The Biotech Growth Trust — Historic low sector valuations

The Biotech Growth Trust (LSE: BIOG)

Last close As at 10/10/2024

GBP10.16

−16.00 (−1.55%)

Market capitalisation

GBP329m

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Research: Investment Companies

The Biotech Growth Trust — Historic low sector valuations

The Biotech Growth Trust (BIOG) now has two co-managers, Geoff Hsu and Josh Golomb, at global healthcare specialist OrbiMed Capital. The trust has experienced a difficult period of relative performance due to the managers’ approach of focusing on emerging (smaller-cap) biotech stocks rather than large-cap biotech businesses, because of their higher growth prospects. This strategy has been out of favour in an uncertain macroeconomic environment. Hsu and Golomb highlight attractive valuations in the biotech sector, which are not reflecting favourable industry fundamentals, including high levels of innovation across a range of therapeutic areas and an acceleration in mergers and acquisitions (M&A) ahead of an upcoming patent cliff.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

The Biotech Growth Trust

Historic low sector valuations

Investment trusts
Biotech equities

4 October 2023

Price

770.0p

Market cap

£276m

Total assets

£324m

NAV*

830.9p

Discount to NAV

7.3%

*Including income. At 29 September 2023.

Yield

0.0%

Ordinary shares in issue

35.9m

Code/ISIN

BIOG/GB0000385517

Primary exchange

LSE

AIC sector

Biotechnology & Healthcare

Financial year end

31 March

52-week high/low

995.0p

754.0p

NAV* high/low

1,085.4p

812.7p

*Including income

Net gearing*

8.8%

*At 31 August 2023.

Fund objective

The Biotech Growth Trust seeks capital appreciation through investing in the worldwide biotechnology industry. Performance is measured against its benchmark index, the NASDAQ Biotechnology Index (sterling adjusted).

Bull points

The biotech sector has delivered above-average returns for shareholders over the long term.

Industry fundamentals and valuations are favourable but are currently being overlooked by investors.

OrbiMed is a global leader in healthcare research and investment, with c $18bn of assets under management.

Bear points

The focus on emerging biotech stocks means performance has been tough since early 2021.

The biotech sector can be volatile.

Periodic political pressure.

Analyst

Mel Jenner

+44 (0)20 3077 5700

The Biotech Growth Trust is a research client of Edison Investment Research Limited

The Biotech Growth Trust (BIOG) now has two co-managers, Geoff Hsu and Josh Golomb, at global healthcare specialist OrbiMed Capital. The trust has experienced a difficult period of relative performance due to the managers’ approach of focusing on emerging (smaller-cap) biotech stocks rather than large-cap biotech businesses, because of their higher growth prospects. This strategy has been out of favour in an uncertain macroeconomic environment. Hsu and Golomb highlight attractive valuations in the biotech sector, which are not reflecting favourable industry fundamentals, including high levels of innovation across a range of therapeutic areas and an acceleration in mergers and acquisitions (M&A) ahead of an upcoming patent cliff.

BIOG AGM presentation with Geoff Hsu (July 2023)

Source: BIOG

Why consider BIOG?

BIOG’s performance has been under pressure since Q121 due to Hsu and Golomb’s focus on emerging rather than large-cap biotech stocks, which is a strategy that has served them well over the long term. They believe that given very attractive valuations, including an unprecedented number of biotech companies trading below the level of cash on their balance sheets, and strong company fundamentals, smaller-cap biotech stocks will once again have their day in the sun.

An uncertain macroeconomic environment has meant that, unusually, biotech stock prices have not been supported by an acceleration in industry M&A. However, takeover bids are likely to continue for some time as major pharma companies look to bolster their product pipelines ahead of a major patent cliff in the second half of this decade. Hence, as central banks come to the end of their interest rate tightening cycles and the economic backdrop stabilises, investors should once again focus on the favourable attributes of the biotech sector.

