Biotech Growth Trust; Time to increase exposure?

10th Jul '13 by johnrosier

11 comments 8970 reads

Biotech Growth Trust (408p and 4.0%of JIC) I attended the AGM yesterday and enjoyed a very bullish presentation by Sven Borho, from Orbimed, the Trust's manager.

His main points were;

Biotech is delivering: six of the current top ten best selling drugs worldwide are produced by biotech companies and only four by large pharmaceutical companies (big pharma). Many of the recent drug launches by biotech companies could be top 10 drugs; e.g. Tecfidera, the new MS drug from Biogen, which in 6-7 weeks has already taken 30% market share.

Biotech companies in which the Trust is invested have an exciting pipeline of drugs in late stage development; e.g. Gilead's Sofosbuvir, launching imminently, provides a total cure to Hepatitis C infection and is estimated could have peak total worldwide sales of $8.0bn.

The FDA climate has become more friendly with 40 new products being approved in 2012; ten more than 2011 and the highest since 2004. It is also fast tracking drugs "addressing unmet medical needs" such as Kyprolis for multiple myeloma which was approved on phase II trial data.

Valuations are attractive for major biotech companies especially compared to big pharma. Following earnings per share growth of 15.9% in 2012, the average growth for the four large biotech companies the Trust is invested in, (Amgen, Biogen Idec, Celgene and Gilead Sciences), is forecast at 13.0% in 2013, accelerating to 26.4% in 2014, followed by 24.9% in 2015. The 2015 p/e ratios for these four companies average 13.6x compared to 13.7x for big pharma, where earnings are only growing at an estimated 6.1% in 2014 and 5.5% in 2015.

Sven then highlighted a number of stocks in the second tier of biotech which are expected to make announcements in the next six months which hopefully will act as catalysts to get their share prices moving upwards. An example cited was Onyx, which has two phase III trail results imminent. (Incidentally, at the last presentation in November, he mentioned Onyx as a possible takeover candidate; last week Onyx rejected an approach from Amgen; the share price has nearly doubled since November).

He expected that merger and acquisition, (M&A) activity would continue as big pharma and larger biotech look to snap-up promising new drugs at an early stage; in the presentation a number of potential M&A candidates are mentioned.

In summary, the manager's strategy is to invest in big biotech companies that…

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johnrosier

28th Nov '13

28th November 2013

Biotech Growth Trust and World Wide Healthcare Trust

Yesterday I attended a presentation given by Samuel Isaly and Sven Borho, senior partners at OrbiMed, the specialist investment manager which manages these two trusts. In summary I came away with my enthusiasm for this theme undiminished.

The full presentation is on the website at http://www.frostrow.com/wp-content/uploads/2013/11/WWH_BIOG_Investor-Slides-Final.pdf

The key points that I took away were;

6 out of the top 10 current selling drugs were developed by biotech companies; in 2016/2018 this will rise to 9 out of the top 10!

2014 could see multiple new drugs with $5bn+ potential sales; A transformational drug for multiple sclerosis where sales are building very quickly and already annualising at $2bn; a complete cure for hepatitis c to be launched in Q2 2014; A new drug for treating “liquid tumours” and a drug for treating solid tumours, (lung cancer, pancreatic, colorectal and melanoma), which works by helping the body’s own white blood cells to fight the tumour. This last one was again described as “transformational”.

The FDA climate is accommodative with it being friendly to biotech companies and accelerating the approval of drugs addressing “unmet medical needs”. The drug described above for solid tumours will “probably” be approved next year after phase II trials.

Consolidation continues in the biotech sector with multiple takeovers in the last year and is expected to continue as big pharma buy the smaller biotechs for their technology/products.

Valuations at “big biotech” still look compelling; the four biggies, Gilead, Amgen, Celgene and Biogen Idec are on a 2015 forecast PE ratio of 15.9x, not much more than the 14.3x of “big pharma” but are growing at 20% per annum.

