Six of the world’s best-selling treatments originate in biotechnology – the use of biological disciplines such as genetics to produce treatments – and Hsu (pictured) says this trend will continue, with nine recent or imminent launches from the sector having a projected sales potential of over $1bn. Despite the strong drug pipeline, concerns about the implications of "Obamacare" have led to a discount opening up, he explains, adding that it is likely to disappear quickly as investors realise that the real effect of the policy will be a massive increase in health spending in the US.
"Only twice in 30 years have healthcare companies been trading at a discount to the S&P 500 – in 94/95 and right now," Hsu said.
"What happened in 1994? Hilary Clinton and her healthcare reforms. The second these disappeared the healthcare sector entered a golden age, healthcare was unbeatable."
One of the companies Hsu is particularly excited about is Gilead Sciences, which has recently won approval for a drug that has a 100 per cent success rate in trials at curing hepatitis C.
Gilead also invests heavily in HIV treatments and in August had a four-in-one treatment approved by the Federal Drug Administration (FDA).
Hsu explains that the FDA has become keener to approve drugs in the past 18 months, another strong positive for the biotechnology sector.
Data from FE Analytics shows that the Biotech Growth Trust has made 193.9 per cent since Orbimed took over management in 2005. It has had a particularly successful 2012, returning 42.78 per cent year-to-date.
Performance of trust vs index since July 2006
Source: FE Analytics
Hsu says that M&A has been a big driver of the trust’s excellent 2012, explaining that the sector tends to see more acquisitions in volatile markets.
"We are hopeful that another M&A window is opening up following the recent market correction," he added.
The performance of the trust prior to Orbimed's takeover may give investors cause for concern: our data shows it grew 134.45 per cent between launch in 1997 and 2000 before losing 80 per cent of its value by 2003.
Performance of trust since 1997
Source: FE Analytics
In the longer run the trust has more than made these losses back, growing 156.03 per cent since launch, but the Orbimed team acknowledges that investors will be worried that such a pattern could repeat itself.
Sven Borho (pictured left), fellow partner at Orbimed, explains that the market conditions are entirely different this time.
"In 2000, P/E ratios were at 30-times earnings in biotech companies. Healthcare was trading at a huge premium to the S&P 500. Now it is trading at 10-times P/E and biotech at 15 to 20 times," he said. Borho adds that Obamacare is not a threat to the sector but an opportunity, and that the management team has been repositioning its portfolios to favour the sectors it thinks will gain the most from the reforms: innovative drugs, generics, healthcare IT and companies that provide Medicaid.
He said: "This is not a government takeover of healthcare in the US, or a UK-style rationing of access. It basically expands Medicaid to 30 million extra people. It’s just a dramatic increase in healthcare expenditure in the US."
The trust is currently on a discount of 2.02 per cent and Borho explains that the management team will keep it at a maximum of 6 per cent, using share buybacks if necessary to defend that number.
Orbimed also runs the Worldwide Healthcare Trust, which data from FE Analytics shows has made 838.48 per cent since launch in 1995.
The trust invests more widely in the healthcare sector, although it holds biotechnology firms too.
Borho says it could be a lower-risk option for those who want to gain access to the new wonder drugs, and it is likely to hold a position one-quarter or one-fifth of the size of the Biotech Growth Trust in the small cap emerging companies that the Biotech Growth Trust favours.
He adds that the risk-adjusted returns on the two funds should be similar, but FE Analytics shows that the Sharpe ratio on the Biotech Growth Trust is higher.
Its score of 0.67 over 10 years is more than double the 0.31 per cent of the Worldwide Healthcare Trust, meaning that it has made more per unit of risk it has taken on.
The annualised volatility on the biotech trust is higher, however, at 19.95 per cent over the decade, than the 18.23 per cent of the Worldwide Healthcare Trust.