BIOG’s managers have a broad mandate and can seek out the best opportunities in both developed and emerging markets, and can hold up to 10% of the fund in unlisted securities. They can draw on the extensive resources of OrbiMed, which is one of the leading global healthcare investors. The company has recently extended its research reach by opening an office in London. BIOG’s discount is wider than its three-, five- and 10-year historical averages, offering scope for a higher valuation once the trust’s performance gets back on track.

BIOG: Bias towards emerging biotech names

BIOG is a specialist fund with a bias towards emerging rather than large-cap biotech stocks. As such, the trust’s relative performance is broadly dependent on how smaller-cap biotech stocks perform versus the wider sector.

Exhibit 1: BIOG’s upside/downside capture over the last decade

Source: Refinitiv, Edison Investment Research. Note: Cumulative upside (downside) capture calculated as the geometric average NAV TR of the fund during months with positive (negative) benchmark total returns, divided by the geometric average benchmark total return during these months. A 100% upside (downside) indicates that the fund’s TR was in line with the benchmark’s during months with positive (negative) returns.

In Exhibit 1, we show how BIOG tends to perform compared with its benchmark. Its upside capture is 105%, while its downside capture is 119%. This suggests that during months when the NASDAQ Biotechnology Index rises, the trust will modestly outperform, but in months when the index falls, the trust will underperform to a larger degree. The analysis appears sensible given BIOG’s tilt towards less mature biotech stocks, which are inherently higher risk than large-cap biotech stocks.

New co-manager

OrbiMed continues to invest in its research team, seeking to improve investment performance. BIOG’s FY23 annual report contained details about the appointment of Josh Golomb as co-manager for the trust. He joined OrbiMed as a partner in 2021 and has around 20 years of biotech investment experience. Including BIOG’s two co-managers, OrbiMed now has seven analysts on its biotech research team, who work alongside a speciality pharma analyst, two tools/diagnostics analysts and four analysts who are based in China.

Portfolio breakdown

At end-August 2023, BIOG’s top 10 holdings made up 47.9% of the fund, which was a higher concentration compared with 40.4% a year before; five names were common to both periods. The portfolio had 62 positions, which was three less than 65 at end-August 2022. Over the 12 months to the end of August 2023, the trust’s active share fell from 76.8% to 70.7%; this is a measure of how the fund compares with its benchmark, with 0% representing full index replication and 100% no commonality. This is evidenced by the fact that BIOG’s top two holdings are US large-cap biotech holdings, which did not feature in its top 10 list on 31 August 2022; although the trust maintains its bias towards emerging biotech stocks.

There has been a notable increase in the trust’s annualised portfolio turnover, to c 123% at 31 August 2023 compared with c 80% a year before. Hsu has explained previously that BIOG’s portfolio turnover is relatively high, as this keeps the portfolio fresh with new ideas, which he considers important in terms of the trust’s performance. The manager notes that once biotech companies have had a significant value-creating catalyst, their share prices can languish while waiting for the next value inflection point. Therefore, it may be better to sell these companies, using the proceeds to invest in other businesses with potential near-term catalysts. Hsu also admits that some investments are unsuccessful, in which case the positions should be sold.

Exhibit 2: Top 10 holdings (at 31 August 2023)

Company

Country

Sector

Portfolio weight %

31 August 2023

31 August 2022*

Amgen

US

Major biotech

7.7

N/A

Biogen

US

Major biotech

6.4

N/A

BioMarin Pharmaceutical

US

Emerging biotech

5.4

4.0

Argenx

Europe

Emerging biotech

5.2

4.6

Ionis Pharmaceuticals

US

Emerging biotech

4.4

3.9

Syndax Pharmaceuticals

US

Emerging biotech

4.2

4.5

Vera Therapeutics

US

Emerging biotech

4.1

N/A

XtalPi preferred**

China

Emerging biotech

3.9

N/A

Xenon Pharmaceuticals

Canada

Emerging biotech

3.5

3.5

United Therapeutics

US

Major biotech

3.1

N/A

Top 10 (% of portfolio)

47.9

40.4

Source: BIOG, Edison Investment Research. Note *N/A where not in end-August 2022 top 10. **Unquoted.

