Christopher Johnson: Welcome to Morningstar. My name is Christopher Johnson. Today I'm joined in the studio by Ailsa Craig, fund manager at the International Biotechnology Trust. My first question to you is, over one year, the share price of the International Biotechnology Trust dropped 8.38%. So, what do you put this fall down to?
Ailsa Craig: We pay a dividend out of capital at IBT and that amounts to 4% paid into instalments, 2% plus 2%. So that 8% is the share price move, but you'd add back the 4% to get the total return from our shareholders. But you're absolutely right. We have seen some short-term volatility and the reasons behind that this year have been mostly macro. So, the rise and fall of interest rates that we're seeing on the back of the inflation issue has been causing a lot of volatility within biotech. Over the long term, however, investors in IBT have seen a return of over 180% in 10 years versus the benchmark of 160% in NAV terms.
CJ: I wanted to hear a bit about Gilead Sciences. So, it is your top holding at 6.19%. So why are you so bullish on this stock?
AC: Yeah, it's been a fascinating story, Gilead, founded back in the late 80s. These guys have been quite unusual in that they've actually reinvented themselves after a very successful franchise. Lots of biotech companies have a one-hit-wonder, if you like, and then end up getting acquired or just sort of diminishing away. These guys have reinvented themselves not once, but multiple times. So, they've effectively helped patients with HIV go from what was practically a death sentence to a chronic disease. It's been absolutely amazing what the pharma industry has done and Gilead specifically for these patients over time. They then made an acquisition in Hepatitis C, and those patients now effectively cured, whereas previously they had chronic therapies for life again, and they're reinventing themselves again. So, they're acquiring oncology companies, cancer companies. The latest acquisitions have been from cutting-edge science with cell therapy company Kite acquisition and then more recently, Immunomedics, an ADC company.
CJ: Amgen is your second top holding, and its share price has been steadily ticking up. What is driving this run, and to what extent does this increase have to do with this anti-obesity injection MariTide?
AC: Yeah, we're all hearing about obesity at the moment. It is the hot topic. And you're absolutely right, Amgen is well-placed to benefit from the obesity market. At the moment, you'll know that there are two major players, Lilly and Novo. The magnitude of potential sales in this market could be anywhere from $50 billion to $100 billion. Amgen have a pipeline asset, so not yet approved, but the early signs of the data coming out of that from management have been very positive. So, they're hinting at 20-plus percent weight loss in a year. It's got a dual action, so a dual GLP-1 as opposed to just one GLP-1 with the competitor products. So, it could be more efficacious. It could mean only monthly injections instead of weekly injections. And the benefit of that for patients would be a more tolerable drug than what we're seeing today. So, at the moment, there's a bit of nausea and vomiting from the Lilly, Novo products. However, Amgen say that their drug, possibly if it proves out in trials, might bring that down and make it more tolerated. So, this is a potentially massive market for Amgen. So yeah, we've seen a good boost in share price from those guys.
CJ: When do you think it will come out to market?
AC: So, the next step will be at the end of this year, we have Phase 2 data. So, in clinical development, there are three phases. So, it would have to go through Phase 2 and then Phase 3 and then file with the regulator and then launch. So, it's years away, but the demand is so high. What we're seeing right now with the Lilly and Novo is they literally can't make enough of the stuff. So, this market is going to be big. And if Amgen can get a piece of that, then they'll really benefit.
CJ: In 2023, a record number of large healthcare companies in the US filed for bankruptcy. So, has this sector seen the worst of it or is there more pain to come, do you think?
AC: Yes, so we write a monthly blog and in one of the blogs we addressed exactly this. What we've seen since the pandemic where there was a big bubble like valuations in biotech on the back of the vaccine discoveries, et cetera, we've seen a bear market. This is a cycle that happens time and time again. And we did a blog on exactly this topic and what we'd expect to see at the various different stages of the cycle. So, when you get a boom, after that you get a retraction in valuations, IPO window closes, fundraisings dry up, M&A picks up and then the IPO window opens up and then you get the whole cycle again. So, we have seen a cleanup of biotech companies, which we think is no bad thing. So, a lot of low-quality companies have disappeared, the number of companies in our benchmark has shrunk. At the end of the day that means our sector is sort of higher quality now. Maybe programs that were being in pipelines are being streamlined and cut where money shouldn't really go. So, it has happened. We think we're coming out to the other side of that, and we think it's a better sector to invest in now.
CJ: Do you think that US healthcare could survive a second Trump presidency?
AC: Well, certainly, our sector during the previous Trump presidency thrived very well. So, the Republicans are known for being very industry friendly. Prior to the pandemic our index actually rose 40% and then on the back of the pandemic the whole of his presidency over 80%. So, they did well last time and more importantly actually Trump appointed a very industry friendly gentleman, Scott Gottlieb, to head up the FDA. So, another presidency of Trump might be seen as quite investor friendly.
CJ: And under Biden how has it been?
AC: So, Biden has done something extraordinary. The biotech sector, the healthcare sector has often used as a political football going into elections and they talk about drug pricing and that's banded around as a primary top agenda for the elections. This time however the Biden administration have introduced within the Inflation Reduction Act a means for Medicare to negotiate drug prices with the industry. This is legislation of drug price negotiations, something that's been discussed for decades and the Democrats have achieved it. So, I think going into this election we might not see healthcare as a top of the agenda because Trump is not going to want to bring up the fact that Biden has achieved this. And Biden ultimately – it's more likely to be geopolitical events rather than healthcare we think going into this election.
CJ: We're also in an election year in the UK and I want to get your view on whether investors in this trust could possibly benefit from the private sector's growing influence on the UK's National Health Service.
AC: Yeah. So, taking a step back what we invest in is innovative new branded drugs. They're mostly companies in the US. The privatisation of the NHS would probably affect investors' investments into hospitals and insurance companies. That's not where we invest. What we should point out though, the benefit that branded drugs can have for patients tends to be that it could keep patients out of hospital. And the big cost to society are hospitals. In the UK, we spend approximately 10% of GDP on healthcare; in the US, it's 20. And within that, only 10% is on drugs. The rest of it's made up of hospitals, doctors, nurses, et cetera. So, to keep patients out of hospitals with new medications would actually benefit society overall.
CJ: Thank you so much for taking the time out to speak to me.
AC: Thank you for having me.
CJ: This is Christopher Johnson for Morningstar UK.
