Buying opportunity for the Biotech Growth Trust

Biotech Growth provides an active and differentiated exposure to the global biotechnology sector, with the recent share price weakness offering a decent entry point for long-term investors.

The £575m Biotech Growth Trust (LON: BIOG) is a unique vehicle with a significant tilt towards emerging biotech, a material weighting in the mid and small caps operating in the sector, as well as a meaningful exposure to emerging markets and crossover/IPO investments. It is a rapidly evolving and highly specialist area, which the investment managers, OrbiMed, are well-placed to exploit.

Their active approach means that there will be times when the fund lags behind the index and this has been the case this year with an NAV total return for the six months to the end of September of -8.3%, compared to a benchmark gain of 10.3%. The main reason was the outperformance of large-cap biotech stocks and a general rotation out of growth.

BIOG shares are currently down around 30% from their all-time high earlier in the year and are trading on a wider than normal discount of six percent to NAV. The broker Investec believes that the secular drivers of returns are well entrenched and thinks that the recent weakness provides an attractive opportunity to acquire a strategic investment.

Positive outlook

OrbiMed is the largest dedicated healthcare investment firm in the world with assets under management of $18bn across a range of different investment strategies including the more diversified Worldwide Healthcare Trust (LON: WWH). Its team of over 100 investment professionals represents an almost unparalleled depth of resource and is complemented by a significant network of industry contacts.

In 2019, the fund made a strategic shift towards emerging biotech, which the manager expects to continue to be responsible for the bulk of innovation. This has meant that it is significantly overweight in small cap biotech and underweight in large cap relative to the benchmark.

The recent performance has been disappointing, but the investment manager believes that the industry fundamentals are intact, with robust innovation, M&A activity, a constructive regulatory environment and reduced political risks, while valuations remain compelling. It expects small cap biotech where it is heavily invested to rebound, with previous similar sell-offs normally followed by strong rallies.

Different to the benchmark

Almost two-thirds of the recent underperformance came from being underweight in Moderna and BioNTech, two of the largest biotech companies. The manager believes that their valuations are high, mainly due to their role in the supply of vaccines and that the stocks risk losing their premium ratings as the pandemic recedes, with both share prices falling back from their August highs.

There has been a lot of reaction to the regulatory interventions taken by the Chinese authorities this year and although they have not specifically affected healthcare it has weighed on the general market sentiment. BIOG has an 18% exposure to the country and the manager remains convinced that developing a Chinese biotech industry is a key goal for the government.

The Biotech Growth Trust provides a high risk/high return exposure to one of the most exciting areas of the market in what OrbiMed describes as a golden era of innovation. It has delivered a 10-year total return of over 600% with the recent share price weakness providing an opportunity for long-term investors to open a position.