The Biotech Growth Trust — Onwards and upwards for performance recovery

The Biotech Growth Trust (LSE: BIOG)

Last close As at 19/04/2024

GBP9.42

−6.00 (−0.63%)

Market capitalisation

GBP316m

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Research: Investment Companies

The Biotech Growth Trust — Onwards and upwards for performance recovery

The Biotech Growth Trust’s (BIOG’s) two co-managers, Geoff Hsu and Josh Golomb, at global healthcare specialist OrbiMed, believe that now could be an opportune time to consider the biotech sector as it is recovering from the longest and largest absolute and relative drawdown since 2006. The sector was negatively affected by sharply rising interest rates rather than a deterioration in industry fundamentals; indeed, the managers continue to refer to a ‘golden era’ of innovation within the biotech sector. BIOG’s relative performance has been through a difficult period given its high weighting in emerging (smaller-cap) biotech stocks, which performed significantly worse than the shares of large-cap biotech businesses during the sector sell-off.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

The Biotech Growth Trust

Onwards and upwards for performance recovery

Investment trusts
Biotech equities

20 March 2024

Price

966.0p

Market cap

£327m

Total assets

£384m

NAV*

1,036.3p

Discount to NAV

6.8%

*Including income. At 18 March 2024.

Yield

0.0%

Ordinary shares in issue

33.8m

Code/ISIN

BIOG/GB0000385517

Primary exchange

LSE

AIC sector

Biotechnology & Healthcare

Financial year end

31 March

52-week high/low

1,010.0p

718.0p

NAV* high/low

1,125.6p

777.2p

*Including income.

Net gearing*

9.7%

*At 29 February 2024.

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.

Positive industry fundamentals and valuations, but the sector has been out of favour with investors.

OrbiMed is a global leader in healthcare research and investment, with c $17bn of assets under management.

Bear points

The focus on emerging biotech stocks was detrimental to the trust’s performance during the latest sector drawdown.

Biotech stocks 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’s (BIOG’s) two co-managers, Geoff Hsu and Josh Golomb, at global healthcare specialist OrbiMed, believe that now could be an opportune time to consider the biotech sector as it is recovering from the longest and largest absolute and relative drawdown since 2006. The sector was negatively affected by sharply rising interest rates rather than a deterioration in industry fundamentals; indeed, the managers continue to refer to a ‘golden era’ of innovation within the biotech sector. BIOG’s relative performance has been through a difficult period given its high weighting in emerging (smaller-cap) biotech stocks, which performed significantly worse than the shares of large-cap biotech businesses during the sector sell-off.

BIOG presentation with Geoff Hsu and Josh Golomb (March 2024)

Source: BIOG

Why consider BIOG?

Having experienced a period of very difficult performance, in both absolute and relative terms, starting in early 2021, BIOG’s results look to be solidly back on track. There is a high level of innovation within the biotech sector, led by emerging biotech companies, due to the development of a range of new technologies addressing multiple therapeutic areas. The regulatory environment remains supportive, and industry M&A is robust as pharma companies take advantage of attractive biotech company valuations to bolster their pipelines ahead of a major patent cliff, with the majority of patent expirations occurring in H224.

BIOG’s managers are very excited about the trust’s prospects and encouraged that investors are once again rewarding biotech companies that deliver positive outcomes. For example, Janux Therapeutics recently reported positive Phase I data for its product for the treatment of prostate cancer and its shares appreciated by more than 200%. This move has catapulted the company into BIOG’s list of 10 largest holdings.

In keeping with many other investment companies, the trust’s discount is wider than its historical averages. This offers scope for BIOG to be afforded a higher valuation now that its performance is back on track, and there is potential for an improvement in investor sentiment in a less uncertain economic environment.

BIOG: Sticking with the emerging biotech bias

BIOG’s portfolio contains major biotech companies, which are large, profitable businesses that can be valued on traditional metrics such as P/E multiples and earnings growth, and emerging biotech companies, which do not generate sustainable profits and may have no revenues. The trust’s portfolio has a structural bias towards emerging biotech companies as, although they are inherently riskier, the managers consider that this is outweighed by their potential positive prospects. These companies represent two-thirds of the biotech industry’s research and development pipeline and 2021 data showed that 53% of new product launches were from emerging biotech companies.

