Andy clark, manager of the finsbury life sciences iT, believes the sector is cheap because it is being priced like tech stocks
Andy Clark, manager of the £34m Finsbury Life Sciences investment trust, says prices for biotech stocks are now so cheap that he is employing an element of gearing in the trust for the first time in its five year life.
Clark says the prices of companies have fallen so far that he wants to use all the 'fire power' he has. He has increased the level of gearing to around 2% and expects that will reach as high as 5%-7% in coming weeks.
Until now, Clark has not used gearing in the trust as he considers this to be a high-risk move given the volatility of the underlying holdings. There was a period in early 1998 when he considered gearing, but by the time investor and board approval was gained, the market had already moved.
The trust, launched in early 1997, falls within the investment trust overseas growth sector. Over three years the trust's share price is ranked third of three trusts in the sector, making gains of 69.7%, compared to the sector average of 131% over the same period. The trust predominantly invests in pan European companies.
Clark, a founder of Reabourne, which contracts its services to Close Finsbury, also manages the Universal Life Sciences Oeic, on which an institutional share class was launched in early 2000 and a retail share class launched the following year. The investment remit of this fund differs from the investment trust in that it is global. Currently 82% of this fund is invested in US companies, predominantly listed on the Nasdaq.
What type of stocks would you expect to find in each of these funds?
One of the features of Finsbury Life Sciences is that 25% of the assets are dedicated to non-quoted stocks. So I co-manage this fund with Merlin Ventures, a venture capital operation. I am responsible for the quoted, and they manage the unquoted companies. All holdings are pan-European based.
Around 54% is invested in the UK and the next biggest geographical areas are Sweden (9%) and Germany (8%).
Universal Life Sciences, an Oeic, invests in biotech companies throughout the world. There are no unquoted companies and the majority is invested in the US.
In both portfolios, we focus on the smaller cap and technology-oriented end of the market. I have no interest, for example, in companies like GlaxoSmithKline, Novartis or AstraZeneca, in terms of potential investments, however I am interested in what they are doing in terms of potential partners. Therefore, there is no overlap in holdings with Finsbury World-Wide Pharmaceuticals, managed by Sam Isaly and investing in larger healthcare stocks. The median market cap in Universal Life Sciences is probably around $500m. In the Finsbury Life Sciences trust it is probably around $300m. The smallest company in each trust is $9m through to $10bn at the large end. However, the vast majority of holdings will probably be at the smaller end of that scale.
How many stocks are contained within each portfolio?
In Finsbury Life Sciences there are 49 stocks, excluding the unquoted companies, and in the Universal Life Sciences we have close to 90 stocks. The big difference in the number of holdings is simply the fact that the universe in Europe is much smaller than that available on a global basis.
In both the funds, we have a core and a tail. You need a broad range of stocks when investing in biotech, because the risks in any individual stock of an adverse clinical trial or a regulatory finding are very high. If you are in small caps being focused in a few is a very high-risk strategy.
The core of the portfolio is those stocks where we have positions of between 2%-4% and have relatively little turnover, then we have a long tail of smaller holdings, ranging from 0.5% upwards. These are the companies that we are getting to know.
How do you research these companies?
Meeting management is critical. There is not a single stock in either portfolio where I have not personally met the management. I would be very unlikely to buy anything purely on research materials and recommendations from a broker.
I know that is an awful clichÃ©. Everyone says management is vital, but in biotech companies it is particularly important. Life sciences companies, unlike almost any area of investment, offer no conventional measures. There are no historic earnings, P/E ratios or cash flows. There is just a group of people, some science and some money so that is why the emphasis is on the management.
Does meeting management provide all the information you need?
Management will not often tell lies but there is a tendency to omit telling something that may be important. It is difficult to know to ask such questions as there will be very few people who know the science as well as they do. So we have to try to overcome this by using someone else's experts. In other words, there is always more than one company in a field. Therefore, we look at what they are doing and then ask the their competitors why they are not doing things the same way. Our job is to uncover what we are not being told. This doesn't tell you the answers but it does at least point you to the important issues.
Once you establish what companies you like, do you ensure that you are not overly focused on one area, be it geographical or thematic, at the expense of another by employing a top down overlay?
No I am not trying to make macro market calls. Rather, I aim to own a portfolio of what I think the best technologies and development products across the sector globally, or in the case of Finsbury Life Sciences, within Europe. If, for example in Universal Life Sciences that resulted in me being 90% invested in the US that wouldn't be a problem. Nor would it be a problem if it involved me swinging half my portfolio into Europe ' provided I was confident that they were the best stocks wherever they were.
