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Manager focus: David Pinninger

Difficult markets and sector concerns have created compelling investment opportunities within the biotechnology sector, says David Pinninger, the manager of the International Biotechnology Trust.

After healthcare reform concerns hit the biotech sector alongside pharmaceuticals, now it is time to buy, he says.

Earlier this year, Barack Obama promised to make health insurance affordable and accessible to all Americans; he vowed to lower healthcare costs and to promote public health.

Everything that had on “a healthcare tag”—investments ranging from hospitals, to big pharmacies, medicals, biotechs and researchers—was sold off.

Pinninger, who took over the £89.5m trust in February 2008, says biotech’s exposure to healthcare reforms is significantly less than investors believe. Still, the healthcare reform news flow worried investors about biotech growth and profitability, and stocks plummeted.

However, he adds that the highest quality companies are well capitalised and can access capital. Their drug sales are also relatively well insulated from economic issues.

“Biotech has done relatively well recently, but valuations remain at decade lows,” he says.

There is “something for everyone” in the biotech sector: defensive growth, beta and inflation protection, larger-cap biotechs with strong growth rates generating cash flows, and smaller-caps with higher risk profiles adding beta to the portfolio.

In March, Pinninger reduced the cash level in the fund from 8% to 2% and channelled the resulting money into quoted small-caps.

The International Biotechnology Trust’s portfolio is made up of 73% quoted shares and 25% unquoted shares. Pinninger says it is a concentrated portfolio of high conviction ideas, with typically 30 to 35 companies in quoted investments and 20 to 25 companies in unquoted investments.

SV Life Science, a venture capitalist targeting the human life sciences sector, took mandate for the fund. They aim to develop smaller biotechs and sell them to pharmaceutical companies or bigger biotechs before they get listed, hence the investment in unquoted shares.

Pinninger says shares of quoted biotechs are cheap and unquoted shares are also doing well. However, some investors lump them together with private equity.

“I’m frustrated because they are not funded by debt but by cash. Unfortunately, the market is applying a discount value of 5% to 10% to quoted shares and 60% to 65% to unquoted ones, which is what private equity is valued at,” he says.

At the same time, it is not unlikely that shares of biotech companies will sell for double or triple the price they are traded at. Pinninger says that if a pharmaceutical company is keen on a particular investment, it is happy to pay $100 (£61) a share, even if they trade at $50 per share.

Big pharmaceutical companies, which tend to specialise in late stage research, marketing, and selling drugs, often lack new drugs that are innovative enough to keep them growing. So they constantly search for promising developments, often turning to biotechs that conduct early stage research and development.

Fund managers and analysts within both sectors also spend much time and resources analysing who could be the next takeover candidate. “There’s a lot of speculation in the sector,” Pinninger says. “This makes it an exciting place to invest in.”

Related Articles:
Manager focus: Jack Foster
Manager focus: Garfield Kiff



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