Risk management is embedded into the investment process. There is comprehensive review and analysis of companies that have significant binary catalysts, with the managers aiming to limit negative outcomes to 100bp. For large-cap stocks the portfolio position size is 5–10%, while emerging biotech holdings are generally 1–3%. Annual portfolio turnover of 90% is relatively high as the managers add to or reduce the holdings to ensure they are appropriately sized, especially for companies with binary events.

Performance of the biotech sector

Exhibit 1 clearly shows BIOG’s preference for emerging biotech stocks.

Exhibit 1: Biotech market cap performance from 31 March 2021 to 29 February 2024

% unless stated

BIOG portfolio weight
at 31 March 2021

NASDAQ Biotech Index weight
at 31 Mar 2021

Delta
(pp)

Performance
Mar 21 to Feb 24

Large cap (> $10bn)

26

59

(33)

(7.0)

Mid cap ($2–10bn)

22

29

(7)

(27.6)

Small cap (< $2bn)

51

13

38

(25.6)

Total

100

100

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

The NASDAQ Biotech Index bottomed in late-October 2023, and since then smaller-cap biotech shares have significantly outperformed large-cap biotech stocks. However, it is interesting to note that in the broader market, smaller-cap stocks are not yet playing catch-up. The managers believe that once this does occur it should fuel further momentum in the shares of smaller-cap biotech companies.

Using the XBI Index (the equal weighted SPDR S&P Biotech ETF) as a proxy for small- and mid-cap biotech stocks shows that versus the US bellwether S&P 500 Index, biotech sector drawdowns are followed by periods of outperformance. The latest drawdown was the longest, and the largest, in absolute and relative terms since the XBI Index was launched in 2006; between 8 February 2021 and 7 February 2024, the XBI Index underperformed the S&P 500 Index by 77pp.

Sector weakness led to depressed biotech company valuations. For those with a market cap greater than $10m, the median market cap versus net cash on the balance sheet was at a record low – so below levels seen during the period of Clinton drug price reform, the bursting of the dot.com bubble and the global financial crisis. There was a record number of biotech companies trading below the amount of net cash on their balance sheets, and while the sector has moved off its low point, using history as a guide, there appears to be significant further upside in biotech stocks.

Biotech industry fundamentals

The latest biotech sector drawdown seems disconnected from strong industry fundamentals, with a pipeline as full as it has ever been. Between 2016 and 2022 the number of Phase I candidates increased by 70% across all therapeutic areas. What the managers refer to as a ‘golden era’ of innovation is being driven by novel/next-generation technologies including gene editing/therapy, cell therapy and RNA therapeutics. There have also been notable new drug approvals to address large markets, some of which have mega-blockbuster consensus peak sales estimates of more than $10bn. These include Biogen and Eisai’s Leqembi for the treatment of Alzheimer’s disease and Vertex Pharmaceuticals’ Trikafta for the treatment of cystic fibrosis.

The regulatory environment remains supportive as in 2023 the US Food and Drug Administration approved a further 55 novel drugs (new molecular entities and therapeutic biological products). Within these approved drugs were several ‘firsts’, including Biogen and Sage Therapeutics’ Zurzuvae, which is the first and only treatment for postpartum depression.

M&A has historically been positive for the performance of biotech stocks. Activity was robust in 2023 and has continued so far in 2024. The managers expect this to continue, supported by attractive biotech company valuations and pharma companies having to bolster their product pipelines ahead of an unprecedented patent cliff. Between 2025 and 2030, an estimated $250bn of branded drugs are going off patent, the bulk of which occurs in 2027 to 2029. As an example, Merck had $25bn in Keytruda sales in 2023, which is used in the treatment of cancers, and is going off patent in 2028, so the company requires external as well as internal developments to plug its upcoming sales gap.

The managers’ playbook

Hsu and Golomb will continue to favour emerging over large-cap biotech stocks, aiming to capture their full rebound from a significant period of underperformance. The managers believe that emerging biotech stocks are coming off unprecedented low valuations, which offers significant upside from current levels, especially considering the positive fundamental features of the biotech sector. In addition, ongoing robust levels of M&A should continue given the looming patent cliff. As a result of this constructive backdrop, the managers are very bullish on the prospects for BIOG.

