Biotech Growth Trust (BIOG) has reported a disappointing set of annual results for the year ended 31 March 2025, with its net asset value (NAV) per share falling 24.4%, compared with a 6.0% decline for its benchmark, the NASDAQ Biotechnology Index (sterling-adjusted, total return). The trust’s share price fell 24.2%, closing the year on a 7.6% discount to NAV, broadly in line with the 7.8% discount seen at the start of the period.

The steep fall reverses the strong gains seen in the prior year, when NAV and share price total returns were 26.5% and 27.1% respectively. The trust’s assets under management declined from £361.3m to £221.2m, reflecting both the fall in NAV and the impact of ongoing share buybacks.

Challenging backdrop for biotech

Much of the underperformance can be attributed to a severe sell-off in small and mid-cap biotech stocks, particularly those in the development stage – companies that have yet to generate product revenue. This segment, where Biotech Growth Trust is overweight relative to its benchmark (46% vs. 28%), was disproportionately affected by rising U.S. interest rates, inflation fears, and regulatory uncertainty following the re-election of Donald Trump and the appointment of Robert F. Kennedy Jr. as Secretary of Health and Human Services.

Investor concerns were raised by talk of pharmaceutical tariffs, an uncertain path for FDA approvals due to potential staffing cuts, and a general risk-off sentiment in equity markets. The trust’s manager highlights that these pressures have pushed biotech valuations to historically low levels, with around 30% of listed biotech companies trading below net cash.

To manage volatility, the portfolio’s gearing was reduced from 9.1% to zero, though gearing still detracted 1.6% from performance over the year. BIOG remains largely focused on quoted equities, with private investments accounting for just 1.0% of the portfolio at the year end.

Share buybacks and discount control

BIOG’s board continued with its active discount management policy, buying back 6.37m shares at an average discount of 8.7%, which generated a 1.9% uplift to NAV. Given the scale of repurchases, a special resolution was passed in February 2025 to renew BIOG’s authority to buy back shares ahead of the regular AGM and a further 883,594 shares have been repurchased since the year-end. The board reiterated its long-term commitment to maintaining the discount around 6% under normal market conditions.

The board is also proposing a capital reduction, cancelling the trust’s £79.9m share premium account and £16.7m capital redemption reserve to create a special distributable reserve. This will provide greater flexibility for future buybacks and distributions, subject to shareholder and court approval.

Portfolio highlights

The top five contributors to performance included Gilead Sciences, Argenx, and Intra-Cellular Therapies, the latter of which was acquired by Johnson & Johnson for $14.6bn, delivering a significant gain for the trust. Other positive contributors included CytomX Therapeutics and Morphic Holding, both of which benefited from strong clinical data or M&A activity.

However, these gains were outweighed by sharp losses in companies like Sarepta Therapeutics, Dyne Therapeutics, and Apellis Pharmaceuticals, where either adverse clinical news, missed investor expectations, or regulatory concerns led to heavy selling. Overall, the manager’s stock selection detracted 17.6%, while management fees and other expenses subtracted a further 1.1%.

The portfolio remains concentrated, with the top 20 holdings making up 75.5% of assets, and continues to focus on high-conviction positions in companies developing first-in-class therapies, often in areas of unmet medical need.

Exposure to China and outlook

The trust maintained a 9.0% weighting to Chinese biotech stocks, up from 7.7% a year earlier, supported by OrbiMed’s on-the-ground presence in Shanghai and Hong Kong. The managers believe Chinese biotech is becoming an increasingly important source of innovation, noting that several large pharma companies have recently licensed or acquired Chinese-developed assets.

Looking ahead, OrbiMed expects M&A activity to re-accelerate as large pharmaceutical companies seek to replenish pipelines ahead of major patent cliffs, and as political uncertainty around tariffs and tax reform stabilises. The trust also sees opportunities in orphan diseases, cardiovascular medicine, and bispecific antibodies for cancer, with many holdings well positioned in these areas.

Board changes and continuation vote

Julie Tankard joined the board in September 2024 and will take over as audit committee chair from Julia Le Blan, who steps down at the July 2025 AGM. Lord Willetts will also retire at the AGM, with a successor expected to be appointed later in the year.

Importantly, the five-yearly continuation vote will be held at this year’s AGM. While the board is recommending continuation, it has committed to an interim continuation vote in 2028, two years ahead of schedule, to allow shareholders an earlier reassessment of progress.

[QD comment MR: BIOG’s overweight to development-stage biotech and small/mid-cap names has worked heavily against it in a risk-off environment dominated by macro shocks and political uncertainty. However, for patient investors, valuations in the sector are now at multi-decade lows, and with the potential for M&A activity to recover, BIOG could be well positioned to benefit from both.

In the meantime, regular buybacks and a firm commitment to shareholder engagement are encouraging. The board’s plans to cancel the trust’s share premium account and capital redemption reserve to create a special distributable reserve should also provide greater flexibility for future buybacks and distributions, while the interim continuation vote in 2028 strikes a fair balance between allowing the manager time to execute on the recovery while still holding them to account. However, this remains a high-risk, high-reward part of the market, and confidence could take some time to return.]