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Takeovers help International Biotechnology beat its benchmark

International Biotech making 15x its money on Convergence

International Biotechnology Trust outperformed the Nasdaq Biotech Index over the year to the end of August 2016 as the fund’s NAV return was -1.7% against -3.8% for the index. Unfortunately, the discount widened from 5.7% to 13.5% and therefore the return to shareholders was -9.8%.

Quoted portfolio

The quoted portfolio outperformed the NBI by 1.1% in the period under review. Medivation, Genmab, Ophthotech, Exelixis and Amgen were the largest contributors to relative performance in the period. Medivation was acquired by Pfizer for approximately $14.0bn after a period of competitive bidding initiated by Sanofi’s proposed bid in April of $52.50 a share. Over the four months since April, multiple parties entered the bidding process for Medivation culminating in the offer from Pfizer for $81.5 per share on 22 August 2016. Genmab (alongside its partner Janssen Biotech) executed an impressive launch of its multiple myeloma drug Darzalex. Initial sales have been strong and further positive studies have been reported in earlier stages of the disease, all helping to boost the share price during the period under review. Ophthotech shares moved higher in anticipation of the phase 3 data announcement expected at the end of 2016. Exelixis sales of their recently launched cabozanatib for advanced renal cell cancer have been strong with the company reporting $17.6m in sales for the first nine weeks on the market following the FDA approval on 25 April 2016.

The main negative impact to absolute performance came in December when Chimerix announced negative data for their phase 3 trials investigating Brincidofovir as an anti-viral agent in stem cell transplant patients. Endo International shares sold off after the company reported disappointing quarterly results and lowered guidance. Gilead shares were under pressure after sales of their hepatitis C virus franchise slowed at a faster rate than expected and investors grew tired of waiting for a transformative deal to materialise. Regeneron shares were weak on the news that it lost the first ruling of an intellectual property battle with Amgen.

During the year, four of International Biotechnology Trust’s holdings were acquired. ZS Pharma was bought in November by AstraZeneca for $2.7bn. Dyax was acquired in the same month by Shire for $5.9bn. Anacor was taken over in May of this year for $5.2bn and finally Medivation was acquired by Pfizer for $14.0bn in August as noted above.

Unquoted portfolio

Unquoted investments increased by 9.5% over the year, positively contributing to the NAV for a third consecutive period. As the unquoted portfolio has matured, many of the earlier investments have begun to be harvested, with cash received in respect of contingent milestones for previous exits in the year totalling GBP2.3m, or 1.1% of NAV. The receipt of cash in respect of the remaining milestones from ESBATech, which was sold to Alcon in 2006, was the largest contributor.

The value of the remaining contingent milestones decreased by GBP0.2m as a result of cash received in relation to Oncoethix and delays in expected receipts of milestones from Ikano Therapeutics (decrease of GBP0.8m). The value of Convergence milestones increased by GBP0.5m following the presentation of data at the Biogen R&D day in January 2016.

Transenterix decreased by GBP0.6m over the year. In April 2016, Transenterix received a response on its 510(k) submission for substantial equivalence stating that the FDA has determined that the SurgiBot(TM) System did not meet the criteria. Whilst the FDA’s decision was disappointing the company has continued to move forward and announced the first sale of the ALF-X Surgical Robotic system in Europe in August 2016.

Current investments rose in value by GBP2.2m in the period, with uplifts in the valuations of Reshape (GBP0.9m) and Karus Therapeutics (GBP0.5m) based on increased values of later funding rounds and NCP Holdings (GBP0.6m) based on higher EBITDA. These were partially offset by a write down in the value of Atopix/Oxagen due to a lack of clinical efficacy in the Phase 2 trials for CRTH2 in moderate to severe atopic dermatitis. Phase 2 trials are ongoing for CRTH2 in asthma. Novartis released Phase II data of a similar CRTH2 antagonist, showing significant reduction of sputum in eosinophilia, following which the Company invested a further GBP200k in Atopix. Delenex Therapeutics AG was sold in the year to Cell Medica in a share-for-share exchange, leading to a new holding. Cell Medica is a UK company which applies innovative technologies with the aim of improving the treatment of cancer and immune reconstitution in the exciting field of immuno-oncology.

IBT : Takeovers help International Biotechnology beat its benchmark

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