New Perspectives on Investing in Taiwanese Biotech Stocks | In-Depth Analysis of Five Hot Picks and Risk Guidelines

▶ Why Are Biotech Stocks the Preferred Hedge?

As we move into 2023, the global economy faces multiple challenges—geopolitical conflicts triggering energy crises, aggressive interest rate hikes causing asset volatility, and frequent financial institution risk events. Against this backdrop, investors are seeking stable asset allocation options. The reason biotech stocks are gaining attention is due to their unique resilience to economic cycles.

Tracking the S&P 500 index with SPY.US and biotech-focused XBI.US over the past year shows a stark contrast—while the broader market declines under pressure, biotech stocks demonstrate stronger resilience. This is no coincidence. The performance of biotech companies mainly depends on the progress of new drug development, rather than macroeconomic fluctuations. Therefore, during periods of rising market risk, biotech stocks often maintain an independent trajectory. In simple terms, biotech stocks have strong anti-inflation properties and tend to outperform during economic downturns, which is precisely what makes them attractive.

▶ What Exactly Are Biotech Stocks?

To truly understand the investment logic behind biotech stocks, it’s essential to clarify their definition and classification. Biotech stocks refer to publicly listed companies that utilize genetic engineering, cell engineering, protein engineering, and other biotech methods to engage in new drug R&D, medical device manufacturing, and commercialization.

These companies can be divided into two main camps: one focused on new drug R&D and sales, and the other on medical device manufacturing. The former involves higher risks due to long R&D cycles and low success rates but offers potentially substantial returns; the latter tends to be more stable due to a more mature business model.

Global biotech giants like Amgen, Pfizer, and Novartis are well-known to investors. However, in the Taiwan market, investors should pay more attention to the performance opportunities of local biotech stocks.

▶ Taiwan Biotech Index and Industry Indicator

The Taiwan Biotech Index, compiled by Taiwan Index Plus, selects representative stocks based on market capitalization, liquidity, and trading volume of listed biotech and medical stocks. It serves as a key indicator of the overall performance of Taiwan’s biotech industry. The main constituents tracked include companies like PhytoHealth, United Biomedical, Grape King, Taiwan Biotech, and Momo.

Changes in the index directly reflect the trend of Taiwan’s biotech stocks and also indicate the industry’s development direction. From 2020 to 2023, the Taiwan Biotech Index experienced a clear upward trend, driven by accelerated new drug approvals and faster performance releases.

▶ Case Analysis of Five Major Taiwanese Biotech Stocks

Phytochem (6446.TW): A Benchmark for Breakthrough New Drugs

Founded in 2003, Phytochem mainly focuses on treatments for blood diseases, chronic hepatitis, and cancer, adopting a R&D model in collaboration with international medical research institutions. As of March 2023, the company’s market cap reached NT$135.3 billion, with an annualized return of -1%, and no dividend yield.

Over the past year, its stock price increased by 45%, contrasting sharply with the overall Taiwan stock market’s decline of 10.5%. Notably, the stock has surged over 600% in the past three years, mainly driven by the performance contributions of newly launched self-developed drugs. In the first two months of 2023, revenue totaled NT$540 million, a 351% increase year-over-year, showing impressive performance.

In mid-March, the company’s treatment for polycythemia vera, Ropeg, was included in Italy’s national health insurance, priced at €7,550, and is expected to become a major future revenue driver. Despite a negative annualized return, this reflects the profit volatility characteristic of the biotech industry rather than a bleak outlook for the company. In the short term, there is still room for stock price correction, and patient investors may consider buying on dips.

United (4743.TW): A Rising Star in Chronic Disease Medications

Founded in 2008, United specializes in innovative drugs for chronic skin and immune diseases. As of March 2023, its market cap is NT$101.7 billion, with an annualized return of 0.3%, and a dividend yield of 0.01%.

Over the past year, its stock price rose by 13%, outperforming the Taiwan market. Since 2019, the company has launched multiple self-developed drugs, turning profitable in 2022. Its new drug “SuBiYi” has proven effective for diabetic foot wound healing and has been approved for listing in Taiwan; the wound ointment Bonvadis has received import permits in New Zealand and India, with promising market expansion potential. Overall, the company’s pipeline is rich, and growth momentum remains strong.

Taiyi (4126.TW): A Stable Medical Device Expert with Profitable Track Record

Unlike the previous two biotech companies focused on new drugs, Taiyi was established in 1977 and mainly engages in medical consumables R&D, manufacturing, and hospital engineering. As of March 2023, its market cap is NT$5.997 billion, with an annualized return of 5%, and a dividend yield of 3.6%.