Exhibit 3 shows BIOG’s geographic split; North America remains the largest region as it is the most innovative and developed biotech market. In the 12 months to the end of August 2023, the largest changes were a higher weighting in Chinese quoted biotech companies (+3.2pp) and a 2.8pp lower allocation to unquoted companies.

At 31 August 2023, the total Chinese exposure was 11.0pp (5.6pp listed and 5.4pp unquoted), which was broadly in line with 10.7% a year before, although then the mix was skewed towards unquoted businesses (8.3pp) versus listed companies (2.4pp). According to Hsu, China has around 15% of the biotech industry’s early drug-development pipeline.

Exhibit 3: Portfolio geographic breakdown (%)

Sector

End-August 2023

End-August 2022

Change (pp)

North America

78.4

77.1

1.3

Continental Europe

10.1

10.5

(0.4)

Unquoted*

5.9

8.7

(2.8)

China (quoted)

5.6

2.4

3.2

UK

0.0

1.3

(1.3)

Total

100.0

100.0

Source: BIOG, Edison Investment Research. Note: Adjusted for gearing. *Of the 5.9% unquoted investments at end-August 2023, 5.4% was in China and 0.5% was in Asia.

Perspectives on the biotech sector’s performance and valuation

The manager highlights BIOG’s portfolio structure with its bias towards emerging (smaller-cap) biotech names and its large underweight position in large-cap biotech companies. Over the course of FY23, there was a significant divergence between the performance of large and small/mid-cap biotech stocks.

Exhibit 4: Biotech market cap performance divergence in FY23

% unless stated

BIOG portfolio weight
at 31 March 2023

NASDAQ Biotechnology Index weight at 31 Mar 2023

Delta
(pp)

Performance in FY23

Large cap (> $10bn)

37

70

(33)

5.5

Mid cap ($2–10bn)

14

18

(4)

(22.2)

Small cap (< $2bn)

52

12

40

(19.2)

Total

100

100

Source: BIOG, Edison Investment Research. Note: Numbers subject to rounding. Excludes private companies.

The manager also provides longer-term data, from 31 March 2021 (end-FY21) to 30 June 2023, for the different market cap bands in the NASDAQ Biotechnology Index. Large caps fell by 4.3%, which was considerably less than the 33.3% and 37.1% declines in the value of mid-cap and small-cap biotech stocks, respectively.

These differences in performance between large and small-cap stocks broadly mirror the US market, where between 31 March 2021 and 30 June 2023 a widely used index of 1,000 large-cap stocks rose by 8.9%, while the stablemate index of 2,000 small/mid-cap stocks fell by 14.9%.

The XBI is a US exchange-traded fund of equal weighted small and mid-cap biotech stocks and since its inception in 2006 has a long-term record of outperformance versus the bellwether US S&P 500 Index. There have been periods when the XBI underperformed, but after each relative drawdown it resumed its outperformance. However, it is important to note that the most recent pullback is unprecedented in terms of being the longest and the largest absolute and relative move; between 8 February 2021 and 2 June 2022 the peak drawdown was 73.3%. Hsu is hopeful that small and mid-cap biotech stocks will outperform over the next 12 to 18 months.

Biotech company valuations are depressed, looking at those with a market cap greater than $10m, and their median market caps versus the net cash on their balance sheets. In the period since 2001, the valuation on this basis is at an all-time low, below the levels seen in the dot-com bust and the global financial crisis. The percentage of companies trading at less than the net cash on their balance sheets within the biotech universe is 20–25% (100 to 120 companies), which the manager says is unprecedented. Hsu believes that we are in the late stage of the interest rate hiking cycle and as rates come down this should be a tailwind to the performance of biotech stocks. He notes that there is recession risk due to higher interest rates. However, looking at the performance of healthcare stocks during the last four recessions, biotech stocks were the best-performing subsector; large caps followed by smaller biotech stocks. The manager suggests that this is a comfort as, if the US does go into recession, the biotech sector should be a good place to be.

