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Surging inflation, rising interest rates and the outbreak of war in Europe have all played a part in the volatility suffered by the biotechnology sector in 2022. However, innovation in the space continues to abound, with numerous potentially trailblazing drugs having been approved to tackle diseases desperately in want of better treatment options.
Four seasons of macro challenges
The start of the year was characterised by a considerable market sell-off, with all major indices falling for the majority of the first half of 2022[2]. This was driven by elevated inflation, aggressive interest rate hikes by most leading central banks, war in Europe, and the associated spike in European energy prices.
Biotech was not spared from the effects of these headwinds. By the start of summer, the NASDAQ Biotechnology Index had fallen by about 30%[3], and around a quarter of its constituent companies were trading at or below the value of their cash holdings. A short-lived summer rally then ensued, with valuations plateauing at a higher level.
The autumn was defined by the real economy feeling the strain of increased interest rates. The large-cap biotech companies, with their solid sales outlooks and predictable cashflows, benefitted from this environment, as investors sought out ‘safe havens’.
Even though we believe inflation is set to slowly abate, interest rates may remain higher for longer, which will limit growth prospects and could tip economies into recession. Businesses offering revenue growth are most likely to benefit in this setting, and fortunately, plenty of companies within the biotech space fit this profile.
Biotech breakthroughs of 2022
Despite the pronounced market turbulence witnessed in 2022, it has been an exciting year for our portfolio companies. International Biotechnology Trust has seen a number of its holdings receive drug approvals this year, most notably including a potentially ground-breaking gene therapy to treat haemophilia B by uniQure, and a new targeted lung cancer treatment developed by Mirati Therapeutics – both of which will be discussed in greater detail below.
As of December 2022, 31 novel drugs have been approved by the regulator this year[4]. While all drug approvals represent a positive development for the biotech sector, fewer approvals have been achieved in 2022 than in previous years. However, this is most likely the result of trial delays incurred during the Covid-19 pandemic.
In May 2021, uniQure partnered the rights to etranacogene dezaparvovec (etranadez) with CSL, and then in November 2022, it was announced the US Food and Drug Administration (FDA) had approved its Haemophilia B drug ‘Hemgenix’ for use in the US. The companies have since announced a positive recommendation for approval in Europe. One infusion of Hemgenix demonstrated a stable and durable increase in Factor IX levels, which led to a 64% reduction in annualised bleeding rates. Following the infusion of the new drug, 96% of patients were able to discontinue their routine Factor IX clotting agent prophylactic injections – a majorly positive transformation to the lives of Haemophilia B sufferers[5].
In December, Mirati Therapeutics announced the FDA approval of its drug adagrasib to treat KRAS G12C-mutated locally advanced or metastatic non-small cell lung cancer. There is only one other drug available to patients that targets this mutation, marketed by Amgen, making Mirati second to market.
Expectations for 2023
Looking forward to 2023, we will be closely following the launches of the exciting new treatments mentioned above. In addition, the FDA will decide whether to approve Biogen’s lecanemab, which demonstrated a reduction in the rate of cognitive decline in Alzheimer’s patients in September 2022. The number of Alzheimer’s patients is enormous, so the next key consideration, should the treatment be approved by the FDA, will be the decision from payors at some point in early 2023. Other pharmaceutical companies will also be reporting their data for competitor drugs in this space, such as donanemab from Lilly, which will be major sentiment-driving events for the sector.
During 2022, a drug pricing bill was passed in the US under the Biden administration. The Inflation Reduction Act of 2022 attempts to address best-selling drugs that have been on the market for a lengthy time period and come under the government-funded ‘Medicare’ system. These drugs will be subject to price negotiations starting 2027. However, much of the detail is being contested, and we will receive greater clarity on the legislation in 2023.
It is key to note the legislation is focused on older, more established drugs and does not challenge the launch prices of new drugs. This is to prevent disincentivising innovative companies from investing in and developing new medicines. Given the Trust’s main focus is on younger, more innovative companies addressing areas of high unmet medical need, rather than the more established pharmaceutical companies selling drugs towards the end of their life cycle, we believe the legislation will likely have a minimal impact on IBT’s performance moving forward.
M&A heating up
As we have mentioned in previous IBT blogs, M&A is and will continue to be a hallmark of the biotech industry’s dynamics. We have seen five companies acquired in the fund during 2022[6]:
Zogenix acquired by UCB – January 2022 for $1.9bn
Biohaven acquired by Pfizer – May 2022 for 11.6bn
Nordic Consulting acquired by Accrete Health Partners (deal value undisclosed)
Chemocentryx acquired by Amgen – August 2022 for $3.7bn
Horizon acquired by Amgen – December 2022 for $27.8bn
The most recent deal in IBT’s quoted portfolio came with the news Amgen would acquire portfolio holding Horizon Therapeutics for $28bn. Followers of IBT will know this was the fund’s largest position, and the premium received in the transaction has made a materially positive impact to the company’s NAV[7].
