International Biotechnology Trust’s (IBT) investment manager Carl Harald Janson remains bullish on his sector and dismisses April’s sell-off as a ‘short-term correction’. He argues a long-term investment story of strong and predictable growth remains intact.

For Janson biotech is not the high-risk sector of 15 years ago. Companies today have sales, earnings and vibrant pipelines. ‘The efficiency of development has improved. It is a market that wasn’t there 10 years ago.’

On a PEG (price/earnings to growth) metric the sector is attractive. He quotes Bloomberg figures of biotech’s forward PEG of 0.9 times, compared to 3.3 times for pharmaceuticals.

The Swede, who commutes to London and the US from his home country, heads a fund that has out performed its benchmark by 130 basis points in the past year. And IBT has maintained its impressive upwards trajectory, up 19.6% in the three months to June, despite the sector growing only 10.6%. The fund charges a 1.15% management fee. There’s also a 10% outperformance fee and the charge on unquoted investments is 20% of net realised gains.

Janson points to a greater understanding of disease mechanisms, a more favourable regulatory regime and increasing emerging market demand as growth drivers.

IBT is not only exposed to biotechnology’s quoted companies, but also to the retail businesses that are usually beyond private investors’ reach. The fund is dominated by listed companies, which accounted for 91% of its £187 million net asset value (NAV) at the end of May.

Janson and Ailsa Craig manage the trust’s quoted investments, while Kate Bingham handles its private company interests. The fund experienced the huge risks biotech carries when investors exited the sector in April. The sell-off was prompted by fears the lucrative US market could implement pricing controls after politicians questioned how much Gilead Sciences (GILD:NDQ) charges for hepatitis C treatment Solvadi.

If such a law is introduced the trust faces earnings downgrades, but Janson is not worried. Such a move would be unconstitutional and when it comes to pricing pressure he is more concerned with generic competition.

Living in America

IBT was launched 20 years ago and has been managed by Boston-headquartered venture capitalist SV Life Sciences since 2001. Janson joined in September, hired on the back of a strong asset management track record. A doctor by trade he joined what is now AstraZeneca (AZN) in the 1990s, where he moved from drug development into the analyst department of several financial firms including Danske Securities. Janson then stepped up to fund management, the highlight of which was a six-year stint at the Carnegie Biotechnology Fund (LUO119485372), which generated a 54% return on his watch, outperforming the NASDAQ Biotechnology Index by 80%.

Hanging up his doctor’s coat was an easy decision to make. ‘Asset management is intellectually challenging and highly dynamic. There is always something happening.’

It certainly appears that there is a lot happening on the other side of the Atlantic judging by the fund’s heavy leaning towards US companies, which represent 89% of the portfolio.

‘The US has a thriving biotech sector,’ Janson says, pointing out that despite the reputation of universities in Oxford, London and Cambridge the UK research industry is half the size of the Boston’s innovation hub.

There is no reason why Britain should not produce more companies in this space. It has plenty of academic venues and access to funding through the City, but in the past decade the US has been more innovative in creating commercially-attractive companies due to the availability of venture capital and investors more open to taking on risk.

Janson believes that to reduce the sector’s huge risks it would be wise to back vehicles such as International Biotechnology Trust. He reasons that investors buying five biotechs trading in London will have limited exposure to the sector, but a trust allows people to tap potentially hundreds of companies in the US.

Biotech is for the long-term investor. ‘If you need your money tomorrow it’s probably not a good idea to invest in biotech today,’ Janson says. Arguably those with a longer-term horizon should have a small part of a portfolio in the sector to diversify risk.

All the right moves

Sentiment remains strong with IBT looking at 30 to 40 initial public offerings in the past year. He avoided allergy drug developer Circassia (CIR) because it changed the trial design of a new drug in Phase III from Phase II, increasing the risk of the treatment failing because the data cannot be relied upon. ‘You should never change anything [in clinical trials],’ he says.

Other factors when assessing a potential investment include long-term growth, of
which patent expiries are a crucial indicator. The experiences of some of the world’s largest drug companies and their falling earnings highlight what can happen when drugs lose exclusivity.

Janson puts a lot of emphasis on management, regularly meeting those leading the companies he backs. Trust and a track record of delivering results are characteristics of a strong leadership team.

‘We do not invest in the science or a product, we invest in the equity,’ he says. ‘The majority of our investments can be traded in a short period because we are a £200 million investment trust, so it’s not good if it takes three months to buy or sell.’

Carl Harald Janson

International Biotechnology Trust (IBT)

Fund Facts

Launch date: 06/05/1994

Net assets: £187 million (as at 31/05/14)

Share price: 288.7p

5 year share priceperformance: 154%

Yield: n/a

Number of companies: 90

Management fee: 1.15%

ISIN: GB0004559349

TOP TEN HOLDINGS (as at 31/05/2014)

Company %

Gilead (GILD:NDQ) 8.6%

Alexion (ALXN:NDQ) 8.2%

Biogen (BIIB:NDQ) 7.4%

Celgene (CELG:NDQ) 7.0%

Amgen (AMGN:NDQ) 5.7%

Illumina (ILMN:NDQ) 3.9%

Mylan (MYL:NDQ) 3.2%

Vertex (VRTX:NDQ) 3.1%

Regeneron (REGN:NDQ) 2.7%

Shire (SHP) 2.6%

Source: International Biotechnology Trust (31/05/2014)