Biotech industry themes

Hsu believes that valuations within the biotech sector do not take into account robust company fundamentals. He explains that innovation has been an important driver of the performance of biotech stocks. Since 2012, there have been record levels of drug candidates in development, with the number of pipeline products increasing by 70% between 2016 and 2022, and growth in all therapeutic areas. The manager comments that novel drug development technology has accelerated in the last five to six years and that we are in the early stages of these technologies reaching their full potential, with only a few products having reached the market so far.

There has been a series of notable new drug approvals that address large markets and therefore have significant revenue potential. Hsu highlights 10 recent launches with consensus peak sales potential greater than $1bn (blockbusters), with some having more than $10bn potential sales (mega blockbusters). The manager notes that the majority of pipeline and approved novel drugs come from emerging biotech companies (53% of new drugs launched in 2021). They have been increasing their share of the biotech industry research and development pipeline, which currently stands at two-thirds and is still growing.

BIOG’s portfolio has exposure to a wide range of novel technologies, including antibody-drug conjugates (11.3% of NAV at 30 June 2023); cell therapy (13.5%); gene therapy/gene editing (17.9%); multispecific antibodies/T-cell engagers (17.6%); and oligonucleotide therapeutics (27.0%). There is some overlap between the NAV percentages stated.

Within the highly innovative biotech industry there have been ongoing important positive clinical trial results and first-in-class product approvals. Relatively recent developments include the first gene therapies for haemophilia A and B (BioMarin Pharmaceutical and uniQure), the first gene therapy for Duchenne muscular dystrophy (Sarepta Therapeutics) and positive Phase III results for an anti-amyloid antibody for the treatment of Alzheimer’s (Eisai and Biogen).

Hsu reports that the US regulatory environment remains constructive. While there was a dip in the number of US Food and Drug Administration new molecular entity approvals in 2022, 37 versus a range of 46 to 59 in the prior five years, this was likely due to COVID-related delays. So far in 2023, there have been 40 approvals, suggesting that last year was an anomaly.

M&A activity has historically been an important driver for the performance of the biotech sector. However, this year the benefits of an acceleration in biotech M&A have been outweighed by the uncertain macroeconomic background. With target companies trading on very low valuations, acquirers can sometimes afford to pay triple-digit premiums and the deals are still accretive. In H123, five of BIOG’s holdings were bid for: CinCor Pharma by AstraZeneca (a greater than 200% premium including contingent value rights); Seagen by Pfizer (a 42% premium); Bellus Health by GSK (a greater than 100% premium); Chinook Therapeutics by Novartis (an 83% premium including contingent value rights); and DICE Therapeutics (a 42% premium). There is a significant patent cliff looming in the second half of the decade, so with an estimated $250bn branded sales at risk, there is an urgent need for large-cap pharma companies to acquire businesses to bolster their pipelines.

With US drug price reform having passed in August 2022 as part of the Inflation Reduction Act 2022, the manager considers that the legislation is manageable for the biotech sector and removes the overhang of drug price controls. Also, pharma companies have launched legal action, so Hsu suggests that the current legislation could be watered down. The manager believes that the healthcare sector can re-rate now the overhang of price controls has lifted.

Performance: BIOG’s strategy is out of favour

As shown in Exhibit 5, BIOG’s relative performance has been very difficult since Q121, as emerging biotech stocks, which have served the trust well over the long term, have significantly underperformed large-cap biotech stocks. BIOG has a structural underweight position in the larger biotech names as the managers believe there are more attractive growth profiles available in emerging biotech stocks.

Exhibit 5: NAV performance versus benchmark over 10 years

Source: Refinitiv, Edison Investment Research

Exhibit 6 shows the seven members of the AIC Biotechnology & Healthcare sector. BIOG’s NAV total returns are below average over the periods shown. Despite this, the trust currently has the narrowest discount in the sector. BIOG has a below-average ongoing charge, although it is one of five funds eligible for a performance fee. Its level of net gearing is higher than the sector average and it is one of the three companies that do not pay a dividend.

