Biotechnology and Healthcare

Low cost of capital has fueled exceptional returns for biotech and health stocks.

As the world grapples with a new strain of coronavirus never before seen in humans, we are reminded of the vital role of biotechnology in fighting disease.

Chinese scientists had isolated the coronavirus and posted its genetic sequence online within two weeks of the virus being reported to the World Health Organization, allowing biotech companies to start making copies they could use in research.

An innovative and high-growth sector using cutting-edge science to bring hope to patients, biotech deserves a place in every diversified portfolio.

What is biotechnology? Put simply, it is the application of technology to living organisms to create products which
solve problems. Biotech is used in agriculture, industry, environmental and waste management, and has become
an increasingly important source of innovation in healthcare and medicine. Biotech addresses unmet medical needs in order to improve human lives, creating new drugs and processes.

The opportunity

Even before coronavirus, the legislative backdrop for biotech has been positive for some time; the US Food and Drug Administration (FDA) is approving more new drugs than ever – last year it gave the green light to 48 new drugs, while in 2018 the figure was 59, the highest ever. This supportive regulatory environment for biotech companies has led the number of drugs in development to triple over the last 15 years, yet valuations among biotech companies have remained stubbornly depressed in recent years compared to other S&P industrial sectors.

Merger and acquisition activity is rife within biotech, as big companies buy up smaller, more nimble innovators at a premium and quickly use the power of their global networks to distribute newly-patented drugs. BristolMyers Squibb’s recent $74bn purchase of Celgene shows that even mega caps can be a target if the price is right. This makes the sector a fertile hunting ground for investors seeking capital growth.

A trust to control volatility

That said, there are some concerns investors could legitimately raise: biotechnology is known to be a volatile space, and valuations have neared bubble territory in the past. Looking at valuations now, some of the larger names are trading on 10 to 13 times earnings, which compares favourably to the S&P 500 Biotechnology index and the S&P 500. Absolute valuations on smaller biotech companies have flatlined for the last five years, suggesting bubble fears have receded.

However, there are options for investors here. One investment trust we would highlight is International Biotechnology Trust (IBT) which has done a great job at controlling volatility. Its maximum drawdown compares favourably with the returns it has produced under the tenure of Dr Carl Harald Janson of SV Health Managers, once named by Bloomberg as the world’s best biotech manager. Backing him up is an investment team with a combined 85 years of experienc in healthcare and life sciences and a broader team of experts at SV Health Managers LLP, so they are well placed to invest successfully in this complex sector.

Access to unlisted stocks

IBT has a 66-strong portfolio of listed companies, alongside a smaller collection of unquoted stocks, which would otherwise be impossible for ordinary investors to access. This allows it to spread risk effectively and tap into opportunities from across the biotech spectrum. Uniquely for a biotech fund, it also gives investors both capital growth and income with an annual 4% yield drawn from capital.

Disclaimer.
International Biotechnology Trust is a client of Kepler Trust Intelligence. Material produced by Kepler Trust Intelligence should be considered as factual information only and not an indication as to the desirability or appropriateness of investing in the security discussed. Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771. Full terms and conditions can be found on www.trustintelligence.co.uk.

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