Profit from the biotech industry with specialized company BioPharma

According to Terry Tanaka, BioPharma has a lucrative niche in lending to biotechnology firms with substantial asset bases

Among the more obscure investment trusts listed in London is BioPharma Credit (LSE: BPCR). Biotechnology is a specialized field that I would typically avoid. Failure is highly likely, and even experts are frequently caught off guard by an unexpected trial outcome, legal dispute, or even death. But as is frequently the case, opportunities arise from complexity and uncertainty.

Small and medium-sized life sciences businesses can get loans from BioPharma. With the loans secured by asset values, the trust is lending against the future cash flows of the majority of the borrowers, which are publicly traded corporations.

Pedro Gonzalez de Cosio, co-founder and CEO of Pharmakon Advisors, the specialized biotechnology investor that oversees the trust, states, "Our borrowers are asset rich for the most part." "They have a monopoly on how to treat a particular illness. Despite having highly valuable assets and high gross margins, the majority of these businesses are still likely investing in product launches, so even though they have valuable assets, they are still losing money.

There are other companies in the same industry as BioPharma, but success in this kind of specialized life sciences lending necessitates experience and a robust pipeline built on reputation and expertise. BioPharma typically collaborates with another Pharmakon fund on its transactions. Pharmakon was founded in 2009 and has invested close to £10 billion through the trust and other private funds. "Only once have we had to put a company into default," Gonzalez de Cosio says, and even in this instance, the fund has recouped over 90% of its investment.

The portfolio of BioPharma is comparatively concentrated. Little more than 60% of the portfolio was made up of just three senior loans to three different businesses at the end of January. But Gonzalez de Cosio advises against viewing the portfolio in a vacuum. Since there is no other way to obtain these assets, I can assure you that investing in us will diversify your portfolio.

Early repayments made by BioPharma.

A 7 percent yearly dividend, or £0.07 on the £1 per share issue price, was promised by BioPharma when it went public in 2017. Over the previous three years, it has increased this return by paying out more special dividends. The trust has disbursed £0.33 per share over the last three years, or £0.11 annually on average. Because the majority of the portfolio (78 percent) is floating rate and because companies typically agree to make additional payments if the bonds are repaid earlier than planned, it has been able to accomplish this.

Immunocore, for instance, obtained a £50 million senior secured loan in November 2022, which was financed in part by BioPharma Credit Investments V and the trust. The floating rate note paid an interest rate of 9.5 percent and was scheduled to be repaid in November 2028. It was repaid in full last November. Along with £264,000 in interest, Immunocore was required to pay a £1.05 million early repayment fee, of which £750,000 went to the investment trust.

Reata Pharmaceuticals, the owner of the first and only approved treatment for Friedreich's ataxia (FA), a rare inherited and progressive neurodegenerative disorder in the US, received a £25 million loan from BioPharma in May 2023. Reata was purchased by Biogen for £7.3 billion three months later. In addition to the principal and early repayment fees, Reata was required to pay interest up front when the acquisition occurred because it had agreed to pay interest on the loan for two years. The internal rate of return booked by BioPharma was 141%.

BioPharma provides a distinct asset class. Its current trading price is double the January net asset value (NAV) of £0.975. Last year and in 2023, it paid out £0.10 in regular and special dividends. Although the special payouts are not assured, that translates to an 11% trailing dividend yield.