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Weak market holds back International Biotechnology

International Biotechnology reports a -6.9% return on NAV and -6.4% return to shareholders for the year ended 31 August 2022. However, it beat its performance benchmark, the NASDAQ Biotechnology Index (NBI), which returned -13.8%. This helped the trust claw back some of its underperformance relative to its benchmark over the past five years so that, in NAV terms it is just 0.9% behind and in share price terms it is 1.1% ahead of the performance benchmark.

In weak markets, the first and second quarters of 2022 saw the fewest IPOs for more than five years. However, more positively the managers say that there are recent signs of an uptick in M&A as we progress through 2022 and that this looks set to continue into the later part of 2022 and beyond. The company benefitted from six particular acquisitions of its portfolio companies during the period under review. COVID-19 related delays to clinical trials may be responsible for a fall in the number of new drug approvals recently, but the managers see promise in the areas of cell therapy, gene therapy, RNA therapy and gene editing.

The return on the quoted part of IBT’s portfolio was -7.6%. The return on the fund’s investment in SV Fund VI was 9.0%, helped by the strong dollar. In addition, in June 2022 the sale of Nordic Consulting Partners (a directly held unquoted stock) to Accrete Health Partners was completed. IBT received gross proceeds of £3.5m and generated a 6x multiple on its initial US dollar denominated investment, including the prior proceeds received in 2016. A performance fee of £471,000 is payable on the unquoted part of the portfolio.

International Biotechnology invested in SV Health Investors’ biotechnology focused private fund, SV Biotech Crossover Opportunities Fund LP (SV BCOF), during the year. SV BCOF focuses on biotech companies which are either in the clinic and/or which have the potential to enter the clinic within 12 months (near clinical stage), typically Series B and beyond. While most of the BCOF’s investments will be made in later venture-led growth rounds or pre-IPO crossovers, the fund is able to invest in listed equities subject to restrictions as set out in its investment guidelines. The total invested capital in the year to date by the company was £3.3m ($4.2m).

In 2022, in line with its policy of distributing 4% of NAV as dividend, the company paid two dividends of 15.7p. As the audited net asset value as at 31 August 2022 declined from the previous financial year, the absolute value of the dividend will fall next year.

Major contributors to returns

The three largest positive contributors to the trust’s returns, adding £14.9m to the NAV, were Biohaven, Neurocrine and Harmony.

Biohaven was the largest contributor to NAV per share after the announcement that Pfizer intended to acquire the company for $11.6bn in May 2022. Biohaven launched Nurtec for the treatment of migraine in February of 2020. Nurtec is an oral anti-CGRP inhibitor, a novel approach to treating the condition and indicated for both the treatment and prevention of migraines. In November 2021, Biohaven entered a partnership for ex-US rights of Nurtec with Pfizer supported by an impressive launch which exceeded expectations, triggering the outright acquisition of the company by Pfizer.

Neurocrine markets a product called Ingrezza indicated to treat a movement disorder called Tardive Dyskinesia. The condition is an unfortunate side effect of traditional anti-psychotic drugs, stigmatizing and potentially irreversible. Ingrezza was launched in 2017 and initial uptake and unmet need was better and higher than initially anticipated by the market. However, during the pandemic, sales were affected as a direct result of fewer face to face interactions with patients, which is a pre-requisite for diagnosis. With the return of post-pandemic normality, patients have started to return to the doctor’s office and sales of Ingrezza have recovered.

Harmony sells a drug called Wakix for narcolepsy, a condition where patients suffer from excessive daytime sleepiness. The current treatments available on the market are “scheduled” drugs which means that the writing of prescriptions requires extra monitoring. The fact that Wakix is unscheduled poses benefits to patients and uptake of the drug has been strong since the launch in the US in 2019. Expectations might increase with potential label expansion in idiopathic hypersomnia, the drug is on a trajectory to exceed sales of $1bn within the coming years.

On the downside, Mirati, Horizon and Illumina took a collective £19.6m off the NAV.

Mirati is developing a targeted oncology drug called adagrasib for the treatment of a subset of cancer patients whose tumours express a specific mutation called KRAS G12C, primarily in lung cancer patients. Researchers have been aware of this mutation for many years but failed to successfully develop a drug. Mirati has filed adagrasib with the FDA with the decision on whether to approve the drug expected in December 2022. Amgen, the closest competitor in the KRAS G12C field, received its approval in May 2021, but with a disappointing initial launch. Therefore, this has had a negative knock-on effect to Mirati’s potential sales expectations and thus the share price.

Horizon Therapeutics is an orphan drug company which had a very successful launch of its drug, Tepezza, to treat thyroid eye disease despite launching during the pandemic. However, the company has recently reported a slowing in the rate of growth of the drug which has had a negative impact on the share price.

 A US district court of Delaware ruled that Illumina infringed on patents owned by a competitor company, Complete Genomics. The court invalidated three patents owned by Illumina. The company has since stated it will appeal the verdict. Illumina, as a high growth company, has been affected by the current geopolitical turmoil, increased interest rates and slowing growth in China.

IBT : Weak market holds back International Biotechnology

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