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William Heathcoat Amory
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Updated 08 May 2024
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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.

  • IBT’s NAV has again beaten the NASDAQ Biotechnology Index (with dividends reinvested) sterling adjusted during the six-months ending 29/02/2024. The NAV total return of 11.2% outpaced the index return of 8.2%. The share price total return per share was 8.7%, marginally ahead of the index, reflecting widening discounts across the sector.
  • Increased confidence that the interest rate cycle has peaked led to a change in investor appetite for risk towards the end of 2023. This has continued into 2024, indicating evidence of a nascent recovery in the biotechnology sector.
  • Two holdings became acquisition targets during the six months under review, contributing an increase of 2.5% to NAV. Bristol Myers Squibb bid for both Mirati, an oncology company with a lung cancer treatment and Karuna, a company with a product to treat psychosis in Alzheimer’s Disease. Following a dearth of M&A activity in 2022, a rebound in 2023 led to a record number of biotechnology companies becoming takeover candidates. The Company has benefited from being invested in 23 such candidates in the last three years.
  • The private equity portfolio, which comprised 7.9% of total investments as at 29/02/2024 is primarily represented by two venture capital funds managed by SV Health. Early-stage biotechnology companies have been significantly affected by higher costs of capital and a deteriorating funding environment. Valuation adjustments in unquoted investments inevitably lag those of the broader market and the portfolio has seen some holdings within the venture capital funds marked down over the interim period.
  • The Company’s dividend policy is to make dividend payments equivalent to 4% of the Company’s NAV, as at the last day of the preceding financial year ending 31 August, through two semi-annual distributions. The first dividend for the year of 13.9p per share was paid on 26 January 2024, and the Board intends to declare the second dividend in July 2024 for payment in August 2024.
  • The board continues to keep the discount to NAV under close review and is committed to buying back its shares to help manage the position. Although 1,060,776 shares were bought back, the discount widened from 6.3% to 8.7%. As expected, the ongoing charges ratio has decreased since the transition to Schroders, reducing from 1.4% to 1.3%.
  • Chairman of the board Kate Cornish-Bowden said of the managers’ move to Schroders “the integration of the new Manager arrangements has gone well. We received a positive endorsement of this strategic decision at the AGM in December 2023, when shareholders voted by over 99% in favour of continuation of the company”.

Kepler View

The Biotechnology sector has suffered three consecutive years of underperformance, and so it is very encouraging that the green shoots of a recovery are appearing, as evidenced by the M&A cycle kicking back in. Ailsa and Marek have so far transitioned to their new management house without any detrimental impact to performance, which will be gratifying for the board and for shareholders who, according to the board, expressed a strong desire for continuity when SV Health took the decision to relinquish the mandate.

We think it noteworthy that the headline NAV performance numbers above under-play Ailsa and Marek’s strong performance from the quoted portfolio, which rose by 13.1% (gross of management and performance fees) for the six-month period, outperforming the reference index which returned 8.2%. This performance reflects the strength of their investment selection and active management strategies. The pair passed their three-year anniversary as joint lead-managers on 15/03/2024. Since taking over the helm, they have delivered a similarly impressive quoted portfolio NAV total return of 14.7% (1st April 2021 to 31 March 2024), well ahead of the reference index which increased by 5.0%, a period which encompassed a huge amount of volatility.

Ailsa and Marek’s approach to investment is pragmatic and valuation-sensitive, with a strong focus on risk management. They have long held that the biotechnology sector has an inherent cyclicality, which at times operates on a different wavelength to the broader equity market. As we highlighted in a recent update on International Biotechnology Trust (IBT), the surge in M&A late last year increased the team’s confidence that the cycle is turning in their favour. Valuations, M&A and the macroeconomic outlook contributed to the managers making a well-timed move into small caps in Q4 2023, and while they have since taken some profits and allowed gearing to fall, Ailsa and Marek maintain a positive outlook for the sector.

The team remains focused on identifying companies with innovative technologies, strong intellectual property and solid growth potential. IBT has an actively managed, diversified portfolio, with a team behind it that has shown it can add value through the highs and lows of sentiment toward this volatile sector. With the discount to NAV at a historically wide level, those who share the board’s belief that a more benign economic environment and robust industry fundamentals will give investors greater confidence to invest in the biotechnology sector, may see this as an opportunity.

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