A sigh of relief has been heard around the world in recent weeks as companies like Pfizer and Moderna have announced results from trials of their Covid-19 vaccines, renewing hope that economies and markets will start returning to normality at some point next year. 
While the development of such vaccines is not the victory of the biotechnology sector alone, its role in developing the drugs has been instrumental, suggesting this could be a new era for vaccine development.
Agustin Mohedas, an analyst on the offshore $40m Janus Henderson Horizon Biotechnology fund, said the sector is undoubtedly the most innovative sector in healthcare.
“Our ability to use scientific understanding from academia and translate that into effective drugs has never been faster than it is today – and its constantly improving,” said Mohedas.
This is especially relevant to the Moderna vaccine, as it is mRNA – messenger RNA, capable of instructing DNA – technology used in the vaccine, was an academic pursuit not too long ago.
Covid-19 has meant these types of technologies have advanced exponentially in a short time frame due to the urgent collaboration between governments, academia and industry leaders.
Mohedas said it’s clear that as well as mRNA, there are developments in gene therapy, gene editing, novel antibody platforms and RNA silencing technologies which also stake a claim in having quite a significant impact over the next decade.
“You have all these different tools in the toolkit to tackle scientific and medical problems now,” he said.
“Combine the tools in the toolkit with the underlying fundamental knowledge of what’s causing the disease, which is a perfect recipe for developing new treatments for unmet medical needs.”
Against this backdrop of scientific innovation, funds invested in these types of technologies have made a considerable level of returns this year.
Indeed, the Janus Henderson Horizon Biotechnology fund, which has been managed by Andy Acker and Daniel Lyons since launch in 2018, is up by more than 40 per cent in 2020.
And while biotech can be an inherently risky area, Mohedas believes the fund’s investment style sets it apart from its peers.
“There are a lot of binary outcomes,” he said. “Either a drug works or it doesn’t.
“What we find is that the market tends to price the probability of a clinical trial working on the law of averages.”
Based on historical data, 33 per cent of phase-two clinical trials fail and companies are priced around that probability of success.
Therefore, trying to find companies that they believe to be mispriced is key, wherein the probability of success is high, but the market has priced in the average probability of success.
Mohedas said the fund’s ability to invest in private companies, which can represent up to 5 per cent, is another contributor to outperformance.
Indeed, biotechnology has seen significant private equity and venture capital investment during the first half of 2020, raising close to $12.6bn in funding, a 73 per cent increase on the $7.3bn from the same period last year.
“We can invest in the cross-over round where the valuation is much lower than what it would be if it were public,” he said. “We can invest in this discounted, arbitraged valuation, and then invest in the initial public offering (IPO) and subsequent financing if needs be.”
Performance of Nasdaq Biotechnology index vs S&P 500 over 10yrs
Source: FE Analytics
While the broad index has outperformed the S&P 500 over a longer time frame, the fast-paced developments of this year have led some to suggest that companies within the sector are overvalued.
Mohedas disagreed, pointing to the fact that biotech companies are trading at five-year lows, whereas it is medtech and diagnostic companies which are trading at all-time highs.
Plus, he noted this valuation issue is not so prevalent in the smaller and mid-sized companies, in which the fund primarily invests and where the vast majority of new drugs are developed.
“As large firms see profitable drugs go generic, they need to replenish their revenue reserves with the next blockbuster drug and will look to acquire the innovative small-to-medium size businesses in order to do that,” said Mohedas.
He finished: “That’s what fuels the entire innovation life cycle – and we just want to benefit from that.”
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
While year-to-date, the Janus Henderson Horizon Biotechnology fund has made 41.07 per cent, since its launch in December 2018 it has made a total return of 66.25 per cent. This is compared with 32.74 per cent for the FO Equity Pharma Heath & Biotech sector and 27.54 per cent for the Nasdaq Biotechnology index. It has an ongoing charges figure (OCF) of 2.07 per cent.