Biotech M&A gains momentum as spotlight turns to small caps

Marketing image in association with the international biotechnology trust plc

International Biotechnology Trust plc (IBT), the investment trust offering access to the fast-growing biotechnology sector, has just published results for the full year to 31 August 2023, with a share price total return of 3%, 4.4% ahead of its benchmark Nasdaq Biotechnology Index, which fell by 1.4%. With six companies in the portfolio being acquired at a premium to their share price, outperformance was principally driven by careful selection of mid-cap revenue-generating biotech opportunities, and an overweight positioning in those becoming acquisition targets.

Positive M&A uplift

The outlook for M&A activity in the sector remains bright. Large-cap companies in the industry have substantially outperformed their smaller peers this year. The relative valuation differential has increased the appeal of smaller innovative companies which are developing the drugs of the future. The industry is forecast to lose up to $200bn a year in sales by the end of this decade from major drugs coming off patent. Cash-rich large-cap companies in the sector are under pressure to maintain earnings growth and are eager to identify the next generation of innovative candidates to fill the pipeline.

This market dynamic is reflected in IBT’s quoted portfolio. In particular, bids from Amgen and Pfizer for Horizon and Seagen respectively, the two largest portfolio holdings, delivered a positive uplift for shareholders. Following the offers, portfolio managers Ailsa Craig and Marek Poszepczynski locked in gains and reduced their positions to lower exposure to the transaction risks. This proved prescient as both share prices have been volatile following announcements of investigations into the deals by the US Federal Trade Commission (FTC). Since IBT’s year end, the US Federal Trade Commission has given the green light to Amgen’s acquisition of Horizon, but Pfizer’s proposed takeover of Seagen remains under review by the regulator.

Exceptional early return

Within the unquoted portfolio, which comprises 9% of the total assets, rising interest rates have led to a tougher funding environment for earlier stage biotechnology, as seen in the wider private equity industry.

Despite this, the younger of IBT’s two unquoted fund investments, SV BCOF, has delivered an exceptional early return with a currency-adjusted IRR of 109% since launch less than two years ago. SV BCOF focuses on later stage pre-IPO and newly listed ‘crossover’ opportunities. One of its first successful investments was Nimbus, which sold a psoriasis treatment to Takeda, Asia’s largest pharmaceutical company, for $4bn in upfront cash and up to $2bn in commercial milestone payments. The majority of SV BCOF remains in cash assets ready to take advantage of the significantly reduced valuations in the recently derated private biotech space – it has so far invested in six companies and drawn down 28% of IBT’s initial $30m commitment.

Within biotech venture capital, deal activity has fallen dramatically and the heady valuations of a couple of years ago are a distant memory. The more mature of IBT’s two unquoted fund investments, SV Fund VI, fell in value with a number of write downs, but has nevertheless delivered a currency-adjusted Internal Rate of Return (IRR) of 17.7% per annum for investors since its launch in 2016.

IBT’s chair, Kate Cornish-Bowden, said:

“Despite significant underperformance of the biotech sector triggered by higher costs of capital, the fundamentals remain very much intact; namely a growing elderly population, a rising middle class, and an increasing demand for treatments to cure disease and enhance the quality of our lives. This spend is, to a large degree, non-discretionary. Furthermore, scientific innovation in areas such as personalised targeted therapies, has led to faster, positive outcomes from clinical trials and better prospects for patients. We are excited about the opportunities for IBT within the Schroders stable and are looking forward to the future with confidence."

Ailsa Craig and Marek Poszepczynski, co-portfolio managers, said:

“The recent period of valuation adjustments has stimulated increased M&A activity within the industry. We expect this trend to persist, as biotechnology continues to display robust innovation, boasting strong numbers of drug approvals and increasing numbers of clinical trials. Notably, emerging modalities such as gene and cell therapies hold transformative potential for addressing significant unmet medical needs across various diseases.

“Increasing demand for high quality therapies, M&A, productivity improvements through consolidation, sustained innovation, and the allure of undervalued companies in this dynamic landscape all contribute to a promising outlook for biotech investments. As we navigate these opportunities, our commitment to delivering value to our investors remains steadfast.”

Notes to editors

About IBT

IBT was founded in 1994 and offers investors access to the fast-growing biotechnology sector through an actively managed, diversified fund.

As well as investing in a wide-ranging portfolio of global quoted biotechnology stocks, IBT includes a small proportion of otherwise inaccessible carefully selected unquoted investments which have the potential to deliver additional returns over the long term. Excellent management teams, unique innovative products and strong potential for outperformance are the key criteria for inclusion in our diversified portfolio of assets.  The £270 million trust aims to pay an annual dividend of 4% of NAV, paid semi-annually, subject to shareholder approval. The dividend is paid from capital reserves (£249.1mn as at 31 August 2023), without affecting investment strategy.

Although IBT’s discount widened at points during the financial year, the discount was managed by share buybacks and closed the year at 6.3%, compared to a 6.6% discount, 12 months earlier.

In August 2023, IBT announced that Schroder Unit Trust Managers Limited, a subsidiary undertaking of Schroders plc will be IBT’s new fund manager, from later this month. Ailsa Craig and Marek Poszepczynski are moving to Schroders plc and will continue to manage the quoted portfolio with the same investment philosophy.

For more information, please visit the Trust’s website at

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Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

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On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.