The Biotech Growth Trust — No style drift, sticking to long-term winning ways

The Biotech Growth Trust (LSE: BIOG)

Last close As at 20/04/2024

GBP9.42

−6.00 (−0.63%)

Market capitalisation

GBP316m

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The Biotech Growth Trust — No style drift, sticking to long-term winning ways

The Biotech Growth Trust (BIOG) is managed by global healthcare specialist OrbiMed Capital. Despite a reversal in the trust’s relative performance following a very successful FY21 (ending 31 March 2021), manager Geoff Hsu is continuing to favour smaller-cap, emerging biotech stocks, as he says these companies are where the bulk of industry innovation occurs, and this is the primary driver of the biotech sector’s long-term positive performance. The manager believes that the latest drawdown in biotech stocks, which is unprecedented in both magnitude and duration, has led to a very large disconnect between favourable industry fundamentals and very low biotech company valuations. Over the last year, BIOG’s portfolio has become increasingly concentrated as Hsu and his team are focusing more on their highest-conviction investments.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

The Biotech Growth Trust

No style drift, sticking to long-term winning ways

Investment trusts
Biotech equities

5 September 2022

Price

1,018p

Market cap

£411m

Total assets

£476m

NAV*

1,109.6p

Discount to NAV

8.3%

*Including income. At 1 September 2022.

Yield

0.0%

Ordinary shares in issue

40.4m

Code/ISIN

BIOG/GB0000385517

Primary exchange

LSE

AIC sector

Biotechnology & Healthcare

Financial year end

31 March

52-week high/low

1,258.0p

753.0p

NAV* high/low

1,360.7p

782.4p

*Including income

Net gearing*

9.0%

*At 31 July 2022

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.

Bear points

Very tough absolute and relative performance in H122.

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) is managed by global healthcare specialist OrbiMed Capital. Despite a reversal in the trust’s relative performance following a very successful FY21 (ending 31 March 2021), manager Geoff Hsu is continuing to favour smaller-cap, emerging biotech stocks, as he says these companies are where the bulk of industry innovation occurs, and this is the primary driver of the biotech sector’s long-term positive performance. The manager believes that the latest drawdown in biotech stocks, which is unprecedented in both magnitude and duration, has led to a very large disconnect between favourable industry fundamentals and very low biotech company valuations. Over the last year, BIOG’s portfolio has become increasingly concentrated as Hsu and his team are focusing more on their highest-conviction investments.

BIOG AGM presentation with Geoff Hsu (19 July 2022)

Source: BIOG

The analyst’s view

BIOG offers investors a globally diverse exposure to biotech stocks including emerging markets and unquoted companies. Hsu is anticipating a biotech sector recovery led by smaller-cap stocks, which have significantly underperformed their larger-cap peers over the last few quarters. He is capitalising on what he considers to be ‘compelling investment opportunities’ as biotech companies that need to refinance are having to do so with depressed share prices. According to the manager, biotech company valuations are now lower than during the 2007–09 global financial crisis and the early 2000s bursting of the dot.com bubble. He envisages that the regulatory environment will remain favourable and there will be an acceleration in biotech merger and acquisition (M&A) activity because of the low valuation of target companies, while a near-term resolution of US drug price legislation could also lead to a relief rally in the biotech sector.

Scope for a higher valuation

BIOG’s valuation has been volatile since early 2021, which coincides with the trust’s period of relative underperformance. Its 8.3% discount to cum-income NAV compares with a 4.0% to 4.9% range of average discounts over the last one, three, five and 10 years. If BIOG can build on its very long-term record of outperformance, there is potential for the trust to be afforded a higher valuation.

Market outlook: Drawdown creates an opportunity?

Over the long term, biotech stocks have outperformed global equities but, as shown in Exhibit 1 (left-hand side), the recent significant drawdown (sell-off) in the biotech sector has meant that their performances over the last decade are now broadly in line. Growth stocks across the board have come under pressure as central banks in developed regions have started to hike interest rates to combat rising inflation. Inflation was already moving higher due to COVID-19 induced supply chain shortages, but the war in Ukraine has exacerbated product shortages.

