Why IMU is a multi multi bagger, page-9779

This is an article from mid 2021 but some may be interested in the NBI - and differences between pharmaceutical companies and Biotech companies.

Worth reading if you have some difficulty getting to sleep at night

The Nasdaq Biotechnology Index: A True Benchmark for Technology-Driven Healthcare Innovation | Nasdaq

Healthcare Innovation

The Nasdaq Biotechnology Index: A True Benchmark for Technology-DrivenHealthcare Innovation

AUTHOR

Nasdaq IndexResearch Team

PUBLISHED

JUN 10,2021 11:25AM EDT

• By Mark Marex, Product Development Senior Specialist

The NasdaqBiotechnology Index (NBI) was launched on November 1, 1993, when the industrywas still in the midst of the original “biotech revolution” ushered in by thediscovery of recombinant DNA technology and Genentech’s IPO in 1980. The indexzoomed almost 700% up to its peak in March of 2000, only to experience adramatic fall along with the rest of the Tech/Internet equity bubble and a lostdecade of subzero returns. NBI bounced back strongly during the 2010s,increasing 370% on a total return basis, trailing the Nasdaq-100 Index (426%TR) by fewer than two percentage points per year on average. Its constituentbasket has swelled from 100 companies at the beginning of 2010 to 274components today, reflecting the tremendous growth in the sector taking placewithin the small-cap space – the overwhelming majority of which has stemmedfrom IPOs on the Nasdaq Stock Exchange.

The nearlythree-decades-old index methodology remains straightforward, transparent, andbefitting of a true industry benchmark: companies must be classified asBiotechnology & Pharmaceuticals by ICB (FTSE Russell’s IndustryClassification Benchmark); minimum market capitalization of $200MM; averagedaily trading volume of at least 100,000 shares; and Nasdaq-listed. The indexis modified market capitalization-weighted such that constituents are capped at8% (for the top 5) and at 4% (for the remaining) at each quarterly indexrebalance; the entire index is reviewed and reconstituted annually in December.

Let’s examine howNBI has performed in the recent past and what its components look like today,followed by a consideration of the drivers of future performance – all in thecontext of the Coronavirus pandemic.

Current Compositionand Top Covid-19 Thematic Names

Of the 274constituents in NBI, the top 10 represented approximately 48% of the indexweight as of May 14, 2021. The top 20 names represented 61%, while the top 5represented 32%. The largest of these was Amgen (AMGN), with a market cap of $144Bn, followed by Gilead Sciences (GILD / $86Bn), Moderna (MRNA / $65Bn), Vertex Pharmaceutical (VRTX / $56Bn), and Illumina (ILMN / $56Bn). Most in the top 10 have seen positive recent performance, with an average YTD return of nearly 9%. Only Vertex and Seagen (SGEN) have registered negative YTD returns thus far, while the clear standout has been Moderna (MRNA, up over 50%) thanks to its industry-leading mRNA vaccine for Covid-19, which continues to win massive new orders from countries across the globe. AstraZeneca (AZN) remains positioned to be the most common vaccine supplier to much of the developing world, as well as certain countries in the EU and its home base of the UK. Outside the top 10, BioNTech (BNTX) – the 17th largest constituent – continues to advance its partnership with Pfizer in manufacturing and refining the only other approved mRNA vaccine besides Moderna’s. Meanwhile, Gilead has made numerous headlines as its previously developed antiviral therapeutic – Remdesivir – was discovered to fight Covid-19 with modestly encouraging success; Regeneron (REGN), on the other hand, has developed an antibody-based therapeutic that began seeing limited use for high-risk patients in late 2020.

In terms ofmarket capitalization for the overall group, the average was $5.7Bn, while theweighted average was $43.9Bn. The median was only $1.1Bn, however. This isreflective of the substantial representation of smaller stocks in the index,with 220 components under $5Bn of market cap comprising 21% of the indexweight. One hundred twenty-two of these constituents measured at less than$1Bn.¹ Interms of international exposure – because the Index methodology permitsnon-US companies with listings on the Nasdaq Exchange – there exists a sizablecomponent with just over 13% of index weight spread across 43 constituents.

