Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Theme basket review: A disaster year for NextGen Medicine
Peter Garnry
Chief Investment Strategist
Summary: Our NextGen Medicine basket has had a difficult past year down 39% as interest rates have charged higher while sentiment on biotechnology has eased. In our annual review we have decided to remove two stocks, Editas Medicine and MorphoSys, and replacing them with Ionis Pharmaceuticals and 10X Genomics providing a better geographical and product mix in the theme basket. A look at the fundamentals show that our NextGen Medicine stocks have had a median revenue growth rate of 60% over the past year. However, high growth and high equity valuations have clearly been a risky journey that past year.
The frontier of biotechnology is risky
This century has been called the century of biology as the human civilization has harnessed our understanding of physics to build machines and systems to advance our society. In this century it is predicted that we will accelerate innovation in our understanding of our biology and that it will lead to breakthroughs in drug discovery and potentially lead to a future of much more personalized medicine based on our understanding of the human genome. That is the premise of our NextGen Medicine, an expression of the innovation that goes on in drug discovery, but while expectations are high the past year has also shown how risky investments in this part of the market really are.
Our NextGen Medicine basket is down 39% over the past year compared to the MSCI World Index that is down 5% in the same period. While this underperformance is big it also reflect the incredible outperformance in the previous years. Our basket has a 60% revenue growth rate over the past year highlighting the enormous growth but with high expectations come high stock price sensitivity to changes in those expectations and NextGen Medicine stocks are typically high duration assets so they have naturally responded negatively to higher interest rates. Analysts remain positive on the industry with a median price target being 66% above current market prices.
NextGen Medicine is updated
We are in the process of reviewing all our current 21 theme baskets and there two baskets already that we have left unchanged and those are Women in Leadership (because it is our newest) and the Defence basket because no new companies have entered the industry and we are satisfied with the geographical split.
Following a review of our NextGen Medicine basket we have chosen to update the basket by removing two stocks: Editas Medicine and MorphoSys. These two companies are the two smallest stocks in the basket on market capitalization and therefore the obvious rule based decision in order to make room for two new companies that we believe provide a better geographical and product split. The two new stocks entering the basket are Ionis Pharmaceuticals and 10X Genomics.
Ionis Pharmaceuticals is developing RNA-targeted therapeutics and 10X Genomics develops integrated solutions across instruments, consumables and software for analysing biological systems and their complexity. The new updated theme basket can be seen below and found in our trading platform.
| Name | Mkt Cap (USD mn.) | Sales growth (%) | R&D in % of mkt cap | Diff to PT (%) | 5yr return |
| Moderna Inc | 66,092 | 4,695.5 | 3.2 | 63.7 | NA |
| Illumina Inc | 56,015 | 32.1 | 1.8 | 19.5 | 119.9 |
| BioNTech SE | 42,821 | 8,263.9 | 2.2 | 62.2 | NA |
| Seagen Inc | 25,221 | -6.3 | 4.5 | 32.4 | 124.2 |
| Genmab A/S | 22,759 | -28.3 | 16.7 | 28.5 | 63.7 |
| Argenx SE | 14,512 | 804.9 | 2.0 | 34.1 | 1,478.3 |
| Exact Sciences Corp | 13,498 | 33.2 | 5.5 | 62.1 | 320.8 |
| 10X Genomics Inc | 10,086 | 75.3 | 5.9 | 110.4 | NA |
| Grifols SA | 10,008 | -2.9 | 3.1 | 67.5 | -24.2 |
| Intellia Therapeutics Inc | 7,141 | -57.0 | 2.8 | 64.5 | 657.4 |
| Mirati Therapeutics Inc | 6,620 | 501.6 | 6.6 | 79.7 | 2,060.4 |
| Natera Inc | 6,598 | 56.1 | 3.4 | 99.7 | 654.9 |
| Swedish Orphan Biovitrum AB | 6,238 | -2.3 | 30.9 | 11.0 | 59.6 |
| Arrowhead Pharmaceuticals Inc | 5,247 | 80.9 | 4.5 | 75.8 | 2,362.9 |
| CRISPR Therapeutics AG | 4,736 | 1,066.5 | 8.2 | 132.4 | 315.4 |
| Ultragenyx Pharmaceutical Inc | 4,677 | 67.2 | 10.8 | 105.4 | -3.9 |
| Ionis Pharmaceuticals Inc | 4,448 | -29.2 | 14.2 | 61.2 | -30.4 |
| Galapagos NV | 4,325 | 5.2 | 11.6 | 1.3 | -7.2 |
| Beam Therapeutics Inc | 4,179 | 3,154.2 | 7.7 | 105.0 | NA |
| Denali Therapeutics Inc | 4,132 | 1,400.9 | 6.1 | 143.0 | NA |
| Abcam PLC | 3,969 | 14.5 | 0.6 | 23.9 | 56.1 |
| Fate Therapeutics Inc | 3,716 | 198.1 | 5.0 | 153.4 | 1,294.6 |
| Twist Bioscience Corp | 3,019 | 44.6 | 2.6 | 26.1 | NA |
| PTC Therapeutics Inc | 2,976 | 37.4 | 17.1 | 21.2 | 217.9 |
| Iovance Biotherapeutics Inc | 2,490 | NA | 9.9 | 118.3 | 125.1 |
| Sage Therapeutics Inc | 2,475 | 15,871.5 | 11.7 | 61.7 | -11.5 |
| Invitae Corp | 2,467 | 77.1 | 14.4 | 181.8 | 25.4 |
| Pacific Biosciences of California Inc | 2,393 | 52.6 | 3.7 | 185.7 | 124.2 |
| CareDx Inc | 2,127 | 62.9 | 3.2 | 111.9 | 1,614.0 |
| Allogene Therapeutics Inc | 1,571 | NA | 13.9 | 191.7 | NA |
| Aggregate / median | 346,556 | 59.5 | 5.7 | 66.0 | 124.2 |
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