The valuation compression in biotech stocks may have created a very interesting opportunity for long-term investors given that fundamentals in the biotech industry remain robust. Global demographic trends are supportive of demand growth, innovation levels are high, the regulatory environment is supportive, as evidenced by the continued above-average novel drug approvals at the US Food and Drug Administration (FDA), and there is a potential resolution to the US drug pricing issue ahead of the November 2022 mid-term elections. There is also the prospect of an uptick in biotech M&A as major pharma companies, which are flush with cash, seek to bolster their product pipelines by buying biotech stocks with innovative technologies at attractive valuations.

To provide additional valuation insights, in Exhibit 1 (right-hand side) we show the absolute and relative forward P/E multiples of the Datastream World Biotech Index. Its current 27.2x P/E multiple is an 11.4% discount to its five-year average and its 61.1% premium to the Datastream US index compares with the 60.9% and 70.5% average premiums over the last five and 10 years, respectively.

Exhibit 1: Biotech index performance and valuation

NASDAQ Biotechnology and MSCI World indices (10 years, £-based)

DS World Biotech Index P/E and relative to DS US Index (past five years)

Source: Refinitiv, Edison Investment Research. Note: Valuation data at 2 September 2022.

The fund manager: Geoff Hsu

The manager’s view: Sticking with long-term winning strategy

Explaining BIOG’s underperformance in FY22 (ending 31 March), Hsu describes the period as ‘a perfect storm’ due to macroeconomic factors. The manager’s investment strategy favours emerging over large-cap biotech stocks, and in FY22 not only did smaller-cap stocks underperform but there was a market shift from growth to value stocks. In the United States, a well-used index of 2,000 small and midcap stocks underperformed its brethren index of 1,000 large-cap stocks by 18.5pp during FY22. Unprofitable technology stocks in all industries sold off in the latter part of the period due to fears about higher interest rates, which exacerbated the underperformance of pre-revenue companies. Hsu also notes that during FY22, there was significant underperformance in the shares of biotech companies that listed in 2020 and 2021 and there was a lull in crossover activity, which is the last round of financing before an initial public offering (IPO); BIOG was very active in participating in crossover financing in 2021. In China, there was a market-wide sell-off starting in June 2021, due to tighter regulation across a variety of industries such as internet and education businesses; healthcare companies did not come under regulatory pressure, but their share prices still weakened. There was also an overhang from the delisting of Chinese companies’ American depository receipts due to accounting/regulatory policy differences between the US and Chinese regulators. In addition, lockdowns in response to China’s zero-COVID-19 policy have dampened the outlook for that country’s economic outlook. As an aside, the manager notes that during FY22, the Hang Seng Healthcare Index declined by 45.6%, but has since stabilised; he is anticipating a recovery in Chinese biotech stocks.

Focusing on the structure of BIOG’s portfolio, Hsu explains that the fund is significantly underweight large-cap and overweight smaller-cap biotech stocks; the c 30pp underperformance of the latter compared with larger-cap biotech stocks was a significant performance headwind for the trust in FY22. The manager notes that after the end of the period the performance divergence became even worse. He comments that the correction was not confined to biotech stocks as there was widespread underperformance of small-cap stocks and unprofitable technology companies. Hsu highlights that Goldman Sachs constructed a basket of the stocks of c 55 non-profitable technology companies across a range of industries, not just biotech stocks; between 31 March 2021 and 30 June 2022, it declined by 60.8%.

Exhibit 2: Market cap breakdown and share price performance since 31 March 2021

% unless stated

BIOG

NASDAQ Biotechnology Index

Delta (pp)

To 31 March 2022

To 30 June 2022

Large cap (> $10bn)

26

59

(33)

(1.9)

(7.4)

Mid cap ($2–10bn)

22

29

(7)

(31.0)

(38.4)

Small cap (< $2bn)

51

13

38

(32.8)

(46.4)

Total

100

100

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

The manager explains that the SPDR S&P Biotech ETF is an equal-weighted index and is a proxy for small and midcap biotech stocks. It has outperformed the US bellwether S&P 500 Index since 2006, although there have been periods of underperformance. Each drawdown was followed by a recovery rally and outperformance by the SPDR S&P Biotech ETF. According to Hsu, prior to the recent drawdown, the worst period of relative weakness was -44%; however, the period between 8 February 2021 and 2 June 2022 saw the SPDR S&P Biotech ETF underperform the S&P 500 Index by 67%. This drawdown proved to be the longest and the largest in both absolute and relative terms in the period since 2006. Since the June 2022 nadir, the SPDR S&P Biotech ETF has started to perform relatively better, and the manager is hopeful that the latest drawdown is over, and that the biotech index will resume its long-term trend of outperformance.

