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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by International Biotechnology. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
- In the half year to 28/02/2023, rising M&A and steadying valuations in the biotechnology sector helped power strong outperformance for International Biotechnology Trust (IBT), with the trust reporting NAV total returns of 6.1% and share price total return of 8.0% against a NASDAQ Biotechnology Index (NBI) total return of 1.8%
- Both the quoted and unquoted portfolios benefited from M&A activity, with three holdings in total the subject of takeover bids. A particular highlight was the acquisition of Horizon, at the time 13.5% of the portfolio, by Amgen at a 48% premium
- The managers argue the raised interest rate environment and technology rotation are now baked into valuations, and they anticipate continued M&A activity going forward, with the trust’s portfolio firmly tilted towards mid- and small-cap holdings at the half-year end
- With biotechnology still broadly out of favour, IBT’s discount currently stands at -7.7%, with the board exercising buybacks in the half-year in order to bring the discount in
- Overall gearing was reduced over the half year, from 14% at 31/08/2022 to 8.2% at 28/02/2023
- The trust’s board is in the advanced stages of finding a new fund management firm
Kepler View
International Biotechnology Trust (IBT) has proved its mettle over a tumultuous two years for the biotechnology industry, as its half-year results confirm. The technology sell-off thrust biotechnology into the limelight as capital rotated into the sector, before rising rates saw it quickly fall out of favour.
The lead managers of IBT, Ailsa Craig and Marek Poszepczynski, have invested in the sector through several cycles. While they freely admit that it is cyclical, their experience means that they feel they are able to see where opportunities are most attractive at any one point in this cycle. Currently, the maturing patent expiration cycle for many of the larger pharmaceutical businesses, means that those companies are looking for new revenue-producing products.
With that in mind, Ailsa and Marek have focused the trust’s portfolio on revenue-generating mid-cap companies, which in their view are likely to be the targets of larger companies looking to maintain their revenues in the medium term. This approach has already borne fruit, with three of the trust’s quoted holdings the targets of takeover bids in the six months to 28/02/2023. The more significant of these was the acquisition of Horizon, at that time 13.5% of the portfolio, by Amgen at a premium of 45% to the share price at the point of the deal’s announcement.
The fund is also invested in unquoted investments via two of its manager, SV Health’s unquoted funds, SV Fund VI and SV BCOF, alongside a select range of directly held unquoted investments. One of SV BCOF’s investments was the subject of an acquisition during the half-year period, which led to a £5.5m uplift being applied to IBT’s investment in the fund.
IBT’s board does not have an explicit discount management policy, but does keep this under close review. With this in mind, and with the discount widening to 6.6% at the end of the last financial year, the board bought back shares over the interim period, narrowing the discount to 4.8% at 28 /02/2023. Since then, the discount has widened out again to 7.7% at the time of writing. In line with the trust’s dividend policy of paying out 4% of the previous year-end NAV, a first dividend of this financial year of 14 pence per share was paid out on 27/01/ 2023.
Looking ahead, the managers highlight that an ageing global population continues to be a secular tailwind for the sector. In addition, the catalyst of the COVID pandemic in terms of accelerating the pace of innovation and an evolving regulatory backdrop means products are reaching the market more efficiently. With this in mind, the team also anticipates a restart of biotech sector IPOs.
Earlier this year, the trust’s board announced that its investment manager, SV Health Investors Ltd, had given notice on its management agreement for the trust. The board says that is in the advanced stages of finding a new manager, with six shortlisted firms having presented to it.
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