Long-term outlook important when investing in the volatile biotech and life sciences sector
A year-long biotechnology bear market has led to a strengthening in the underlying fundamentals of the biotech sector. This is according to the management of the International Biotechnology Trust (IBT), which saw a 46% fall in NAV for the year ended 31 August 2001.
Over three years to 1 October 2001 the biotech and life sciences sector is the top performing sector in investment trusts, returning £2,908 on an initial £1,000 invested on a mid to mid basis.
However, that masks significant losses made by the main body of biotechnology stocks. While IBT's NAV fell 46.1% over the last year to 31 August 2001, the Nasdaq Biotechnology Index fell by 35.4% and the Bloomberg UK Biotechnology Index fell 43.3%.
Andrew Barker, chairman of the trust, said the dramatic variation in performance over consecutive years demonstrates the highly volatile nature of the biotechnology market and the importance of taking a long-term view when investing in the sector.
Kate Bingham, general partner at Schroder Ventures Life Sciences (SVLS), financial advisers to IBT, said the biotech market is very cyclical, and that any biotech vehicle should be looking at an investment time frame of three to five years.
Bingham said the fundamentals for biotech remains strong, with the sector having come down so much. It means there are many companies currently at all time lows, that there are some very good buying opportunities at present.
Barker said: 'The outlook for product-orientated companies goes from strength to strength, in the face of a deteriorating outlook for many other growth sectors. However, these positive fundamentals have been overshadowed by the increasingly negative market sentiment, with biotechnology stocks dragged down with the market as a whole.
'It is difficult to predict when the bear market will cease to overshadow the sector but we believe the strong underlying fundamentals will eventually shine through. Current valuations of biotech companies, with many trading around cash levels, make this an opportune time for IBT to be making investments in the sector.'
SVLS was appointed investment adviser to the trust in November 2000, and since then IBT has gone through a period of significant restructuring and made a number of new investments.
Barker said while the fall in IBT's NAV was to some extent due to the market correction, this was compounded by the write-downs of some of the private companies in the inherited portfolio made by the new manager as part of the on-going rebalancing of the portfolio. He said the result of these write-downs was a reduction in net assets of £9.9m during the period in review.
'Despite the year-long biotechnology bear market, the life sciences industry has actually experienced its second best fundraising ever,' said Barker. 'In the first three quarters of 2001, $9.6bn was raised in the US and Europe compared with $35.6bn raised in total in 2000 and $7.0bn raised in 1999.'
However, Barker says the IPO market is currently extremely weak and looks likely to remain so for the foreseeable future. He says in the first three quarters of 2001 only $269m was raised in the US and Europe compared to $8.6bn raised in total in 2000 and $1.7bn in 1999.
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