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International Biotechnology benefits from narrowing discount

International Biotechnology benefits from narrowing discount

International Biotechnology benefits from narrowing discount – International Biotechnology has reported that, over the year ended 31 August 2018, its NAV laggeded the NASDAQ Biotechnology Index (NBI) a little, returning 8.6% versus the NBI return of 10.1%. A narrowing discount meant that shareholders saw a total return of 13.7%, however. The biotech sector outperformed the UK equity market over the period. The fund met its commitment to distribute 4% of NAV as dividend.

The fund’s unquoted portfolio made a strong contribution to returns. 66% of a $30m commitment to SV Life Sciences Fund VI has been invested to date (in 21 investments). IBT has seen a 32% unrealised gain on the capital committed to-date. The legacy unquoted portfolio, which is in run-off, also yielded returns of 10.8% in the year.

Extract from the managers’ report

Best performing investments Worst performing investments
Contribution to NAV (Reduction) in NAV
SV Fund VI Investment £6.6m Celgene £(5.7)m
Neurocrine £6.2m Regeneron £(3.8)m
Nektar Therapeutics Com £5.1m Exelixis £(3.8)m
Illumina £4.4m Incyte £(3.1)m
Ligand £3.8m Tesaro £(3.1)m

Six portfolio holdings were the subjects of successful bids during the year under review: Ignyta, Entellus, Juno, AveXis, Shire and Spinal Kinetics.

  • Ignyta was acquired by Roche at a 91% premium to the previous share price. Ignyta’s lead asset was a tyrosine-kinase inhibitor that targets specific mutations in tumours and has the ability to cross the blood brain barrier.
  • Celgene acquired Juno in January 2018 at a 70% premium to the previous share price. Juno was a cell therapy company with a late-stage asset, also for oncology. Its technology harnesses the body’s immune system to treat certain blood cancers.
  • Novartis agreed to acquire AveXis Inc. for $8.7bn to expand its position as a gene therapy leader. AveXis’ lead product candidate, AVXS-101, has potential to be the first-ever one-time gene replacement therapy for spinal muscular atrophy (SMA), a disease which results in early death or lifelong disability with considerable healthcare costs.
  • In April 2018, Shire was the subject of an ambitious $62bn takeover bid by Japanese giant Takeda. The takeover now appears to have cleared most of the hurdles and should complete in the autumn. We identified that Shire’s valuation was exceptionally low, and initiated a 4.8% position.
  • Entellus was a listed company classified within the unquoted portfolio for performance purposes while Spinal Kinetics was unquoted. These two companies are discussed in greater detail in the Unquoted Portfolio review below.

Whilst this activity is indicative that M&A is alive and well, the last of these offers was made in April 2018, suggesting that the upcoming mid-term elections and other factors may be building up a backlog of potential M&A deals. With many large and mega-cap companies searching for increased top-line growth, we expect M&A to continue to be a prominent feature of the sector in the year ahead and will continue to pick stocks which we think have strong M&A potential.

Positive contributors

  • Neuorcrine’s launch of Ingrezza to treat Tardive Dyskinesia was highly successful, continually beating expectations throughout the year, as we expected. Neurocrine was the biggest contributor to performance in the year.
  • Nektar announced exciting, albeit early, data for its CD122 biased agonist at a medical conference in the autumn of 2017. NKTR-214 is an investigational immune-stimulatory therapy that helps boost the cells that target cancer in the patient. In February 2018, the company announced a lucrative deal with Bristol Myers Squibb. The share price rose 300.7% in the year under review.
  • Life science tools company Illumina, one of the larger holdings in the Company, reported strong revenue and earnings growth based on an increased demand for its gene sequencing machines and consumables. Gene sequencing has come of age and its ever-increasing use will allow Illumina to profit from its dominant position in the market.

Negative contributors

  • Celgene experienced two setbacks in October 2017, announcing disappointing results from its pipeline asset, GED-301, in Crohn’s disease and concerns about long-term revenue growth once its lead asset Revlimid goes off patent. The company is taking steps to diversify away from Revlimid by seeking M&A targets. In January 2018, it acquired Juno, shortly followed by the acquisition of Impact BioSciences, both of which are oncology companies.
  • Regeneron shares fell in value over the year due to slower than expected sales growth of its newly launched asthma drug Dupixent and disappointing clinical data from a mid-stage ophthalmology trial testing a new combination of drugs for wet Age-related Macular Degeneration. The company reported positive results for its lipid-lowering drug, Praluent, in March 2018, which Regeneron hopes will turn around its fortunes in 2018.
  • Following a positive start to 2017, Incyte shares declined in value during the year, as investors’ excitement for its experimental “IDO” drug tempered. These fears were confirmed when data from the IDO clinical trial showed a lack of efficacy in April. However, with IDO now behind the company, the Fund Manager believes the company is undervalued and may even be an M&A target for larger pharmaceuticals companies.
  • Exelixis shares declined during the year under review. Its marketed drug Cabo, used to treat renal cell carcinoma, faced competition from newer immune-oncology drugs which investors feared may capture market share off their drug. We think these fears are over blown and the stock should recover over the next twelve months.
  • FX losses negatively impacted the quoted portfolio by £4.2m, or 11.3p per share.

Unquoted investments

Within the unquoted portfolio:

  • Entellus was acquired by Stryker for $24 per share, crystallising a gain of £2.0m (see above).
  • Transenterix’s Senhance system received FDA approval in October 2017 with the system making its first sales in November 2017, followed by further FDA approvals in 2018, leading to a valuation increase of £3.4m in the year under review.
  • Kalvista announced a collaboration deal with Merck worth $715m in future milestones and a $37m upfront payment. As part of the deal, Merck took a 9.9% stake in the company which resulted in the share price responding positively leading to a valuation uplift. The company initiated phase I and phase II trials for two separate candidates, with a goal to advance at least one additional candidate to clinic before the end of 2018. The positive outlook for these candidates has resulted in the share price continually increasing throughout the second half of the year, resulting in a £2.6m gain in the year.
  • FX also made a small negative contribution to performance in the year, with an FX loss of £0.5m, or 1.2p per share.

AGM

Details of the company’s AGM are available here

IBT : International Biotechnology benefits from narrowing discount

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