In terms of themes, I try to represent within the portfolio the cutting edge of development within the life sciences. Therefore, I would want to have some exposure to diagnostics as well as exposure to medical devices, platform technologies and drug development companies.
I'm not consciously saying I'm going out, for example, and looking for three phase three companies and 16 phase two companies. I want to be represented across all of the sub sectors all of the time, but the respective weightings will change.
What areas are you currently focusing on?
I tend to focus on the areas that are out of favour. For example, over the last 12 months, the market has focused more and more on product and drug development companies, and has ascribed effectively no value at all to technology platforms.
To me, this just appears bizarre as these technologies add significant value. The better platform companies will deliver their technologies and see returns from it. So I have actually increased my weighting in the platform-oriented stocks because I can buy them so cheaply. Performance in biotechnology sub sectors seems to be very cyclical. I aim to pick up individual sub groups when they are at their least fashionable as that is when you get the best price and the best potential return.
Why has the sector's performance suffered so much recently?
The biotech industry has been under pressure recently, particularly at the smaller cap and technology-oriented end of the market, because they are perceived to be of particularly high risk and have been caught up in the general malaise of technology stocks.
What is frustrating is that in technology, there are serious issues about the end market - people are simply not buying new software or buying new computers. But if you consider that the end market for biotech market is actually healthcare, there is no cyclical downturn in healthcare spending. In every developed country in the world, healthcare spending goes up incrementally year by year. The fact that biotecs swing in cycle with the techs is a little unfair, if you look at the end market they are addressing.
Another factor putting downward pressure on the industry is the spate of bad clinical trials over the past six months.
What will lead to a turn around in these types of companies?
One of the reasons that biotech has had such a tough time is that the clinical data that has come out of the US over the past six months has been universally poor. It is a quirk that you tend to get clusters of either all good news or all bad news, and we have just had an unbelievable cluster of bad news. What will start driving these stocks again is some good news and regulatory approvals.
That will happen, I just can't see when it will be. But a product will be approved and there will be some blinding data out of a clinical study and everyone will want to own these things again.
So has the market bottomed out now?
Experience has taught me one thing ' that these things can always get cheaper than we initially through. But in general, I think there are some excellent opportunities around.
Currently, you can buy quality names trading at or below cash or book value, which presents fantastic potential. I am employing some gearing to maximise this potential in my investment trust. The trust 1%-2% geared at the moment. We wouldn't take it up beyond 5%-7%,that would be my maximum.
Do you have a second in charge?
Yes, Huaizheng Peng, is a medical doctor with a PhD in molecular biology. He trained in medical school in China and studied his PhD in London. Molecular biology is a field that is changing very quickly. This is not my background and I was in danger of not understanding the various nuances, which he can in that space. Therefore, our skills really complement each other.
There is also Micheal Bourne on the Reabourne team. He basically chips in from time to time, he has been involved in the industry a long time and know all the right people.
What are examples of some of your most overweight companies?
Three important stocks in Finsbury Life Sciences include Alizyme, Biacore and GPC Biotech. Alizyme is a small UK company with three significant products in human clinical trials, all of which are gastro intestinal based. The success in any one of these would lead to outstanding returns. The market seems to be very sceptical of the company but I can see reason for this, other than the fact it's a tiny little UK stock.
Biacore is a Swedish instrument company, which makes lab equipment that looks at binding kinetics of drug molecules to their target. This company has huge depth of technology and is extremely well managed. This stock seems to command very little attention on the world stage, being based in Sweden and has no need for making deals or obtaining finance.
The third is GPC Biotech, a German drug development company. It has great technology, with significant deals with larger players. There is a very low cash burn and trading at cash value.
All of these companies feature in the Universal Life Sciences portfolio, but other interesting stocks in this fund include Epix and Dyax. Epix, in the US, makes an imaging agent that will allow very high resolution mapping of vascular systems, which can help identify, for example narrowing of arteries, leading to angina.
This system can be mapped and stored on computer. It is very powerful but yet another $200m Nasdaq company that no body wants to know about so is very cheap.
Dyax, is a leader in antibody display technology. The share price has suffered because antibodies are out of favour. It's not fashionable at the moment so the share price is around $4 now compared to around $50 two years ago.
FUND MANAGER: Andy Clark
Andy Clark has managed the Finsbury Life Sciences Trust and Universal Life Sciences Oeic since their launches in 1997 and 2000 respectively. A founding partner of Reabourne Technology, he studied psychology at Sheffield University and later completed a PhD at St Andrews.
He spent three years with Smith Newcourt before joining Baring Securities as a biotechnology analyst. This was his latest role prior to the formation of Reabourne in 1995.
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