Hsu highlights that biotech company valuations are at unprecedented low levels. Looking at market caps versus cash on their balance sheets, which he believes is an objective view as it does not include any probabilities of success or revenue projections, the ratio is lower than during the bursting of the dot.com bubble, the global financial crisis or the Hillary Clinton drug pricing debate in 2015–16. The manager says there are now more than 25% of biotech companies (c 150) with market caps greater than $10m that are trading below the net cash on their balance sheets, which compares to c 10% during the global financial crisis; hence, Hsu is very bullish on the prospects for a valuation reversion.

The manager comments that interest rates have increased in response to rising inflation. The US 10-year government bond yield rose rapidly from c 1.5% at the beginning of 2022 and he says that it appears to have stabilised around 3%, which Hsu says includes market expectations for further short-term interest rate hikes. He suggests that once inflation has been brought under control, interest rates will decline, and the manager does not expect incremental interest rate pressure on biotech stocks.

Hsu highlights the sharp disconnect between biotech shares’ price performance and industry fundamentals; in his opinion, the major drawdown is unwarranted. The manager opines that innovation is the primary driver of value creation within the biotech sector, and the innovation engine remains robust. This is evidenced by an increasing number of global launches of novel active substances across a broad range of therapy areas, from 35 in 2012 to 84 in 2021 and more than double compared with five years ago. Hsu says that novel technologies are driving the growth in the biotech industry pipeline including RNA therapeutics, CAR-T and cell therapy, gene editing and gene therapy. BIOG focuses on emerging biotech companies as these businesses provide the bulk of the biotech industry innovation (around two-thirds of its research and development pipeline). According to the manager, these firms originated 53% of the new drugs launched in 2021. Hsu notes that BIOG has exposure to a range of novel technologies: antibody-drug conjugates (14.1% of NAV at 30 June 2022); oligonucleotide therapeutics (11.5%); gene therapy/gene editing (10.6%); multi-specific antibodies/T-cell engagers (7.4%); cell therapy (5.2%); and liquid biopsy (0.7%).

The manager highlights that there is a very favourable US regulatory environment, and he expects this to continue. The new FDA commissioner, world-renowned cardiologist Dr Robert Califf, who previously held the post under President Obama, was confirmed in February 2022. He is viewed as ‘industry friendly’ and is expected to continue the FDA’s constructive approach towards new drug approvals. COVID-19 related delays have largely been resolved and the pace of new molecular entity approvals remains robust (50 in 2021 is broadly in line with the average over the last five years).

M&A activity has historically been a driver of the biotech sector’s performance. Hsu notes that there has been a relatively consistent number of public transactions in recent years, and he expects the pace to accelerate given biotech target companies are trading at lower valuations and their financing options are currently less attractive. The number of deals announced in Q222 was higher than in the previous two quarters, and the manager is hopeful that this is a sign that activity is picking up. In FY22, BIOG directly benefited from Pfizer’s bid for Trillium Therapeutics and Pacira BioSciences’ bid for Flexion Therapeutics. ‘There are a series of names in the portfolio that would make great M&A targets’, adds Hsu.

The manager highlights the Biotech IPO market has cooled considerably over the last 12 months, following a surge in 2020/21. Since 2018, more than 250 biotech companies have gone public, so the global investment universe is now more than 1,500 companies. He considers that a silver lining to the current challenging period is that BIOG can capitalise on investment opportunities at attractive prices.