If you’re looking for a biotech company with stable performance and proven profitability, Taiyi is an ideal choice. Its stock price has risen 17.5% over the past year, outperforming the Taiwan market. Over the past two decades, the company’s annual profit margin has remained above 10%, and in the last three years, it has maintained over 15%, with only a single loss in 2009. This stability stems from the nature of medical consumables—no need to go through the “development and上市” cycle typical of new drugs, resulting in relatively moderate stock price fluctuations.

Bao Dao Technology (5312.TW): Traditional Strength in Eyewear Retail

Founded in 1989, Bao Dao is Taiwan’s largest eyewear retailer, engaged in eyewear design, sales, and optometry services. As of March 2023, its market cap is NT$3.838 billion, with an annualized return of 7.6%, and a dividend yield of 4.5%.

Similar to Taiyi, Bao Dao is a stable biotech enterprise, with profit margins around 10% over the long term. Although revenue declined in the past two years, its annualized return last year and recent dividend yield still outperform peers. As an industry leader, brand recognition is a core competitive advantage, but attention should be paid to the risk of continued revenue decline. The 5% stock price increase over the past year is above the Taiwan market but still relatively moderate compared to growth stocks.

Johnson & Johnson (4747.TW): The Rise of a Traditional Pharma Company

Johnson & Johnson (J&J) was founded in 1959, mainly engaged in manufacturing and selling Western medicines, covering treatments for central nervous system, respiratory, and gastrointestinal conditions. As of March 2023, its market cap is NT$1.517 billion, with an annualized return of 3%, and a dividend yield of 3.2%.

Most notably, J&J’s stock surged 61.2% over the past year—far exceeding industry peers and the Taiwan market. The stock traded between NT$30-40 until December 2022, then quickly broke through and stabilized above NT$45. The growth driver was accelerated performance, with monthly revenue growth reaching a maximum of 41.52% in 2022, and the first two months of 2023 showing YoY increases of 24.29% and 9.97%. Technically, the medium- to long-term upward trend remains intact, but short-term adjustments are possible, making it suitable for phased buying on dips.

▶ Rational Reflection on the Investment Outlook for Biotech Stocks

In the current environmentally conscious economic environment, biotech stocks are favored for their anti-inflation and cyclical resilience. Especially, companies like Phytochem and United are at critical “Phase 3 clinical trial unblinding” stages—where the efficacy of new drugs in humans is validated before approval. If these drugs pass smoothly, the subsequent revenue potential will be significant, ultimately reflected in stock prices.

However, this depends on successful drug approval. Even at this stage, there remains a risk of failure, and comprehensive evaluation of other factors is necessary before making investment decisions. Blind optimism is irrational.

▶ Three Key Risks in Investing in Biotech Stocks

Biotech stocks are classified as high-risk assets mainly due to the peculiarities of new drug R&D:

Low success rate of new drugs: The success rate from R&D to final approval is less than 10%, with a cycle of about ten years. During this period, companies often burn through funds in R&D without guaranteed success, which is the fundamental reason for the high risk of biotech stocks.

Short patent protection period: In Taiwan, new drug patents are protected for a maximum of 10 years, typically with an initial protection of 5 years, extendable by another 5 years upon application. Once protection expires, generic manufacturers flood the market, and the exclusive advantage of the new drug disappears, causing revenue to plummet.

Debt risk: Long-term capital investments without stable income sources, coupled with unappealing R&D projects, can lead to high debt levels and even threaten daily operations.

▶ Three Strategies for Rational Investment in Biotech Stocks

Diversify to reduce single-stock risk: Avoid over-concentrating funds in a single biotech stock. Diversify investments across multiple companies to balance different business performances and industry fluctuations. Choose a portfolio with strong fundamentals and growth potential to ensure overall stability.

Regular review and dynamic adjustment: Establish a routine for reviewing your investment portfolio, tracking performance, market trends, and relevant information. Detect risk signals early and adjust holdings accordingly—adding, reducing, or selling individual stocks—to keep the portfolio flexible and adaptive.

Leverage professional analysis tools: Use reliable stock analysis tools to understand company fundamentals and investment value. These tools should provide key information such as financial indicators, R&D progress, and product pipelines, helping to make informed decisions. Ensure tools come from authoritative sources and align with your investment goals and risk tolerance.

▶ Final Investment Advice

For investors planning to include biotech stocks in their portfolio to hedge against inflation, it’s crucial to carefully evaluate the company’s debt levels, stock price position, new drug R&D progress, and success rates. Generally, Taiyi, Johnson & Johnson, and Bao Dao are more worth prioritizing—these companies have either proven profitability or demonstrated strong performance acceleration, with relatively manageable risks, suitable for investors with different risk preferences.