The biotech sector is weighed down by the same problems that are dragging on the rest of the economy: lower R&D funding as interest rates rise, and supply chain issues that are hurting productivity, asserts Michael Foster, editor of CEF Insider.
But this sector is too important to America's future for the government to let it wallow. So President Biden has stepped in. What his administration is doing will more than offset those negatives — and put the sector on an upward trajectory for years to come.
We note that we espouse no political agenda here; we simply mine the overlooked opportunities before us. And the Biden plan primes the sector for strong gains.
The plan is a multi-billion-dollar project called the National Biotechnology and Biomanufacturing Initiative. Among other things, it's designed to bring the production of more vital treatments to the US. At the same time, US pharma firms can use these funds to push out into new markets and grow their current ones.
The plans are ambitious and wide-ranging: there's hope to develop new antibody therapeutics, alternatives to meat, biodegradable plastics and age-reversing technology.
All of this boils down to the fact that the government is turning on the flow of money to biotech at a time when the Fed is reducing the flow of money to the economy as a whole. That will set up the sector to regain its edge. But not all biotechs will benefit equally, which is why we're playing the "Biden biotech boom" through an actively managed CEF.
The best biotech CEFs are managed not just by financial pros but also by Ivy League-trained medical doctors and researchers who can cast a critical eye on the research churned out by different pharma firms. This is why CEFs are the ideal tools for biotech investing. Algorithm-run ETFs and individuals picking their own stocks simply can't compete with financial and medical experts who know the sector inside and out.
The pros at the 6.8%-yielding Tekla Healthcare Opportunities Fund (THQ) are a perfect example. This fund, like all funds managed by Tekla, is run by a mix of financial and medical pros with decades of experience.
It portfolio is solid, sporting a mix of blue-chip firms with healthy cash flows and smaller firms with solid pipelines of drugs and medical devices. THQ sports an 8.6% discount to net asset value, so we're essentially buying for 91 cents on the dollar here. I'm expecting THQ's discount to flip to a premium, taking the fund's price along with it.
THQ is a good choice, but we prefer two other biotech funds — the Tekla Healthcare Investors Fund (HQH) and Tekla Life Sciences Investors Fund (HQL). Both yield more — around 8.2% apiece today.
In addition, there are some key differences in their portfolios that provide greater upside. While THQ has many large cap medical companies to smooth out the risks from the smaller biotech firms. HQL, in particular, is more focused on more growth-oriented pharma firms doing solid research. This is where Biden's plans are going to translate into the biggest windfalls of R&D cash.
Similarly, HQH holds strong companies, like Regeneron (REGN) and Vertex (VRTX), which are two of its top three holdings. Both are also well-positioned to profit from Biden's plans.