Hsu reports that US drug pricing legislation is ‘back on the table’. It was part of President Biden’s ‘Build Back Better’ plan but was unable to gain unanimous Democratic support. The Democrats are now rushing to pass a stripped-down version of the legislation to score a win ahead of the November 2022 mid-term elections. The manager says that there is no guarantee that this strategy will be successful, and if a healthcare pricing bill is passed it should have a manageable impact on the healthcare industry. It would likely include Medicare price negotiations starting in 2026 for a limited number of drugs, with other provisions such as caps on out-of-pocket expenses and inflation caps on price increases, although a final bill could be watered down still further. Opinion polls indicate that the Democrats could lose control of both the House of Representatives and the Senate in the mid-term elections. If benign legislation is passed now, Hsu suggests it could eliminate the drug pricing overhang and lead to a relief rally in biotech stocks. However, if this does not occur, a Republic majority would mean that there is unlikely to be extreme drug price legislation, which is essentially a ‘win-win’ for the biotech sector, concludes the manager.

Current portfolio positioning

At end-July 2022, BIOG’s top 10 holdings made up 41.0% of the fund, which was a higher concentration compared with 31.9% a year before; just two names were common to both periods. There were 64 companies in the fund, which was a significant 30.4% reduction compared with 92 at end-July 2021.

Exhibit 3: Top 10 holdings (at 31 July 2022)

Company

Country

Sector

Portfolio weight %

31 July 2022

31 July 2021*

Seagen

US

Emerging biotech

5.1

N/A

Argenx

Netherlands

Emerging biotech

4.9

N/A

Syndax Pharmaceuticals

US

Emerging biotech

4.7

N/A

Yisheng Biopharma**

China

Emerging biotech

4.3

2.9

Xenon Pharmaceuticals

Canada

Emerging biotech

4.2

N/A

Sarepta Therapeutics

US

Emerging biotech

4.0

N/A

Aclaris Therapeutics

US

Emerging biotech

3.8

N/A

Horizon Therapeutics

US

Major biotech

3.7

4.2

QuantumPharm

Romania

Emerging biotech

3.2

N/A

Vaxcyte

US

Emerging biotech

3.1

N/A

Top 10 (% of portfolio)

41.0

31.9

Source: BIOG, Edison Investment Research. Note *N/A where not in end-July 2021 top 10. **Unquoted.

Over the 12 months to the end of July 2022, the largest changes in BIOG’s geographic exposure were a lower weighting to quoted Chinese stocks (-6.7pp) and higher weightings to unquoted (+4.4pp) and North American companies (+3.6pp).

Exhibit 4: Portfolio geographic breakdown (%)

Sector

End-July 2022

End-July 2021

Change (pp)

North America

72.8

69.2

3.6

Continental Europe

14.3

12.0

2.3

Unquoted*

9.5

5.1

4.4

China (quoted)

2.7

9.4

(6.7)

UK

0.7

2.8

(2.1)

Singapore

0.0

0.9

(0.9)

South Korea

0.0

0.6

(0.6)

Total

100.0

100.0

Source: BIOG, Edison Investment Research. Note: Adjusted for gearing. *Of the 9.5% unquoted investments at end-July 2022, 9.0% was in China and 0.5% was in Asia.

Performance: Manager is anticipating a turnaround

Exhibit 5: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

NASDAQ Biotech (%)

World-DS Pharm & Bio (%)

MSCI World
(%)

31/08/18

1.0

(1.3)

9.6

10.5

12.7

31/08/19

(8.1)

(6.9)

(9.7)

4.2

7.6

31/08/20

60.5

50.8

20.6

14.0

6.8

31/08/21

1.4

5.4

22.8

15.0

26.8

31/08/22

(23.1)

(20.2)

(13.8)

2.4

0.9

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

Having significantly outperformed the NASDAQ Biotechnology Index in FY21 (ending 31 March, its NAV by 30.0pp and share price by 50.1pp), FY22 proved to be a complete reversal in BIOG’s fortunes. Its NAV and share price total returns of -33.8% and -37.0% respectively were meaningfully behind the benchmark’s -7.4% total return. The broad reasons for the trust’s underperformance were its heavier weighting in small-cap biotech stocks and its Chinese exposure. On a stock-specific basis the three largest positive contributors to BIOG’s FY22 performance were: Trillium Therapeutics (it received an acquisition bid from Pfizer at a 203% premium); GH Research (which had positive Phase II trial data for its inhaled therapy for patients with treatment-resistant depression); and StemiRNA Therapeutics (a private Chinese vaccine company developing an mRNA-based COVID-19 vaccine). The largest detractors were: Singular Genomics Systems (early-stage tools businesses fell out of favour with investors and the company faced increased competitive threats); Guardant Health (broad pullback in the share prices of tools and diagnostics growth businesses and rumours of a bid for NeoGenomics); and Aptose Biosciences (which had disappointing data from its lead asset for the treatment of myeloid leukaemia).

