The International Biotechnology investment trust thrives on later-stage companies in the long term as a growing generics market and time-sensitive patents hit American drugs sales.
These pessimistic predictions were just the latest in a long run of bad news for most investors, but biotechnology shareholders could be forgiven for wondering what all the fuss is about. Biotech stocks performed strongly over the past three months, causing the MSCI ACWI Biotechnology index to rise by almost 20%. For the year ending August 18, the benchmark rose by 28%. This compared with a decline of 10% for the MSCI All Country World index, according to Financial Express.
David Pinniger, investment manager at SV Life Sciences (SVLS), says merger and acquisition (M&A) activity is underpinning the sector. Data from Pfizer shows that there were 28 M&A transactions of more than $50m (£27m) in 2007.
“The pace of M&A will stay pretty solid,” says Pinniger. “We will not see a glut of deals, but companies have to fill their crumbling pipelines [of drugs] and biotech is the only source of innovation.”
According to Cowen, an equity research firm, $24 billion of American drug sales are under threat from generics in 2008, as patents expire on established products. As a result, large pharmaceuticals are paying smaller biotech firms for their products, or buying companies outright.
“That $24 billion is coming straight out of the top line for companies,” says Kate Bingham, managing partner at SVLS. “It is a massive problem for pharma – historically, companies have been able to develop drugs to fill the pipelines.” Biotech stocks have risen twice as fast as pharmaceuticals over the past five years, she adds.
Bingham joined SVLS in 1991, but Pinniger is a more recent recruit. He joined the firm in May, to manage the £100m International Biotechnology investment trust (IBT). SVLS – which has employees in London, Boston and San Francisco – also runs four venture capital funds, with total assets under management of about $1.6 billion.
However, the investment trust’s primary focus is on later-stage companies, rather than the “more scary, mad professor-type businesses,” says Bingham.
“IBT gets to pick the companies with more robust drugs,” she adds.
The trust focuses on small and mid-cap value and growth stocks, and takes a long-term investment horizon. Pinniger says performance suffered at the start of 2008, as small and mid-caps were sold off, but investors have since been tempted back by biotech’s defensive growth qualities. “People do not stop buying drugs in a slowdown,” adds Bingham. She also points to data that shows the industry is positioned to benefit from ageing populations over the longer term. The proportion of people using drugs increases sharply with age, from about 50% in the 40-59 age range, to 75% of people aged 60 and over.
IBT is split into quoted and unquoted portfolios. Unquoted companies formed 17% of the fund at the end of June, and Bingham says investments are carefully structured to minimise risk. Cash is held in reserve and companies receive funding in stages, based on performance and hitting certain “milestone” targets.
Almost three-quarters of the 21 holdings were American companies, with just four British investments: EUSA Pharmaceuticals, Oxagen, RespiVert and Vantia Therapeutics. Previous successful unquoted invest-ments include PowderMed, which was sold to Pfizer in late 2006.
The quoted portfolio was also heavily skewed to America, with nine of the top 10 holdings based in the country – CSL, an Australian vaccine manufacturer, took third spot. The second-biggest holding in the portfolio was Gilead Sciences, an American firm which Bingham says is developing drugs for the treatment of HIV and Aids. She also highlights Micromet, which revealed positive results for a clinical study on its Blinatumomab cancer treatment earlier this month.
Across the quoted and unquoted portfolios, IBT held 71% of its assets in America at the end of June. Europe and Australia had allocations of 18% and 5%, respectively.
According to data from Morningstar, the trust has lagged the other two funds in the Association of Investment Companies Biotechnology/Life Sciences sector over the past year. In the 12 months ending August 18, IBT returned 2%, compared with 19% and 22% for Finsbury Worldwide Pharmaceutical and Biotech Growth, respectively.
However, IBT comfortably outperforms its rivals when measured over three years, with a return of more than 33%. “IBT is a nice way of getting a broad exposure to biotech,” says Bingham. “There is no other fund like it.”