The cream of British biotech

Ageing populations and burgeoning middle classes spell long-term growth for the biotech industry, says professional stock picker David Pinniger. Here, he tips three British pharmas to buy now.

Each week a professional investor tells MoneyWeek where he'd put his money now. This week: David Pinniger, CFA, investment manager at the International Biotech Trust.

On the 28 October 1982, the US Food & Drug Administration approved Genentech/Lilly's Humulin diabetes treatment. It was the first approval of its type and since then several hundred more biotechnology-based drugs have been developed for patients with a range of serious life-threatening illnesses.

Such successful innovation is reflected in the value of today's biotechnology industry. The high-profile US Nasdaq Biotechnology Index (NBI) is made up of more than 100 listed firms with a combined value of more than $450bn. And there are plenty more listed companies, including some located outside America, and also hundreds of privately owned venture-capital-backed enterprises all developing the medicines of tomorrow.

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Despite the well-known risks of drug discovery and development, over the last five years the sector (NBI) has returned 77%, versus the S&P 500's 6%. The longer-term investment case for biotechnology also remains solid.

Ageing populations and burgeoning middle classes in developing economies provide the demographic foundations for the long-term secular growth of the industry. Demand is only set to increase for innovative new drugs, diagnostics and medical devices to prevent and treat modern complex diseases associated with living longer and unhealthier lifestyles.

Yet while the international biotechnology industry has come of age, such success hasn't yet been mirrored in Britain. In the current, capital-starved, risk-intolerant investment climate, this is not going to change any time soon. However, there are a few British firms investors can buy that carry an acceptable level of risk when held as part of a broader portfolio. Here are three of my favourites.

Shire (LSE: SHP) has over recent years transformed itself into one of the highest-growth speciality medicine companies operating in the global pharmaceutical and biotechnology industry. The company's strategic move into rare, life-threatening genetic disorders is paying off, as these drugs command high prices and generate high profit margins.

A string of recent minor setbacks has seen investors' great expectations diminished, but this makes now a good time to buy a high-quality company with strong growth prospects.

Summit (Aim: SUMM) is a small British-based biotechnology company developing a potentially exciting new treatment for Duchenne muscular dystrophy, a rare, genetically inherited, muscle-wasting condition. The first clinical results for its drug candidate are expected towards the end of the year.

It's a high-risk project the company's stockmarket valuation suggests investors are already discounting failure yet it could surprise everyone.

Oxford Pharmascience (Aim: OXP) is another small, British-based firm applying its formulation technologies to improve the usability of well-established drug products. Poor compliance around chronic drug treatments is a major problem for the healthcare industry.

The company has already licensed its technology for chewable calcium and vitamin D tablets to a large Brazilian firm. It is also working on developing safer versions of statins cholesterol-lowering drugs that make up one of the world's largest drug classes.