Exhibit 6: Investment trust performance to 31 August 2022

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 7: 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

10.1

5.9

(7.0)

(10.7)

(1.9)

(8.0)

(13.4)

NAV relative to NASDAQ Biotechnology

10.8

16.2

0.9

(7.3)

(0.5)

(7.8)

(4.7)

Price relative to World-DS Pharm & Bio

16.2

18.2

(5.9)

(24.9)

(6.7)

(24.8)

(6.0)

NAV relative to World-DS Pharm & Bio

17.0

29.8

2.2

(22.1)

(5.4)

(24.6)

3.6

Price relative to MSCI World

13.7

16.8

1.1

(23.8)

(8.4)

(29.9)

(5.2)

NAV relative to MSCI World

14.5

28.2

9.7

(20.9)

(7.1)

(29.7)

4.4

Price relative to CBOE UK All Companies

16.0

23.7

5.2

(24.5)

11.8

(0.7)

75.0

NAV relative to CBOE UK All Companies

16.8

35.8

14.2

(21.6)

13.4

(0.4)

92.7

Source: Refinitiv, Edison Investment Research. Note: Data to end-August 2022. Geometric calculation.

Exhibit 8: NAV performance versus benchmark over 10 years

Source: Refinitiv, Edison Investment Research

Data from OrbiMed show that over the long term, from 18 May 2005, when the company took over the management of BIOG, to 30 June 2022, the trust’s 784.5% NAV total return has outpaced the NASDAQ Biotechnology Index’s 727.2% total return. However, as shown in Exhibits 7 and 8, the trust’s significant underperformance since early 2021 has had a meaningful negative impact on BIOG’s track record. Except for the last few months, its NAV and share price have lagged the benchmark’s performance over all periods shown. It is interesting to note that despite the trust’s recent performance pressures, over the last decade, it has significantly outpaced the performance of the broad UK market.

Peer group comparison

There are seven funds in the AIC Biotechnology & Healthcare sector. In Exhibit 9, we also include two Switzerland-listed funds, BB Biotech and HBM Healthcare Investments, to provide a broader comparison. BIOG’s NAV total return ranks ninth over the last 12 months as its performance continues to be negatively affected by its strategy of focusing on emerging rather than large-cap biotech stocks. The trust also lags the selected peer-group averages over the last three, five and 10 years. Its valuation is below average in a group where just one fund is trading at a premium. BIOG has a competitive ongoing charge, ranking fourth, and a level of net gearing that is above the mean. The trust is one of three funds in the selected peer group that does not pay a dividend.

Exhibit 9: Biotech and healthcare investment companies, at 2 September 2022*

% unless stated

Market cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (ex-par)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

Biotech Growth Trust

410.8

(18.0)

32.6

21.1

287.4

(7.7)

1.1

Yes

108

0.0

BB Biotech

2,803.1

(17.7)

14.8

9.2

325.4

9.8

1.2

No

103

6.7

Bellvue Healthcare

1,004.6

(6.2)

60.8

82.7

(5.1)

1.1

No

110

3.6

HBM Healthcare Investments

1,585.3

(3.3)

66.2

151.3

613.8

(7.9)

1.8

Yes

100

3.8

International Biotechnology Trust

267.0

(4.4)

28.2

31.1

293.6

(7.2)

1.2

Yes

109

4.9

Polar Capital Global Healthcare

385.6

6.5

42.8

70.0

238.3

(7.2)

0.9

Yes

106

0.6

RTW Venture Fund

220.0

(11.1)

(11.8)

1.9

Yes

100

0.0

Syncona

1,307.9

10.6

(1.7)

45.2

(1.3)

0.5

No

100

0.0

Worldwide Healthcare Trust

2,153.2

(3.2)

33.9

47.2

347.6

(8.1)

0.9

Yes

105

0.8

Average

1,126.4

(5.2)

34.7

57.2

351.0

(5.1)

1.2

104

2.3

Trust rank in sector (9 funds)

6

9

5

7

5

6

4

3

7

Source: Morningstar, Edison Investment Research. Note: *Sterling performance to 1 September 2022 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Dividends

BIOG aims to generate long-term capital growth rather than income and a large proportion of the fund is invested in early-stage companies that invest for future growth rather than returning cash to shareholders. In FY22, the trust’s revenue return was 0.0p per share, compared with -0.2p per share in FY21. No dividend has been paid since 2001 (0.2p per share).

