Healthcare is simultaneously dominated by a handful of mega-cap incumbents and awash with innovative upstarts. The former (think long-established pharmaceutical groups) are reliable dividend payers, although they rarely post awe-inspiring gains. Biotech companies, which tend to be leaner and newer, offer little stability and their products face a challenging road to commercialisation.
However, investors who manage to identify a genuinely transformative therapy or technology have a lot to gain. Take Moderna (US:MRNA) as a case in point: The group went public in 2018 with more than 26mn shares sold at a price of $23 (£18) each – making it the largest-ever biotech initial public offering (IPO) up to that point. Despite a sharp sell-off in the post-pandemic era, the company’s shares still trade at over five times the initial price.
The reason for this is undoubtedly the messenger RNA (mRNA) technology that forms the cornerstone of its entire product pipeline. In addition to viruses such as Covid-19, mRNA has the potential to revolutionise the treatment of certain cancers and genetic diseases. But for every Moderna, there are countless biotechs that never get their products to market.
Assembling a healthcare-focused investment trust is therefore a delicate task. If a fund is weighted too heavily towards the staid world of big pharma it might have limited scope for market-beating returns. On the other hand, too much exposure to early-stage biotechs could scare off anyone without a substantial appetite for risk.
Biotech struggled in the aftermath of the pandemic as record levels of sector enthusiasm petered out and investors fled toward safer securities in light of rising rates. Last year, company valuations ultimately fell close to the all-time lows seen during the global financial crisis. However, this biotech bear market now appears to be fading into history, with some fund managers attributing renewed investor interest to US drug pricing reforms.
The policies themselves aren’t the appealing factor – it’s merely that fears about their impact on profits have been allayed. Despite this, London’s seven listed biotech and healthcare trusts were still trading at an average discount to net asset value (NAV) of nearly 11 per cent on 1 August. RTW Biotech Opportunities (RTW) leads the pack, with a discount to NAV of 23.2 per cent.
A recent victory for the portfolio came in the form of the $10.8bn acquisition of the fund’s largest holding, Prometheus Biosciences, by Merck (US:MRK) in April. Prometheus made up around 15 per cent of RTW’s NAV prior to the deal, with the subsequent upward share price move adding an additional 11 per cent to the fund's net asset figure. According to broker Numis, RTW has a core portfolio of private investments which constitutes 25-40 per cent of its net assets. A further 30-50 per cent of constituent companies are publicly-listed, although they were privately held at RTW’s initial investment.
The fund has recently backed companies with later-stage pipeline assets, which Numis says “may lead to relative swift discovery of value, and potentially attractive returns”. So why the major discount? One possibility is a lingering pessimism toward earlier-stage biotechs. It’s perhaps worth noting that the healthcare fund trading on the lowest discount (of 5.7 per cent) is Bellevue Healthcare Trust (BBH) – which counts insurance giant UnitedHealth Group (US:UNH) among its largest holdings.
Whether you think current discounts are overblown depends partly on your attitude towards cutting-edge medical science. Some drugs and technologies never see the light of day, but others can change the world.