Portfolio breakdown

At end-February 2024, BIOG’s top 10 holdings made up 43.1% of the fund, which was a higher concentration compared with 41.5% a year before; two names were common to both periods. The portfolio had 62 positions, which was very similar to 61 at end-February 2023. Over the 12 months to the end of February 2024, the trust’s active share fell from 82.4% to 70.5% (this is a measure of how the fund compares with its benchmark, with 0% representing full index replication and 100% no commonality). The lower active share is unsurprising given how well large-cap biotech stocks have performed versus smaller biotech companies.

Exhibit 2: Top 10 holdings (at 29 February 2024)

Company

Country

Sector

Portfolio weight %

29 February 2024

28 February 2023*

Amgen

US

Major biotech

6.8

N/A

Biogen

US

Major biotech

5.8

5.4

Janux Therapeutics

US

Emerging biotech

5.6

N/A

Regeneron Pharmaceuticals

US

Major biotech

4.3

N/A

Sarepta Therapeutics

US

Emerging biotech

4.0

5.2

Neurocrine Biosciences

US

Emerging biotech

3.9

N/A

Vaxcyte

US

Emerging biotech

3.3

N/A

Apellis Pharmaceuticals

US

Emerging biotech

3.2

N/A

Argenx

Europe

Emerging biotech

3.2

N/A

Scholar Rock Holding

US

Emerging biotech

3.0

N/A

Top 10 (% of portfolio)

43.1

41.5

Source: BIOG, Edison Investment Research. Note *N/A where not in end-February 2023 top 10.

Exhibit 3 shows that BIOG’s exposure to the dominant North American biotech market increased by 8.9pp to 88.0% in the 12 months to the end of February 2024. There was also a notable 5.5pp decline in the trust’s exposure to unquoted companies.

At 29 February 2024, BIOG’s total Chinese exposure was 6.9% (3.9% listed and 3.0% unquoted), which was considerably lower than 13.2% a year before (8.4% unquoted and 4.8% listed).

Exhibit 3: Portfolio geographic breakdown (%)

Sector

End-February 2024

End-February 2023

Change (pp)

North America

88.0

79.1

8.9

Continental Europe

4.8

6.0

(1.2)

China (quoted)

3.9

4.8

(0.9)

Unquoted*

3.3

8.8

(5.5)

UK

0.0

1.3

(1.3)

Total

100.0

100.0

Source: BIOG, Edison Investment Research. Note: Adjusted for gearing. *Of the 3.3% unquoted investments at end-February 2024, 3.0% was in China and 0.3% was in Asia.

Performance: Back on the right track

To provide a long-term perspective, from BIOG’s inception in May 2005 to the end February 2024, the trust’s NAV total return of +983.5% compared with the NASDAQ Biotech Index’s +843.0% and the UK market’s +228.7% total return.

Exhibit 4 shows that BIOG’s performance is solidly back on track following a prolonged period of underperformance starting in Q121, as emerging biotech stocks significantly underperformed the shares of large-cap biotech companies.

Exhibit 4: NAV performance versus benchmark over 10 years

Source: LSEG, Edison Investment Research

Exhibit 5: AIC Biotechnology & Healthcare sector at 19 March 2024*

% 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

326.5

15.9

(28.7)

30.8

83.6

(7.5)

1.1

Yes

110

0.0

Bellevue Healthcare Trust

678.6

0.5

(7.6)

32.4

(6.2)

1.0

No

100

4.1

International Biotechnology Trust

246.0

6.2

8.3

38.9

154.4

(11.6)

1.4

Yes

106

4.3

Polar Capital Global Healthcare Trust

446.3

17.3

47.4

78.1

177.4

(6.7)

0.9

Yes

107

0.6

RTW Biotech Opportunities

401.9

16.5

1.6

(31.7)

2.1

Yes

100

0.0

Syncona

853.3

(2.3)

(6.4)

(2.2)

81.2

(30.9)

0.9

No

100

0.0

Worldwide Healthcare Trust

1,773.7

10.9

6.2

41.0

184.5

(13.4)

0.8

Yes

101

1.0

Average (7 funds)

675.2

9.3

3.0

36.5

136.2

(15.5)

1.2

103

1.4

BIOG rank in peer group

6

3

7

5

4

3

5

1

5

Source: Morningstar, Edison Investment Research. Note: *Performance data to 18 March 2024 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).

