Defiance Nasdaq Junior Biotechnology ETF
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
February 2021
Investment Case for IBBJ:
Defiance
Nasdaq Junior
Biotechnology ETF
Pharma and biotech are often safe havens for investors in turbulent economic times.
But that’s not the reason that this sector suggests great potential moving into 2021. A
number of factors, both macro-economic and sector-specific have coalesced to provide
strong growth indicators. Defiance’s IBBJ Junior Biotech ETF offers low-cost, diversified
exposure to this dynamic space, with its strong R&D and M&A elements and conducive
regulatory environment.
This investment case will explore:
1. Why pharma and biotech?
2. Why junior stocks?
3. Why IBBJ?
1
February 2021 Investment Case for IBBJ
Why pharma and biotech?
The global pharmaceutical market has experienced Growth in this sector is not dependent on a post-
significant growth in recent years. It was valued vaccine spending boom, on employment figures or
at about US$1.25 trillion at the end of 2019, a other traditional business metrics. R&D lies at the
significant increase from its US$390 billion 2001 core of value-determination in biotech, which is
evaluation.1 Research and development in this largely insulated from short term economic slumps
industry also rose from $129 billion in 2010 to by the insurance system that pays for medicines.
$179 billion by 2018.2 According to a report from This means that data and innovation are perhaps
IQVIA, the industry has experienced a 3 percent better indicators of future growth than in other
compound annual growth rate (CAGR) since 2014.3 sectors. Take Inovio for example. Its R&D costs in
2019 totaled $95m, far greater than its revenues
of $4m. However, by mid-2020 the company’s
market cap was $4.3bn - its investment in DNA
vaccine technology was paying off as Inovio found
itself positioned among the leaders in Covid-19
vaccine research. And while internal sector forces
continue to drive growth, the macro-economic
context also contributes to bullish estimations.
Very low interest rates combined with massive
government support for small and mid-sized
companies leaves capital chasing opportunities.
High investor demand, plenty of financial capacity
Biotechnology’s performance stood out in 2020. and limited assets have been viewed by PwC as
Termed “the greatest year ever for the biopharma offering the potential conditions for market deals.6 A
industry,” venture capital remained high: over $26bn widespread sense that science and technology offer
raised (the prior high was $19 bn in 2018).4 One the way out of the pandemic have also contributed
of these deals was in September, when Gilead to positivity around this sector. FDA approvals
Sciences purchased Immunomedics for $21 bn, and pre-approvals were already up before the
a 108% premium; which was six months after pandemic, and the need to find a vaccine has only
Gilead’s $5bn purchase of Forty Seven.5 And these heightened awareness of the need to expediate the
are just the tip of the iceberg. regulatory process of medical innovation.
1 “Revenue of the worldwide pharmaceutical market from 2001 to 2019,” Statista,
https://www.statista.com/statistics/263102/pharmaceutical-market-worldwide-revenue-since-2001/
2 “Total global spending on pharmaceutical research and development from 2010 to 2024,” Statista,
https://www.statista.com/statistics/309466/global-r-and-d-expenditure-for-pharmaceuticals/
3 “Why Consider Investing in Pharmaceutical Stocks?” Melissa Pistilli, Investing News Network, June 11, 2020
https://investingnews.com/daily/life-science-investing/pharmaceutical-investing/investing-in-pharmaceutical-stocks/
4 “The Biotech Paradox Of 2020: A Year In Review,” Bruce Booth, January 4, 2021.
https://www.forbes.com/sites/brucebooth/2021/01/04/the-biotech-paradox-of-2020-a-year-in-review/?sh=a5abee43b3ac
5 “2021 forecast: M&A poised to rebound in 2021, fueled by pharma's $1.47T in deal-making firepower: analysts,” Arlene Weintraub, December 22, 2020.
https://www.fiercepharma.com/pharma/m-a-poised-to-rebound-2021-as-pharma-sits-1-47t-deployable-capital-analysts-predict
6 “Global M&A Industry Trends in Health Industries,” PwC, https://www.pwc.com/gx/en/services/deals/trends/health-industries.html
2
February 2021 Investment Case for IBBJ
Why junior stocks?
While biotech and pharma are both economically
and politically on the up, what makes the junior
side (under $5bn market cap) so exciting looking
ahead to 2021? Even before Covid-19, small-cap
biotech companies had the advantage of a Food
and Drug Administration more receptive to new
cutting-edge and rare-disease therapies. They were
also encouraged by increased patient lobbying and
greater willingness by insurers to pay for treatments.7
However the sub-sector continued to strengthen,
largely due to the effects of the pandemic as well
as natural sector development.
A number of large firms are facing a patent cliff,
whereby their exclusive rights to manufacture certain
widely-used drugs are coming to an end. Their
revenue stream is about to face serious competition
and they need to develop other sources. Combined
with their large accumulated funds (the ten largest
biotech and pharmaceutical companies in the
S&P 500 had an average cash stockpile of $10.7
billion as of mid-June, 20208), the stage is ready
for extensive M&A activity and valuation leaps for
the smaller companies. due to the extensive innovation in the country and
the lower tax penalties for incoming firms.
