The Biotech Growth Trust (BIOG) aims to generate long-term capital growth from a concentrated portfolio of global biotech companies. It is jointly managed by Richard Klemm and Geoff Hsu of OrbiMed Capital, who are positive on the outlook for the biotech industry due to a favourable regulatory backdrop, continued industry innovation, an anticipated uptick in M&A activity and reasonable company valuations. The trust is benchmarked against the NASDAQ Biotech index, which it has outperformed in NAV total return terms over 10 years, while trailing over shorter periods. Recent investment performance has been affected by negative newsflow from one of BIOG’s top 10 holdings, Celgene, in October 2017.
The managers are able to draw on the broad resources of OrbiMed, which is the world’s largest global specialist healthcare investor. Stocks are selected on a bottom-up basis following in-depth fundamental analysis. For each potential investment, a financial model is constructed, and research pipelines and likely catalysts are assessed. Company meetings are a critical element of the investment process to enable an understanding of a firm’s development programmes and commercial prospects for individual products. BIOG invests globally, across the capitalisation spectrum. Reflecting the structure of the worldwide biotech industry, the majority of the trust’s holdings are in US companies.
Fundamentals in the biotech industry are positive, led by innovation, a supportive regulatory environment, and a potential higher level of mergers and acquisitions (M&A) following US tax reform. In addition, biotech valuations look relatively attractive. On a forward P/E multiple basis, biotech stocks are trading at a more modest premium to US equities versus the average over the last 10 years, and in aggregate, large-cap US biotech stocks are trading on lower earnings multiples than large-cap US pharma companies. Given this backdrop, investors seeking healthcare exposure may wish to consider the biotech sector.
BIOG’s share price discount to cum-income NAV has been in a broadly narrowing trend since Q417. The current 3.6% discount is lower than the averages of the last one, three, five and 10 years of 5.5%, 5.8%, 4.9% and 5.3% respectively. The trust employs a discount control mechanism, with the board aiming to limit the discount to 6% in normal market conditions.