Biotechnology is a science-driven industry that uses living organisms and molecular biology to produce healthcare-related products. Biotechnology is best known for its role in medicine and pharmaceuticals, but the science is also applied in other areas such as genomics, food production, and the production of biofuels.

The term biotechnology was first used by Károly Ereky in 1919 to refer to the production of products from raw materials with the aid of living organisms. The core principle of biotechnology involves harnessing biological systems and organisms, such as bacteria, mould, and plants, to perform specific tasks or produce valuable substances. The production of beer where a living organism—unicellular fungi—is introduced to a solution of malted barley sugar to develop the aroma and alcohol in beer is one example. Another is the development of penicillin, which is extracted from mould and used as an antibiotic to treat bacterial infections.

Biotechnology took off in the 1950s, spurred by a better understanding of cell function and molecular biology. Every decade since then has produced breakthroughs in biotechnology.

In 1982, recombinant insulin became the first product made through genetic engineering to secure approval from the U.S. FDA. Since then, dozens of genetically engineered protein medications have been commercialized around the world. These include recombinant versions of growth hormones, proteins for stimulating the production of red and white blood cells, interferons (proteins released by animal cells), and clot-dissolving agents.

Major new developments on the horizon

Some of the current exciting developments in the biotechnology field include biosensors (personal health monitoring), bioprinting (use of living cells to produce human body parts), and gene editing (treatment of hereditary diseases).

At the same time, some of the big names in biotech are Novo Nordisk, Moderna, and BioNTech. The high risk of failure in this group is illustrated by the high levels of volatility in the share prices, especially among the smaller companies operating in this field.

Within the healthcare sector, the biotech group generated a market-matching return over the past decade, but the volatility of this group was very high (see table above).

Over the same period, the medical devices and healthcare service provider subsectors have performed better than the other main categories—and their volatility was lower. Meanwhile, the pharmaceutical group lagged, and its performance was well below the other categories.

Significant winners within the biotech group

While the investment return generated by the U.S. biotech group has been satisfactory, it represents the performance of a large group of companies classified under the biotech umbrella.

Within the group, there have been spectacular winners. To demonstrate—the top 20 companies in the iShares Biotechnology ETF (see page 91) had an average return of 413% over the past 5 years. Some of the biggest winners in this group include Axsome Therapeutics, Krystal Biotech, and Argenx.

Axome Therapeutics is involved in the development of products for the treatment of depression, migraine, and Alzheimer’s disease. Krystal Biotech has developed a gene delivery platform that enables off-the-shelf treatments for serious dermatology and respiratory diseases. Argenx has developed a pipeline of antibody therapeutics focused on cancer and autoimmune diseases.

On the other hand, there was also a large group of companies that lost significant value. About a quarter of the companies held in the ETF declined by 70% or more over the past 5 years. Still, the large gainers made up for the losers leaving the ETF with a positive return over the 5 years.

Also notable is that 85% of the companies currently held in the IBBI ETF are not profitable. New medical products take a long time to develop and gain regulatory approvals before they generate income. Among the top 20 performers over the past five years, only three are currently profitable.