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Should investors bet on Covid-19 treatments?

Sentiment toward biotech companies may deteriorate again if efforts to develop treatments for Covid-19 prove to be unsuccessful, according to Polar Capital.
David Pinniger, Polar Capital

The biotechnology industry has become among the more resilient sectors this year amid the Covid-19 pandemic.

Globally, the MSCI World Biotechnology Index is up 15.78% on a year-to-date basis, which compares with the -4.4% performance of the MSCI World Index, according to data from FE Fundinfo.

Like other secular trends such as technology, David Pinniger, a healthcare-focused portfolio manager at Polar Capital, expects that biotechnology companies will prove to be durable under the Covid-19 pandemic.

“People are not going to stop taking medicines. Healthcare doesn’t fall into the category of hotel, restaurants or airline industries,” Pinniger, who manages the Polar Biotechnology Fund since its launch in 2013, told FSA.

“Risk appetite evaporated very quickly [during the March sell-off],” he said. “But the fund has rebounded strongly (see below) due to a combination of factors. For example, biotech companies and the industry have been perceived to be offering more solutions, such as antivirals and diagnostic tests.

“The strong performance of this sector will continue over the coming months.”

Covid-19 treatments caution

However, while Pinniger has a positive outlook on the biotech sector, he cautions investors from betting on Covid-19 treatments or vaccines that several companies have claimed to be developing.

“We saw a lot of irrationality from companies claiming to offer silver bullets and we declined to participate in that.

“[We are cautious of the] probabilities of success as well as timelines for a whole range of medicines that companies and academic researchers are investigating for the treatment of Covid-19 infection, [as well as] what we perceive to be extremely high levels of expectation and enthusiasm on the part of investors,” he said.

Pinniger added that through the Covid-19 pandemic, biotechnology and pharmaceutical companies have moved fast to try and develop antivirals and vaccines, which has created a more positive sentiment on the industry.

“But if these efforts prove unsuccessful, sentiment may deteriorate again.”

While he is invested in companies that are investigating their own treatments for Covid-19, his expectations for the success or failure of these programmes do not feed into his investment theses for these companies, he noted.

Preference for small caps

Pinniger’s fund has a bias toward small-cap companies, with only 10% of the portfolio’s assets invested in the larger established biotech companies, he said.

Because of that, the fund underperformed its benchmark, the Nasdaq Biotechnology sector, during the March sell-off.

The Polar Capital Biotechnology Fund versus its benchmark and sector (YTD performance)

Source: FE Fundinfo. In US dollars.


“The fund has an investment emphasis on the sector’s smaller earlier-stage, higher-risk companies, more so than the fund’s benchmark. During the coronavirus pandemic and market sell-off, the share prices of these smaller companies were hit harder.

“However, during the recovery, the reverse was true, with smaller earlier-stage higher risk companies performing better than their larger peers.”

He explained that some of these smaller companies have launched new medicines – not necessarily focused on Covid-19 – and are continuing to generate revenues. Meanwhile, some are still developing medicines and innovative new technology platforms for the creation of new candidate medicines.

“Exciting new technology approaches such as cell therapy, gene therapy and gene editing have captured the imagination of investors for their potential to create breakthrough medicines, with almost curative potential for serious diseases, and we are invested in a number of companies using these new technologies,” he said.

The Polar Capital Biotechnology Fund versus its benchmark and sector

Source: FE Fundinfo. Three-year cumulative performance in US dollars.

Part of the Mark Allen Group.