The right stuff

In July 2020 Forbes Magazine printed an article under a headline which read: “The record breaking biotech funding tsunami of 1H 2020”. Pithy it is not, but the language used here captures the wild-eyed greed which can lure investors when they scent a bargain in this high octane sector.

Less than a year later money was pouring out of biotech stocks as investors sought to take advantage of battered share prices in other areas of the market. The Nasdaq Biotech Index lost $85bn in the first week of March after two prior weeks of heavy losses.

Biotechnology is, by its nature, a high risk, high reward sector. Whilst the latter has obvious appeal to investors seeking growth for their portfolio, hence the ‘tsunami’ when they all pile in at once, it is crucial to understand what lies at the core of success for companies in this field in order to really make consistent gains in the long term.

It is important to remember that these companies are developing medicines and therapies which are at the cutting edge of scientific achievement, and even the best funded and most deeply resourced development projects have no guarantee of a successful outcome.

Against that backdrop, real experience counts, and the team at SV Health – manager of the £320m International Biotechnology Trust (IBT) – has plenty of it. IBT aims to deliver long term capital growth via a portfolio of listed and unlisted companies operating in biotech and life sciences.

Kate Bingham, well known these days thanks to her role as chair of the UK’s COVID-19 vaccine taskforce, runs the unlisted portfolio which makes up a small element of the trust’s overall assets. Less famous, but with deep experience in the sector, are joint lead managers Ailsa Craig and Marek Poszepczynski who run the listed portfolio which makes up 91% of the trust’s assets.

Between them, the managers bring a wealth of complimentary experience and skill to a portfolio which has delivered NAV total returns of 65% over the five years to 13 October, not far behind the Nasdaq Biotechnology ETF which tracks the index – but with lower beta (a measure of risk versus the benchmark), lower volatility, and a lower maximum drawdown throughout the period.

Ailsa and Marek stepped up to lead the listed portfolio in March this year, having worked together in the portfolio since 2014 under then lead manager Carl Harald Jansen. Their competencies are well matched. Ailsa has long experience as an investor, having worked for SV Health since 2006, and is focused on the trading aspect of managing the portfolio – the market itself; aiming to identify valuation opportunities, identifying investment themes and shifting sentiment toward them, and monitoring the political atmosphere around healthcare in the United States, where most biotech companies are based. Marek has more than 15 years of experience on the other side of the fence – working in business development for life sciences companies rather than investing in them – and he is focused on fundamental analysis of the companies in which the trust invests; looking at their valuations, management teams, testing regimes, and development programmes and using his experience to judge their quality.

Between them, and via as many as three companies meetings a day, their aim is to gather enough data to create a complete picture of a biotech company which they can use to decide whether to buy, sell or hold its stock. The final decision depends on red and green flags that they have identified while creating that picture.

The risky nature of biotech as a business means there are many red flags to look out for. Poorly controlled clinical data, multiple programmes in different diseases suggesting a lack of focus, companies jumping on obvious bandwagons and changing the parameters of clinical trials between stages are among the easier to define. Others are more subtle, and knowing what they are is – again – a matter of experience.

“Very often it’s what they do not talk about that’s bad,” says Ailsa, “You have to have the experience to notice what you aren’t being told about – and if there’s a gap where there shouldn’t be in what they’re saying, that’s a big red flag for us.”

Not making the wrong decision is so important in this field that red flags outnumber green significantly, but obvious positive indicators are, for example, a focus in one specific disease area, steady dose response throughout the dose increments, and rigorous, consistent trial designs. Again, however, these tangible clues are only part of the picture. Marek’s experience on the front line of life-sciences business gives him the ability to analyse companies in a less binary way.

“When you are talking to a management team it’s the ones who are most upfront about the challenges they face that you can put your faith in. If somebody is too bombastic I don’t really feel they’re acknowledging the risks, whereas you can have more confidence in somebody who understands the limitations they’re faced with.”

The consequences of investing in this complex sphere without the right experience can harm even the most sophisticated investors. There are plenty of examples of companies with a wide investor following failing to deliver a drug.  This is why a portfolio approach to investing in the sector helps to spread the risk.

Looking ahead, the managers are excited about the future. Whilst the trust’s recent performance has been hampered by its inability to hold vaccine related stocks – a consequence of doing the right thing by lending Kate Bingham’s skills to the nation in its time of need – they see the rapid advances in scientific discovery as a key tailwind for the sector.

“When I read biology twenty years ago the things we are seeing today were science fiction.”, says Ailsa. “We are talking about therapies where we are taking an immune cell out of a patient’s body, reprogramming it basically as a missile to kill a specific cancer type, and then putting it back into them.”

Further, biotech offers a rare thing in the sometimes cynical investment world – it can be a fundamental force for good.

Ailsa adds: “Lung cancer is a massive killer and at the moment we are following a drug recently launched by Amgen which can address a relatively large proportion of these patients. Fifteen years ago we saw a new breast cancer drug introduced which has saved millions of lives since, and we are now looking at potentially the same thing for lung cancer– ultimately that’s what investing at the cutting edge of science is all about”.