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Getting rich while you’re getting high

Biotechnology as an industry offers great potential.

I was going to add a little more to the still-raging controversy surrounding the African Bank collapse and its ever-widening financial ripples, but I thought best to leave it alone.

As it is, the story has now taken on a life of its own and there are better and far more able journalists and commentators to provide a running commentary on it. But mark my words, the last words on this spectacular collapse has yet to be written.

I’m quite sure  the inimitable Barry Sergeant* must be wringing his hands in anticipation in getting stuck into what really happened  during those tumultous last couple of  days when the insiders—Abil management, the SA Reserve Bank and two of our largest fund managers Coronation and Allan Gray were all dealing with this financial hurricane in their own way.

Fascinating stuff indeed!

If this was Hollywood the script writers would already have furiously been busy churning out scripts for soap operas or blockbuster movies, like it happened very soon after the Great Financial Crash of 2008.

As it is, Karl Leinberger from Coronation and Ian Liddle from Allan Gray, might as well be called upon to play themselves in any movie being contemplated.

But begone with Abil, let me regale you with something far more profitable and enjoyable.

The idea for this column was prompted by an email from a long-lost friend, former stockbroker Neville Stevens-Burt, who now lives somewhere in Malaysia in semi-retirement, making handcrafted nougat in his spare time.

“I hear through the grape-vine that you have been investing in biotechnology funds,” popped the email in my inbox earlier this week. “Do you know anything about companies investing in marijuana, or dagga, as we call back in SA,” he asked.

For those who have been partaking too much of the stuff in recent past and might not be aware of it, the production and sale of marijuana has been legalized in several states in the US. Early investors have made incredible returns for their investors in this sector, literally going up in smoke.

 

OFFSHORE DIVERSIFICATION

Indeed he was correct, as I have been pontificating, almost religiously, about the investment merits of biotechnology as an offshore diversification for South African investors. This was after I attended an investment seminar hosted by US investment commentator John Mauldin in Cape Town in October 2011.

I spent considerable time researching this issue and I came to the conclusion that (a) biotechnology as an industry offers great potential and (b) as we don’t have any biotech companies in SA, you would need to invest offshore with your foreign investment allowance.

Several of my columns on Moneyweb dealt with this issue and I have discussed it many times on radio. I am glad to report that I also invested a fair chunk of my own money into one such fund, the Franklin Templeton Biotechnology Fund.

Although I have been bullish on this sector was I more than pleasantly surprised by the fantastic returns over the past three years or so. A return of 60% per annum versus 24% per annum for the JSE over the past three years. This outperformance stretches back even longer into the past. Since 2009 the fund has return 34% per annum versus 19% per annum earned on the JSE and since 2000 the biotech sector has substantially outperformed the  DJ industrial index.

Apart from a sharp sell-off in February this year, which was welcomed by many analysts as they thought the market was overcooking it, the returns have been astonishingly good ever since I started tracking the index.

Over the last month the biotech index on Nasdaq (NBI) has jumped almost by 8%, partially due to good news relating to MS drugs being developed by biotech giant Argent as well as some good pipeline developments in other major players. This is an industry that lives or dies on new products. Hundreds of new products are launched every year but it’s the blockbusters like Viagra and Cialis, for instance, that  earn the  really big bucks.

The biotech sector’s outlook is largely determined by products in the pipeline, regulatory approval or declines and lastly earnings growth. Very few of these companies pay dividends as most of the profits are ploughed back into research and development.

 

OUTBREAK OF EBOLA

The sector was also indirectly boosted by the outbreak of the deadly Ebola-disease in West Africa, which has already cost the lives of more than a thousand people and is threatening to rage out of control.

Only yesterday the SA government imposed a travel ban on non-SA citizens travelling from most west African countries, as well as Kenya.

With the severity of the outbreak increasing each passing day, the Federal Drug Agency (FD) in the US declared late last week that it collaborate with companies to develop treatments to combat the deadly virus. There is currently no approved treatment for the Ebola virus.

According to Reuters the FDA is not averse to proposals that aim to offer treatments to combat Ebola under special emergency new drug applications in the event of the therapy having a favourable benefit /risk profile.

A Canadian Company Tekmira Pharmaceuticals (TKMR), one of the few companies developing treatments for Ebola, gained significantly following the FDA announcement.

Another US company Mapp Biopharmaceuticals is also developing a treatment for the Ebola virus,  as is BioCryst Pharmaceuticals (BCRX), which has a product in early stages of development to combat a wide array of viruses including Ebola.

The biotech sector is not only a good offshore diversifier for South African investors, giving them a dollar exposure to an industry we don’t have in SA, but it is also one of the few defensive sectors that protected investors’ portfolios to a certain extent during the sharp sell-off in 2008/2009.

I need to do some research on marijuana companies and where and how one can invest in them. However, I don’t think I will do justice to the research if I don’t at the very least sample the products….

Click image to enlarge

·        Barry Sergeant, a former Moneyweb staffer, is the author of several books including Assault on the Rand as well as The Kebble Collusion. The latter book is most probably the best business book I have ever read.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached for ideas and suggestions at magnus@heystek.co.za.

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