Perhaps the mostinteresting aspect of NBI’s composition stems from its subsectorclassifications, namely the split between Biotechnology and Pharmaceuticals.ICB currently classifies 230 companies as Biotechnology and the remaining 44 asPharmaceuticals. The resulting split by index weight is approximately 65% and35%, respectively. This immediately indicates one major difference between thetwo groups: Pharmaceutical companies tend to be much larger than Biotechnologyfirms. Within the NBI Index, the size gap is almost 4x, with the average marketcap for a Pharma constituent at $15.5Bn vs. only $3.8Bn for Biotech. Thecorollary is that Pharma companies tend to be older and more mature in theirlifecycle, clocking in at an average of 10.5 years since the date of their IPOvs. only eight years for Biotech. What is the practical implication of thisfinding, and why does the NBI Index include Pharmaceutical companies to beginwith?

The two subsectorsare closely related, with Biotechnology firms often focusing intensely onR&D for many years until a breakthrough product receives approval from theFDA following extensive periods of clinical trials, safety testing, and thelike. These highly uncertain, multiyear periods of R&D result in limitedrevenues and potentially significant losses, as was the case with Modernabefore its untested mRNA vaccine technology produced its first, history-makingCovid-19 shot. The resulting impact on company market values is thereforeintuitive. Once a company successfully launches a flagship product into themarket, it may continue focusing disproportionately on R&D and remaincloser to a “pureplay” Biotech, or it may expand into a biotech-drivenPharmaceuticals company with vertically integrated processes for the ongoingdevelopment, production, marketing and distribution of new therapeutics. TheIndex’s largest constituent, Amgen, just recently had such a transformationformalized by ICB when it was reclassified from Biotechnology toPharmaceuticals. Thus the decision to include both subsectors in the Index islogical, not only in the respect that companies may transition from Biotech toPharma at a certain stage of their lifecycle but also because companies canstraddle the two classifications for some period of time, too. In fact, 41Biotechnology companies in the Index currently contain the word “Pharma” or“Pharmaceutical” in their legal corporate names, while 140 Biotechnologycompanies contain the same in their full-length company descriptions (perFactset). Similar-sounding benchmarks from other index providers, such as theS&P Biotechnology Select Industry Index (SPSIBI), select for only thosecompanies classified as Biotechnology by their respective industryclassifications, leaving separate indexes such as the Dow Jones US SelectPharmaceuticals Index (DJSPHM) to track Pharmaceuticals.

The upshot of allof the above is that attempting to construct an ideal benchmark index – withtransparent, systematic construction guidelines – to track the Biotechnologyindustry is far more challenging than it sounds, given the existence ofpureplay biotech firms, hybrid biopharmaceutical companies, and lessR&D-intensive, generally older and more diversified pharmaceuticalmanufacturers. Given Nasdaq’s extensive history of attracting the overwhelmingmajority of biotech IPOs both in the US and internationally, it stands toreason that the unique methodological approach of the NBI Index results insomething very close to the ideal benchmark: capturing all but a few of theinvestable listings providing exposure to pureplay Biotechnology, in additionto preserving the names that have matured and transitioned to Pharmaceuticalswhile still maintaining a strong biotech heritage. In spite of a couple large,diversified international pharma exceptions (e.g., Sanofi & AstraZeneca,the latter completing its acquisition of biotech giant Alexion Pharmaceuticalsin 3Q’21), the Index excludes the majority of traditional pharmaceuticalmanufacturers such as NYSE-listed Pfizer, Merck, Johnson & Johnson, andBristol-Myers Squibb, as well as European-listed Bayer, GlaxoSmithKline,Novartis, and Roche.

