Investment Manager’s Blog
Welcome to the International Biotechnology Trust monthly blog for January 2019
24 January 2019
International Biotechnology Trust receives five-star Morningstar rating
After an intensive week in San Francisco at the JP Morgan Healthcare Conference, including our team meeting 22 different companies, I am confident that the sector is as vibrant as ever. The tone for the week was set by the proposed mega-acquisition of Celgene by Bristol-Myers Squibb following the acquisition of Tesaro by GSK in December, both of which were held by the Trust. The M&A theme continued in the week of the conference when Loxo Oncology was acquired by Eli Lilly for $8bn. So the thesis I outlined in the November factsheet email appears to be playing out as anticipated: the stock market correction over the last six months has resulted in substantially reduced valuations, meaning companies are more attractively priced for acquirers. Biotech M&A is alive and well in 2019 and it should come as no surprise, given approximately two thirds of new drugs have been developed by small companies while two thirds of new drugs are commercialised by large companies.
The turbulent market conditions in the autumn led us to thoroughly review the portfolio holdings, particularly with respect to ensuring companies had the financial strength to survive a dry spell in the financial markets. This adjustment, combined with the non-volatile nature of the unquoted portfolio, helped The Trust outperform the benchmark in December. Despite it being a negative month for the biotech market, with the NASDAQ Biotechnology Index down 11.1% (GBP), the Trust NAV only retracted 7.2%. It is also worth pointing out that the retraction was not isolated to biotech. Overall, US equities had their worst December since 1931.
Our gearing strategy remains conservative and we have not used the facility for a number of months. I am still undecided about the direction of the broader stock market in 2019 because of the number of unpredictable moving parts. Potential interest rate increases by central banks, reversal of QE in the US, the continuing trade dispute between China and the United States, Brexit and increasing social unrest in Europe, all lead us to maintain this conservative gearing position for the time being. Otherwise, we continue to manage the Trust as usual, trying to ensure the current negative market sentiment does not affect our long-term view. In a sector with strong fundamental growth characteristics, the long-term view is crucial to finding the best opportunities and maximising returns for our investors.
Summarising 2018 from a performance point of view, the year closed down on where it opened. The NASDAQ Biotechnology Index was down 3.3% (GBP) and the Trust NAV was down 4.9% (GBP), which is far from ideal. The relative overweight in small and mid-cap names contributed to the underperformance in a year when large caps fared better thanks to their lower volatility. But from another viewpoint, 2018 was an exceptional year for drug development given the FDA approved a record 59 novel drugs, significantly higher than the average of 30 drug approvals per year (last 20 years). The consequence should be an increased number of drug launches in 2019 which, when combined with M&A optimism, has resulted in both the NASDAQ Biotechnology Index and International Biotechnology Trust experiencing their strongest ever starts to a calendar year.
We were also pleased that our efforts to reduce our discount paid off and we were able to grow the trust slightly by issuing 75,000 of our treasury shares in the last week of December. In January, Morningstar re-rated the Trust at five stars (https://www.morningstar.com/cefs/xlon/ibt/quote.html), a rating currently unrivalled by any other UK-based healthcare or biotechnology Investment Trust.
Extract from the Investment Manager’s review in the factsheet:
In December 2018, the Trust’s NAV per share returned -7.2% (GBP) while the NASDAQ Biotechnology Index returned -11.1% (GBP). The FTSE All-Share Index returned -3.7% (GBP) and the S&P 500 Index returned -8.9% (GBP). IBT’s share price returned -4.4% (GBP).
The main positive contributors to NAV in the month were Tesaro, Regeneron and Fibrogen. GlaxoSmithKline announced the acquisition of Tesaro for $5.1 billion, a premium of 63%. Oncology company Tesaro accounted for almost 1% of NAV prior to the acquisition, meaning the announcement increased the NAV by 0.6%. Regeneron shares held up well during a difficult period for the broader equity market on the back of the stock receiving an analyst upgrade. Fibrogen announced positive results for its lead asset, Roxadustat, in chronic kidney disease.
The main negative contributors to NAV in the month were Gilead, Alexion and Celgene although the cause of the weak performance was not company specific. The broader market sell-off throughout December also led to a retraction in the biotech sector, and as a result the Trust’s larger positions contributed most to the negative performance. In fact, the most significant event for these companies was the positive news that Gilead had recruited a new CEO.
