Beyond COVID-19: Investing in biotechnology

Here's where some of Fidelity's portfolio managers see potential opportunities.

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Key takeaways

  • The rapid development of effective COVID vaccines has helped focus the public's—and investors'—attention on biotechnology.
  • The messenger RNA technology that has sped development of COVID vaccines has the potential to treat many other diseases.
  • Biotech firms are working on innovative therapies for cancer, heart disease, and other ailments.
  • Investors interested in biotech may want to research and consider funds managed by investment professionals.

The rapid development of COVID-19 vaccines using messenger RNA (mRNA) technology (mRNA works as the genetic information for making proteins) has raised awareness of the potential for high-speed innovation in the biotechnology sector. Operating in an environment in which many of the regulations that typically govern drug development were temporarily suspended, the industry has shown the world and investors what is scientifically possible.

Now the question is how biotech companies will apply the experience gained in the rapid development of COVID vaccines to other pressing medical needs—and how they may create opportunities for investors.

Messenger RNA's big moment

"mRNA is a disrupter," Rajiv Kaul manager of Fidelity® Select Biotechnology Portfolio (FBIOX) since 2005. "But mRNA is not something that has come out of nowhere: It has a long history, one that we have been closely tracking."

The COVID-19 pandemic was mRNA's time to shine, but its potential could expand past just the recent crisis, believes Kaul, who also thinks mRNA could be effective for treating the flu and cancer.

"In the scheme of drug development, these mRNA companies are very young, but their performance in development of the COVID vaccines is a testament to mRNA's advantages over traditional drug development," says Kaul. "The technology is moving pretty fast. Eventually the entire pharmaceutical industry may have to have an mRNA presence. The pharmaceutical industry right now could be widely unprepared for mRNA's potential."

Although mRNA has potential as a therapeutic, Kaul cites possible hurdles, including the need to improve the ability to deliver the mRNA into various types of cells, and other engineering obstacles: "The biggest challenge right now is delivery to different cell types. Safety could also be a concern."

"This is going to be a very powerful therapeutic class over time," says Kaul. "As long as the safety aspect holds up, mRNA should have a more favorable drug development pathway, although we are still early."

Not by mRNA alone

While the mRNA COVID vaccines have been in the spotlight, biotech firms have continued developing other innovations targeting cancer, heart disease, and other medical conditions.

Overall, the biotech industry's pipeline of new drugs remains robust, Kaul says, with 53 novel drugs approved by the US Food and Drug Administration in 2020. About 40% of those were first-in-class, meaning they employ a new and unique mechanism for treating disease.

Trodelvy® made by Immunomedics, which Gilead Sciences (GILD) recently bought, is one of the innovative new drugs on the market. It earned a breakthrough designation (given by the FDA only to novel therapies that have the potential to provide more effective treatment or diagnosis of life-threatening or irreversibly debilitating health problems) and was approved for triple-negative breast cancer, says Kaul, adding that it has had a rapid launch.

Kaul also notes that Tepezza®, a drug made by Horizon Therapeutics (HZNP), received a breakthrough designation for thyroid eye disease and had a strong product launch, leading to a robust rally in the company's shares.

"These are just a few of the products I think are making a difference and are examples of the types of companies I'm excited about as we look beyond COVID-19," Kaul says.

In the pipeline

Karim Suwwan de Felipe manages Fidelity® Select Pharmaceuticals Portfolio (FPHAX) and looks at fundamentals that might help drive pharmaceutical stocks as the pandemic recedes in much of the world. "I believe the market is overlooking the potential positive impact of a large number of drug candidates coming to market in the next few years" he says.

The process of developing and testing drugs can be lengthy, and many promising drug candidates that are near the end of their review processes spent the past several years in the earlier stages of clinical trials.

Suwwan de Felipe expects excitement for new drugs to ramp up as more readouts for later-stage clinical trials come out in the next 2 years. He's especially bullish on prospective breakthrough treatments for rare diseases, as well as for more common applications such as treating Alzheimer's disease, cancer, and immunology.

"Some of these drugs could radically change patients' lives and reduce morbidity and mortality, and I believe they could help support growth in the industry for the next decade," he says. These drugs include several from Swiss maker Roche Holding (RHHBY), such as EvrysdiTM for spinal muscular atrophy, CD3/CD20 for lymphoma and TIGIT and Tecentriq for lung cancer and Huntington's disease. All are in the later stages of the development pipeline.

"My focus in terms of pipeline assets is understanding how this new crop of drugs could drive the performance of pharma stocks—including both potential winners and losers—and I like the potential I see for the coming years," Suwwan de Felipe says.

Newer is not always better

Initial public offering (IPOs) for biotechnology companies went on a tear in 2020, with more than 80 new issues, many of which reached above-average post-offering valuations. So far in 2021, the industry is once again off to a hot start, says Fidelity biotech analyst and portfolio manager Eirene Kontopoulos.

"We've seen a good number of deals, although in many cases the quality of the new offerings isn't great," says Kontopoulos, who earned her PhD in neuroscience from Harvard Medical School.

Investing in established companies that have proven track records of innovation could present less risk than investing in younger companies on public markets.

Finding ideas

Those who want to invest in the future of biotechnology may want to consider professionally managed mutual funds and ETFs.

Fidelity® Select Biotechnology Portfolio (FBIOX) and Fidelity® Select Pharmaceuticals Portfolio (FPHAX), held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, click the fund trading symbols above.

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