Recent Performance

Biotechnology hasbeen a relative underperformer in 2021, with the Nasdaq Biotechnology Index(NBI) down 1.3% on a YTD, price-return basis as of May 14 vs. a broader marketgain of 11.3% as indicated by the S&P 500 Index (SPX). Looking at theS&P Biotechnology Select Industry Index (SPSIBI), the YTD loss is morematerial, down almost 10%. The difference is driven by SPSIBI’s modifiedequal-weighted methodology, which systematically overweights the smallercompanies in the space while underweighting the largest. In 2020, the roleswere reversed, as NBI handily outperformed SPX with a gain of almost 26% vs.approximately 16%, respectively. Through the first three quarters of the year,SPSIBI's performance closely tracked that of NBI, only to accelerate dramaticallyin the final quarter along with a broader outperformance of small-cap stocksvs. large-cap. With its emphasis on smaller companies to the detriment of theindustry leaders, SPSIBI is subject to higher volatility and may experienceperiods of both over and underperformance vs. NBI. SPSIBI restricts indexconstituents to firms classified as Biotechnology by GICS Subsector, leavingout numerous biopharmaceutical names. It is also a US-only index by design,excluding key international players such as BioNTech.

NBI ETP Assets

Having looked atperformance, we can also gauge the impact of Coronavirus on investor appetitefor Biotech by tracing how assets under management (AUM) have changed over thepast few years within the ETF industry, including funds tracking NBI in theUnited States and internationally in Europe and Asia. AUM staged an impressivecomeback in 2020, up from a multiyear low of $6.2Bn on March 16 to roughly$11.5Bn by the end of the year. By mid-February 2021, approximately $13Bn inAUM was attained before moderating back down to a range between $11- 12Bn. Eventhough there is a clear end in sight for the pandemic, allocations haveremained elevated as investor interest clearly extends far beyond.

Biotech IPOs in2020-21

Nasdaq hasdemonstrated its leadership with respect to company listings in the biotechspace over many years, and recent history has only further affirmed itsdominance. Through the end of April, there have been 37 IPOs of Biotechnologyfirms in the US in 2021, all of which listed with Nasdaq. Over the course of2020, there were a total of 86 IPOs, only three of which did not list withNasdaq. Collectively, these listings raised $21.5Bn. Nasdaq’s market dominancein attracting biotech IPOs over several decades has resulted in an overallmarket share of 98% of current listings representing $1.1 Trillion in totalmarket capitalization as of April 2021, including seven companies large enoughto warrant inclusion in the Nasdaq-100 Index. In contrast, NYSE is home to 11biotech listings in total, representing approximately $40Bn in marketcap. In terms of constructing an ideal benchmark to track theindustry, there is very little to be gained by including NYSE-listed companies.

The Current Landscapeand Future Prospects of Biotech R&D

As one mightreasonably expect, constituents of NBI tend to engage in above-average levelsof Research & Development. For the group as a whole, R&D expensetotaled $68.5Bn in 2020, a stunning 31% of these companies’ total revenues. (Asa reference point, weighted average R&D expense as a percentage of totalsales was 9.9% for the Nasdaq-100 and 7.1% for the S&P500 in 2020.) To someextent, this is a distorted measure to consider given that nearly a quarter(66) of these firms recorded no revenues whatsoever in 2020; more than 20% (59)of NBI constituents IPO’ed in 2019 or 2020, contributing to roughly half ofthis population of zero-revenue companies. Even for those that did report somelevel of sales, 188 (two-thirds of the constituents of the index, totalingnearly 35% of the index weights) of them recorded R&D expense that exceededtheir revenues – clearly an indicator of the unique business models at play inthe space. Moderna is a useful example, though, of the tradeoffs investors acceptwith pureplay Biotech. R&D expense in 2019 totaled $465MM, far exceedingrevenues of $60MM. In 2020, R&D jumped to $1.3Bn vs. $800MM in revenues. In2021, it is estimated that Moderna’s revenues will exceed $18Bn – a stunningincrease of 300x in just two years. Its differentiated mRNA vaccine technologyhas positioned Moderna as one of the two leading developers of thehighest-effectiveness Covid-19 vaccines and perhaps the fastest ever to market.The other leading developer, of course, is BioNTech, whose revenue trajectoryis very similar: $121MM in 2019, to $550MM in 2020, to an estimated $14Bn in2021. Its partner Pfizer (excluded from NBI), while clearly benefitting fromthe relationship, experienced a 19% drop in revenue in 2020 vs. 2019, driven bythe net-negative impacts from the pandemic on its diversified business model.As a result, its stock price was up only 14.5%, while both Moderna and BioNTechwere up more than 1,200% each since October 9, 2019 – the date of BioNTech’sIPO.

