International Biotechnology Trust sold out of riskier smaller companies at the beginning of the Covid-19 crisis and took advantage of the low valuations of bigger growth stocks.
International Biotechnology Trust (IBT ) sold out of its riskier small companies as the Covid-19 pandemic gripped China but the growth names it bought into as the market hit rock bottom continue to be ‘undervalued’.
As coronavirus emerged from Wuhan in China at the start of the year, Marek Poszepczyski, one of four fund managers on the £284m trust, said the trust ‘sold off most of our exposure to small companies that may need liquidity and had the highest volatility’.
‘When markets hit rock bottom and we realised we needed to invest and felt that there were so many companies that were undervalued and we deployed that money into more growth, mid-sized companies,’ he said.
‘We focused on growth names with prospects and with performance that is consistent over time.’
The rotation out of smaller companies does not mean they are totally out of favour with the managers of the trust, who also include Carl Harald Janson, Alisa Craig, and Kate Bingham, who is currently heading the UK’s Covid-19 vaccine taskforce, and 10% of the portfolio is invested in unlisted companies.
‘Small companies are where the innovation is happening,’ said Poszepczyski. ‘The large companies are very good at exploiting their ideas and commercialising them.’
The demand for the next generation of treatments and drugs being developed by the biotech industry, such as gene editing and cell therapies, is expected to continue the rapid growth it has experienced over the past decade as the over-65s population doubles in the next generation.
‘The industry is responding to a demand from society,’ said Poszepczyski. ‘On the supply side, drugs in development measured by ongoing clinical trials has doubled in the last 10 years.
‘The spend on and sales of pharma has increased and is expected to increase over the coming decade which is a nice tailwind for the industry’
He added that the sub-sector of the drugs industry that grows the quickest is pharma targeted at rare diseases, which often affect children and have the ‘highest unmet need’.
‘This is an area IBT focuses a lot on and we will see sales double over the next decade.’
Although the biotech industry was ‘overhyped and hot’ at its peak in 2015, over the past five years’ the drugs companies have ‘continued to grow in a nice trajectory but valuations have not followed through’.
‘This is the reason why we believe the sector has a bright future,’ said Poszepcyski.
While the investment trust beat the Nasdaq Biotechnology index in the year to the end of August, delivering 20.3% return on net assets ahead of the benchmark’s 18.6%, it had to adapt to the pandemic and look for companies benefiting from the race to find a vaccine and treatments.
Janson said there were currently 37 human trials taking place and another 91 treatments in development, with Gilead Sciences (GILD.O) - IBT’s third largest holding - already gaining approval for its antiviral drug remesdivir to be used to treat Covid-19 patients.
Janson said there was ‘great co-operation between governments and companies’ to stop the spread of coronavirus and he believed mass vaccinations could start ‘towards next summer’ as drug approvals are being fast-tracked and companies were already considering how to mass produce vaccines should they work.
‘The industry has done this at risk. When they develop products, vaccines, or drugs, they develop the production side in parallel with the drug but they wouldn’t necessarily scale up the production in parallel. If [a company’s Covid-19 vaccine] doesn’t work there will be losses but if there is a win companies will very quickly be able to make vaccine doses available,’ he said.