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International Biotech continues to impress

Swiss biotech trusts resilient after recent sell-off

International Biotech (IBT) announced its half-yearly report for the year ended 28 Feb 2023. The company’s share price was up 8.0% over the six month period, well ahead of the Nasdaq Biotechnology Index (NBI), which had a total return of 1.8%. The company’s Net Asset Value total return over the period was 6.1%. Over three years to the end of February 2023, the total share price return was 43.2%, versus 22.6% for the NBI, and the company’s share price was also ahead over five years with a total return of 43.8% versus 41.2% for the NBI. All figures are on a sterling adjusted total return basis, with dividends reinvested. Despite the impressive returns, the company still trades on a modest discount of around 6%.

These returns are particularly impressive given the upheaval we have experienced across global equity markets. The manager noted that the frothy valuations seen in the biotechnology sector during the pandemic have now been largely unwound, which has led to a more fertile environment for M&A activity. Both the quoted portfolio and the unquoted portfolio benefited from being invested in takeover targets during the first six months of the company’s financial year.

Manager change

As announced on 13 February 2023, SV Health has decided to focus on its venture capital business and has served notice of termination on the trust. The board engaged with many key shareholders following the announcement. It has received many expressions of interest in managing the assets. Together with the professional advisers, it narrowed this field down to a short list of candidates before sending them request for proposals. It then selected six institutions to present to the board. At the time of writing, it is in the process of reviewing the presentations received. It expects to be able to release more information in the near future.

Managers’ comments

Commenting on the market backdrop over the past six months, the manager noted:

“During the period under review, global macro-economic conditions have continued to be uncertain. Interest rates across the world have risen and investors have been cautious about investing into areas deemed to be risky. Continued inflationary pressure has caused monetary policy makers to increase interest rates faster than anticipated. The rise in interest rates led to renewed popularity of debt instruments. Following record inflows into equities during the pandemic, the third quarter of 2022 saw record outflows from UK equities following the brief tenure of Liz Truss as Prime Minister.

“The biotech sector has seen a divergence in performance depending on the characteristics of the specific biotech company. Smaller early stage companies have struggled to keep their valuations compared to their larger, more diversified peers. While innovation in these smaller companies has been exciting, investors have held off from backing them due to concerns over financing costs. In the last quarter of 2022 investors, fearing that the rising valuations seen in technology companies were unsustainable, rotated their focus into the largest biotech companies. In turn, those mega cap biotech names which are usually considered to be slow growth in nature, experienced an unexpected boost to performance. At the start of 2023, following a correction in the global mega- cap technology companies, that money retreated back into technology, causing a retraction in the ‘safe haven’ mega cap biotech names. Meanwhile the performance of the mid- tier biotech companies which have products that have been approved and are on the market but have not yet turned profitable, have been relatively robust and several of them have benefitted from the acquisition appetite of the cash-rich, large biopharma companies.

“The Nasdaq Biotech Index (NBI) outperformed the S&P 500 over the period by 4.5% while the equal weighted S&P Biotech ETF (XBI) underperformed by 6.7% reflecting the relatively poor performance of smaller cap biotech companies against the sector as a whole.”

Regarding the outlook, the manager continued:

“Since the half year end in February, the risk of contagion following the demise of Silicon Valley Bank and Signature Bank in the US, and Credit Suisse in Europe, has sent shivers through the market. Nevertheless, the Board believes that the biotechnology sector offers a very compelling long term investment opportunity. Over the 20 years from the end of 2002 to the end of 2022 the NBI has produced an average return of 13.3% per annum versus 11.4% for the S&P 500.

“The aging global population will continue to ensure strong demand for therapeutics to treat disease and enhance quality of life. We are living through a period of great innovation in medical science, including exciting advances in cell based and gene therapies, which have the potential to change outcomes for patients suffering from diseases such as cancer and dementia. The renewed focus on drug development following the global pandemic has highlighted the potential for faster, more personalised clinical trials which should reduce the risks of late stage failure.

“Cash rich, large pharmaceutical companies needing to replenish their pipelines are increasingly looking to the smaller revenue generating innovative companies in which IBT invests. We share our Investment Managers’ enthusiasm that the current more realistic valuations and the prospects for increased corporate activity in the biotech sector represent an excellent opportunity for IBT shareholders.”

IBT : International Biotech continues to impress

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