International Biotechnology 13 November 2024

International Biotechnology Trust (IBT) offers exposure to the exciting growth potential in drug discovery and development. Ailsa Craig and Marek Poszepczynski have co-managed the trust since March 2021, delivering strong outperformance of the Nasdaq Biotechnology Index benchmark, most impressively doing so in both falling and rising markets. Over this period, the two other direct, biotech-focussed peers have both delivered double-digit losses. IBT’s strong momentum initiated in Q4 2023 has continued into this year, with the portfolio delivering attractive returns as risk appetite has grown (see Performance). Key to this performance has been astute top-down positioning, the managers taking on more risk over 2023 which was rewarded as the cycle turned. They retain a higher weighting in small-caps and earlier-stage companies, with a bullish outlook on the sector’s prospects. In their view, biotechnology is only just emerging into a new up-cycle, and they expect the momentum to continue in the coming months and years. In recent months, they think activity in the sector may have paused before the US election, but a Trump win could mean a more favourable regulatory regime in the sector emerges.

Key themes in the Portfolio at the moment include potential M&A targets, drugs for the Central Nervous System (e.g. for depression, schizophrenia), obesity treatments, and innovative oncology drugs. The managers are particularly positive about the outlook for M&A in the coming years thanks to the number of patents held by large-caps that are set to expire. This, plus lower interest rates, has created a promising environment for M&A.

Despite the strong performance and an active buyback programme, IBT remains on a c. 12% Discount at the time of writing, despite a jump in the shares following the US election. The trust pays a Dividend from capital, equal to 4% of the previous year-end NAV.

IBT’s returns have been impressive since Ailsa and Marek took over, delivering a meaningful positive gain during a period in which other specialist biotechnology trusts have lost money. It has been a rough period for the sector, but the managers’ top-down manoeuvring has added value and, hopefully, seen shareholders through it. The outlook now appears much brighter , thanks to the subsidence of the inflation crisis that has seen interest rates start to fall. A Trump presidency also has the potential to see a surge in M&A activity and positive investor sentiment. Taking a longer-term view, we think the impending expiry of patents and pricing pressure from the drug pricing reforms within the Inflation Reduction Act combined with the large cash balances at big pharmaceutical companies should combine to put pressure on them to acquire innovative new products from biotech companies.

There is clearly a lot of exciting science being done in the industry at the moment which is promising from a medical and an investment point of view, and we think IBT is an attractive way for investors to get exposure. The managers have many years of experience analysing the sector, having spent their entire careers involved in it, and have a prudent, clear approach to managing risks. The strategy involves the use of gearing at times, as well as a c. 10% allocation to venture-stage unlisted companies, both of which increase the return potential. The latter position also differentiates the trust from its direct peers. Finally, we note the dividend policy, which means that income investors can draw an income while maintaining exposure to a high-growth industry which doesn’t usually offer an income.