Healthcare & Biotchnology, are investors missing a tick here by owning so little of it?

The Overlooked and Under owned sector that’s beating the market

Biotechnology & Healthcare outperforms, beating the market average over 1, 3,  5 and 10 years, but despite its record it’s under owned by investors. I spoke to two of the sectors leading managers to look at the sectors continuing success to discover the reasons for its success  and to consider if it will continue?

The four companies that make up the AIC’s Biotechnology & Healthcare sector have been producing stellar returns for investors over a long time frame (see table below). In total the market value of the four is around the £800 million mark which many view as low for such a large sector with a long track record of great returns.

The tables below depict the share price total return on £100 invested to 31 August 2012…….

Sector1 year3 years5 years10 years
Average investment trust£98.18£127.1£104.44£240.83
Sector Specialist: Biotechnology & Healthcare£125.66£161.76£183.3£255.01

Sector Specialist: Biotechnology & Healthcare

Investment Trust1 year3 years5 years10 years
Biotech Growth Trust£162.48£209.20£260.28£436.53
International Biotechnology Trust£138£163.43£141.46£257.96
Polar Capital Global Healthcare Growth & Income Trust£114.22---
Wordwide Healthcare Trust£113.41£149.80£178.36£231.05

Source: AIC (Association of Investment Companies)

I met up with Daniel Mahony, the manager of Polar Capital Global Healthcare Growth & Income, and with David Pinniger, Manager of the International Biotechnology Trust recently and discussed the opportunities and challenges facing them as managers and the healthcare industry at large. 

The so called Baby boomer generation born just after World War two are reaching retirement, and it is they who are driving demand for healthcare resources now and for at least the next 10 or 20 years in the Western World.

Their needs as they get older from a healthcare perspective will only increase and range from personal care if they suffer from degenerative or chronic illnesses to expensive medicines, physicians and use of health infrastructure such as hospitals. All of this presents an opportunity from a healcare perspective not only to cater for their needs but to come up with solutions that society at large deems to be both affordable and effective.

In Emerging Markets meanwhile there are also opportunities. As newly developing countries become richer, and after they’ve fed and housed their populations they turn to education and healthcare. We saw this with countries like South Korea 30 years ago. The proportion of GDP they devote to Healthcare gradually goes up from around from 2-3% to 7-9%.

Daniel Mahony from Polar Capital commented “From investors point of view it is not just that the expenditure on healthcare in say a country like China is going to increase as a percentage of GDP, it is that it will double over a period of 10-15 years”. He continued “We can make a pretty good guess at what infrastructure will be needed in China and India over those years”.  

Mahony referred to Research carried out by the US Congress that predicted that the proportion of US GDP spent on Medicare (healthcare for the over 65’s) will increase from 4% to 15% of GDP by 2050. A very large proportion of this expenditure is accounted for by the cost of looking after the daily care of Alzheimer patients. It cost the US $170 billion last year to do this, and that’s predicted to increase to $1 trillion by 2050. This strikes the fear of God in US politicians as we can see from the high profile attacks on what’s been dubbed ‘Obama care’ in the Presidential election campaign.

The problem with this analysis according to Daniel Mahony is that they “take the current cost base and just push through the predicted demographics to 2050. It takes no account of innovation and the ability of new, not just drugs, but medical devices to alter this cost substantially. The way I think of it is, when I was at school we were taught that by 2010 the world would run out of oil. Well we’ve passed 2010 and the world discovered more oil that that prediction didn’t allow for”.

Mr Mahony and his colleagues argue that innovation will dramatically cut this huge cost the US Congress report predicts. “If you had a drug that isn’t a cure but just delays the onset of the disease by about 5 years, and enables suffers to continue to look after themselves in their own homes, dress and feed themselves etc then you could almost cut those costs in half” he explained.

Mahony’s Polar Capital Global Healthcare Growth & Income Trust was launched only in June 2010, raising £89 million from investors. Managed jointly with Gareth Powell, the pair also manage an open ended fund the Polar Capital Healthcare Opportunities fund, that they’ve been running it since 2007. This differs from the investment trust somewhat because where as the investment trust vests 80% of its assets in dividend paying mostly large pharma, and 20% of its assets in growth stocks, the open ended fund invests almost solely in the latter high growth field.  