December Factsheet 2018 (click to open)
Thank you for taking the time to read our factsheet
Welcome to the International Biotechnology Trust monthly blog for December 2018
19 December 2018
Monthly IBT factsheet: November brings some stability amid macroeconomic uncertainty
November Factsheet 2018 (click to open)
The global equity market stabilised in November after an October that was amongst the worst months in several years. You will recall I previously suggested the October detraction had little to do with the biotechnology sector’s fundamentals, and the stabilisation throughout November and into December demonstrates this to some extent. Nevertheless, macroeconomic factors continue to weigh on the markets. The risk of increased interest rates, heightening trade disputes and the political situation in Europe all require greater clarity to reduce the current market volatility. Emergence of such clarity may see the markets rally, but until then our gearing will remain conservative, as evidenced by our 3% cash position at the end of November.
One uncertainty clarified in November was the US political situation. The mid-term elections resulted in the Republicans expanding their majority in the Senate and the Democrats achieving a majority in the House of Representatives. In our view, this reduces the probability of major partisan reform within the US healthcare system.
Mergers and acquisitions have always been a hallmark of the biotech sector. Treatments developed by smaller companies may be very effective but small-scale, inexperienced marketing teams can be a limiting factor in the treatment’s sales growth. Transferring the treatment to a large, geographically-diverse company with a well-oiled marketing machine will immediately increase the Net Present Value (NPV). This driver of value will make such acquisitions accretive to the acquirer. But that isn’t the only reason large companies are so keen to acquire smaller ones. These more mature companies have ageing product portfolios facing patent expiry, so acquiring a company with a new treatment can help to fill holes left by the blockbuster drugs of yesteryear. Having said all that, the last six months have seen fewer M&A transactions. So, has something fundamentally changed? Should we expect reduced M&A activity going forward? Well, over time, biotech M&A has been very consistent and, while it is difficult to predict the future, it has always been my view that M&A will continue to be an integral driver of the sector. And this could be exemplified in the coming months. Recent market headwinds have led to a retraction in biotech company valuations. Once acquiree expectations are reset, buyers and sellers will once against be able to agree on sensible prices. Combined with the M&A growth incentives for large companies outlined above, these conditions could produce an uptick in M&A transactions, which we believe International Biotechnology Trust will once again benefit from. Indeed, on 3 December, GSK announced it had reached an agreement to acquire one of our portfolio companies, Tesaro, for £4bn ($5.1bn). This is the 12th Trust holding to be acquired in the last two years, as demonstrated by the chart below, showing we are usually well placed to capture the value from any M&A uptick in the sector.
Looking forward, early January brings the JP Morgan Healthcare Conference, a four-day gathering in San Francisco of the world’s healthcare companies and the associated investment community. It is our team’s kick-off for 2019, where we meet an array of management teams in the search for exciting growth prospects to provide better returns for our investors.
Finally, I would like to wish all our readers and investors a happy holiday season as we all look forward to a healthy start to 2019.
Extract from Investment Manager’s Review in the factsheet:
In November 2018, the Trust’s NAV per share returned 1.1% (GBP) while the NASDAQ Biotechnology Index returned 4.8%% (GBP). The FTSE All-Share Index returned -1.6% (GBP) and the S&P 500 Index returned 1.9% (GBP). IBT’s share price rose 3.6% (GBP). The USD strengthened by 0.1% vs the GBP.
The main positive contributors to NAV in the month were Exelixis, Genmab and Morphosys. Exelixis reported stronger than expected sales for its drug Cabometyx, which is used to treat patients with Renal Cell Carcinoma. Genmab released encouraging data within its abstracts ahead of the Amercian Society of Hematology conference, for front line treatment of multiple myeloma with its drug Darzalex. Morphosys also announced positive data ahead of the same medical conference for its late stage oncology drug, MOR208, in the treatment of a rare form of lymphoma.
The main negative contributors to NAV in the month were Stemline, Aerie and Adamas. Stemline shares were hurt as the market sold off but in our view the company fundamentals remain intact. Aerie shares fell because of tempering investor expectations for its newly launched glaucoma drug, after the company’s latest quarterly earnings report. Adamas shares were hit on weaker than expected sales of Gocovri.
Thank you for taking the time to read our factsheet.
Welcome to the International Biotechnology Trust monthly blog for November 2018
21 November 2018
I am pleased to present the International Biotechnology Trust factsheet for October.
