Many investors rightly adopted a wait-and-see attitude when Biopharma Credit (LSE: BPCR) raised $762m in its March 2017 flotation. The prospective return of 8%-9%, including a dividend yield of 6%, looked attractive, but how risky were its returns?
BPCR’s manager, Pharmakon, is a specialist lender to the life-sciences sector, having invested $4.7bn in 40 transactions over 12 years. This, Pharmakon says, is a $1.1trn industry growing at 6% per annum.
The loans to companies are “predominantly secured on approved, commercial-stage products” but the servicing and repayment of the loans is dependent on their success. An average rate of return in double figures implies a material risk of the products not selling.
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Pedro Gonzalez de Cosio, CEO of Pharmakon, says that companies have to move fast to capitalise on innovation by spending on research and development (R&D) now. They cannot afford to wait for the cash flow from existing products.
“It’s a race. We, however, are not taking clinical risk. For us, the risk is in projections of future sales from established products. Safety issues and product recalls are very rare and competition from new drugs is highly visible owing to the publication of trial results. With a team of 20, we have the expertise to do the necessary due diligence.”
Four years after flotation, BPCR has made 13 investments, four of which have been repaid with better-than-expected realised returns. The remaining nine are on course to generate annual returns between “high single-digits” and 12%.
A single company, Sarepta, comprises 25% of the portfolio, but it has a market value of $11bn including $1.9bn in cash. “It has $500m of sales at net margins over 70% from three products but has 20 more in the pipeline, so it is spending heavily on R&D.” A fifth of the portfolio is in cash but there is a “very attractive pipeline of deals for 2021”. In 2020, Pharmakon closed just three investments out of 243 screened, but four to six is more normal. The shares trade at $0.97, a 3% discount to net asset value (NAV), and yield 7%.
Another trust, launched in late 2016, that has proved itself is Civitas Social Housing (LSE: CSH). It trades at a 7% premium to NAV, yields 4.7% and has a market value above £700m. It invests in social housing, which it leases to housing associations on long-term, inflation-adjusted terms. These properties are for those in need of “supported living” owing to disabilities, mental-health issues or homelessness. There is a chronic shortage of supply of such accommodation yet local authorities are required to house those in need of it.
Firm foundations
Three housing associations account for 57% of CSH’s income and ten for 94%; 35% of CSH’s balance sheet is financed with low-cost debt but the rental yield of CSH’s portfolio is still around 5.5%, indexed to inflation.
This is expensive finance for housing associations, who have access to much cheaper loans from the public sector. Presumably, their rents are correspondingly elevated but these are paid by the local authority (and indirectly by the government) so they must still offer a good deal compared with the alternatives. CSH investors benefit from the inability or unwillingness of the public sector to drive down the cost of the social housing it is obliged to provide.
It is very hard to see how this could change; there is surely no political appetite to alter the financing structure of the provision of housing to those who can least afford it in order to save the government money. This makes CSH, like BPCR, an attractive long-term proposition for those seeking income plus a bit of capital gain.
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