Biotech Growth (BIOG) fund managers Geoff Hsu and Josh Golomb were vindicated in their backing of smaller drug developers in the US and around the world today as the £245m investment trust reported a stunning 73.4% investment return for the year to 31 March.
Chair Roger Yates said while the Orbimed duo’s conviction that mid and small-cap stocks were undervalued had weighed on returns in recent years, it had been the main factor in the trust “significantly outperforming” the 35% gain in the Nasdaq Biotechnology index. The strong annual results build on an impressive first half recovery.
Shareholders’ actual return was lower at 67.1%, in part because of the unusual 8% gain the portfolio made on the last day of the financial year when Apellis Pharmaceuticals agreed to be acquired by Biogen. The London-listed shares did not have time to respond to the rise in Apellis which came after the market close, briefly leaving the trust standing 10.9% below net asset value.
BIOG shares traded at an average 8.5% discount to NAV during the year, prompting the board to buy back £69.5m of the undervalued stock. The gap has now narrowed slightly to 7%. Despite the rapid rebound from a low of 652p last April, at £12.53 the shares still lie some way off their £16.70 peak in January 2022, which is why no performance fee is payable to the managers.
Our view
Matthew Read, senior analyst at QuotedData, said: “After a painful period for the sector, OrbiMed’s decision to stay tilted towards small and mid-cap biotech has paid off handsomely with Biotech Growth having a spectacular year, helped by improving sentiment, a better interest-rate backdrop and a marked pick-up in M&A.
“The six bid situations in the portfolio are particularly encouraging. Traditionally, the biotechnology sector has relied on larger pharmaceutical companies buying innovation from smaller businesses and, with big pharma facing patent cliffs and valuations in the sector still depressed by historic standards, that should remain a powerful driver. These results also underline why active management matters in this area: the portfolio’s outperformance came from stock-specific outcomes, not just a rising market.
“The discount remains frustrating, particularly given the board’s active buyback policy, but the buybacks themselves added meaningfully to NAV. Biotechnology will remain volatile and policy risk has not disappeared, but the sector looks much healthier than it has for some time. If M&A continues and capital markets reopen further, BIOG’s focus on emerging biotech could still have plenty of room to run.”
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