October Factsheet (click link to open)
October saw a sharp increase in volatility for the equity markets. It was one of the worst months in several years, in fact, with all major world equity markets displaying negative returns. The MSCI World Equity Index was down 5.2% GBP, the MSCI World Healthcare index was down 4.5% GBP, and the NASDAQ Biotech Index was down 12.7% GBP. This rather abrupt turn to the negative has been attributed to a number of macro-economic factors that are unrelated to the biotechnology sector. Most notably, the market retraction correlates in time with a speech by the new Chairman of the US Federal Reserve, Jerome Powell, in which he stated that we should expect additional increases in the Federal Reserve interest rates after a period of positive economic development. Increasing interest rates often lead to short term sell-offs, both in equity and debt markets, which can then create buying opportunities for long term investors.
The US midterm elections on 6th November resulted in gridlock, with the Democrats controlling the House and the Republicans strengthening their grip on the Senate. With the more industry-friendly Republican party in control of the upper house, we do not expect any major changes to the healthcare system in the near to medium term, and many political commentators have suggested the moderately surprising outcome of Republicans increasing their majority in the Senate has actually lowered the probability of a Democratic clean sweep in 2020. Whilst there is a proposal to amend Medicare part B to reduce the price for patients at the expense of drug companies, which would clearly be unfavourable for some companies in the industry, it seems unlikely that it will be implemented while the US is in this gridlock situation. Therefore, in the absence of any personal political views, it would appear the outcome of the mid-term elections is a positive one for our sector and therefore the Trust.
At the end of October, the Trust had a gearing ratio of 1%. The current strategy of the Trust has been to maintain a relatively neutral cash position, only increasing the gearing for shorter periods to take advantage of dips in the market. Our reasoning is that it is relatively late in the economic cycle, so we prefer to have the opportunity to take advantage of retractions in the market rather than being negatively exposed to them. Interestingly, in October, we only made marginal use of this tactic because the October retraction did not appear to be the isolated “V-shaped” retraction we would usually see. With increasing interest rates ahead, we may see additional volatility in the near to medium term and we will therefore employ a more conservative gearing strategy for the time being.
Despite this short-term volatility, the fundamentals underlying the sector remain robust, giving us comfort that the longer-term outlook is still very much positive. The FDA approved six novel drugs in October, the second highest monthly approval rate for any month in the last four years (August 2018 being the highest). Whilst October might have been an uncertain month for the market, this approval rate helps to highlight that the fundamentals of the biotechnology sector are as strong as ever. Including the two additional new drugs approved in early November, the total number of novel drugs approved in 2018 is 49, the highest number of new drug approvals in a single year for the last twenty years, as per the figure below. And we expect that number to increase before the end of 2018.
Therefore, the only conclusion I can draw is that, despite potential near-term headwinds, the industry is in good shape, innovation is on the rise, and we will continue to see new drugs to meet the ever-growing patient demand.
Source: US Food and Drug Administration
Extract from the Investment Manager’s Review in the factsheet:
October 2018 was a tough month for the entire global equity market. The Trust’s NAV per share returned -12.0% (GBP) while the NASDAQ Biotechnology Index returned -12.7% (GBP). The FTSE All-Share Index returned -5.2% (GBP) and the S&P 500 Index returned -6.8% (GBP). IBT’s share price fell 12.5% (GBP). The USD strengthened 5.0% vs the GBP.
The main positive contributors to NAV in the month were Array, Genfit and Shire. Array reported first full-quarter of sales for its newly launched oncology drugs, Braftovi and Mektovi, used to treat melanoma patients with a specific mutation. The company reported better than expected sales whilst also advising investors to expect clinical trial data in early 2019. Metabolic disease company Genfit recovered in October after its share price fell the previous month, caused by the resignation of the Chief Medical Officer. Speciality pharmaceutical company Shire performed well in a difficult month because Takeda has already agreed the price at which it will acquire the company, thereby limiting the share price range.
The main negative contributors to NAV in the month were Celgene, Ligand and Illumina. In a negative month for equities, Celgene shares were weak amid concerns surrounding ex-US Revlimid franchise sales, which missed expectations in the third quarter. Ligand shares fell in October after its partner Novartis reported weaker than expected sales of Promacta. Illumina shares traded down despite reporting very strong quarterly sales, with the gene sequencing company suffering from the same contraction in valuation that affected many companies with high price/earnings multiples throughout the month.
Thank you for taking the time to read our factsheet.
Welcome to the International Biotechnology Trust monthly blog for October 2018
24 October 2018
I should start by addressing the recent equity market volatility observed throughout October. The Trust is invested in a sector of the market that has higher historical returns than the wider market, but also higher historical volatility than the wider market, given its higher beta characteristics. I expect the Trust to continue to experience similar returns and volatility when compared to the wider market. Whilst the recent sell-off may cause short-term concern, I expect long-term investors will be rewarded since the sector is fundamentally unchanged. In my view, the cause of the recent volatility is the new restrictive monetary policy by The Fed, increasing short term interest rates and restricting liquidity.
