Choosy about risk

Generally, the illness is treated with hormone therapies, which, basically, rely on reducing the production of testosterone. When this fails, the next stop is chemotherapy. However, new treatments look as though they can extend the lives of sufferers of advanced prostate cancer. For Brits, the best known drug should be Zytiga because it was discovered by The Institute of Cancer Research in London and is owned by BTG, the London-listed manager of intellectual property rights. Zytiga acts by stopping production of an enzyme that is vital to the development of prostate tumours. It is marketed by pharmaceuticals giant Johnson & Johnson (J&J) in the US, where it has been available since summer 2011 (although, ironically, it's not available in the UK via the NHS because it's considered too expensive). However, it was developed by a US biotechnology company, Cougar, which J&J acquired in 2009.

Including Zytiga, there are five new treatments that are extending the lives of sufferers. But what's significant is that four of the five were discovered by biotechnology companies and just one by a pharmaceuticals major. And what's true of drugs for prostate cancer applies across the spectrum - increasingly, drugs are discovered and developed by biotechs (even if they end up being marketed via the sales muscle of the established players).

The implication for investors is obvious: having exposure, directly or indirectly, to small and medium-sized biotech companies should be a smart move because the chances are that a good few of them will be acquired by aged sclerotic pharma majors, which desperately need the growth that young companies with innovative research departments can bring.

Certainly, following that logic is a key tactic of Richard Klem and Geoffrey Hsu, the managers of The Biotech Growth Trust (BIOG), a London-listed investment trust, which owned Cougar's shares when J&J came along and whose returns in the year to end March - net asset value up 35 per cent - were boosted when other holdings became acquisition targets. Despite this, two months later the trust's investment managers were still talking of a "valuation disconnect between companies' market capitalisations and their perceived value by potential strategic acquirers". Most likely they were right because now the trust's shares no longer trade at a discount to their underlying net asset value and their price is 63 per cent up on the year.

True, there are other factors behind Biotech Growth Trust's success. It has a healthy weighting in each of the four major US biotech companies - Gilead Sciences, Amgen, Biogen Idec and Celgene (the first two are the trust's biggest holdings). The reasoning was that their share ratings had dropped so low that they were more like value stocks than growth stocks. That meant a re-rating could be prompted by even a little good news, which duly came along in 2011-12. Second, the managers reckoned there was value in life sciences companies, which supply the equipment and diagnostics tools that keep biotech laboratories bubbling. Granted, their customers' revenues might be pie in the sky, but their own income was stable, predictable and underrated.

But the chief message for private investors is that the forces propelling biotech make it a must-have sector for portfolios that strive to reflect big themes, such as the Bearbull global portfolio. If that's so, then the questions that remain are: how do you get the exposure and at what price?

The answer to the first part is almost certainly via a fund because few investors will have the expertise to assess the prospects of individual companies. This could be in a specialist fund where you rely on the manager to supply the knowhow; possibly even shares in Biotech Growth Trust, which have drifted into my view more than once. Alternatively, it could be via an exchange-traded fund that tracks an index of biotech stocks, although the choice is decidedly limited.

As to price, the performance of shares in Biotech Growth Trust implies that the prospects for biotechnology are currently fully valued. After all, the risks associated with biotech are such that shares in collective vehicles, where possible, should trade below their book value. The fact that they are not indicates that investors have become tolerant of the risks involved. That may be surprising given their current reluctance to entertain some more familiar risks.

But that's how it is. Investors always have risks to live with, but, almost unconsciously, they pick and choose which ones to flee from and which ones to stare down. If only they could do that with nasty cancers.

Bearbull global portfolio