The healthcare sector has expanded significantly and we are excited by the technology advancements that are driving huge innovation in the biotech sector.
An industry article in the journal,
Nature Reviews Drug Discovery highlighted how sponsorship of clinical trials has changed rapidly. In 2000, 50% of phase 1-3 trials were sponsored by one of the top 10 pharma companies. By 2017, this had fallen to 27% with biotechs playing a much greater role.
Biotechs push the innovation envelope and raise money independently as pharma companies cannot fund everything and this creates great investment opportunities. For investors it’s critical to understand the science but also how the business will develop and the internal drug development pipeline of each company.
An example was our investment in US biotech,
Moderna in its December 2018 initial public offering (IPO). Bianca recognised the potential of their vaccine capability well before COVID-19 arrived.
Quanterix, another stock we hold, is a US biotech/tool company that is pushing the limits of disease detection. If they can detect a tiny bit of a disease in blood, they can treat it before it becomes acute. Their Simoa technology is an ultra-sensitive immunoassay technology allowing detection of proteins and nucleic acids at the lowest possible levels. The technology provides 1,000 times the sensitivity increase over conventional assays. Prevention really is better than the cure. Quanterix has a very commercial and technically capable management team who we have known for over a decade. They ensured the Simoa technology is well tested and placed in the right labs. Now they can detect biomarkers that are in high demand for diseases such as Alzheimer’s, Multiple Sclerosis and also in oncology.
Bluebird bio focuses on editing the genetic code. Many genetically defined diseases can be fixed by just editing this code. Bluebird now has a product approved in Europe and oncology cell therapy following in the US. Genetic engineering, manufacturing and supply chain management as a whole platform is key and Bluebird has the team to make this a reality.
We believe biotech companies should be considered in a similar vein to technology companies. In the near future, biotech will challenge and change the way healthcare is provided and profoundly impact on our longevity and quality of life. It’s a very exciting area undergoing constant change. We feel our expertise in this field allows us to bring an edge to uncovering underappreciated growth ideas in this sector.
4. Robust travel-related companies
At times of large market dislocations, we have used large sell-offs to add significant new positions to our portfolios, such as semiconductors during the memory price sell off in 2018, or banks post the GFC. We believe, this time is no different, and we have added considerable exposure to travel.
Travel has been critically impacted by COVID-related lockdowns, with a long recovery timeframe. Nevertheless, our view is that travel will recover, though it may take at least three years to return to prior levels with business travel potentially taking longer, given the widespread adoption of effective video-conferencing.
It should be remembered though, that prior to the pandemic, the travel industry had showed steady growth for many years. Global air travel has grown around 5.5% per year for 50 years.
[8] It’s important to note that this timeframe contained recessions, wars, oil shocks and the introduction of multiple technologies (e.g. the internet, live streaming), which would supposedly reduce the need to travel.
2020 is the ultimate exception but this presents an opportunity. Travellers have disappeared but the innate human desire to travel has not.
In early June, Ryanair reported their bookings for July/August were only 50% below the 2019 level. This was before any borders had re-opened and without any prospect of a vaccine. Cruise reservations for 2021 are up 40% from 2019, according to booking site CruiseCompete, as holidaymakers rush to reschedule cancelled trips and new customers plan ahead.
On a base rate of 5.5% annual growth, we can add booming demand from emerging markets as income levels rise (only around 10% of Chinese have passports vs. 40% of Americans and 80% of British), Western consumers allocating more spending towards ‘experiences’, and the continued reduction in the cost of travel thanks to low-cost carriers and platforms such as Airbnb.
Our investments in the sector are dominated by capital-light internet booking platforms and software providers. We own online travel agents
Booking Holdings (owners of Booking.com, KAYAK, Priceline, Agoda, OpenTable) and
Trip (formerly called Ctrip). Both companies have significant cash buffers to weather the storm, primarily serve leisure customers and help hotels fill unsold rooms (where they will never have better access to inventory). Their competitive positions improved as smaller peers exited the industry.
Amadeus IT Group is one of only three GDSs (Global Distribution Systems). Type a couple of city names and dates into Booking.com or other ‘Online Travel Agencies’ and you’ll see a menu of airlines, routes, dates, times and prices. You can easily browse various options and book your trip right then and there. The backbone powering this technology is a GDS.
This is an online marketplace where airlines upload their ‘inventory’. Automating distribution was the only way to handle over four billion passengers and countless more enquiries and searches. It allowed airlines to automate their interactions with travel agents. Huge wage costs were replaced by a small fee per booking paid to the GDS. Not only is switching expensive, it entails a small possibility of massive operational disruption, which any CEO or Board would strive to avoid. This makes it hard for new players to gain a foothold. So, the GDS economics are excellent and barriers to entry are high.
Amadeus spends hundreds of millions of dollars developing and maintaining the GDS and other software offerings each year. They then sell them to many airlines, for a fraction of what it would cost each airline to do it for themselves.
Given the current concern over passenger volumes, this example of exaggerated demise was available for around 16x 2019 earnings.