Another way tocontextualize the intensity of R&D across NBI is to look at patent activityin distinct healthcare applications. Leveraging datasets from Yewno – a trustedNasdaq partner in various Thematic Tech indexes – we can observe, for example,that on both trailing-twelve-month and trailing-three-year timeframes, NBIcompanies contributed 50% of all patents in the Precision Medicine space. ForOrphan Diseases, the contributions exceeded 75%. And for a handful of others,contributions remained significant, in spite of the index’s exclusion of majorpharmaceutical players like Johnson & Johnson, Pfizer, Merck, andBristol-Myers Squibb. Sanofi represents an interesting exception to this rule,owing to its ADR being listed with Nasdaq (along with the aforementioned AstraZeneca).With 100,000 employees and well north of $100Bn in market capitalization,Sanofi is one of France’s premier pharmaceutical giants and was founded almosthalf a century ago. In addition to exploring an ultimately unsuccessful vaccineventure with GlaxoSmithKline, Sanofi is partnering with Translate Bio – yes,yet another member of NBI – to develop its own mRNA vaccine candidate whileassisting Pfizer and Johnson & Johnson in scaling production of theirrespective, successful vaccines.

More broadly speaking,bio innovations in the fight against Covid-19 have developed across a range offive subdisciplines: Identification, Diagnosis, Vaccines, Treatment, andEpidemiology. In terms of Identification, the full genome ofSARS-CoV-2 was sequenced and published within weeks, considerably faster thanthe SARS-CoV-1 virus that caused the SARS outbreak in 2002-2004. Diagnosis –while uneven and error-prone initially – has been ultimately aided by advancesin nucleic acid-based diagnostic methods and by the machines that process testsamples becoming smaller, more affordable, and more widely available; numerouscommercialized testing approaches now exist providing reliable, safe, anddiscrete results in a fraction of the time versus only a few months ago. Vaccinecandidates have entered clinical trials faster than ever before, leveraging arange of previously unavailable approaches. Treatment has been aided by, amongother things, genetically engineered animals specifically developed to testpotential avenues for encouraging monoclonal and polyclonal antibodyproduction. And in Epidemiology, genomics has helped uncover population-levelinsights thanks to regular sequencing of the virus across different areas ofthe world, while also discovering the various mutations that explaintransmission dynamics. These achievements all exist somewhere on the spectrumof Biotech, and our current advantages in fighting a new, deadly pandemic stemfrom decades of costly, intensive R&D.

In terms ofwhat the longer-term future holds for Biotech R&D, there are numerousreasons to feel excited. Biological sciences are driving innovation today infour key areas: Biomolecules, Biosystems, Biomachine Interfaces, andBiocomputing. Each of these encompasses distinct revolutions in both Mappingand Engineering processes, aided greatly by recent advancements in technologiessuch as machine learning and artificial intelligence. In other words, a truefusion of Biology and Technology is taking place right now, and the dividendsit yields should be far-reaching, impactful, and in some cases, eventransformative.