Exhibit 6: AIC Biotechnology & Healthcare sector at 2 October 2023*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum-fair)

Ongoing charge

Perf.
fee

Net
gearing

Dividend yield

Biotech Growth Trust

276.2

(21.3)

(39.3)

(7.2)

88.2

(5.0)

1.1

Yes

109

0.0

Bellevue Healthcare Trust

745.5

(12.8)

(0.6)

18.5

(8.0)

1.0

No

100

4.4

International Biotechnology Trust

242.5

(1.2)

(4.7)

18.7

170.6

(5.8)

1.3

Yes

112

5.0

Polar Capital Global Healthcare Trust

389.3

2.8

31.7

48.2

174.6

(7.0)

0.9

Yes

108

0.7

RTW Biotech Opportunities

213.0

(0.3)

20.1

(24.2)

2.1

Yes

103

0.0

Syncona

799.3

(6.7)

(12.4)

(10.4)

82.3

(35.5)

0.9

No

100

0.0

Worldwide Healthcare Trust

1,787.6

(5.6)

(0.7)

23.0

214.7

(10.0)

0.8

Yes

109

1.0

Average (7 funds)

636.2

(6.4)

(0.8)

15.2

146.1

(13.6)

1.2

106

1.6

BIOG rank in peer group

5

7

7

5

4

1

5

3

5

Source: Morningstar, Edison Investment Research. Note: *Performance data to 29 September 2023 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

Exhibit 7: Investment trust performance to end-September 2023

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 8: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to NASDAQ Biotechnology

(1.0)

(4.8)

1.6

(19.3)

(43.2)

(17.8)

(27.1)

NAV relative to NASDAQ Biotechnology

(1.3)

(5.5)

0.1

(18.9)

(39.7)

(18.7)

(25.2)

Price relative to World-DS Pharm & Bio

(2.0)

(7.5)

(4.5)

(25.7)

(53.2)

(36.5)

(37.5)

NAV relative to World-DS Pharm & Bio

(2.3)

(8.3)

(5.9)

(25.3)

(50.3)

(37.1)

(35.9)

Price relative to MSCI World

(0.5)

(4.2)

(5.4)

(30.4)

(57.8)

(39.7)

(40.5)

NAV relative to MSCI World

(0.8)

(5.0)

(6.8)

(30.0)

(55.2)

(40.4)

(38.9)

Price relative to CBOE UK All Companies

(3.4)

(5.7)

(2.3)

(31.8)

(59.7)

(21.8)

6.5

NAV relative to CBOE UK All Companies

(3.6)

(6.4)

(3.8)

(31.5)

(57.3)

(22.6)

9.3

Source: Refinitiv, Edison Investment Research. Note: Data to end-September 2023. Geometric calculation.

Looking at BIOG’s relative performance over the last few months, the trust has been negatively affected by both the macroeconomic backdrop and company-specific events. An uncertain economic environment and a realisation that interest rates are likely to stay higher for longer has contributed to an investor ‘risk-off’ attitude, which has disproportionately affected emerging rather than large-cap biotech stocks. There have also been large fund flows into other areas such as large US technology stocks.

March 2023 was a particularly difficult month for BIOG as its NAV fell by 14.5%, while the benchmark declined by a far more modest 0.8%. The failure of US regional bank Silicon Valley Bank (SVB) had a particularly negative effect on the share prices of small-cap biotech stocks, many of whom were SVB customers, despite these companies having minimal cash exposure to the bank. BIOG’s holding in Chinese vaccine company YS Biopharma hurt the fund’s performance by c 4pp. The company listed via a special purpose acquisition company (SPAC) merger, but its share price subsequently declined significantly. BIOG’s managers believe that this weakness was due to SPAC-related trading dynamics rather than YS Biopharma’s fundamentals.