BIOG is one of the smaller funds of the seven members of the AIC Biotechnology & Healthcare sector. Reflecting the trust’s improved recent performance, its NAV total return is above average over the last 12 months, ranking third. It has below average returns over the other periods shown. BIOG’s has a lower-than-average discount in a sector where no funds are trading at a premium. It has a below-average ongoing charge and the highest level of gearing. The trust is one of three companies in the sector that does not pay a dividend.

Exhibit 6: Investment trust performance to end-February 2024

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

Price, NAV and benchmark total return performance (%)

Source: LSEG, 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

5.7

12.9

16.6

3.8

(35.6)

0.5

(19.8)

NAV relative to NASDAQ Biotechnology

8.3

14.9

18.6

3.7

(30.9)

2.1

(13.7)

Price relative to World-DS Pharm & Bio

4.2

17.0

16.9

(3.4)

(51.7)

(16.8)

(34.7)

NAV relative to World-DS Pharm & Bio

6.7

19.1

18.9

(3.5)

(48.2)

(15.5)

(29.7)

Price relative to MSCI World

2.5

16.7

11.8

(9.4)

(54.5)

(26.8)

(45.9)

NAV relative to MSCI World

5.0

18.8

13.7

(9.5)

(51.2)

(25.7)

(41.8)

Price relative to CBOE UK All Companies

7.1

24.5

20.9

8.1

(48.6)

6.9

9.3

NAV relative to CBOE UK All Companies

9.8

26.7

22.9

7.9

(44.9)

8.6

17.5

Source: LSEG, Edison Investment Research. Note: Data to end-February 2024. Geometric calculation.

BIOG’s relative performance is shown in Exhibit 7. The trust has certainly enjoyed a reversal in its fortunes in recent months with a near 20pp NAV outperformance versus its benchmark over the last six months. Biotech shares have started to perform better following a prolonged period of being out of favour with investors for both macroeconomic and company-specific reasons. During ‘risk-off’ episodes, emerging biotech stocks with their higher risk profiles tend to be disproportionately negatively affected compared with larger-cap more diversified biotech stocks.

Due to BIOG’s recent improved performance, it is now ahead of its benchmark over the last one and five years. However, there is more work to be done to restore the trust’s three-year record.

Exhibit 8: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

NASDAQ Biotech (%)

World-DS Pharm & Bio (%)

MSCI World
(%)

29/02/20

23.8

29.7

6.0

9.2

9.6

28/02/21

69.2

52.8

26.6

11.3

18.8

28/02/22

(38.6)

(38.9)

(15.0)

7.4

15.9

28/02/23

(2.3)

5.7

14.0

11.8

3.2

29/02/24

8.9

8.7

4.9

12.7

20.2

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

BIOG’s upside/downside analysis

In Exhibit 9, we highlight BIOG’s performance versus its NASDAQ Biotechnology Index benchmark over the last 10 years. The trust’s upside capture rate is 111%, suggesting that in months when biotech shares are rising, BIOG will outperform by a modest amount. It has a larger downside capture rate of 121%, which implies that in months when biotech shares are falling, the trust will underperform to a greater extent. This analysis is not surprising given BIOG’s bias to emerging biotech stocks, which are inherently more risky than large-cap biotech stocks.

Exhibit 9: BIOG’s upside/downside capture

Source: LSEG, Edison Investment Research. Note: Cumulative upside/downside capture calculated as the geometric average NAV total return (TR) of the fund during months with positive/negative reference index TRs, divided by the geometric average reference index TR during these months. A 100% upside/downside indicates that the fund's TR was in line with the reference index’s during months with positive/negative returns. Data points for the initial 12 months have been omitted in the exhibit due to the limited number of observations used to calculate the cumulative upside/downside capture ratios.

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 2024 Edison Investment Research Limited (Edison).

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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 2024 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.

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20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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OPAP — A good end to FY23

OPAP enjoyed good growth from its land-based activities, as well as through the continued expansion of its online activities in FY23, and the company surpassed its own profit expectations. Ongoing enhancements to OPAP’s offer, including the revitalisation of games, will support further growth in FY24.

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