Valuation: Discount wider than historical averages

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

BIOG’s shares are trading at an 8.3% discount to cum-income NAV, which compares with a range of a 2.9% premium to a 12.7% discount over the last 12 months. It is wider than the 4.8%, 4.0%, 4.9% and 4.7% average discounts over the last one, three, five and 10 years respectively. There is scope for a higher valuation if BIOG’s relative performance gets back on track.

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% in normal market conditions. In FY22, a modest c 0.2m shares were issued at an average 1.0% premium raising c £2.1m, while c 0.6m were bought back at an average 6.6% discount at a cost of c £6.9m. So far in FY23, a further c 0.8m shares have been repurchased at a cost of c £7.7m.

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 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, 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 12 of his colleagues at OrbiMed working on BIOG (nine based in New York and four in Shanghai/Hong Kong) 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. Hsu may employ gearing up to 20% of net assets; net gearing was 9.0% at end-July 2022.

Investment process: Bottom-up stock selection

Hsu aims to generate long-term capital growth from a globally diversified portfolio of biotech companies across the market cap spectrum. He 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 manager seeks out the best potential opportunities across the globe, most of the portfolio is held in US companies (72.8% at end July 2022), reflecting its dominance in the biotech industry, although BIOG has a notable exposure to China (11.7%). The trust’s holdings are regularly reviewed to ensure the original investment theses are still valid and positions are sized correctly. Hsu notes 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. The manager continues to invest in unquoted companies (9.5% of the fund at end-July 2022).

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 wellbeing, 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 manager seeks to invest in reputable management teams and is 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 July 2022, the trust’s net gearing was 9.0%, 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. Prior to April 2021 Frostrow received 0.3% of the trust’s market cap, plus a fixed fee of £60k pa and a performance fee was payable (1.5% of outperformance versus the benchmark).

In FY22, BIOG’s ongoing charges were 1.1%, which was in line with FY21; no performance fees were payable, unlike in FY21, when ongoing charges including performance fees were 1.3%. During FY22, due to underperformance versus the benchmark, there was a reversal of prior period provisions of c £10.7m. At the end of FY22, no performance fees were accrued or payable compared with c £17.8m at the end of FY21 (c £7.0m crystalised and was paid on 30 June 2021).

Capital structure

BIOG is a conventional investment trust with one class of share. There are currently 40.4m ordinary shares in issue and the average daily trading volume over the last 12 months is c 94k shares. At the end of FY22, BIOG’s shareholder base was split as follows: 72.0% retail investors; 9.9% pension funds; 9.5% mutual funds; and 8.6% other.

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

Exhibit 12: Major shareholders

Exhibit 13: Average daily volume

Source: BIOG, at 31 July 2022

Source: Refinitiv. Note: 12 months to 2 September 2022.

Exhibit 12: Major shareholders

Source: BIOG, at 31 July 2022

Exhibit 13: Average daily volume

Source: Refinitiv. Note: 12 months to 2 September 2022.

The board

Exhibit 14: BIOG’s board of directors at end-FY22

Board member

Date of appointment

Remuneration in FY22

Shareholdings at end-FY22

Andrew Joy (retired)

15 March 2012

£40,000

55,000

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

£30,000

7,000

Geoff Hsu

16 May 2018

Nil

Nil

Dr Nicola Shepherd

18 January 2021

£27,500

Nil

Roger Yates (chairman since July 2022)

1 December 2021

£9,667

Nil

Source: BIOG

As Geoff Hsu is a partner at OrbiMed, he is considered to be a non-independent director. Roger Yates became chairman following the retirement of Andrew Joy at the 19 July 2022 AGM.

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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 2022 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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