Firms like Pacific Biosciences of California, which
has developed Single Molecule and Real-Time Whether for cancer research, or a vaccine or
(SMRT) technology to enable real-time analysis of treatment for Covid-19, there is confidence that the
biomolecules with single molecule resolution. Or strong demand side in these industries, combined
FATE, which researches and develops therapies to with the drive towards innovation and research,
repair and regenerate body tissues with the help will continue to support growth and development.
of stem cells, and announced its intention to IPO Government regulation and policies also appear
in January 2021.9 Such junior stocks are even a to prioritize these sectors, whose centrality to the
potential target for global biopharmas looking for wider economy has only been highlighted by the
assets in the US. They have become more attractive global corona pandemic.
7 “Small Is Best for Biotech ETFs,” Teresa Rivas, Baron’s, December 23, 2017, https://www.barrons.com/articles/small-is-best-for-biotech-etfs-1514002637
8 “An Upstart Biotechnology ETF Right for the Times, ”Todd Shriber, August 11, 2020.
https://www.nasdaq.com/articles/an-upstart-biotechnology-etf-right-for-the-times-2020-08-11
9 Fate Therapeutics Announces Proposed Public Offering of $350 Million of Common Stock, January 4, 2021.
http://Fate Therapeutics Announces Proposed Public Offering of $350 Million of Common Stock
3
February 2021 Investment Case for IBBJ
Why IBBJ?
With committed R&D budgets, small cap biotechs are
primed for innovation. The wider economic context
suggests that there will be some consolidation, as
large companies look for new income flows and
smaller firms band together in uncertain economic
times. All of these movements can bring growth
and profit to investors, but it is not always possible
to predict the winners. This is where a weighted,
index-based fund can offer low-cost, diversified yet
targeted exposure, while seeking to insulate against
big swings in individual stocks.
Graph comparing the performance of IBBJ with NBI, its large-cap equivalent
4February 2021 Investment Case for IBBJ
IBBJ, the Defiance Nasdaq Junior Biotechnology Initial R&D stats from the companies captured
ETF seeks to replicate the performance of the in the Junior Biotechnology Index indicate a
Nasdaq Junior Biotechnology Index (before fees thirst for growth and a pharma business model
and expenses). It offers investors exposure to small- that prizes innovation before sales. For 2020,
cap “junior” companies, under $5 billion of market companies in the Index totaled nearly $20 bn on
capitalization, classified as either biotechnology R&D, equivalent to 63% of their revenue. Some of
or pharmaceutical according to the Industry these companies do not yet have any revenue, and
Classification Benchmark (ICB). IBBJ provides of those companies who did some level of sales,
exposure to companies engaged in research and 73 (the equivalent of 40% of the index) reported
development, the sale or licensing of biological R&D expenses higher than their revenues.11 The
substances for the purposes of drug discovery scope for M&A and major scientific breakthroughs
and diagnostic development; and pharmaceutical is there. IBBJ is rebalanced every quarter to ensure
manufacturers of prescription or over-the counter that the maximum weight of any one security
drugs, including vaccines and development and does not exceed 8%.
manufacturing companies.10
US and global pharma spending on research and development since 1990 12
(R&D lies at the core of value-determination in biotech)
10 “Industry Classification Benchmark (Equity) v3.5,” FTSE Russell, June 2020, https://research.ftserussell.com/products/downloads/ICB_Rules_new.pdf
11 As a reference point, weighted average R&D expense, as a percentage of total sales, was 10.5% for the Nasdaq-100, and 4.8% for the S&P 500 in 2019.
https://www.nasdaq.com/articles/the-launch-of-nasdaq-junior-biotech-2020-09-03
12 Data Source: https://efpia.eu/media/554521/efpia_pharmafigures_2020_web.pdf
5February 2021 Investment Case for IBBJ
About Defiance
Founded in 2018, Defiance ETFs is an exchange-traded funds (ETFs) sponsor and registered
investment advisor focused on next generation investing. Our suite of rules-based ETFs allows
retail and institutional investors to express a targeted view on dynamic sub-sectors that are
leading the way in disruptive innovations.
The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before
investing. The prospectus contains this and other important information about the investment company.
Please read it carefully before investing. A hard copy of the prospectus can be requested by calling
833.333.9383 or going to www.defianceetfs.com.
Investing involves risk. Principal loss is possible. The Fund is a recently organized investment company
with no operating history. As an ETF, the fund may trade at a premium or discount to NAV. Shares of
any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the
Fund. The Fund is not actively managed and would not sell a security due to current or projected under
performance unless that security is removed from the Index or is required upon a reconstitution of the
Index. A portfolio concentrated in a single industry or country, may be subject to a higher degree of risk.
The Fund is considered to be non-diversified, so it may invest more of its assets in the securities of a
single issuer or a smaller number of issuers.
The securities of small-capitalization companies may be more vulnerable to adverse issuer, market,
political, or economic developments than securities of large- or mid-capitalization companies. The success
of biotechnology companies is highly dependent on the development, procurement and/or marketing
of drugs. The values of biotechnology companies are also dependent on the development, protection
and exploitation of intellectual property rights and other proprietary information, and the profitability of
biotechnology companies may be affected significantly by such things as the expiration of patents or
the loss of, or the inability to enforce, intellectual property rights. The research and development and
other costs associated with developing or procuring new drugs, products or technologies and the related
intellectual property rights can be significant, and the results of such research and expenditures are
unpredictable and may not necessarily lead to commercially successful products. Diversification does
not assure a profit, nor does it protect against a loss in a declining market.
Defiance ETFs are distributed by Foreside Fund Services, LLC.
6You can also read
