Biotech as a sector is known for having explosive returns when things go well or flopping badly when either the product or the wider market doesn’t perform. Fundeye spoke to Pedro Gonzalez de Cosio, Principal and co-founder of Pharmakon Advisors and the investment manager of BioPharma Credit to find out how investors can gain exposure without taking on so much risk.
The investment trust Biopharma Credit has been a huge success since its IPO just two years ago. It now has market cap of over £1 billion. According to Mr de Cosio, its share register contains some well-known institutional names such as Invesco and Prudential and is growing in attraction to both wealth managers and individual investors. The last two class of investors like to see a track record before committing funds he added.
The trick of this fund is that while biotech equity funds are at the mercy of the markets, this company only invests in drugs that have already been approved. “We’ve never had a default in our ten years,” said Mr Cosio, referring to the times before the company joined the main market.
As the company lends cash to biotech firms, this is some achievement considering it is a fairly high risk industry. But for a fund yielding 7 percent annually, with anything above that given back to shareholders in the form of a special dividend, it’s not difficult to see why it has attracted such a great deal of assets.
Mr de Cosio told Fundeye: “If you look at drug sales around the world they are uncorrelated to whatever else is going on. What drives drug sales is people getting sick, economic cycles have no impact on sales of pharmaceutical products.”
In the current environment an asset class not beholden to the vagaries of market dynamics should be seen as a blessing. There are alternative asset classes which are also less correlated but these tend to be either expensive like private equity or illiquid such as infrastructure.
One thing that biotech fund managers like to boast of is the M&A premium in their sector. This is true although also works in the debt markets as well. Mr de Cosio said that when GSK bought Tesaro, not only did they have to pay back the principle loan but also additional prepayments to gain control of the company.
“This industry is about information, we know which products are likely to get approved, how many products are sold that have been approved so there’s a steady pipeline of deals coming all the time,” said Mr de Cosio. For those wishing to park some money and get an income in a yield starved environment, this trust may be the answer.