Daniel Mahony, Manager Polar Capital Global Healthcare Growth & Income Trust


The trust pays a dividend four times a year and has a fixed life which is expected to expire in January 2018. It has a target annual return of 10-12%.   

The chart below lists the top 10 holdings of Polar Capital Global Healthcare Growth & Income trust.

Polar Capital Healthcare Top 10 HoldingsPercentage
Merck & Co8.2%
Roche Holding6.1%
Abbott Labs4.9%
Eli Lilly4.7%
Astellas Pharma4.3%
Bristol Myers Squibb4.0%


International Biotechnology Trust

Over at International Biotechnology Trust, manager David Pinniger has been at the helm since April 2008, though the trust was established back in 1994. The trust is co-managed by Kate Bingham.

International Biotechnology differs substantially from the Polar Capital trust because it is concerned solely with the high growth biotechnology sector.

In describing the opportunities he faced David Pinniger explained “traditionally in drug development it takes 10-15 years to bring a new drug through. The cost involved in this is huge, as are the risks with only around 1 in 10 of these drugs finally gaining approval. This type of drug development technique is based upon technology platforms that have been in use for decades”. Pinninger continued “what we’re seeing now is new technology platforms that started to develop over the past 20 years from DNA sequencing, to cloning, antibody conjugate technology, Gene therapy, Stem cells, Immunotherapy etc, come through and have a huge impact on how drugs are developed”

Pinniger and his team believe the Current pace of innovation is set to accelerate over the next 10-15 years.

The potential

Biotechnology drugs are already huge with drugs like Humira, a Rheumatoid arthritis drug that was approved in 2002 and is now the leading drug in its field. This was developed by Abbot Laborities of the US and the UK’s Cambridge Antibody. It now sells over $9 billion a year.

And there are many others like Ritxuan, a Cancer drug that is doing over $7 billion a year. Remicade for Cohn’s disease and Arthritis pulls in $7 billion. The list is long with the top 20 Biotechnology drugs selling over $78 billion last year.

Biotechnology products generally are rejuvenating the pharmaceutical industry and it’s not just drugs, its devices too and it’s diagnostics Pinniger explained.

Eighty percent  of IBT’s investments are in to the US market where the industry is both huge and has many examples of successful and highly profitable companies.

The NBI or Nasdaq Biotechnology Index, which comprises around 120 companies, has produced annualised returns of 11.12% since its formation in 1994, against the S&P 500’s 8.13% annualised return over the same period. On a total return basis, that is when you factor in the dividend payment and reinvest it (many of the constituents of the S&P 500  pay dividends but almost none of the biotechnology indexes constituents do), the NBI returned 616.36% against the S&P’s 201.55%.

An investment in HIV drug company Gilead back in 1992 would have turned $1,000 vested in to $4.3 million. apologises to our readers for not informing you of this at the time, but we didn’t exist then and we were as unaware of it as you.

The three III’s of healthcare


All healthcare systems are inefficient across the world. Until fairly recently the idea of value for money wasn’t often considered in healthcare. If you bought a flat screen TV 3 years ago for £1000 and then bought a new one this year for the same value you’d expect way more features or even that it might cost you less. In healthcare, 10, 15 years ago if I took this surgical tool painted it red for this year I could increase its cost by 5% without anyone asking me if it would improve the surgical outcome or was more cost effective.

That has changed now. This new requirement for value means improving incomes or cutting costs. “We look to invest” said Daniel Mahony “in businesses across the healthcare investment spectrum, better healthcare for less or the same healthcare for less works well too”.

Quality not quantity

“We’re beginning to see remuneration systems that rewards quality and not quantity. So, when were we read about hospital waiting lists being cut what they’re talking about there is a quantity metric, more people are being seen, it doesn’t mean they’re getting better or even good treatment”.

One of the reasons why healthcare is so expensive in the US is doctors are incentivised to do whatever is medically legitimate rather than do what is necessary, if you see the difference there. This is because they are rewarded for quantity rather than quality of care. Now if you shift that and start remunerating people for quality you start to see a different outcome.

