This publication recently interviewed the manager of a biotechnology/healthcare trust about its strategy and views on the sector.

Life-saving treatments don’t always generate the sort of noisy publicity as the launch of the latest mobile device – which might suggest a rather strange set of priorities. Even so, this sector can generate useful risk-adjusted returns for investors taking a medium-term view, so firms operating in this space claim.

Another story last week highlighted the trends at work. Shares in Novartis India and  Aurobindo Pharma rose after the firms won approval by the US Food and Drug Administration (USFDA) for heart failure and antiarrhythmic drugs, respectively. At a recent conference organised by this publication in London, the audience was told that no fewer than 41 “blockbuster drugs” were approved by US regulators in 2014, in areas such as cancer treatment. While obscured perhaps by some other financial news, this sector appears to be in relatively rude health.

Step forward the International Biotechnology Trust, a UK-listed vehicle managed by SV Life Sciences Managers. According to latest published data in June, the net asset value of the fund was £238 million (around $369 million).

SV Life Sciences, founded 22 years’ ago with offices in London, Boston and San Francisco, focuses on biotech, medical devices and healthcare services and related information technology and has raised $1.9 billion in five venture funds.

“IBT invests in the higher growth part of the pharmaceutical sector which expects to have higher top line growth. The revenue growth and earnings growth is high quality and high margin and high visibility (IP protected products). We think valuations are reasonable for the quality of the earnings growth potential,” Carl Harald Janson, one of the managers of the fund, told this publication in a recent interview. He joined IBT in September 2013 and works with Kate Bingham and Alisa Craig. Between them, Janson, Craig and Bingham have around 50 years of investment experience in the healthcare and related sectors. It is the kind of intellectual firepower that this kind of sector requires if investors are to handle some of the risks.

So how well has the IBT vehicle done? According to figures to 28 February this year from the fund manager firm, the IBT share price shows a cumulative return of 128.6 per cent over a two-year period, slightly ahead of the NASDAQ Biotechnology Index (in sterling) of 126.3 per cent; over three years, performance of the trust lagged the index slightly. Net asset value has been positive although there was a widening of the share price discount to NAV last summer because of a round of profit-taking in the biotech sector. Janson and colleagues say they expect the positive forces at work behind biotech - demand for new treatments, ageing populations, rising affluence - to be in place for a decade or more.

The sector
There are a number of such biotech-flavoured trusts in the market. An example is the Biotech Growth Trust; over the 12 months to last Thursday, it showed a share price return of 69 per cent (source: Hargreaves Lansdown). Other UK-listed trusts are International Biotechnology, Polar Capital Global Healthcare Growth & Income, and Worldwide Healthcare (Source: Association of Investment Companies). Further afield, Switzerland’s Bellevue Group, for example, provides a suite of specialist funds, several of which operate in the space, such as the BB Biotech Ventures and the wonderfully-named BB Adamant Biotech (Lux) vehicles. In the latter case, the fund, launched in April 2009, has generated performance since inception of 257.2 per cent, lagging the benchmark of 371.58 per cent (source: Bellevue website); over one year, however, results have been ahead of the wider benchmark.

For investors who would rather save on management fees and track indices instead, there are exchange traded funds; relatively common in the US, biotech ETFs aren’t quite so numerous in Europe, but last year, for example, the ETF provide Source rolled out the Source NASDAQ Biotech UCITS ETF, which is denominated in dollars and trades on the London Stock Exchange. It is registered for sale in a number of European countries, including Switzerland.

Quoted firms
SV Life Sciences Managers has increased its focus on quoted investments in IBT, arguing that significant growth in public markets will continue and it will continue to harvest its holdings of unquoted firms, noting a busy period of trade sales and initial public offerings of privately-held firms. According to a June 2015 factsheet, quoted firms dominate the portfolio, with names such as Biogen (the largest single holding, at 8.4 per cent of net asset value), Celgene, Gilhead, Amgen and Chimerix.

The general outlook for the sector is a positive one, Janson said.

“The pharma / biotech sector is in a long term growth trend. In the next five years the world wide pharma sales are expected to grow by 5 per cent compound annual growth rate,” he said.

“We hold a balanced portfolio of unquoted and quoted stocks. The quoted part constitutes 93 per cent of the fund and is balanced between small, medium and large cap companies residing mostly in the US. We like innovative profitable high growth biotech and earlier stage companies too. The themes we like are M&A, immuno-oncology, orphan and anti-infectives,” he continued.

The path of the biotech/pharma sector isn’t always smooth and as Janson knows only too well, healthcare is, in much of the world, a political battlefield. The US, for example, has seen painful birth of the Affordable Health Care Act, which is sometimes dubbed by its opponents – or even supporters – as Obamacare. The Act aims to widen access to healthcare while opponents argues that it is likely to achieve the opposite result, at a time when healthcare spending is already rising excessively.

With that in mind, this publication asked what Janson thinks are the main risks in the sector that you see in the next year/five years.

Janson is concerned about pricing pressures on both sides of the Atlantic as being a challenge to the sector over the next year, and longer.

But as far as President Obama’s signature legislation is concerned, Janson is relaxed. “This act we think is neutral to positive for the sector as it expands the market by giving more people access to drugs,” he said.

To spread risk in the fund, the managers hold profitable companies, revenue-generating companies, earlier stage development companies, speciality pharma companies and life science tools companies.