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Biotech Growth is benefiting from looking beyond coronavirus

Geoff Hsu tells Mary McDougall why he has not rushed to buy more companies working on coronavirus treatments
June 9, 2020

Healthcare stocks around the world have outperformed broader global markets as the coronavirus pandemic has highlighted the critical need for healthcare products and services. So, perhaps not surprisingly, Biotech Growth Trust (BIOG) has done particularly well in recent months and made a net asset value total (NAV) return of 60 per cent over the year to 5 June 2020.

“The case for the biotechnology sector is very strong,” says Geoff Hsu, manager of Biotech Growth Trust, which has assets worth over £500m. “There is unprecedented innovation, an accommodative regulatory environment, and in recent years record [numbers] of new drug approvals by the US Food and Drug Administration (FDA)."

He adds that the financing environment has been helpful so many companies have listed on public markets in recent years. 

Biotechnology is a sub-sector of healthcare that focuses on novel drug development, and clinical research on treating diseases and medical conditions. A number of biotech companies that the trust invests in are working on coronavirus treatments, such as Gilead Sciences (US:GILD), Applied Therapeutics (US:APLT), Regeneron Pharmaceuticals (US:REGN) and CanSino Biologics (HK:6185).

Mr Hsu says that even if these companies produce a vaccine they are unlikely to make much of a profit from it. But it would be a “tremendous opportunity for the biotech industry to really improve its image and demonstrate value to society,” he adds. 

High drug prices, for example, have been a common criticism of the pharmaceutical industry.  

A number of the trust's holdings have benefited from the coronavirus 'halo effect' – share price increases due to investors buying in the hope that these companies will profit from finding coronavirus treatments. But Mr Hsu has not rushed to buy more companies that are developing Covid 19 vaccines.

“A slew of companies are developing Covid [19] treatments, but we have chosen not to chase them," he explains. "The demand has been retail driven and we are sceptical about the ultimate revenue potential for those vaccines."

Mr Hsu adds that the impact of coronavirus on the biotechnology sector has been minimal so far. “People can still take medication at home, make renewals online and have refills mailed to their homes," he says. "There has been some impact where people have to go to hospitals to get treatment, but as hospitals reopen people are coming back quickly as many treatments are for serious conditions such as cancer.”

Mr Hsu says that biotech companies have been considered essential businesses since the outbreak of the coronavirus so have continued with clinical trials. Although there have been some delays to the start of new trials, the FDA has been flexible and companies have experimented with new ways of collecting data from home to be able to continue trials. 

The trust’s strong performance over the past 12 months succeeds a number of years of underperformance relative to the NASDAQ Biotechnology Index. Mr Hsu says that coming into 2020 he slanted the portfolio more towards emerging biotechnology companies  that are not yet making sustainable profits because that is where the innovation is. Two-thirds of the trust's assets were in such companies based in the US at the end of last year, with 12.5 per cent in these kinds of companies in Europe and Asia.

Mr Hsu says the trust is also overweight in targeted oncology companies relative to the NASDAQ Biotechnology Index, an area where companies are developing drugs that target specific cancers driven by gene mutations. Mirati Therapeutics (US:MRTX), Turning Point Therapeutics (US:TPTX) and Deciphera Pharmaceuticals (US:DCPH) are companies in this area that have boosted the trust's performance over the past year. 

The trust’s largest holding at the end of April was Vertex Pharmaceuticals (US:VRTX), which is developing treatments for the underlying cause of cystic fibrosis. Mr Hsu says that it is in the process of launching a groundbreaking drug.

Biotech Growth Trust has a relatively high annual turnover rate of its holdings of 126 per cent. “A lot of emerging biotech companies go up 100 per cent or down 80 per cent," explains Mr Hsu. "So you have to be nimble, and harvest profits from those that have done well and redeploy them in those that are yet to realise value.” 

Mr Hsu says that although he did not change the trust's asset allocation in response to the pandemic he did top up companies of which the valuation became more attractive.

“Asian stocks held up well over the drawdown," he says. “So we took some money out of stocks that had done well in Asia and redeployed it into US names that had come down in line with the market."

He adds that US political risks to healthcare and biotech stocks have been greatly alleviated by Joe Biden securing the Democratic presidential nomination. This means that Medicare for all – a national health insurance programme for all US citizens – is unlikely to be introduced soon. This was a policy advocated by former Democrat candidate Bernie Sanders.

That said, Mr Hsu sees increasing opportunities in China. “The biotech ecosystem in China is still in its early stages," explains Mr Hsu. "We are uniquely positioned to invest there as we have two analysts on the ground who can go and visit facilities in person."

He adds that the Sino-US trade war will have minimal impact on the trust’s Chinese holdings because these companies predominantly service the domestic Chinese market.