In a new series in association with Fund Calibre, we’re bringing you soundbites from interviews with fund managers which can be found on the Fund Calibre website.
In this interview, Linden Thomson, manager of the AXA Framlington Biotech fund, discusses trends in biotech and how new legislation in the US, the largest purchaser of biotech products, may affect the market.
In simple terms, biotech is technology that uses biological systems and living organisms to develop or create different products. The most prominent area is production of therapeutic proteins and other drugs through genetic engineering. Arguably it’s one of the few winners from the impact of the Covid pandemic. Linden Thomson, manager of the AXA Framlington Biotech fund has nearly two decades experience and is one of the early specialists within the biotechnology sector.
What sort of themes are driving the sector today?
“Drugs are the main driving force and, largely, innovation. That’s a tenet that runs all the way through [the sector] – has done over the last 20 years and will continue to do so. Scientific advances in our understanding of diseases and new drug technologies have really accelerated the innovation in the sector since the main sequencing of the human genome.
“Another theme to think about is demographics; that remains a long-term tailwind to both pharma and biotech and actually the broader healthcare sector. Populations are getting older on average, prone to more age-related diseases such as dementia, cancer, heart disease and, as we age, we also use more healthcare.
“There’s also a rise in lifestyle diseases. We’re all generally leading more sedentary lives. This drives chronic conditions like heart disease, diabetes, liver diseases and obesity, which is becoming more widely accepted as a disease area in its own right. So, these chronic conditions require safe, effective long-term treatments. Of course, given the Covid pandemic, there’s also a focus now on disease prevention and thinking about vaccines.”
How can US politics impact the sector?
“There’s long been concern, stretching over probably five years now, from stakeholders as to what the US government could do to lower prices for drugs in the US. And this – just as a bit of background – stems from the fact that the US is the largest market by quite some way for biopharma. The Inflation Reduction Act last year covered much ground, but there was a focus for healthcare within that, among other things. And one important area that it’s opened up, from a biotech remit perspective, is the fact that the US government can now negotiate the prices of some drugs which cost the system most each year.
“Historically, the US government could never get involved in drug pricing directly. But from 2026 they will be able to do that for a specific number of drugs each year. We expect information on how they’ll plan to choose those drugs within the next few months, and the list of the first 10 that they will negotiate from 2026 onwards, will be available around September of this year. So, I think there’s still quite a lot to be fleshed out. And there are a number of check boxes that drugs will need to show in order for them to be even considered within the price negotiation. For example, they will have needed to be on the market for at least nine years. So, it’s a way off, but I think that just the introduction of some of these lists etc. may just bring the risk into the view of quite a lot of investors.
“But from a biotech specific point of view, the risk is likely manageable at the moment. In some ways we’re in a position now where we have at least some certainty over the outcome and how things will be managed going forward, which in equity markets is often better than the unknown risk potential that’s been an overhang for the last five years. But you know, in 2023 and [in particular] the next six months there will be a lot more focus on this. And so, there could be some volatility around it.”
Is biotech a volatile sector?
“Historically, quite rightly, it’s been viewed like that. But it has changed markedly over the last five years. In terms of the number of stocks, the sector is still very much weighted towards those loss-making early-stage companies – the ones that are typically more binary [in outcome] and no doubt this is where much of the disruptive innovation is to be found. And so, that part of the market’s critical to the long-term growth.
However, there is a very large profitable, more defensive part of the sector, which really has come into its own in the last six to eight months. And there’s a mid-cap part of the sector, which is a high growth, innovation driven commercial assets or soon to be commercial assets, which is where our fund has typically invested, which have compelling R&D pipelines and growth from commercial launches. So, I think the sector now really does offer a mix of defensive top line growth and pipeline leverage, which, from a long-term perspective, is an area of focus.
“In terms of the fund, it’s about 80% invested in companies that are profitable or have commercial assets that aren’t profitable yet but have that in their near-term horizon. So, I think the view that biotech funds are all very small-cap binary, is not necessarily any longer the case and certainly isn’t with the AXA Framlington Biotech fund.”
Listen to the full 20-minute interview here.
