Outlook favorable despite extended bull run
The Biotech Growth Trust (LONDON:BIOGW) is an established specialist investor in the worldwide biotechnology industry. Biotech has performed strongly in the three years to 31 January, with the benchmark NASDAQ Biotech index producing a total return of 195% and BIOG achieving NAV total returns of 223%. However, the managers point to valuations for major biotech stocks that compare favorably with big pharmaceutical firms, and greater potential earnings growth, as evidence that relative value still remains. Scientific advances and a more favorable regulatory environment are feeding through into a healthy drug pipeline. BIOG’s shares currently trade close to par, with buybacks used if the discount to NAV exceeds 6%.
Investment strategy: Focus on medical advances
The portfolio managers of BIOG draw on OrbiMed’s team of c 80 professionals with backgrounds in life sciences, business & finance and the law, to identify companies with compelling valuations, strong product pipelines and identifiable catalysts that the wider market may not have appreciated. Company meetings and financial modelling are key parts of the process, but most weight is given to clinical considerations. The portfolio contains a mix of emerging and more mature biotech companies, speciality pharmaceuticals and life science tools.
Sector outlook: Biotech better value than pharma
Continued advances in drug development, in response to longer life expectancy and the resultant growing incidence of conditions like cancer, have driven the biotech market to new heights in recent years. Unsurprisingly, first-year estimated sector P/Es are not obviously cheap, but given higher growth potential and valuations that are less stretched in relation to history, biotech stocks look to offer better value than their peers in the pharmaceutical sector. After a couple of pauses during 2014 in the three-year bull run, further volatility should not be ruled out, particularly given a number of macro factors that could dent investor risk appetite in general.
Valuation: Close to par and issuing to meet demand
Greater volatility in biotech stocks during 2014 saw BIOG’s shares move to a discount to net asset value after trading at a premium for much of 2012 and early 2013. The trust will buy back shares when the discount exceeds 6%, and 5.1m shares were repurchased between March and October 2014. More recently the shares moved back to a premium, leading to the issuance of 110,000 shares to meet demand in January. At 17 February 2015 the shares traded at a 2.5% discount to NAV, which is narrower than the averages over one, three and five years (5.0%, 2.9% and 4.4% respectively).
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