McKinsey GlobalInstitute estimates that up to 60% of the world’s physical inputs could be madeusing biological means, while up to 45% of the world’s disease burden could beaddressed, leading to $2-4T of annual direct economic potential globally by2030-40.² In practicalterms, this means for example, shifting some meat and plant production fromtraditional, resource-intensive agricultural methods to lab-grown, whileincreasing yields in the former thanks to precision mapping of a plant orsoil’s microbiome and subsequent genetic engineering; repurposing fermentation(and other existing, natural processes) to create sustainable, biodegradable (andin some cases, even self-repairing) fabrics; truly personalized medicine andnutrition plans stemming from increasingly cost-effective human genomics anddirect-to-consumer testing; leveraging biofuels to more efficiently storeenergy while initiating biosequestration processes to capture carbon emissions;even using DNA to store near-limitless quantities of data. McKinsey analyzedapproximately 400 such applications and use cases that could be plausiblycommercialized by 2050, with more than half of the impact from the currentlyvisible pipeline existing outside the realm of healthcare itself. This is afunction of the considerable overlap in the previously separate spheres ofBiology & Computing R&D, as well as from all of the anticipated diffusespillovers to upstream, downstream, and ancillary sectors.

In terms of biotechR&D monetization, analysts at ARK Financial are also thinking big – to thetune of trillions of dollars. Their recent research focuses on how artificialintelligence, combined with advances in Next Generation Sequencing (NGS) andCRISPR Gene-Editing, will drastically boost the efficiency of thebiopharmaceutical drug development process. By leveraging NGS to match upprospective patients more precisely for clinical trials of new drugs, thefailure rate can be reduced by anywhere from 10% to as much as 45%.³ Fewerfailures mean less money spent developing drugs that don’t ultimately make itto market. Additionally, they forecast a reduction in the length of clinicaltrials themselves, potentially by more than 50%, thanks to the increasing usageof AI. All told, they forecast these improvements to R&D efficiency may addup to $9 trillion to the market capitalization of therapeutics companies(currently estimated at closer to $2 trillion) as soon as 2024, assuming only a10% failure rate reduction and a 25% time-to-market reduction across theindustry. And while gene therapies are still in their infancy and moreexpensive than traditionally-developed therapeutics, they have already proven tobe more cost-effective per life-year gained in the three initial examples oftheir usage to target cancer. Taken together, the returns to biopharmaceuticalR&D are projected to increase dramatically after stalling out during thelast two decades.

Summary

While theCoronavirus pandemic continues to pose significant risks to both themacroeconomic and physical health of the entire planet, the NasdaqBiotechnology Index offers a unique lens through which to view human society’sscientific and technological advancements in fighting the virus. There aremultiple efforts by established and upstart players alike seeking to treat,prevent, and outright eradicate this deadly pathogen, whose short-term impactsare far-ranging and obvious. Longer-term, there remains much uncertainty abouthow starkly human behavior will change and what the knock-on effects on theeconomy will be. What is undisputed, however, is how much better positioned weare to cope and ultimately defeat the virus, largely thanks to decades of advancementalready made within the biotech space. When one considers the ongoinginnovations and seemingly limitless potential for new kinds of advancements,the future does seem brighter indeed. As investors, we must also consider thelasting psychological impact of biotech leading us through and out of a globalcrisis. Perhaps a higher level of public approval, coupled with more proactive– as opposed to reactive, constraint-imposing – regulatory structures, willhelp lead the industry into a truly sustainable, rewarding new age.

ETFs currentlytracking NBI include the ProShares Ultra Nasdaq Biotechnology ETF (Nasdaq:BIB), ProShares UltraShort Nasdaq Biotechnology ETF (Nasdaq: BIS), InvescoNasdaq Biotech UCITS ETF (London: SBIO), iShares Nasdaq US Biotechnology UCITSETF (London: BTEC), Tachlit Nasdaq Biotechnology ILS (Tel Aviv: TCBI105),Capital Nasdaq Biotechnology Index ETF (Taiwan: 00678), and Mirae Asset TIGERNasdaq BIO ETF (Korea: 203780).