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James Carthew: don’t let Biopharma’s slow start give you the wrong impression

James Carthew: don’t let Biopharma’s slow start give you the wrong impression

This week I’m revisiting Biopharma Credit (BPCR) which I last wrote about at the end of March, when it listed having raised £610 million. As things stand, it still holds the top slot for the largest new issue of 2017. It is still early days though, given the fund still had 66% of its assets in cash at the end of August. Unfortunately, that is higher than the roughly 56% in cash that the fund had when it first listed.

Biopharma Credit purchased a seed portfolio at launch, comprising both a $160 million stake in Biopharma III Holdings (a limited partnership run by the manager) and a $232 million credit agreement with RPS Biopharma Investments. Seed portfolios are a good idea as they are a way of hitting the ground running.

Depomed, which was Biopharma Credit’s largest underlying investment, prepaid $100 million of its senior secured loan early in April, coughing up a $4 million early-repayment penalty which provided a useful early boost to the fund’s income account. Just after this, RPS BioPharma Investments handed over £48.8 million of cash. Since then, BioPharma III has handed over another $12.6 million and RPS BioPharma another $11.1 million. In addition, Depomed announced in July that it intended to refinance the balance of its loan ($46 million at the end of August).

Just over six months in, the manager hasn’t made any investments beyond the acquisition of the seed portfolio but says it is working towards having the flotation proceeds invested by the end of next March. A few weeks ago in its half-year results, the manager said it would present indicative terms to a number of potential borrowers in the coming weeks. Fingers crossed, we could see some news about new investments over the next month. Investors are being patient in any case, with the shares trading at a premium of 12.6% over their net asset value.

When I last wrote about BioPharma, I said that ‘barring accidents and provided that the balance of the cash proceeds is invested within a reasonable time frame’ they will probably come back for more money. This is certainly happening elsewhere. We are seeing a spate of funds returning for a second bite of the cherry not that long after they were first listed.

Civitas Social Housing (CSH) is looking to double in size, LXi (LXI) real estate investment just raised £60 million, RM Secured Direct Lending (RMDL) raised £30 million and BB Healthcare (BBH), which raised £150 million when it listed in December 2016, just raked in another £64 million in its second issue and is also dripping stock into the market, taking its market capitalisation close to £300 million.

BBH invests via a fairly high conviction portfolio (maximum 35 stocks) and measures its returns against those of the MSCI World Healthcare Index. On Morningstar’s figures, BBH outperformed the index between launch and the end of September. It lagged Orbimed’s Worldwide Healthcare (WWH) and Biotech Growth (BIOG) trusts though.

I thought that part of the reason for this might be that the Orbimed funds have higher exposures to biotech than BBH. However, biotech was 25.7% of BBH’s portfolio at the end of September. I don’t have the equivalent figure for Worldwide Healthcare at 30 September but, at the end of March 2017, it was 28.6%. Worldwide Healthcare’s outperformance must just be down to stock selection. Nevertheless, all these funds beat the index over this period.

Leaving the excitement of drug discovery and innovative therapies aside, the arguments in favour of having exposure to stocks in the wider healthcare sector are many and convincing. They were sufficient to encourage investors to support the relaunch and expansion of Polar Capital Global Healthcare (PCGH) in May this year. I would not be surprised if the biotech and healthcare equity sector continued to expand. It is going to be interesting to see whether BioPharma Credit represents the first step in the establishment of a much larger biotech and healthcare debt sector as well.

James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.



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