The outlook for 2014 was positive; they expected a continued re-rating of large cap pharma as valuations are still relatively cheap v market and history; large cap biotech companies would benefit from new drug releases; midcap biotech continues to be a leading source of innovative drugs and would benefit from further takeover activity; new product cycles and innovation will drive performance of medical device companies.

Conclusion; I have been keen on the biotech/pharma theme since launching JohnsInvestmentChronicle in January of last year having bought into the idea that we are entering a new era in medical advances, driven by both our understanding of the human genome and the huge computing power now available to researchers. Jim Mellon’s book “Cracking The Code“, which I read early last year, opened my eyes to the potential of this theme. I could not possibly pick the individual stocks which will be the winners, both due to a lack of expertise and time and it would be far too risky given the gulf between success and failure. I decided to use the experts. Orbimed for example employs 70 professionals, twenty of whom are PhD’s.

I currently hold 4.5% in Worldwide Healthcare Trust, up 46% since the start of the year, 3.6% in Biotech Growth Trust, up 49% and 2.9% in the International Biotechnology Trust, up 45%. I have decided this morning to increase my holding in Biotech Growth Trust to 4.5% of the portfolio. It currently stands at a 7% discount to net asset value compared to the 1% discount at Worldwide Healthcare and the company has a buyback plan once the discount opens up above 6%. (See transactions)

To pay for this I have sold the remainder of my holding in Templeton Emerging Markets. I halved the holding a couple of weeks ago as it was not behaving as I had hoped, it rallied briefly but is now seemingly friendless. (See Transactions)

cig

"6 out of the top 10 current selling drugs were developed by biotech companies; in 2016/2018 this will rise to 9 out of the top 10!"

That's a slighly misleading claim, isn't it? I'd rather know the hit rate, "1 out of a 100 biotech companies producing a bestselling drug" would not look so good. (Just made up the number, but it's the one that's relevant.)

Moreover I'm not so convinced of the potential for discoveries, the low hanging fruits may already have been discovered. There's also a risk of backlash from regulators/payers for drugs that have negative net benefits (e.g. I'm told some terminal cancer drugs just extend the patients' life by a few months at the expense of making all the time hell, and frankly the guys that sell these knowingly should be in prison, not running public companies.) It's a problem for investors who are uncomfortable with the idea of making money from torturing terminally ill people, and it's hard for civilians to distinguish the drugs with potential real benefits from pharma scams.

So I end up buying stuff like Surgical Innovations (LON:SUN) -- harder to get it wrong with scalpels.

Hi Cig. Its not really misleading as those are the facts. Yes of course there are lots of drugs that fail and never get to market but it is the biotechs that are developing the new drugs. Big pharma is failing to which is why they are taking over the nimble biotechs. In fact the best big pharma company in my view is Roche but that is really a biotech company given that they bought Genentech! Big pharma provides the distribution but unfortunately not much of the innovation anymore.

I agree it is a hit and miss industry which is why most people I mention this to say "oh biotech, its far too risky!". That is why I hold a Fund and leave it to the experts. You can't fault their performance; just look at it.

I really suggest you read Cracking the Code by Jim Mellon. The point is that our relatively new understanding of the genome is allowing researchers for the first time to understand the mechanisms of how cancers start and spread.

Also I think you are right about a backlash against expensive drugs that only give a a month or two's extra life but if you have a new drug such as the solid tumour drug I mentioned which saves 50% of melanoma patients' lives (i.e. 5 year survival rate) that's got to be good.

Biotech Growth Trust also invests in medical devices. One investment is a robotic knee surgery company, the other is Illumina (Genome reading device)

I really think this theme has got a lot further to go and I haven't even mentioned the growing middle class in the developing world who will want the same medical care that we are used to in the West.

29th Nov '13

Good points, and thanks for the book recommendation, it looks interesting from a superficial skim of the free sample on amazon. The introduction mentions living to 120: what a horrible idea! You'd be likely to spend the extra decades in an infernal loop of procedures, recoveries and collateral damage from past procedures...

