Tough year for International Biotechnology but confidence remains – International Biotechnology (IBT) has published its annual results for the year to 31 August 2021. During this time, the company’s NAV per share and share price returned 9.8% and 3.8% respectively whilst the Nasdaq Biotechnology Index returned 22.8%. The board said while this is a disappointing outcome, there has been a short-term factor impacting relative performance and it remains confident IBT will outperform in the future.
In order to avoid any perceived conflicts of interest, IBT was precluded from investing in COVID-19-vaccine developing companies due to the appointment of manager SVM’s Kate Bingham as chair of the UK Covid-19 Vaccine Taskforce. The performance of the company’s benchmark was heavily influenced by these companies, most notably Moderna and has had an impact on the relative performance of the company.
At the year end, IBT’s shares were trading at a 6.8% discount to its NAV. During the beginning of the financial year it issued 2,947,000 ordinary shares which included all the shares which had been held in treasury and which allowed the company to begin issuing new ordinary shares for the first time in over eight years. The board actively monitors the situation and is willing to step in and buy back shares if necessary. There were no shares bought back during the financial year, however IBT bought back 55,469 of its own ordinary shares on 4 October 2021, which assisted in narrowing the discount. The board views tap issuances as a key mechanism to grow IBT and intends to continue to issue shares at a premium to the NAV when there is demand.
On 31 January 2021 and 28 August 2021, the company paid dividends of 14.2 pence per share, an increase of 14.5% from the dividend paid in the previous year.
Fund manager’s review
Exiting the pandemic
The speed and success of the COVID-19 vaccination programme has had a profound impact on how the developed world was able to mitigate the impact of the pandemic and restore economic confidence. Equity markets, particularly in the US, have continued to perform strongly as both fiscal and monetary policies have supported the re-opening of the economies. Joe Biden’s victory in the US elections in November 2020 translated into investor confidence in a rapid economic recovery driven by immunisation and trillion-dollar spending plans. This has since been tempered by concerns over waning vaccine protection, new vaccine resistant variants and patchy vaccination take-up in the US and the developing world, as well as the threat of inflation arising from monetary easing. Despite these concerns, US equity markets, as measured by the S&P 500 index, have risen by 26.8% since 31 August 2020.
As the threat of COVID-19 starts to recede across the globe, life is gradually returning to a new normal. While this progress is unlikely to be linear, clinical trials undertaken by biotechnology companies have resumed after being impacted by lockdown and patient concerns over virus transmission have reduced. Companies have adapted to the ongoing challenges and drug manufacturing is also back on track. After such a successful deployment in the developed world, the focus is likely to be on how vaccines can now be rolled out across the rest of the world to cement the global economic recovery.
The tremendous success of the vaccines has boosted the profile of biotechnology companies, making this sector more accessible and understandable for investors. The public now has a clearer understanding of the pace of innovation in the sector and the pathway from drug discovery to approval. While being in the spotlight is helpful for the whole sector, IBT continues to focus on the long-term growth prospects of those disease areas where there remains considerable unmet need, such as the treatment of cancer and rare diseases.
Sector performance
The NBI yielded returns of 22.8% for the year ended 31 August 2021 while the FTSE All-share rose by 26.9% for the same period. All figures are based on sterling-adjusted total return, which includes costs and assumes dividends are reinvested. After Joe Biden’s election win, and the announcements surrounding vaccine efficacy, the share prices of small biotechnology companies rose rapidly as investors predicted a swift exit to the pandemic and economic recovery. The valuations of the XBI Index (in which the smaller capitalisation biotechnology companies have a greater weighting than they do in the NBI) rose c.100% from the nadir in March 2020 to the peak in February 2021 causing us to shift our portfolio into larger capitalisation stocks where the valuations were more easily justifiable. Many of these smaller company valuations have since corrected to a level more in line with their fundamentals and we saw this as an opportunity to increase exposure to some of these exciting earlier stage companies.
The Initial Public Offering (IPO) market for biotechnology companies remained robust with a flurry of new companies being listed. The success of the vaccines helped to bolster interest in biotech companies making flotations attractive both to companies and potential investors. While IPO volumes and investments remain healthy, deal flow and valuations have moderated, after an exceptionally active year.
The Chinese biotechnology market continues to be of interest, although we are reluctant to invest in companies that are not listed on NASDAQ, preferring to buy their shares in the more tightly regulated US market. In recent months, those US listed Chinese biotechnology stocks have been affected by broader Chinese equity regulation concerns, making their valuations look more attractive.
Outlook
Few sectors offer such long-term visibility on their core drivers. In biotech, the key drivers are the pace of innovation, and the growth of the patient universe. It is unquestionable that both the pace of innovation and demographic growth are accelerating, and so the fundamental outlook for the biotech sector is positive. Other drivers are the regulatory environment which is currently reasonably stable and supportive; the political backdrop, especially in the US where the bulk of biotech innovation is undertaken, which is currently relatively benign, albeit with an underlying risk of healthcare reform affecting pricing. The economic outlook is positive as recovery from the pandemic gains’ momentum. This gives us cause to be optimistic about the long-term future of the sector, and consequently, the Company.
Investing in biotech companies is investing in the development of medicines that will improve health outcomes for humankind. This is a major driver for the Company in its approach to stock selection and will continue to be so. The world is focusing more on responsible investing and the economic, social and governance (ESG) impact of companies around the world. The Company has recently approved an ESG policy which will form a core part of the investment process and will, in turn, play a role in encouraging significant portfolio companies to focus on their own ESG impact.
As valuations of smaller companies have retracted to more justifiable levels, and lockdowns have eased thereby facilitating due diligence and face-to-face meetings, we expect to see a return to a steady flow of acquisitions in the sector. Larger companies have healthy balance sheets, expiring patents and a need to replenish their pipelines of therapeutics, and they are also ever more conscious of the societal impact of their investments. We hope that our portfolio of companies addressing unmet medical need with strong management, good science and fair valuations will prove to be attractive to acquirors.
IBT : Tough year for International Biotechnology but confidence remains