M&A activity has been prevalent in recent months and BIOG has benefited from this. For example, in June 2023, Novartis made a bid for investee company Chinook Therapeutics at a c 67% premium to its pre-bid share price (an 83% premium including contingent value rights), while another portfolio investment, DICE Therapeutics, received a 42% premium bid from Eli Lilly. Unfortunately, these positive developments were more than offset by clinical setbacks from investee companies Mersana Therapeutics (five fatal events in more than 500 ovarian cancer patients dosed with its antibody-drug conjugate) and uniQure (mixed data from its Phase I/II trial of its gene therapy for the treatment of Huntington’s disease).

Exhibit 9: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

NASDAQ Biotech (%)

World-DS Pharm & Bio (%)

MSCI World
(%)

30/09/19

(15.7)

(17.1)

(13.2)

2.1

8.4

30/09/20

94.3

84.1

30.5

18.1

5.8

30/09/21

(11.1)

(3.0)

15.3

8.1

24.1

30/09/22

(17.6)

(20.2)

(9.7)

7.8

(2.5)

30/09/23

(21.9)

(21.5)

(3.3)

5.0

12.1

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Valuation: Scope for a narrower discount

In an environment of elevated investor risk aversion, in general, investment trust discounts have widened. BIOG is no exception, as its 7.3% share price discount to cum-income NAV is larger than its average discounts of 4.6%, 5.4% and 5.5% over the last three, five and 10 years, respectively. There is scope for the trust to be afforded a higher valuation if there is an improvement in its relative performance, while a positive change in investors’ risk tolerance should also be helpful. Looking at Exhibit 10, BIOG traded at a premium for parts of the last three years.

Exhibit 10: Discount over three years (%)

Exhibit 11: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 10: Discount over three years (%)

Source: Refinitiv, Edison Investment Research

Exhibit 11: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Renewed annually, the board has the authority to purchase up to 14.99% and allot up to 10% of BIOG’s issued share capital. It remains committed to limiting the discount to 6% over the long term, in normal market conditions. In FY23, c 2.4m (c 5.9% of the share base) were repurchased at a cost of c £22.6m. Buybacks have continued in FY24; so far, c 2.9m shares (c 7.4% of the share base) have been repurchased at a cost of c £23.0m.

Fund profile: All-cap, global biotech exposure

BIOG was launched in June 1997 and is listed on the Main Market of the London Stock Exchange. The trust is managed by Geoff Hsu and Josh Golomb at OrbiMed Capital, which is a global healthcare specialist investor with c $18bn of assets under management. OrbiMed operates from three continents with offices in New York, San Francisco, London, Herzliya (Israel), Hong Kong, Shanghai and Mumbai. It has a team of more than 130 people, of whom more than 30 hold PhD or MD qualifications and around 15 are former CEOs or company founders.

Hsu and Golomb aim to generate long-term capital growth from a diversified portfolio of global biotech equities and related securities. The trust’s performance is measured against the NASDAQ Biotechnology Index (sterling adjusted), and its currency exposure is unhedged. BIOG’s investment guidelines state that at the time of investment, a maximum of 15% of gross assets may be held in a single stock; up to 10% may be in unquoted securities (including any private equity funds managed by OrbiMed and its affiliates); and swaps exposure is permitted up to 5% of gross assets at the time of entering into the contract. The managers may employ gearing up to 20% of net assets.

Investment process: Bottom-up stock selection

Hsu and Golomb aim to generate long-term capital growth from a globally diversified portfolio of biotech companies across the market cap spectrum. They can draw on the broad resources of OrbiMed’s experienced investment team; their scientific expertise is deemed critical in terms of evaluating potential investments. Stocks are selected on a bottom-up basis following thorough in-depth fundamental research, which includes financial modelling, an assessment of research pipelines and identification of potential catalysts; company meetings are a very important element of the research process. Reasons to initiate a new position include whether an early-stage company is approaching profitability, ahead of anticipated positive clinical data, or if a business is considered a potential takeover target.

While the managers seek out the best potential opportunities across the globe, most of the portfolio is held in US companies, reflecting its dominance in the biotech industry, although BIOG has a notable exposure to China. The trust’s holdings are regularly reviewed to ensure the original investment theses are still valid and positions are sized correctly. The managers note that BIOG’s portfolio turnover is relatively high because of its large emerging biotech exposure, where stocks can be volatile around news about clinical results.

