Investor Update

The Biotech Growth Trust PLC

31 March 2020

Coronavirus Investor Update

It is clear that the coronavirus pandemic is having a far more severe impact on markets than previous virus outbreaks, with governments taking increasingly draconian measures to contain the virus. However, despite the significant economic implications, with unprecedented volatility in the markets, we still believe the outbreak will ultimately be a temporary phenomenon and should not have a long-term fundamental effect on the biotech industry.

While there is clearly a lot of panic in the markets, there are several near-term events that could potentially calm investors, including signs that the social distancing measures implemented by various governments are effectively reducing the rate of new cases, a peaking in the number of confirmed cases in hotspots like Italy and New York, the continued decline of mortality rate estimates as broader testing is carried out and physicians learn more about properly managing the disease, and progress from the biotech and pharmaceutical sector on the development of treatments and vaccines for COVID-19. It is also possible that warmer weather later in the spring may help to limit further spread of the virus.  The stock market is forward-looking, so we don’t believe every case of the virus needs to disappear for the market to begin to recover.

Much of the virus’ economic impact has already been reflected in share prices with the steep drop in the market.  As the increasingly stringent lockdown measures implemented in the US cause a dramatic slowing of the economy, the US government has already taken unprecedented actions to stimulate the economy, including the Federal Reserve’s implementation of “unlimited” quantitative easing and passage of a $2 trillion fiscal stimulus package, the largest in US history.  There is now talk in Congress of an additional fiscal stimulus package to be passed in the coming weeks.  These financial measures should help stabilize markets and accelerate a recovery once the virus outbreak has been brought under control.

Healthcare, as a defensive sector, should fare better economically during government-mandated lockdowns than other parts of the economy.  In terms of the impact to biotech specifically, there may be some temporary negative impact to commercial sales, potential delays for clinical trials, possible regulatory delays, and a more dilutive financing environment with the decline in share prices.  However, sales of drugs taken by patients at home should be minimally impacted, supply chain disruption for biotech has been largely non-existent, the FDA has stated that it intends to adhere to drug approval timelines, and most biotech companies have sufficient cash to avoid any imminent financing needs.  Overall, any headwinds should be manageable for the industry.

While we cannot predict the daily volatility of the market in the near-term, we think the current market dislocation provides an excellent buying opportunity for the biotech sector for long-term investors.  Outside of the coronavirus, all of the fundamental investment themes for biotech remain intact: unprecedented innovation based on novel technologies, a friendly FDA proactively approving new drugs, compelling valuations relative to historical norms, and expected continued M&A activity.  The only headwind that had dampened sector performance prior to COVID-19 was the political overhang of the Democrats potentially nominating a progressive Presidential candidate like Bernie Sanders, who supports nationalizing the US healthcare system.  With Joe Biden’s strong performance in recent Democratic state primaries, Biden has become the clear presumptive Democratic nominee.  His centrist approach markedly reduces the likelihood of dramatic healthcare reform, and we believe the political overhang has largely abated with his ascendance.  This significant positive fundamental development for biotech has been completely overshadowed by the coronavirus.  Additionally, we think the biopharmaceutical industry’s public image may actually be strengthened by the ongoing crisis.  If a biotech or pharma company successfully develops a treatment or vaccine that curtails the epidemic, the electorate may develop a greater appreciation for the value to humanity that the industry provides.

Our investment strategy in light of the coronavirus outbreak remains largely unchanged.  We are fundamental stock pickers, and we have been capitalizing on the market volatility to improve the quality of the portfolio and add to our best ideas.  We have not made significant changes to the overall structure of the portfolio or altered our emphasis on emerging biotech.  While the higher-beta emerging biotech names experienced a greater share price decline on average in March compared to the large-cap biotechs, we believe the emerging names will rebound more strongly when the virus crisis abates.  We are encouraged by the biotech companies attempting to develop potential treatments and vaccines for COVID-19, but we have not actively “chased” these names, as the probability of success and ultimate revenue potential from those therapies remains unknown.  Having said that, some of the Trust’s portfolio companies happen to have active coronavirus programs, including Gilead Sciences (developing the antiviral remdesivir), Regeneron Pharmaceuticals (developing antibody treatments for COVID-19), and CanSino Biologics (a Chinese vaccine company which has already advanced a vaccine for coronavirus into human trials).

Overall, we are staying the course but trying to be as nimble as we can.  The entire public equity team – analysts, portfolio managers, traders – are in constant virtual communication every day in real time using the latest technologies available.  Despite the significant challenges the coronavirus is posing to countries worldwide, we are more focused than ever on choosing the best investment opportunities for long-term sustained performance.

Geoffrey Hsu, CFA, OrbiMed Advisors LLC
Portfolio Manager, The Biotech Growth Trust PLC

Please note a number of the companies mentioned are owned by The Biotech Growth Trust PLC (‘BIOG’)

Important Information

The Biotech Growth Trust PLC (the Company) is a public limited company whose shares are premium listed on the London Stock Exchange (LSE) and is registered with HMRC as an investment trust. The Company has an indeterminate life, although shareholders consider and vote on the continuation of the Company every five years (the next such vote will be held in 2020).

This update is for information purposes only and does not constitute an offer or invitation to purchase shares in the Company and has not been prepared in connection with any such offer or invitation. Before investing in the Company, or any other investment product, you should satisfy yourself as to its suitability and the risks involved, and you may wish to consult a financial adviser. Any return you receive depends on future market performance and is uncertain.

The Company does not seek any protection from future market performance so you could lose some or all of your investment. For information on the principal risks the Company is exposed to please refer to the Company’s Annual Report or Investor Disclosure Document available at www.biotechgt.com.  

Shares in the Company are bought and sold on the London Stock Exchange. The price you pay or receive, like other listed shares, is determined by supply and demand and may be at a discount or premium to the underlying net asset value of the Company. Usually, at any given time, the price you pay for a share will be higher than the price you could sell it.

The Company has increased its exposure to investments via the use of an overdraft facility and derivatives, and this could potentially magnify any losses or gains made by the Company. The Annual Report and Investor Disclosure Document, available on the Company’s website, include further details on the use of, and exposure to, derivatives.

Enquiries:
Mark Pope
Frostrow Capital LLP
Company Secretary
Tel:  [phone]