GlaxoSmithKline and AstraZeneca have been struggling to maintain pipelines of new drugs, and the latter has recently resorted to drastic measures.
In the past week the company has announced it will cut thousands of jobs and relocate its headquarters and research centres. Pinniger says this has led to the sector discarding people and products with great potential.
"All of this activity means people and assets fall out of the big pharma companies. You can find high-quality assets and people that have fallen out."
"So we, SV Life Sciences, have started a number of companies that are spin-outs of Glaxo such as Convergence, which focuses on pain, and Autifony, which investigates hearing loss."International Biotechnology Trust [IBT] is a closed-ended investment company run by SV Life Sciences, a venture capital firm that seeds start-up companies developing new medicines and treatments.
What sets it apart from the other trusts in its field, Pinniger says, is the 15 to 20 per cent of the portfolio that it holds in unquoted companies, many of which are drawn from the companies started by SV Life Sciences.
"We currently have 20 companies in which we invest alongside the larger venture funds in SC Capital."
"Say SV invests £10m, we will invest £1.5m, that’s how it usually works," he said. "We try to invest in companies we think we can get a good exit from in two or three years."
Retail investors cannot otherwise access these unquoted companies and Pinniger thinks one of the key advantages of doing so is they diversify the portfolio away from the stock market.
"They have the potential to give you uncorrelated returns. When you have had a raging bull market for equities and the market then trades sideways, unquoted companies give you the chance to make good returns."
"It’s a way to employ capital by investing in businesses that are creating value independently of the market, giving you a buffering effect against market volatility."
Data from FE Analytics shows that although the nearest direct competitor – The Biotech Growth Trust – has produced higher returns over the past five years, it has done so with significantly higher volatility.
IBT scores 15.77 per cent on an annualised basis compared with the 21.39 per cent from the Biotech Growth Trust.
According to data from FE Analytics, IBT has doubled in value over the past five years, making 100.22 per cent.
Performance of trust vs benchmark over 5yrs
Source: FE Analytics
It has been a boom period for the sector, with the NASDAQ Biotechnology index up 186.26 per cent over this time.
Pinniger says that there are both bullish and bearish reasons for this.
"Equities rebounded very strongly after the financial crisis because of QE, so lots of capital is looking to go to work in equities," he said.
"When the market goes higher, people want to increase their Beta, and as it keeps going higher people’s attitude to risk increases."
Pinniger says that over the medium-term, the larger stocks in the sector have also benefited from a flight to safety, with multi-billion dollar drug companies seen as more secure investments in a time of crisis.
"They are not as susceptible to the economic cycle as people don’t stop getting sick when the market goes down or get sick more often when it goes up."
What investors in the sector worry about most is a repeat of what happened in 2000, when it suffered its own "dotcom bubble".
Performance of trust vs benchmark over 15yrs
Source: FE Analytics
Pinniger explains that the market was taken up with "irrational exuberance" surrounding the potential for gene therapies that was analogous to the misreading of the significance of the internet.
The sector was trading on 50x times earnings at the peak, rather than the 14 to 15x it is at right now, and Pinniger says that the current boom is totally different.
"We are starting to see a new range of drugs come through that went into development around the turn of the century and are only now passing late clinical trials," he added.
Healthcare spending is under pressure in the West, but Pinniger says that R&D in the US is unlikely to suffer.
The sector is one of the few where the US has a large competitive advantage, and with the developed world catching up in other areas, the US government is likely to fight to keep its pre-eminence.