AXA Framlington Biotech is a high conviction strategy which looks to tap into what is now one of the fastest growing subsets of the healthcare sector. The fund targets long-term capital growth by investing across businesses of all sizes, principally in the biotechnology, genomic and medical research industries. The portfolio can invest globally but tends to have a bias towards the US, where most biotechnology companies are based.
Our opinion
One of the few winners from the impact of the Covid pandemic, the case for investing in biotechnology is a strong one. These companies are helping us live longer by bringing new drugs to market to tackle the likes of cancer, heart disease and obesity. However, while the sector is evolving at a rate of knots, it continues to be led by high-end science. It requires a specialist, focused team with skills, experience, and a network to keep up with these changes. That is exactly what manager Linden Thomson and her team offer. Performance has been incredibly strong over the long term, underpinning a rock solid investment process and an ability to adapt to a rapidly changing sector.
Company description
AXA Investment Managers (AXA IM) is the asset management arm of the eponymous French insurance giant. AXA IM’s equity investment team manages a range of qualitative and quantitative solutions. AXA IM’s qualitative equity strategies – which are actively managed - aim to generate high and consistent returns over the long term, investing in companies with high revenue growth and sustainable profit margins. The quantitative investment approach, driven by the ‘Equity QI’ team, combines vast sets of data and technology to seek investment opportunities on a global scale. AXA IM Equity was awarded the Elite Provider for Equities rating in 2015, 2016, 2018 and 2021.
Fund manager
Linden Thomson has nearly two decades of buy-side and sell-side experience as one of the early specialists within the biotechnology sector. She began her career at Goldman Sachs where she was based in the healthcare research team with specific focus on the biotechnology sector. She joined AXA IM in June 2011 from Hedge Fund Clear River Capital where she was responsible for fundamental stock research across the global pharmaceutical and biotechnology sectors. She has been managing the AXA Framlington Biotech fund since July 2012. Linden graduated from Edinburgh University with a BSc in Medical Microbiology and is a CFA Charterholder.
Linden is joined on the fund by Cinney Zhang who joined AXA in 2021 after seven years of being an equity research analyst specialising in pharmaceuticals and biotech stocks.
Linden ThomsonFund manager
Investment process
Linden and the team target companies of all sizes as well as looking at the sector through a therapeutic lens, ranging from oncology to neurodegeneration.
AXA Framlington Biotech is benchmarked against an index of some 400 stocks (a figure which has doubled in the past five years). The science-led background of the team sees them initially apply a quality filter to these companies. Essentially, their respective backgrounds help them to make an informed call about whether a drug/product is going to be suitable for the market and whether the opportunity is robust.
To put this into context, a drug typically goes through three trial phases before being considered as an effective medical treatment. The average probability of success (to approval) is about 10% at Phase I; around 20% at Phase II; and c. 50% at Phase III – however there are marked differences in each therapeutic area.
If the team believes a product will be successful, it is willing to wait for a long period provided the original thesis stays in place. Passing each stage also de-risks the product or opportunity – which will likely mean an increase in the value of the company. This requires heavy due diligence, such as reading scientific papers published on the respective illness/drug and peer reviews.
The second stage is meeting management. This is arguably more important than ever in the biotech space, as the team has to trust the management to take the product through those clinical trials competently. For example, having the confidence in management to have the right manufacturing agreements in place with suppliers and having productive conversations with appropriate regulators (something which takes place behind closed doors). Linden and the team will probe to make sure management are asking the right questions around designing the trials and the external research they have undertaken.
Linden also taps into her extensive network to understand the potential of a product or drug. For example, speaking to doctors about their own confidence in a new drug or any potential ideas in their specialist area of the market.
The final portfolio will typically consist of around 50 stocks, with a focus on quality/later stage opportunities that have a greater chance of making it to market. The AXA Framlington Biotech fund will typically have a greater defensive ballast than some of its peers through its large-cap weighting, although it will tap into mid and small-caps.
The defensive exposure is highlighted by the fact that over half of the companies held in the portfolio in January 2023 were already profitable and that 95% have a cash runway for at least the next two years.
ESG
As a firm, AXA has company-wide investment restrictions based on specific ESG risks – an approach that has been very forward thinking. It monitors and excludes multiple industries for all assets under management (e.g.: controversial weapons, palm oil and soft commodities). It has also recently enforced and strengthened its stance on coal-based power production with limits and exclusions on revenue, power generation, expansion, and mining development.
Beyond this, the AXA Framlington Biotech fund has no formal integration process, but the team does monitor these factors within the wider AXA framework. There is a particular focus on analysing the social and governance issues within the biotech space – for example, is a company producing a drug purely for profit or with a view to wider access for people? AXA also employs a team of investment analysts who will provide monthly updates on all risk parameters captured within the fund.
Risk
Although there is a strong defensive focus - through large cap exposure, a preference for companies already in profit and with a product which has ‘proof of concept’ - there are still a significant number of smaller companies at the bottom end of the market. These companies are often reliant on the success of one product/drug – which means share prices can fall/rise rapidly.
In addition to single sector risk, the AXA Framlington Biotech fund may also hold investments in other currencies – this means exchange rate movements may cause the value of investments (and any income received from them) to fall or rise, affecting the fund’s value.
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