The fund's performance seems nothing to write home about compared to the handful of US biotech ETFs I looked at, which seem a good benchmark. Pretty much shadowing each other. Yes the absolute perf is stellar but if the managed offer is similar to a passive index there's no evidence of skill here which is what you buy active management for.

The theme is indeed likely to go further, but remember that investments related to a theme are at best weakly correlated with its real world impact.

30th Nov '13

You are right that performance this year is nothing to write home about a fact they freely admitted. YTD BIOG NAV +51.3% , NASDAQ Biotech Index + 51.8%! However 2012 +38.9% v +26.1%, 3 year annualised +37.1% v +32.1%, 5 year annualised +29.5% v +23.9% and since inception (18/05/13) +339% v +260%.

I know past performance is no prediction of future performance but I think Orbimed are a quality outfit and I would rather back them than be in an Index etf!

22nd Jan '14

Biotech Growth Trust (BIOG) (537p and 4.0% of JIC Portfolio)
International Biotechnology Trust (IBT) (312p and 4.0% of JIC Portfolio)

I have this morning reduced Biotech Growth by 1% to 4% and invested the proceeds in International Biotechnology Trust, increasing it from 3% to 4%. The former has been a much stronger performer over the last year helped by good stock selection but also by the fact that it does not hold around 15% of the portfolio in unquoted investments, as is the case with IBT. I think, as a consequence of this, Biotech Growth now stands on a small premium to Net Asset Value whilst International Biotechnology is on a discount of around 15%. In the last year that discount has been as wide as 18% and as narrow as 2% so we are currently near the bottom of the range.

Conclusion: I am, as longer term readers will know, a long term fan of the Biotech Theme, (see Company blogs tab above on Biotech Growth), but without the skills to pick the individual winners I leave it to the experts, and gain my exposure through these two investment trusts. Biotech in general has had a very strong start to the year and should it retrace some of its gains I would hope IBT would be more resilient given its exposure to unquoted investments and the current wide discount, hence my little bit of portfolio re-balancing. Even if the sector pushes on upwards I would hope that the discount on IBT would narrow from here. (See Transactions)

jules2k6

23rd Jan '14

John says "Biotech Growth Trust (408p and 4.0%of JIC) I attended the AGM yesterday and enjoyed a very bullish presentation by Sven Borho, from Orbimed, the Trust's manager." I have Biotech growth trust inn one of my portfolios in Stockopaedia but I did not see the AGM advertised in the News tab which I check daily.

By News tab, I meant events tab

24th Jan '14

Hi,The original title was from the 10th July last year. The Stockopedia recommendation is, I think, that you should not change the original! John

The header I saw on the fist comment says "28th November 2013" so I made a mistake, but as I check the news daily I still think I should have seen a notification during 2013. It's a while ago so never mind. Biog has done me proud this year. Though, I will look out for the AGM notification in July. Thank you for the original post. I'll pay more attention to the original date in the future.

17th Apr '14

Biotech Growth Trust (BIOG.L): I have added to my holding in the JIC Portfolio. The Trust has had a pretty torrid month, reflecting the sharp falls in biotechnology stocks in the US. On looking at the underlying holdings in the Trust, (stocks like Biogen, Gilead, Illumina, Incyte, Celgene, Amgen and Regeneron), there has been a savage fall in valuations to levels which look more attractive given forecast growth rates. In the coming weeks we have results from many of the companies, Gilead for instance report next Tuesday, which hopefully will settle investors’ nerves and attention will return to the long term prospects for this sector which I have written about many times in my previous posts.

Conclusion; in hindsight I should have been a little more alert to the over extension of the sector in early March and the sudden change in investor sentiment. Having missed the opportunity to reduce my exposure at the high levels I now have to look forward; hopefully we have found some sort of support at these levels and in six months’ time today’s purchase will look timely. (See Transactions and updated JIC Portfolio)

Biotech Growth Trust; Time to increase exposure?

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Johnrosier

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