The healthcare overhaul and the U.S. federal budget cuts could complicate the long-term growth for the biotech sector, which has been on a roll in recent years. Even so, the outlook for inventive companies is strong, says the manager of a top-performing biotech fund.
"The general backdrop is that in the next 5 to 10 years there is a lot of innovation that is going to occur in medicine. I think we are just at the beginning of a 10 to 20 year period for a lot of breakthroughs," Rajiv Kaul, manager of the Fidelity Advisor Biotechnology Fund, said in a recent interview.
Last week, the Fidelity fund was recognized with a 2013 U.S. Lipper Fund Award for outstanding-yet-consistent performance for the past three years ending November 2012.
The Nasdaq biotechnology index rose 15 percent in that period through November 2012 and the Fidelity Advisor Biotechnology Fund was up 24 percent during the period.
Kaul, who has managed the fund since 2005, is positioning his portfolio for long-term growth and targeting companies with reasonable valuations.
The fund's largest holdings as of January 1, 2013, were Gilead Sciences Inc and Amgen Inc. Gilead's shares are trading at 21 times 12-month forward earnings and Amgen has a forward price-to-earnings ratio of 14 times. The Nasdaq biotech index, made up of 30 biotech companies, trades at 25 times forward earnings.
AFFORDABLE CARE ACT
President Barack Obama's healthcare law, enacted in 2010, overhauled the medical industry in the United States, implementing new rules and taxes. Aimed at widening access to healthcare services, the law is expected to add 30 million people to the ranks of the insured over the next decade.
Other aspects of Obama's law focus on the quality of care and will help companies that work on treatments that lead to better patient health, Kaul said.
"The whole basis of the Affordable Care Act is to improve outcomes at a lower cost. And I think that's exactly where the biotech industry is heading," Kaul said.
But drugmakers will pay an annual tax of a few billion dollars a year under the ACA and the government has changed its system of discounts and payments for drugs through Medicare and Medicaid programs.
In addition, the healthcare overhaul has put financial pressure on hospitals, doctors and insurers, and drug prices have been squeezed. For instance, in November, Memorial Sloan-Kettering Cancer Center in New York said the $11,000 price of a Sanofi SA cancer drug was too high. Given it had only modest impact on survival, worked no better than a competitor's drug and had worse side effects, the hospital said it would not use it.
Some areas of biotech or drugs are more vulnerable than others to price pressure or having reimbursements from insurers reduced or cut altogether.
"If it's only a short benefit at high costs, I think one should be cautious about that. I think those type of treatments will have a much harder time getting funded and or paid for," Kaul said.
Many biotechnology companies use a combination of private and public funding as they research and develop drugs. Sequestration, automatic Federal budget cuts that started kicking into place on March 1, is cutting funding to the National Institutes of Health.
That presents a long-term risk for an industry that is largely based in the United States, Kaul said.
"I don't think it's a problem in the short term for 2013 or 2014," he said. "But I do think there is a structural shift in the way research is funded and conducted in the United States. I think that is definitely going to be a competitive disadvantage."
The Food and Drug Association, the U.S. drug regulator that reviews applications for new treatments, is also facing budget cuts because of the sequester.
The drug review typically takes a year and is partly funded by the companies themselves, which help fund the FDA in return for promises the agency will meet certain deadlines.
"If the FDA resources are constrained, it's unfortunate because it would mean review times would get pushed out and the work of the FDA would be very difficult for the agency to manage," Kaul added.
(Reporting by Caroline Humer. Editing by Lauren Young and Andre Grenon)