Despite a weak overall equity performance, from January to mid-July, in sterling terms, the NASDAQ biotechnology sector rose by 28% until concerns over the future of US drug prices caused valuations to falter.
When the market’s momentum works in favour of the fund manager, it’s tempting to simply ride that wave and not be overly concerned about stock selection. But by adhering to our investment principles, IBT has managed to outperform the NASDAQ biotech index.
Since September 2013, the IBT share price and net asset value has outperformed our benchmark by 29% and 19% respectively.
Up until three months ago, the rise of the biotechnology sector seemed inexorable – threference benchmark had more than quintupled its value since July 2010. Despite a weak overall equity performance, from January to mid-July, in sterling terms, the NASDAQ biotechnology sector rose by 28% until concerns over the future of US drug prices caused valuations to falter.
When the market’s momentum works in favour of the fund manager, it’s tempting to simply ride that wave and not be overly concerned about stock selection. But by adhering to our investment principles, IBT has managed to outperform the NASDAQ biotech index.
Since September 2013, the IBT share price and net asset value has outperformed our benchmark by 29% and 19% respectively.
For a sector like biotechnology knowing which stocks to avoid is as important as knowing which ones to select.
When deciding where to invest, a biotechnology fund manager needs to select those companies which have drugs that will address an unmet medical need and will be able to command a high price.
Selecting the companies which meet these criteria requires a careful assessment of a number of different factors. The company’s management should have a proven track record of drug development to demonstrate they understand the technical complexities of this process.
We look for those drugs which meet a genuine medical need – the drug in development should either extend patient life or have a much improved side effect profile. Health authorities will be willing to pay for such a compound, and it will generate high revenues.
It’s also important to understand the competitive landscape: how long will that drug have on the marketplace before a similar or better drug is introduced? The intellectual property of a new drug must be robust; the compound should be able to avoid generic competition for as long as possible.
As well as assessing the individual factors of each company, we also assess its value to the healthcare sector. There has been a high volume of M&A activity in the biotechnology sector driven by the low cost of debt financing and larger companies’ appetite for drugs with a high growth potential to replenish their depleted pipeline.
A company which meets all these criteria not only has the potential for capital appreciation but is likely to become a bid target – in the twelve months to 31 August, five of the companies we owned were acquired by larger firms.
Not only did the acquisition of these companies allow us to book a high profit from our investments but it also validated our asset allocation process – the acquiring company was willing to pay a premium to the current market value in order to secure these assets.
Healthcare companies not only look to acquire publicly quoted companies but also at the unquoted market. In fact, many privately financed companies never make it to an IPO – they are usually snapped up by a larger firm.
To exploit this additional source of investment revenues as well as to add diversification to our portfolio, we allocate around a tenth of our portfolio to investing in unquoted companies. This strategy sets us apart from other biotechnology funds.
There is, however, a downside to operating in an environment where there is a high demand for M&A targets – valuations can easily become over-stretched. The key to long-term investment success is to ensure assets can be bought at the right price.