The Biotech Growth Trust

The Biotech Growth Trust (BIOG) has continued its strong track record of outperformance during the past 12 months. Share price and NAV total returns have been 56.2% and 55.9% respectively, which are both appreciably ahead of its benchmark, the NASDAQ Biotechnology Index (sterling adjusted) over the same period at 48.9%. Recent price gains have moved ahead of earnings growth so that average P/E ratios have moved up during the last two years, having fallen for the previous 10 years. However, the manager believes valuations remain attractive in a historical context, he reports that attractive opportunities remain and that, in their view, there is still strong growth potential for the sector.

Investment Strategy: Major And Emerging Biotech
Biotechnology investments in companies at the early stage of development can provide the highest returns over time but also carry substantial risk if drug developments prove unsuccessful. BIOG focuses on these early stage, emerging biotech companies (around two-thirds of the portfolio, with the balance invested in generally larger, established, and profitable companies). For the emerging part of the portfolio, OrbiMed will typically invest during the development process, two to three years before development success (product approval or launch) is likely to produce sales and sustainable profitability. The key to success in early-stage investments is to be able to manage the risk of development failure and in this respect OrbiMed is well resourced with a good track record.

Sector Outlook: Fuller Valuations
The biotech sector has provided a very strong performance during the past 18 months, when the sector has experienced a significant rerating. Initial price gains were broadly matched by earnings increases, keeping valuations near historic lows. Recently, valuations have expanded, making a correction more likely on any set back. The manager is comfortable with current valuations and continues to see attractive opportunities in the space. In addition, the longer term stories of favourable demographics and innovation remain intact.

Valuation: Currently Trading At A Mild Premium
BIOG’s discount has narrowed substantially during the past 18 months and the trust is currently trading at a 1.4% premium (three- and five-year discount averages are 4.7% and 5.5% respectively). However, the premium rating arguably reflects both strong performance and its clear discount maintenance policy. BIOG has been issuing new shares. This should benefit existing holders by stimulating liquidity and reduce ongoing charges by spreading fixed costs over a larger asset base.