called Affimer. This is a portfolio of reagent proteins that can be used to detect specific infections within a given sample. Traditionally, this process uses antibodies. However, manufacturing antibodies is a complex, time-consuming process that Affimer reagents don’t have to go through.
On the therapeutics side of the business, the company is currently testing its flagship AVA6000 chemotherapy drug in clinical trials. This treatment is being developed with the group’s second chemical platform called pre|CISION. Unlike existing chemotherapy treatments, AVA6000 is highly targeted. As a result, fewer healthy cells are caught in the crossfire, which reduces the severity of side effects.
- Market cap: £311.4m
- Average daily volume: 1.46m
- HQ: Wetherby, UK
- Cash/debt: £26m/£1.7m
Investing in the US biotech industry
As with pharmaceutical and healthcare companies, investing in American biotech stocks comes with the same degree of regulatory risk. All treatments need to approval from the Food & Drugs Administration (FDA) for commercialisation in the US.
The list of US biotech stocks is significantly longer than here in the UK, as the American healthcare market size is enormous by comparison. With that said, here are some of the largest biotech shares available across the pond in order of market capitalisation.
- Regeneron Pharmaceuticals (NASDAQ:REGN)
- Vertex Pharmaceuticals (NASDAQ:VRTX)
- Exelixis Inc (NASDAQ:EXEL)
- Novavax Inc (NASDAQ:NVAX)
- Twist Bioscience Corp (NASDAQ:TWST)
Are biotech stocks right for you?
Investing in a biotech company is a high-risk move. Drug development is notoriously challenging and expensive, with most drug candidates failing to get past regulators. In fact, a failure in a clinical trial can often be a death sentence. After all, most pre-commercialisation biotech stocks rely on external financing, which isn’t easy to raise when promoting a failing product.
But, this sector has a lot to offer investors despite its high-risk nature. And an easy solution to reducing risk exposure is to only invest in the firms that already have a product on the market with a sizeable revenue stream that can help fund future developments.
Having said that, even the largest biotech shares can still be volatile, especially when bad results emerge from ongoing clinical trials. Therefore, the biotech sector is not suitable for everyone. And taking a diversified approach is, as always, a prudent strategy when investing in biotech stocks.