Outlook of biotechnology and the technology sector

Evan McCulloch, Senior Vice President, Director of Equity Research and Jonathan Curtis, Senior Vice President, Franklin Equity Group, shared the below first-hand insights and views on how the fourth industrial revolution is blurring the lines for the technology and biotechnology during a webinar last week, as well as the profound impact of biotech and tech discoveries for humans.



On the development and risk of the biotechnology sector by Evan McCulloch, lead portfolio manager of Franklin Biotechnology Discovery Fund 

Biotech companies are now more sophisticated in terms of how they approach drug research and development, how they conduct and structure preclinical trials etc. It is a difficult sector to succeed in, as seen by the existence of companies that have yet to launch any product since 2000, but today’s investors are also more thorough in the level of due diligence they conduct before deciding if an investment is warranted. The sector has also matured and expanded significantly. The Nasdaq Biotech Index contains 270+ names now compared to 60+ back in 2000.


The continuous advancement of mankind’s understanding of human biology, and of drugs through development and towards commercialization is the gateway towards profits and returns for investors, and there are many medical conditions awaiting the discovery of a treatment. The sector will continue to see innovation and progress, and while high valuations are a concern now, professional management and specialized expertise in analyzing these companies may help mitigate such risks.


One key risk is that of government policy, and of potential legislative changes that may change drug reimbursement models. High drug prices are a concern and is probably the major sustainability risk to the sector. Drug development may be a noble business, but still a business that needs profitability to survive and thrive, so it is crucial for investors to consider carefully the merits of investing in any company, in terms of its drugs’ clinical value and efficacy relative to the R&D and other costs.


On technology sector and digital transformation by Jonathan Curtis, lead portfolio manager of Franklin Technology Fund


The impact that technology can have on everyday lives was crystalized by the COVID-19 pandemic, with digital transformation at the forefront. In a nutshell, digital transformation is about collecting and using data to better understand customers and business processes, and then using technology to radically transform how businesses and entire industries operate.


Enterprises were estimated to spend about US$1.3 trillion on digital transformation in 2020, but this could be vastly understated as the pandemic may be bringing about an acceleration of plans, so there are enormous opportunities in this space that investors are just beginning to see.


There are ten sub-themes within digital transformation that investors should focus on. They are AI/machine learning, secure cloud computing, new commerce, software as a service, digital advertising, fintech and digital payments, internet of things, digital collaboration, cyber security and 5G, and it is important to own the best ideas associated with each one. Of these, AI/machine learning and secure cloud computing may be the most exciting, with the most potential of significant impact on everyone’s daily lives.


The tech sector has seen some recent volatility, and the right approach to manage it is to focus on the long term, do rigorous due diligence and invest in companies that are best positioned for the long run. The sector is also well positioned to deal with inflationary risks, as it is generally asset-light and do not have input costs that may be negatively impacted by inflationary pressure.


Government regulation is a major risk in the tech sector, and the U.S., Europe, China etc have all been closely monitoring and applying pressure on the influence and power of big tech companies. However, such action, although detrimental to the big players, may be a tailward for small and mid-sized tech companies, who will then find it easier to compete, and that can be a positive for investors.