Innovation – Consumerisation of Medicine

If you’re over 65 you probably should get vaccinated for Flu. The vaccine costs a fiver but if delivered in a hospital with its fixed costs it would probably cost £250 because of salaries, buildings etc. If it was delivered in the GP surgery it would cost something like £50. In Boots it would cost £20 and you’d probably pay it yourself.

The challenge though is if you get it in Boots how does the GP tick the box to say you’ve been seen. It doesn’t happen the UK but it does in the US at Walgreens, a chain similar to Boots.

This is an example of the consumerisation of healthcare that many in the industry see as the future.

Another example is there is a company based in the UK that have developed a new blood pressure monitor. If you’ve ever had your pressure monitored with that inflatable water wing like thing its accuracy is plus or minus 20%, so you need to have your pressure taken around 10 times to get anything like an accurate reading. What these guys have developed is a wee chip that buzzes a laser  and you can attach to the back of your Android phone that essentially works out your blood pressure to plus or minus 1%, pretty accurate! They’re looking at putting that monitor in your pyjamas. A lot of people get heart attacks at 4 or 5 in the morning, so you could have this chip wirelessly monitoring your heart whilst you sleep so it could send an alert if your blood pressure is dropping and you’re in danger of having a heart attach to wake and alert you.


Billions of pounds is being spent with many billions more required to bring developing economies up to the standard of the West. This will be an ongoing evolutionary process that will continue for the next 15 to 20 years.

US Election

As much of the pharma industry is so dependent on the US and healthcare spending is a high profile issue in this year’s election it’s useful to consider the impact of either a Democrat or Republican victory in November.

The part of us healthcare taken up by the drug industry makes up only 10% by value.  Most of the drugs in development are not the ones that politicians are likely to cut. They’re targeting diseases such as cancer, ms etc that we all want cures for and secondly many of them may save us as society a lot of money through cutting out the need for homecare and turning chronic illnesses in to manageable longterm conditions.

The sector

Investors considering the sector should also look at the other two players in this sector Biotech Growth Trust & Worldwide Healthcare Trust.

They are both managed by the same team at OrbiMed, an international investment firm focused solely on the healthcare sector. OrbiMed manages over $6 billion and has offices in New York, San Francisco, Tel Aviv, Shanghai & Mumbai, with 40 investment professionals.

Biotech Growth Trust – is a pure biotechnology investor, focussing on a potentially higher risk segment of healthcare but one which if you get it right can be very profitable. To date they have got it right much more than wrong at the table at the beginning of this article illustrates.

It is similar in its investment remit to International Biotechnology trust though it has a much higher portfolio turnover and more likely to respond to news event to buy and sell sock.

Their Worldwide Healthcare investment trust has a wider remit to invest across the healthcare sector and is perhaps more similar in profile to the Polar Capital fund.

Our view

Investors have ignored this sector for too long. It is benefitting from structural changes in society where there are clear incentives for companies in the sector to develop solutions to provide for an aging population in the West whilst at the same time there are new markets to be exploited from newly developing economies.

All four investment trusts in this sector have merit and warrant consideration. Their future prospects suggest they deserve a larger share of investors portfolios.  

International Biotechnology Investment Trust Metrics

Share Price206.5 penceDividend Yield
Total/Net Assets/Market Cap (Million)£130.88 / £130.88 / £114.52Gearing0
AIC Sector/Date FoundedBiotechnology & Healthcare / 31/03/1994Ongoing charges2.19%
Discount/Premium to NAV-12.39%12 Month Average Discount to NAV-13.37%
Share Price 1, 3 & 5 years+42.9 +66.9 +47.0
Share Price 1, 3 & 5 years+40.2 +74.0 +90.1


Polar Capital Global Healthcare Growth & Income Investment Trust Metrics

Share Price121 penceDividend Yield
Total/Net Assets/Market Cap (Million)£118.70 / £118.70 / £118.46 Gearing0%
AIC Sector/Date FoundedBiotechnology & Healthcare / 2010Ongoing charges1.25%
Discount/Premium to NAV+2.49%12 Month Average Discount to NAV1.32%
Share Price 1, 3 & 5 years+8.1%--
Biotechnology & Healthcare Share Price 1, 3 & 5 years+7.4%
+74%+90% Disclaimer should always be referenced with all of our articles. If you  haven’t read it please do so now.






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