It has been a tough year for capital markets, with few biotech initial public offerings and secondary offerings. High quality established public companies that have had successful clinical trial readouts have been able to return to the markets and raise money. However, struggling companies with no positive news have not. Many of the companies that floated during the hype of 2021 at unjustifiably high valuations have since struggled to stay afloat. We expect to see the least successful of these drop out of the index over the coming year.
With many uncertainties on the horizon, we continue to focus on companies developing compelling new treatments aimed at tackling currently ‘untreatable’ ailments, as well as those delivering disruptive technologies and methods of drug delivery, which we hope will greatly improve the lives of patients taking today’s already available treatments. We particularly like assets that have demonstrated success in clinical trials, and those making good progress towards – or having already achieved – drug approval. We believe M&A will continue in the sector, as large, cash-rich biotech and pharma players look to put money to work. These transactions seem to be favouring the relatively derisked companies with a shorter timeframe to profitability.
We will continue to focus on mitigating volatility risk within our portfolio by trading nimbly around our holdings’ binary events, as well as by tilting our portfolio on a 'bigger picture' basis away from riskier areas during periods of high volatility, and then back again when growth is expected. We also place significant emphasis on quality of management and environmental, social and governance (ESG) factors. As such, we will continue working closely with the senior leadership teams of sector companies to accurately gauge what drives their business and to fully grasp the science behind their pipeline of innovations. Additionally, we will continue to draw from our team of Key Opinion Leaders. Their expertise in dynamic and complex sector areas will be critical moving forward, especially where they possess insights into the relevant regulation, clinical trial design, or novel science.
As we enter 2023, we feel confident the M&A transactions of recent months offer strong evidence we are well into Stage 2, and we are hopeful the more stable investment environment of Stage 3 will be beckoning in the not-too-distant future.
Source: Schroders, 2023.
Finally, we would like to express our gratitude for your continuing support and trust. We hope you had a wonderful festive period, and we look forward to speaking to you again soon in 2023.
[1] Source: Bloomberg
[2] Source: Bloomberg
[3] Source: Bloomberg
[4] Source: US Food and Drug Administration
[5] Source: US FDA report on Hemgenix - https://www.fda.gov/media/163467/download
[6] Company press releases on each company’s websites and Bloomberg
[7] https://www.londonstockexchang...
Fund risk disclosures - International Biotechnology Trust plc
Capital risk / distribution policy: As the Company intends to pay dividends regardless of its performance, a dividend may represent a return of part of the amount you invested.
Concentration risk: The Company's investments may be concentrated in a limited number of geographical regions, industry sectors, markets and/or individual positions. This may result in large changes in the value of the Company, both up or down.
Currency risk: The Company may lose value as a result of movements in foreign exchange rates, otherwise known as currency rates.
Gearing risk: The Company may borrow money to make further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase by more than the cost of borrowing, or reduce returns if they fail to do so. In falling markets, the whole of the value in that such investments could be lost, which would result in losses to the Company.
IBOR risk: The transition of the financial markets away from the use of interbank offered rates (IBORs) to alternative reference interest rates may impact the valuation of certain holdings and disrupt liquidity in certain instruments. This may impact the investment performance of the Company.
Liquidity risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. In difficult market conditions, investors may not be able to find a buyer for their shares or may not get back the amount that they originally invested. Certain investments of the Company, in particular the unquoted investments, may be less liquid and more difficult to value. In difficult market conditions, the Company may not be able to sell an investment for full value or at all and this could affect performance of the Company.
Market risk: The value of investments can go up and down and an investor may not get back the amount initially invested.
Operational risk: Operational processes, including those related to the safekeeping of assets, may fail. This may result in losses to the Company.
Performance risk: Investment objectives express an intended result but there is no guarantee that such a result will be achieved. Depending on market conditions and the macro economic environment, investment objectives may become more difficult to achieve.
Share price risk: The price of shares in the Company is determined by market supply and demand, and this may be different to the net asset value of the Company. This means the price may be volatile, meaning the price may go up and down to a greater extent in response to changes in demand.
Smaller companies risk: Smaller companies generally carry greater liquidity risk than larger companies, meaning they are harder to buy and sell, and they may also fluctuate in value to a greater extent.
Valuation risk: The valuation of some investments held by the Company may be performed on a less frequent basis than the valuation of the Company itself. In addition, it may be difficult to find appropriate pricing references for these investments. This difficulty may have an impact on the valuation of the Company and could lead to more volatility in the share price of the Company, meaning the price may go up and down to a greater extent.
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