Biotechnology remains an exciting stock market topic

Interview with fund manager Harald Kober (ERSTE STOCK BIOTEC)

Where is biotechnology used?

There are many applications for biotechnology: in medicine, antibodies are produced for the diagnosis and treatment of diseases. In agriculture, crops are bred for higher yields and resistance to pests and diseases. Biotechnology is also an important part of the development of biofuels, which are produced from renewable resources. In environmental technology, certain biotechnological applications contribute to soil or wastewater remediation.

How will the revenues and profits of global biotech companies develop until 2030?

Most biotech companies are based in the US. For large, profit-generating companies, there are consensus estimates that assume mid-single-digit percentage growth in profits. Growth rates are currently somewhat sluggish due to threats by the Trump administration to intervene massively in pricing if companies do not take action themselves. This has a direct impact on profitability and profits. Added to this is the dispute over generic drug imports and possible tariffs, which also affect US companies: around 85 per cent of production ingredients come from abroad. These could become more expensive.

Which countries could come under particular pressure from the US government’s tariffs?

Switzerland is one example, although it is home to large pharmaceutical companies. In other parts of Europe, there are smaller biotech players that would also be affected. If you combine the appreciation of the euro and the tariffs, you arrive at a potential cost increase of around 30 per cent. That is significant – even if exchange rates fluctuate and could move in a different direction again. The US government’s response to investments by European companies in research and production in the US remains to be seen. Trump has announced that he will initially introduce moderate tariffs, which could rise significantly in a year and a half. The media has already mentioned figures of up to 200 per cent.

What other challenges does the industry face?

Government health budgets are tight, both in Europe and in the US. In the US, for example, political decisions have been made to discontinue government support for certain mRNA vaccines. Trump has also written a letter to the largest pharmaceutical companies asking them to submit proposals for price reductions. If they fail to do so, he is threatening to regulate prices based on the lowest prices worldwide. This is part of his negotiating tactic: first apply pressure, then find compromises.

How much of a burden are generic drugs on established companies?

Generic drugs come about when patents expire. This is only a problem for companies if they are unable to develop new, better drugs. As long as innovations continue to emerge – more efficient and with fewer side effects – they have a clear raison to be here compared to generic drugs. This broadens the market, but also makes it more demanding.

Why do US companies dominate the biotech sector? Are there any new players in Europe?

The dominance of the US has grown historically and is also reflected in the investments of ERSTE STOCK BIOTEC. Although there are smaller companies in Europe, the major impetus comes from the US. Recently, there have been mixed results for European pharmaceutical giants such as Novo Nordisk. Its competitor Eli Lilly has recently experienced price fluctuations, initially due to disappointing study results for a new weight-loss pill, whose effectiveness fell short of expectations. However, new study data with improved results recently caused the share price to rise. The pipeline is crucial, and this is where smaller, innovative biotechnology companies are making increasing progress.

What role does obesity play for the fund?

We focus on innovative companies with promising products in the pipeline. One example is Viking Therapeutics: the Phase 2 study of a weight loss pill showed good efficacy, but also increased side effects, especially at higher doses. The study discontinuation rate was significantly higher than for comparable active ingredients, which may have been due to the rapid increase in dosage. Further studies are now testing a more cautious dosage increase to improve tolerability.

What other areas of application are of interest to ERSTE STOCK BIOTEC?

In addition to obesity, rare diseases are an exciting field: there is little competition and high pricing power. Oncology is also relevant, but with a lot of competition and high dynamics. Another interesting area is eye diseases such as macular degeneration, cataracts and glaucoma. We expect interesting study results in this area in the next 12 to 18 months.

One example of a company in this segment is Ocular Therapeutics. The company focuses on developing long-acting delivery systems to reduce the burden of frequent injections, particularly for conditions such as wet AMD (disease of the blood vessels in the eye) and diabetic macular oedema (damage to the retina caused by diabetes).

What distinguishes successful biotech companies from less successful ones?

Two things: a superior product and strong management. The best drug is useless if management fails to get it approved or markets it poorly. Product and management must go hand in hand – that is crucial for success.

What are you currently looking for in particular when making new investments?

We are looking for opportunities with a good product, strong management and attractive valuations. It’s not about buying at the top but getting in when there are setbacks – when others no longer believe in it. Then you can reap the rewards with the “luck of the brave”.

What could give biotech stocks a boost in the next five years?

A more efficient FDA (US Food and Drug Administration, note) that makes decisions faster would be an advantage. Planning security in pricing is also important, such as guaranteed pricing power for particularly efficient drugs. And, of course, a favourable interest rate environment: interest rate cuts in the US would be a clear tailwind for the industry.

 

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