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Earlier this year, International Biotechnology Trust (IBT) celebrated its 30-year anniversary, having launched as a pioneering investment trust dedicated to what was then a nascent opportunity in the biotech industry, back in 1994. The trust remains a compelling way for investors to access the attractive long-term growth on offer from biotech, and Ailsa and I have been privileged to have now co-managed the trust since March 2021, having been part of the investment team from 2006 and 2014 respectively.
Over the course of the last three years, we have witnessed a variety of market conditions, with the Nasdaq Biotechnology Index reaching an all-time high shortly after we took full responsibility for the trust, before experiencing a sustained correction through 2022 and 2023. This year, however, we have seen increasing evidence of recovery and, despite this market volatility, our efforts to adapt the portfolio to evolving conditions have enabled us to consistently add value for shareholders.
A year of recovery
After a challenging period, 2024 has seen a more positive backdrop emerge for the biotechnology sector. In the year to 31 August 2024, the Nasdaq Biotechnology Index increased by 15.5% in UK sterling terms. IBT was ahead of its benchmark with a net asset value (NAV) total return of 16.1%[1]. In share price terms, however, IBT was modestly behind its benchmark as a result of a wider discount (the gap between an investment trust’s NAV and share price), a phenomenon experienced by much of the investment trust sector during the period under review.
Initially, the recovery was driven primarily by larger companies, but it has broadened out as the year has progressed, with small and mid-cap biotech stocks increasingly participating in the rally. Having seen encouraging signs of renewed vitality in smaller, earlier-stage biotech, we elected to increase the portfolio’s exposure to this part of the market and also increased gearing to a peak of 14%, confident that the recovery would continue to gather momentum. Both of these strategic decisions stood the portfolio in good stead through the initial stages of the biotech rally. We have subsequently reduced gearing to 5% but the portfolio remains well exposed to small and mid-cap biotech, where we continue to find very attractive opportunities.
Dividend growth was also positive, and the year end NAV implies a further dividend increase in the year ahead, as illustrated in the chart below.
Bid activity drives returns
One key development during the year has been the resurgence of merger and acquisition (M&A) activity in the biotech sector. Four companies from the IBT portfolio were acquired during the period, each at a significant premium.
In October 2023, Bristol-Myers Squibb announced it would acquire commercial-stage, targeted cancer specialist Mirati Therapeutics, for $4.8bn. The deal was struck at a 45% premium to Mirati’s undisturbed share price as well as a contingent value right (CVR) worth up to an additional $1bn if its non-small cell lung cancer therapy, MRTX1719, is approved by the FDA.
Bristol-Myers Squibb also acquired Karuna Therapeutics for $14bn in December 2023, paying a 53% premium to the pre-bid share price. Karuna’s lead asset, KarXT, is positioned as a potential first-in-class treatment for schizophrenia and other neuropsychiatric conditions.
Meanwhile, within the private element of the portfolio, EyeBio, an innovative retinal disease therapy developer, was acquired by Merck in May for up to $3bn, including up to $1.7bn in potential milestone payments, and in July, Edwards Lifesciences acquired Endotronix, a leader in heart failure management technology, as part of a broader $1.2bn deal.
As well as realising meaningful gains for IBT shareholders, this renewed M&A activity reflects continued innovation in the biotech sector and the desire among larger pharmaceutical companies to bolster their pipelines through deals. Furthermore, it highlights our ability to identify attractively valued biotech businesses with exciting technology in development.
Outperformance in all weathers
Over the three years to 31 August 2024, IBT’s NAV rose 11.8% whereas the benchmark index NBI fell 1.3%, an outperformance of 13.1%.[1] IBT has consistently outperformed its index in a range of different market conditions, as illustrated in the table below.
Financial year to | IBT NAV performance | NBI performance | Outperformance |
31 August 2022 | -7.2% | -13.8% | +6.6% |
31 August 2023 | +2.7% | -1.4% | +4.1% |
31 August 2024 | +16.1% | +15.5% | +0.6% |
Source: Bloomberg in total return, UK sterling terms. Past performance is not a guide to future performance and may not be repeated.
The key to this outperformance has been a flexible, valuation-driven strategy, adapting to evolving market conditions with a focus on capital preservation and selective risk taking. For example, in the market downturn of 2022, we focused on managing downside risk by reducing exposure to higher-risk, smaller biotechs in favour of larger, resilient, cash-flow generating businesses. This cautious stance paid off, and we were then able to take advantage of lower valuations in 2023 to move back towards earlier-stage biotechs once the market had shown signs of stabilisation. Shareholders have increasingly seen the benefit of these strategic moves as we have progressed through 2024.
This flexibility is typical of what investors should expect from our management. There will always be a strong emphasis placed on capital preservation, as reflected in the approach to “binary event risk”, where we look to reduce exposure to holdings as they approach critical milestones such as trial results, in order to minimise exposure to excessive share price volatility.
Similarly, we take a “basket approach” to therapeutic areas where the ultimate winners are hard to predict. This involves a lower risk, diversified strategy of taking smaller positions across a range of the most promising assets, rather than backing a single opportunity.
In addition to our scientifically driven and valuation aware bottom up stock picking, investors should expect us to continue to take a top-down view which informs whether the portfolio should be tilted towards defensive or riskier biotech companies, depending on where we are in the investment cycle. This view can also be amplified through active management of the gearing facility, and by taking advantage of market volatility as conditions evolve.
This approach has served our shareholders well over the last three years, and we hope that our process will continue to deliver returns for our shareholders in the future.
Looking ahead
The biotech sector looks poised to make further progress as we look towards 2025 and beyond. With inflation seemingly under control and interest rates expected to decline, the environment should be increasingly favourable for long-duration assets such as biotech. There are signs that the IPO window is beginning to open and secondary offerings remain strong, indicating renewed appetite for biotech from a broader range of investors. This is all typical of what we would expect to see in the more positive stages of the biotech investment cycle.
Meanwhile, innovation continues apace in the sector, with record levels of new trial initiations and a number of key product launches, approvals and late-stage clinical trial read outs anticipated in the months ahead.
As has been the case in prior years, the US Presidential election could result in near-term volatility in the biotech sector, and for healthcare more broadly. We will understand more about specific policy intentions as the campaign momentum builds, but based on current information, we do not expect any election outcome to materially change the long-term biotech investment case.
Stronger than ever with Schroders
IBT’s transition to Schroders is now complete and the Trust has been benefiting from this partnership for a full nine months. The support of a large organisation like Schroders, with its administrative and distribution capabilities, has further expanded the Trust’s reach and makes the IBT investment proposition even more robust.
As we move further into what has historically been one of the most rewarding phases of the biotech investment cycle, IBT is therefore well positioned to capture the opportunity that lies ahead, through the disciplined application of a successful and repeatable investment approach, augmented by the strength and resources of Schroders. Notwithstanding the risk of near-term volatility as we move through the US election season, we view the long-term future for IBT and its shareholders with more confidence than ever.
[1] Source: Bloomberg to 31 August 2024. Past performance is not a guide to future performance and may not be repeated.
[2] Source: Total return, UK sterling terms. Bloomberg to 31 August 2024. Past performance is not a guide to future performance and may not be repeated.
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International Biotechnology Trust plc Risk Considerations
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.
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.
We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.
For help in understanding any terms used, please visit address https://www.schroders.com/en-gb/uk/individual/glossary/
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