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Biotech Growth trails benchmark by miles

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Biotech Growth has reported results for the 12 months ended 31 March 2023 and they aren’t good. The NAV total return for the year was -11.0%, a whopping 16.4 percentage points behind the +5.4% return on the NASDAQ Biotechnology Index. The return to shareholders was -12.8%.

The chairman’s statement attributes the underperformance to investors’ preference for larger cap companies, the trust’s Chinese exposure (which has been reduced a little but was still 9% of the portfolio at the period end), and gearing (which took about 0.8% off the NAV).

2,421,263 shares were bought back at an average discount of 8.0% and for a total cost of £22.6m.Since the year end, a further 1,057,959 shares have been bought back for cancellation.

New co-manager

Josh Golomb, a partner at OrbiMed, has been promoted to be a co-portfolio manager of The Biotech Growth Trust. Josh has close to 20 years of experience investing in biotech. Including Josh and Geoff, OrbiMed now has seven analysts on the biotech research team, supplemented by one specialty pharma analyst, two tools/diagnostics analysts, and four analysts in China.

OrbiMed recently opened a London office, initially for professionals in its venture capital and structured debt businesses. While its public equity investing efforts will continue to be headquartered in New York,  it says that London gives a foothold to further expand in the UK and other parts of Europe in the future.

Investment policy changes

The board is proposing a number of small changes to the investment policy in order to clarify the scope of the use of swaps and derivatives for efficient portfolio management. The proposed changes will:

  • Enable derivative instruments (other than equity swaps) to be used to mitigate risk and/or enhance return subject to an aggregate net exposure of 5% of the value of the company’s gross assets measured at the time of the relevant transaction; and
  • Remove the current limit for equity swaps but impose a limit on aggregate net counterparty exposure, through a combination of derivatives and equity swap transactions, of 12% of the value of the gross assets of the company at the time of the transaction.

Extracts from the managers’ report

Similarly to the prior fiscal year, the underperformance of the Company versus the Benchmark can be principally attributed to the portfolio’s heavier weighting in small cap biotech…. if one looks at the market cap distribution of the Company’s portfolio at the beginning of the fiscal year, the Company was 41% overweight small caps and 33% underweight large caps relative to the Benchmark. If one plots the average stock price performance of the Benchmark constituents in each of those market capitalization categories, one observes that small cap biotech underperformed large cap biotech by about 27% during the review period. Notably, the prior fiscal year showed a similar 30% underperformance of small caps versus large caps, a trend that we had hoped would reverse in the review period…. small cap underperformance during the fiscal year is simply an extension of a longer trend of underperformance since 31 March 2021. We are surprised that the underperformance of small caps has persisted for so long but remain convinced that the segment is overdue a recovery.

Sarepta Therapeutics, Verona Pharma, Forma Therapeutics, Syndax Pharmaceuticals and Seagen were the leading positive contributors to performance in the portfolio during the year.

  • Sarepta Therapeutics is a commercial biotechnology company focused on rare neuromuscular diseases. It markets three approved therapies for Duchenne muscular dystrophy but is also developing a gene therapy for the condition. The company’s share price rose on the increased investor expectation that the company would be able to obtain accelerated approval for its gene therapy in 2023.
  • Verona Pharma is a biopharmaceutical company focused on developing therapies for the treatment of chronic respiratory diseases. Verona Pharma’s product candidate, ensifentrine, combines bronchodilator and anti-inflammatory activities in one compound for the treatment of chronic obstructive pulmonary disease (COPD). In August 2022, shares appreciated on the announcement of a positive Phase 3 trial for ensifentrine in COPD, showing the drug yielded improvements in lung function, symptoms, and quality of life. In December 2022, the stock rose significantly on the announcement of a second positive Phase 3 trial of ensifentrine in COPD, confirming the benefits demonstrated in the first trial.
  • Forma Therapeutics was a development stage biopharmaceutical company focused on developing new therapies for patients with sickle cell disease and rare blood disorders. Its lead asset, etavopivat, works by activating an enzyme that is thought to improve anemia and red blood cell health, thereby reducing the painful episodes experienced by sickle cell patients. In early September, Novo Nordisk announced that it was acquiring Forma for $1.1 billion in cash, representing a 49% premium to Forma’s closing price the previous day.
  • Seagen is a pioneer in antibody-drug conjugate (ADC) technology, marketing four ADC therapeutics for the treatment of cancer. Seagen’s stock appreciated in March after Pfizer announced its plans to acquire the company for $43 billion.
  • Syndax Pharmaceuticals is an emerging biotechnology company with two drugs in pivotal trials: revumenib for leukemia and axatilimab for chronic graft versus host disease. The stock appreciated in anticipation of pivotal data readouts for both of those programs in 2023.

YS Biopharma, GH Research, Jounce Therapeutics, Mirati Therapeutics, and Kezar Life Sciences were the principal detractors for the year.

  • YS Biopharma is a Chinese vaccine company which markets a rabies vaccine and is developing a novel vaccine adjuvant that could have applications for developing superior versions of vaccines for COVID, rabies, and hepatitis B. The company went public in the U.S. in March via a special purpose acquisition company (SPAC) merger but subsequently saw a substantial decline in share price that we attribute to SPAC-related trading dynamics rather than fundamentals. Given that the company generates over $100 million of revenues, we think the shares are extremely oversold and will recover once the fundamentals are properly recognized by investors.
  • GH Research is a biopharmaceutical company focused on the treatment of psychiatric and neurological disorders. The company is developing a proprietary 5-MeO-DMT inhaled therapy for the treatment of patients with treatment-resistant depression (TRD), now in Phase 2 clinical trials. Shares declined during the fiscal year due to overall sector weakness and a lack of near-term catalysts.
  • Jounce Therapeutics is a clinical stage biotech company focused on developing targeted immuno-oncology therapies. Shares of Jounce underperformed after disclosing its drug vopratelimab failed in a Phase 2 trial in lung cancer. Its second asset JTX-8064 also failed to demonstrate sufficient efficacy in a variety of tumor types in a Phase 1/2 proof of concept trial. The Company exited the position.
  • Mirati Therapeutics is a biotechnology company developing novel small molecule drugs to treat cancer. Its lead product, adagrasib, is a precision oncology medicine that targets cancers with a specific gene mutation. Shares fell in December 2022 following the presentation of disappointing clinical trial data suggesting adagrasib might not be superior to standard-of-care treatment in first-line lung cancer. The drug may still be used in later-stage lung cancer and colorectal cancer.
  • Kezar Life Sciences is an emerging biotech company developing zetomipzomib, a first-in-class immunoproteasome inhibitor, for the treatment of lupus nephritis. The drug has shown promising results in a Phase 2 trial for lupus nephritis. However, shares declined in March 2023 when the company announced a lengthy delay in the completion of its first pivotal trial for zetomipzomib.

BIOG : Biotech Growth trails benchmark by miles

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