Biotech and healthcare are dynamic sectors with opportunities for high growth potential. Sue Whitbread talks to Paul Major, manager of the BB Healthcare trust about why he feels that this is a golden era for healthcare investing
SW: Can you give us some background to the business of Bellevue and to the BB Biotech and BB Healthcare Trust itself, as these are names that some advisers might not be familiar with?
PM: The Bellevue Investment Trust franchise has a storied history; Swiss-listed BB Biotech is one of the oldest and arguably most successful biotechnology investment funds, dating back to 1993. With a market value today of £3.0bn, it is also one of the largest listed investment companies.
Whilst it may be less familiar to UK advisers, Bellevue is very well known in the healthcare arena and has more than $6bn of healthcare investments across public and private equity and a highly experienced team of Portfolio Managers- with extensive academic backgrounds in relevant fields.
Although the Trust team continues to see the biotech sector as the engine of innovation in the pharmaceutical arena, we feel strongly that healthcare in the wider sense must undergo a revolution to meet the needs of an ageing population across the developed world. In December 2016, we launched a sister vehicle, the £400m UK-listed BB Healthcare Trust, to capitalise on the investment opportunity arising from this inevitable disruptive innovation.
SW: When they are researching investment opportunities in these sectors, why should advisers consider using Bellevue? What is different in the structure of the trusts and in your approach to investing in these sectors?
PM: BB Biotech and BB Healthcare prosecute very similar strategies within their respective mandates, namely to own a concentrated portfolio of companies that maximise exposure to compelling thematic opportunities: companies whose products are potentially transformative to the healthcare paradigm. In the case of BB Biotech, that is offering novel treatments that serve unmet medical needs, often delivering curative therapies for serious diseases.
The Healthcare approach is similar, but the remit broader: we are looking across all aspects of care from drugs to devices to the whole ‘consumer’ experience of delivering healthcare to the patient and this includes companies that would be outside of the remit of most other healthcare funds (consumer, technology etc.), because the sources of future innovation are likely to come from very different places to the traditional players in the healthcare marketplace.
A confluence of long-hoped for positive factors have coalesced into an environment that is highly supportive of innovations in products and services across the healthcare space
Because they are unconstrained, both funds are free to invest across any market capitalization range and geographical area, as long as companies meet our rigorous due diligence requirements. There is some overlap between the two funds, but it is fairly limited. Again, we feel this unconstrained approach is important, as large conglomerate companies that we do not expect to lead the next wave of innovation dominate healthcare benchmarks. As such, they are likely to underperform the smaller, more innovative ones and we are able to ignore these companies and focus on the innovators. There is as much alpha opportunity versus a benchmark or ETF strategy in not owing underperforming companies as there is in picking the outperformers.
SW: Where are you seeing the best opportunities for investment across biotechnology and healthcare and how do you carry out due diligence activities?
PM: Trite as it may seem, we feel strongly this is a golden era for healthcare investing. A confluence of long-hoped for positive factors have coalesced into an environment that is highly supportive of innovations in products and services across the healthcare space.
Firstly, new tools to explore the molecular and genetic basis of various diseases have accelerated the rate at which we identify the pathology of disease, opening up new opportunities for therapy. Secondly, new approaches such as controlling the expression of genes involved in diseases (e.g. gene therapy, RNA silencing, gene editing) are allowing us to target diseases that would be inaccessible to traditional pharmaceutical approaches.
Finally, electronic patient records and genetic screening allow us to identify patients more rapidly and analyse the real-world effectiveness of treatment. This latter point is critical for the inception of BB Healthcare; never has it been so easy to re-imagine the healthcare paradigm and deliver care in new ways that are demonstrably better or cheaper.
As exciting as the above all sounds (and timely too, given the relentless negative headlines about the state of healthcare provision here in the UK and the lack of affordability for new approaches etc.), one cannot get carried away. We are very evidence-focused in our investment approach and due diligence (scientific, competitive and financial) is crucial. For example, we hope as much as anyone else that the spectre of Alzheimer’s will eventually succumb to scientific interrogation but, for now, the evidence base supporting any of the current approaches to treatment is uncompelling and so we are not invested in this area.
Furthermore, there is a big distance between an interesting scientific idea and commercialising a product or service, with many potential pitfalls along the way. Even the most experienced companies in this industry can see high levels of project failure and it is important to have realistic expectations of eventual success factored into any investment scenario. Both BB Biotech and BB Healthcare have highly experienced boards with relevant knowledge in these areas and we draw on their knowledge and extensive networks of contacts when considering potential areas of investment. We see this s a key area of difference to most of our peers and a competitive advantage.
Never has it been so easy to re-imagine the healthcare paradigm and deliver care in new ways that are demonstrably better or cheaper
SW: How is healthcare investing different to other sectors of the market
PM: At Bellevue, we feel that healthcare has a number of unique attributes that favour active rather than passive investment strategies. Most important is the due diligence aspect; inevitably one needs a degree of relevant background knowledge to interrogate the strategy and product developments of healthcare companies, often spread across the globe. In addition, the competitive dynamics can be highly complex, with dozens of companies racing to develop products or register intellectual property in a given area. This is in contrast to many other industries, where there is typically a smaller group of companies that are competing in a given field.
One also cannot understate the human element. With development timelines that can span a decade, the emotional investment made by project leaders in these areas is significant and they are often the last to see that the field has moved on and the current project is no longer best in class etc. We often hear impassioned pitches for ideas that we simply cannot back, but it is the collective experience of the team that gives us the perspective to take a view that is contrary to a company’s management team or received wisdom.
SW: So can we talk about the risks? Are there particular areas of caution for you at the moment?
PM: Healthcare in general and drug development in particular, are areas where incumbency and historical track records are of little value; each project must be assessed on its own merits. The pharmaceutical industry’s long-declining R&D productivity is testament to this. As I mentioned previously, we will only invest in areas where we have some clinical data that supports the development of a particular type of therapy or device.
The rapid speed of development is probably the greatest challenge to stay on top of. Haemophilia is a great example, where we have seen companies like Shire pressured by perceived obsolescence of Factor VIII therapy by novel approaches like Hemlibra (from Roche), only for the debate now to move on to the potential risk to both approaches from gene therapy, where various players are racing to bring a product to market. All of this has unfolded in less than two years.
SW: How can advisers find out more about Bellevue and its investment products?
PM: Our websites (www.bbbiotech.ch/en/bb-biotech/ and www.bbhealthcaretrust.com/en/bbhealthcare-trust) offer a wealth of background information on both Trusts, including our monthly factsheets. In addition, advisers can contact Claude Mikkelsen, who is responsible for investor relations on both Trusts (firstname.lastname@example.org).
About Paul Major
Paul has 20 years of experience in the healthcare sector on the sell-side and was top-rated by a number of nstitutional investment clients. He was one of the first research partners at Redburn, Europe’s leading independent research firm. His work there included bespoke projects on healthcare portfolio construction for several institutions. Paul was previously an analyst and corporate financier at UBS Warburg and studied biochemistry.