International Biotechnology Trust (IBT)
05/11/2024
Results analysis from Kepler Trust
Intelligence
Once again, IBT has beaten
the NASDAQ Biotechnology Index with a NAV total return of 15.9% for
the year ending 31/08/2024, compared to 15.3% for the benchmark
index (on a sterling-adjusted basis with dividends reinvested). The
share price total return was 10.3% due to a widening of the
discount during the year, despite the trust's strong
performance.
The biotech sector saw a
marked recovery over the financial year, driven by investor
confidence that interest rates had peaked at the end of 2023. This
recovery started with the larger-cap pharmaceutical companies and
later broadened to small and mid-cap companies, reflecting renewed
confidence in the sector.
IBT's portfolio continued to
benefit from M&A activity, with the acquisition of two quoted
holdings by Bristol Myers Squibb during the financial year. The
company's acquisition of commercial-stage, targeted lung cancer
specialist Mirati Therapeutics completed in January. This was
followed by the completion of its acquisition of Karuna
Therapeutics, which has potential first-in-class drugs under
development for neurological and psychiatric conditions, with
Cobenfy receiving FDA approval in September 2024 for the treatment
of schizophrenia.
The private equity portfolio,
which currently comprises 8.6% of total assets, is primarily
represented by two venture capital funds managed by SV Health.
These funds have also had a successful year with two acquisitions
and another company achieving a significant uplift in share price
following its IPO on NASDAQ.
Chair Kate Cornish-Bowden
commented: "It is rewarding to report on the green shoots of a
recovery in the biotechnology sector following an unprecedented
period of share price declines in the sector. Relative valuations
are compelling and the potential rewards for investors in
innovative companies developing future treatments look more
attractive than ever."
Kepler
View
After a three-year bear
market, it is encouraging to see clear signs of a recovery in the
biotech sector. This reflects more positive sentiment as interest
rates start to fall, with an uptick in private and follow-on
financing and tentative signs that the IPO pipeline may be
strengthening, albeit slowly.
The managers' investment
strategy remains focused on identifying companies with innovative
technologies, strong intellectual property and solid growth
potential. The managers continue to manage 'binary event risk' by
reducing exposure ahead of key milestones such as clinical trial
results and regulatory approvals. They also take a 'basket'
approach to certain therapeutic areas, taking smaller positions
across the most promising companies rather than backing a single
company.
As a result, Ailsa and Marek
continue to demonstrate the benefits of active management in an
inherently cyclical sector. The managers believe that the biotech
sector is currently entering the 'equilibrium' phase, characterised
by strong growth but fair valuations, prompting IBT's well-timed
move into higher-growth, earlier-stage small-caps in late 2023.
However, there is also a strong emphasis on capital preservation,
with the managers reducing the trust's exposure to higher-risk,
smaller companies during the downturn in 2022.
Looking ahead, the biotech
sector is supported by strong secular growth drivers, including the
demographic timebomb of ageing populations, increased healthcare
spending by developing countries and the soaring incidence of
age-related diseases such as cancer and heart disease.
Additionally, falling interest rates could be a tailwind for
returns due to the sector's strong historical inverse correlation
with US interest rates. We think these robust fundamentals may
present an attractive opportunity for investors given IBT's proven
track record and current discount.
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