It has opened the eyes of many investors to the potential returns that lie within the biotech sector. We have not visited biotech yet on the podcast, so this week we spoke with Ailsa Craig, an investment manager with SV Health Investors, a specialist fund manager which concentrates its activity in the biotech sector.
Craig joined SV Health Investors in 2006 – prior to that she was an analyst at Baring Asset Management. She is also part of the team responsible for the International Biotechnology Trust (LSE:IBT). Between 85-90% of the investment trust is invested in a portfolio of healthcare stocks with the remainder in unquoted companies. The unquoted component is accessed through the SV Life Sciences Fund (VI) and a few direct unquoted investments. Given the tiny universe of available investment trusts on the London market, IBT represents one of only a few liquid ways to access a sector which is defined by niche and highly specialised companies.
International Biotechnology Trust
The trust invests in companies that work on the development of breakthrough treatments in areas like cancer, rare diseases, infectious diseases and cardiovascular disease. Apart from the capital return, the trust also aims to pay a dividend of 4% of NAV per annum.
Biotechnology is a very specialist sector. While we have had seen some phenomenal returns from stocks in the Covid medicine space in 2020, generating consistent returns from this area requires considerable expertise and a wide array of expert contacts. On the podcast we define some of the characteristics of the biotechnology sector – what makes it tick and what biotech companies look like, compared with other companies in the healthcare universe.
We also discuss how biotech companies can evolve into pharma-like larger stocks, the importance of universities for the development of new biotech ideas and R&D, and what is driving the massive returns for some biotech companies at the moment.
“Biotech will always be lumped in with the Teslas and companies like that,” Craig says. “We are seeing pockets within biotech exhibiting the same things. We are wary of valuations and have a strict definition of the value of a company….you are seeing some really extreme valuations for some incredibly early stage companies.”
We also chat about the importance of regulatory approval and the various stages of those approvals, and how that can also affect the performance of share prices. This is what Craig calls the “bread-and-butter day-to-day job” of her team and part of their added value is their ability to keep track of the progress of the development of a wide range of new drugs. In some respects, she says, it is like looking for oil.
The discussion also includes some interesting perspective on how a fund manages risk within the sector. and why the team prefer not to be in a stock in the lead up to an anticipated approval.
the armchair trader