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Biotech Growth extends run of poor performance

Biotech Growth's NAV shrinks by a quarter

Biotech Growth extends run of poor performance – On Friday, Biotech Growth Trust published results for the year ended 31 March 2019. Its net asset value per share rose by 5.3% and the share price by 4.6%, reflecting a slight widening in the discount. The benchmark (Nasdaq Biotechnology Index) returned 13.0%. Biotech Growth Trust has now underperformed its benchmark in each of the last four financial years.

Extract from the chairman’s statement

Larger capitalisation biotechnology stocks, which account for more than half the aggregate index, collectively had a tough year. The larger stocks’ lacklustre performance also cast a shadow over the whole sector, as they can be considered “bellwethers”. By way of illustration of their difficulties, late in the year, in March, Biogen reported very disappointing news on its prospective treatment for Alzheimer’s, aducanumab. Celgene’s share price continued to suffer over the first nine months following a major rerating of its shares towards the end of 2017. In January the low valuation did in fact provoke a takeover offer from Bristol-Myers Squibb which reversed the decline, but the valuation remained well below the level of 24 months ago.

Other factors in the relative weakness of the biotechnology sector include firstly some background disquiet about political pressures on drug prices – a disquiet which your Portfolio Manager, OrbiMed, argues is overdone – and secondly a shift in how biotechnology is understood by the market. Historically, the sector tended to be considered one with high growth, justifying a high rating. With larger biotechnology stocks now relatively mature, and no longer offering such high growth, the transition into mainstream portfolios has yet to happen.

For the Company, the weakness in the market in biotechnology stocks in the second half of the year was compounded by relative underperformance. This was principally a result of particular stock choices and weightings against the NBI, the chosen benchmark, as more fully set out in the Portfolio Manager’s report. The NBI rose 13.0% in the year as a whole, against the 5.3% noted above
for the Company.

Mitigating the underperformance was the U.S. dollar’s strength against sterling over the twelve months to 31 March 2019, over which period it was up 7.1%. Almost all the Company’s assets are denominated in U.S. dollars.

It is clearly disappointing that the Company has underperformed its benchmark both this year, and overall for the past five years. The Board has held extensive discussions with OrbiMed and Frostrow in order to understand how a process which has had great long term success has hit such choppy water. It is clear that there is no obvious simple factor. The team and investing strategy are the same as that which achieved a decade of outperformance. Amongst other influences, it appears that within the sector, investor behaviour while still sensitive to scientific advance within particular ompanies, is also influenced by market sentiment, which has diluted the impact of the proprietary research the Portfolio Manager conducts. It appears that market behaviour has changed, and we are discussing the implications of that with OrbiMed and how they can adapt to it.

There are reasons to be optimistic about the future for the biotechnology sector. There is a sea-change in the science underlying the sector, driven by advances in gene technology. Gene therapy and gene editing are now a reality; new CAR-T products addressing blood cancers have been approved and other novel treatments, such as Vertex’s for cystic fibrosis, are now on the market. In addition, there has been a pickup in merger and acquisition (M&A), including the take-over of Celgene by Bristol-Myers Squibb noted above. As far as the Company is concerned, OrbiMed are working hard to maintain their long-term record of outperformance and reverse recent underperformance. Since they took over management of the portfolio the Company’s net asset value per share has appreciated by 689.1% against the benchmark of 624.8%.

One small but significant step was taken in the year: in the search for sources of outperformance, OrbiMed made what was for the Company its first investment in a Chinese biotechnology company’s initial public offering (IPO) on the Hong Kong stock exchange. The outperformance of this share since IPO will not on its own make a big difference to the portfolio but it is a sign that OrbiMed is searching globally for outperformance.”

BIOG : Biotech Growth extends run of poor performance

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