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Biotech Growth: we will ride out this storm
Geoffrey Hsu of Biotech Growth Trust says the sell-off in biotechnology stocks represents a buying opportunity for long-term investors.
The Biotech Growth Trust (BIOG ) has established one of the strongest long-term records of a UK-based fund, turning a £100 investment into £521 over 10 years as the biotechnology sector has ridden a wave of medical innovation and mergers and acquisitions (source: Morningstar Inc, Association of Investment Companies).
In the past six months, however, the trust has experienced a serious setback with the shares down 18% since September as biotechnology companies have come under political pressure over drugs pricing and as a more cautious mood has swept global stock markets.
In this video interview Geoffrey Hsu, co-manager of the £404 million trust, explains:
- why the fundamentals of biotechnology remain intact;
- why the trust is relatively highly geared (ie, borrows to invest more money in the stock market);
- why US political attacks on drug pricing won't lead to law changes.
Can't watch now? Read the transcript
Gavin Lumsden: Geoffrey, stock markets have obviously had a terrible start to the year. What do you say to investors who see that the biotechnology sector has been hit harder than most?
Geoffrey Hsu: What I think we’re seeing right now in terms of the industry fundamentals is that they have actually been as strong as we have ever seen them. So I think a lot of the market volatility that we’re seeing right now is really just a side-effect of the fact that biotech is perceived as being a higher beta sector, selling off in tandem with the rest of the market but we really view this as a buying opportunity because the industry fundamentals have not changed.
Gavin: OK. So the fundamentals of the companies you invest in haven’t changed but as you say other investors’ attitude towards risk appears very much to have changed! So I’m just wondering whether there is anything you can do – obviously it is quite a high risk fund, it’s got the beta, it goes up with the market and it comes down faster when the market is going down – but is there anything you can do to sort of ‘de-risk’ some of the portfolio?
Geoff: So it is a biotech-focused sector fund.
Gavin: It is what it is.
Geoff: It is what it is. We do have a little bit of gearing in the fund right now about 11 to 12% gearing.
Gavin: Which is higher than some of the other funds in the sector.
Geoff: That is true but the gearing level really reflects the fact we think the industry fundamentals are very strong right now. And just to touch on some of those fundamentals. I think among the major biotech companies we are seeing very compelling valuations, certainly after this drawdown [stock market fall] even more compelling. They’re delivering strong, robust earnings growth off the backs of a number of blockbuster products. In terms of R&D innovation we’re seeing a lot of new developments of new drugs being developed in, for example, the immunotherapy space, for cancer, where we’re seeing durable cures to certain types of cancers with these new agents. In terms of the FDA [US Food and Drug Administration] regulatory environment it’s very friendly right now, in fact in 2015 the FDA actually approved 45 new drugs.
Gavin: This is the US drugs regulator.
Geoff: That’s right. This is the US drugs regulator. This is the most number of drugs they’ve ever approved since 1996.
Gavin: That’s fascinating to hear that because our perception would be that the healthcare and the biotech sector are in a really hostile environment, politicians constantly talking about drug pricing. In fact it was that hostile debate that really started the stock market slide back in September. How do you square the two?
Geoff: Sure, you’re absolutely right that starting in September Hillary Clinton made some public comments about the high prices of drugs in the United States and laid out some proposals over what she would do if she were elected President about some of those high prices. Our view on that is that it is a lot of election-year rhetoric, a lot of noise and in fact because the Republicans control Congress we think they will effectively block any legislation even if Hillary is elected President. So we think this certainly has affected sentiment in the biotech sector and weighed on the sector but in reality we don’t think anything fundamentally legislatively is going to change in terms of how drug pricing is done in the United States.
Gavin: Ok. Now in terms of the portfolio, you run quite a focused fund, the top 10 positions account for two thirds of the assets roughly. Is that something you could look at as well when you’re trying to guide the fund through these troubled times?
Geoff: You’re absolutely right, most of the fund right now is invested in what we call major biotechnology companies. These are the larger, sustainably profitable companies and they should be less susceptible to these market gyrations. They’re more stable, they have stable earnings you can pin a valuation to, and so already the portfolio has most of its investments in that particular area of the biotech spectrum. We don’t actually anticipate making further changes in terms of portfolio construction. Given the market volatility we’re just going to ride this out, we think the industry fundamentals will just bear themselves out. And we’ve seen this before, we’ve seen pricing scares before, we’ve seen market drawdowns before and ultimately we think industry fundamentals will win out and the shares will continue to appreciate.
Gavin: Well Geoffrey, we’ll have to wait and see what happens but let’s hope that things do bounce back. In the meantime thank you very much.
Geoff: Thank you.
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