Will Biotech Keep Booming in 2015?
Everyone loves a winner.
Despite a rocky finish, biotech largely delighted investors in 2014. The iShares Nasdaq Biotechnology EFT rose 35-percent. Two other major biotech ETFs, SPDR and First Trust, also saw big increases.
So where should grateful investors direct their thanks? To visionary CEOs? Brilliant scientists? The FDA?
Actually, to beer drinkers.
Our ancient ancestors used yeast to create brews. These early "craft beverages" were our first effort at biotechnology.
And they proved popular. Very popular.
Beer was a staple drink for Egyptians. Sumerians had their own beer goddess.
People used it as currency. They used it to celebrate. They used it to mourn. Taxes on beer paid for wars and civic pojects.
Beer even rates several mentions in The Code of Hammurabi, the oldest laws ever written.
Thousands of years later, we've never stopped trying to improve yeast. Now we're reaping the benefits of industrial-scale fermentation.
Our thirst for suds laid the groundwork for all of modern biotech's amazing advances.
Betting on biotech
Biotech stocks aren't everyone's favorite. They are often volatile.
Yet we're betting the biotech party continues in 2015.
Many of the variables that produced a banner 2014 for biotech remain in place. Interest rates are low. New drug approvals are in the pipeline. Demographics are only going to get more favorable.
Yet all isn't perfect in biotech. An expected decision by the Federal Reserve to bump interest rates could stall growth. If rates go up, companies lose access to dirt-cheap borrowed money.
Drug companies often take a hit for sky high prices. Yet the cost of developing new drugs is often stratospheric. Increased competition in the sector could also depress profits.
When new drugs receive approval, existing treatments offered by other companies may fall out of favor with insurers.
Less predictable factors may also rain on the parade. Poor results from drug trials can cripple an individual stock. Unless you've got an appetite for serious risk, it's smart to bet on biotech firms with diversified revenue streams.
Gilead Sciences is a biotech golden child. The company sells HIV, hepatitis, influenza and cancer drugs. Its product line is popular and diversified. The company has made a slew of brilliant acquisitions. Its stock has been a huge winner. In 2014 it flirted with a 30-percent return.
Yet even Gilead isn't immune to the vagaries of the industry. Its stock took a sharp hit last year when a competitor, AbbVie, received approval for a new hepatitis treatment.
Because AbbVie's treatment is cheaper, Express Scripts switched treatments. The nation's largest drug benefit manager dropped Gilead to make a deal with AbbVie.
That's the nature of the beast in biotech. Competition is good for insurers. It's excellent for customers.
It's not always great for investors.
Here's more food for thought. Regulus Therapeutics is a scrappy small-cap biotech upstart.
It left Gilead's returns in the dust last year.
Regulus has a very promising treatment pipeline. Because of this, Regulus stock jumped around 115-percent. The stock has plenty of room to grow.
Sounds great, right? There's just one catch. Regulus doesn't possess any approved drugs. If its key pipeline treatments fail, big trouble could follow.
What about broader biotech trends in 2015? Some of them look promising.
A strong dollar should tamp down international competition. The healthcare industry is recession proof.
Obamacare is likely to push insurance enrollment higher. Demographic tailwinds are also present. The Baby Boom generation will increase demand for old and new treatments.
Investors willing to tolerate risk are in good position to reap the rewards of biotech in 2015.
That's something worth thinking about next time you crack open a beer.