Biotech Growth (BIOG) is ploughing on with share buybacks in the hope investors will soon sit up and notice the startling recovery in its shares.

Since early April, when the investment trust had tumbled to more than a six-year low on Trump tariff fears, the shares have shot up 77%, lifting its market valuation to £241m.

At £10.85 on Wednesday, BIOG shares were back at their level at the start of January 2022, but more than a third below their £16.70 peak in January 2021.

From that high point they tumbled as rising inflation and interest rates caused investors to shun the smaller drug developers in which Orbimed fund managers Geoff Hsu and Josh Golomb like to invest. In July nearly a quarter of shareholders at the annual general meeting voted against the trust’s continuation in its five-year poll, so unhappy were they with performance.

This followed annual results in June when BIOG disappointed investors with a 24.4% slump in net asset value (NAV) in the year to 31 March compared to the 6% decline in its benchmark, the Nasdaq Biotechnology index. 

Relief rally

All that is in the rear window though as North American biotech companies, which make up 63% of the BIOG portfolio, have rallied in anticipation of further interest rate cuts by the Federal Reserve following last month’s 0.25% reduction.

Fears that the sector would be hit by Trump imposing costly tariffs, drug pricing and budget cuts on the US regulator, the Food and Drug Administration, evaporated last month when Pfizer agreed to offer its lowest prices to the country’s Medicaid health insurance scheme for lower earners.

In response BIOG leaped over 13% in September, massively outperforming the 4.7% sterling rise in the Nasdaq Biotechnology benchmark.

Share buybacks continue

Despite the strong rebound of the past six months, BIOG shares trade 8% below asset value, prompting the board to continue with its weekly purchases of its cheap stock in an effort to narrow the valuation gap to 6%.

The lack of a rerating in BIOG’s shares could reflect that its half-year revival does not show up in its performance figures with the non-dividend paying stock up 6.9% over one year, while the five-year decline of 27% reflects the painful bear market the company and its shareholders endured.

However, it shouldn’t take long for the market to notice as other biotech trusts have also rallied. International Biotechnology Trust (IBT) has advanced over 27% in the past year but stands on a 10.8% discount. That’s despite a 51% rebound in the past six months as a spate of mergers and acquisitions have boosted returns. Rivals RTW Biotech Opportunities (RTW), up 40%; Polar Capital Global Healthcare (PCGH), up 19%, have also done well. Worldwide Healthcare (WWH), which is also run by Orbimed, has gained 23%.

Buying back shares on a discount is good for shareholders as it adds to a trust’s asset value and, in the absence of other buyers, helps ensure the share price doesn’t drift too far from the underlying value of its investments.

Yesterday, aware that it had used up more than two thirds of its annual 15% buyback allotment since July, the board called for a general meeting of shareholders on 12 November to renew its authorisation.

The company has plenty of money to buy back shares having reclassified over £96m of reserves for this purpose in August.

Our view

Matthew Read, senior analyst at QuotedData, said: “We think BIOG’s request that shareholders renew its buyback authority makes a lot of sense. The trust has been clear about its intention to defend a discount of around 6% and we think it should continue to have the means to do this. BIOG also raised considerable funds from tap issuance during the boom years, and we think that it is only right that it buys back share now that the environment is more challenging. That said, the biotech sector and BIOG in particular have performed strongly in recent months. We think that, if this trend continues, buybacks will slow down and we might even see some new issuance, potentially making this renewal of the buyback authority obsolete. Regardless, we think shareholders will be pleased to know that BIOG will have this authority if it needs it.”