BIOG’s approach to ESG

OrbiMed believes that there is a high congruence between companies seeking to act responsibly and those that succeed in building long-term shareholder value. To the extent that it is practicable and reasonable, OrbiMed takes applicable environmental, social and corporate governance factors into account when evaluating a prospective or existing investment via a five-step process:

Negative screening – OrbiMed does not invest in businesses that lead to negative effects on public health or well-being, such as banned or illegally marketed pharmaceuticals or tobacco.

Due diligence – fundamental analysis to review material ESG factors.

Monitoring – performance of portfolio companies is regularly monitored on multiple factors.

Engagement – occurs with portfolio companies on a regular basis including meetings with management, voting by proxy and ESG conferences.

Reporting – OrbiMed has introduced a quarterly ESG update covering sector and portfolio highlights, along with engagements on material issues.

OrbiMed may seek to engage with portfolio companies to promote changes in their conduct or policies and could ultimately decide to sell the investment in these firms. In some cases, it may adopt an ‘activist’ approach to encourage change at investee companies, which may include a proxy campaign or seeking representation on their boards of directors. The managers seek to invest in reputable management teams and are especially cognisant of corporate governance in emerging markets, as company credentials in these regions may not be as high as those of firms in developed regions.

Gearing

Gearing of up to 20% of NAV is permitted and is employed via a loan facility with JP Morgan Securities, priced at 45bp above the US Federal Funds rate. At the end of August 2023, the trust’s net gearing was 8.8%, which compares with its typical range of 5–10%.

Fees and charges

OrbiMed is paid an annual management fee of 0.65% of BIOG’s NAV. It is also entitled to a performance fee of 15.0% of outperformance versus the benchmark if the cumulative outperformance since the commencement of the arrangement on 30 June 2005 gives rise to a total fee greater than the total of all performance fees paid to date.

Frostrow Capital is the trust’s alternative investment fund manager, providing company management, secretarial, administrative and marketing services. It receives a tiered annual fee of 0.3% of BIOG’s market cap up to £500m, 0.2% between £500m and £1bn and 0.1% above £1bn.

In FY23, the trust’s ongoing charges were 1.1%, which were in line with FY22; no performance fees were payable.

Capital structure

BIOG is a conventional investment trust with one class of share. There are currently 35.9m ordinary shares in issue and the average daily trading volume over the last 12 months was c 80k shares.

At the end of FY23, BIOG’s shareholder base was split as follows: 72.4% retail investors (72.0% at end-FY22); 9.5% mutual funds (9.5%); 8.5% pension funds (9.9%); and 9.6% other (8.6%).

Exhibit 12: Major shareholders

Exhibit 13: Average daily volume

Source: BIOG. Note: At 31 August 2023

Source: Refinitiv. Note: 12 months to 2 October 2023.

Exhibit 12: Major shareholders

Source: BIOG. Note: At 31 August 2023

Exhibit 13: Average daily volume

Source: Refinitiv. Note: 12 months to 2 October 2023.

The trust has a five-year continuation vote; the last was held at the July 2020 AGM where the resolution was passed by a significant majority (99.9% of votes were in favour).

The board

Exhibit 14: BIOG’s board of directors at end-FY23

Board member

Date of appointment

Remuneration in FY23

Shareholdings at end-FY23

Roger Yates (chairman since July 2022)

1 December 2021

£35,696

10,000

Steve Bates

8 July 2015

£30,000

10,000

Rt Hon Lord Willetts

11 November 2015

£27,500

Nil

Julia le Blan

12 July 2016

£32,000

7,000

Geoff Hsu

16 May 2018

Nil

Nil

Dr Nicola Shepherd

18 January 2021

£27,500

Nil

Source: BIOG

As Geoff Hsu is a partner at OrbiMed, he is considered to be a non-independent director and his fees are waived.

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London │ New York │ Frankfurt

20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by The Biotech Growth Trust and prepared and issued by Edison, in consideration of a fee payable by The Biotech Growth Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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