Turning to the immediate future, on 6 November 2018 US midterm elections will see all 435 seats in the lower house, The House of Representatives, and 35 of 100 seats in the upper house, The Senate, up for election. In my opinion, it is highly unlikely that the Democrats will win 60% of the Senate, resulting in either a Republican government or “grid-lock”, without any major changes to the healthcare system. If that happens, support for innovation will continue and generic competition will continue to increase. But, as Nobel Laurette Nils Bohr once said, prediction is very difficult, especially about the future.
On the topic of Nobel Prize winners, in early October, the Nobel Prize for Medicine was awarded to James Allison and Task Honjo for discovering how to treat cancer by taking the brakes off the immune system, thus enabling the immune cells to attack the tumour. And on the same day, Sanofi and Regeneron, a top ten holding of the Trust, announced the approval of their anti-PD-1 Libtayo, whose mechanism of action is derived from the work of Allison and Honjo. A growing number of drugs in this field are in development or have already been approved, increasing hope for cancer patients and adding more investment opportunities in a highly innovative area of drug discovery. The PD-1/PD-L1 drugs have broad applicability which presents greater market opportunities, demonstrated by a number of marketed drugs from large pharma companies including Bristol-Myers Squibb, Merck, AstraZeneca and Roche.
I don’t often discuss the unquoted portfolio in my monthly emails but since one of our legacy unquoted investments listed this month, I felt I should highlight it, particularly given it’s a part of the market most other Trusts do not have exposure to. The Trust aims to invest in a venture fund in the range of 5-15% of NAV which increases diversification and reduces volatility. At the end of September, the non-listed investments amounted to 12.3% of NAV, consisting of 8.3% investment in SV Fund VI, 2.3% directly-held legacy unquoted companies, and 1.8% unquoted legacy which have been exited but have contingent milestone payments attached. As you might remember, the Board of the Trust decided to stop new investments in individual unquoted companies in 2014 and to invest in a venture fund in 2016, thus the current holding in these unquoted companies and earnouts should be considered a “run-off” portfolio, and the investment in the SV venture fund a “run-in” investment.
Sutro Biopharma, a legacy unquoted investment, successfully listed on NASDAQ in September, resulting in a valuation uptick of 58% and a reduction in the legacy unquoted investments since the holding is now quoted. Coupled with the positive run-off, SV Fund VI has performed strongly in the first 22 months since our first investment, with an unrealised return of 1.3x of our invested capital to-date. My conclusion, therefore, is that the Board’s decision to change strategy is proving to be an excellent one, and one which is already benefitting shareholders.
Welcome to the International Biotechnology Trust monthly blog for August.
July saw strong positive returns for both the biotechnology and pharmaceutical sectors. The NASDAQ Biotechnology Index was up 6.7% (GBP) and the NYSE Pharmaceutical Index was up 8.4% (GBP). This was mainly driven by solid Q2 earnings reports and positive news in drug development projects, in particular Biogen and Eisai reporting positive Phase II results in Alzheimer’s Disease for BAN2401. It was encouraging to see the market react to the positive fundamentals rather than focusing on President Trump’s political tweets. Despite the encouraging signs, mid and small-cap companies experienced profit-taking towards the end of the month. Historically low trading volumes in the summer months and the upcoming US mid-term elections in November has naturally resulted in the market focusing on larger companies. As a result, International Biotechnology Trust’s focus on the higher growth mi- and low-cap stocks has not been as successful as in other months but we remain positive about the longer-term outlook for these smaller stocks.
The month of July also saw interesting developments for IBT’s portfolio companies. Life science tools company Illumina, one of the larger holdings in the Trust, reported strong revenue and earnings growth based on an increased demand for their 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.
As mentioned above Biogen and partner Eisai reported positive Phase II results for the drug candidate BAN2401 in early stage Alzheimer’s Disease, with the shares of both companies reacting positively. It is understandable that these promising results attracted great interest since many people are affected by Alzheimer’s and there remains little to offer these patients in terms of effective therapies. A new disease modifying drug would fill a significant unmet medical need and would be an important success story for the developing company, generating significant future revenue. For the last 25 years, the “amyloid hypothesis” has been the dominant theory in the development of potential Alzheimer’s drugs but all of these drug candidates have failed to date. BAN2401, also founded on the amyloid hypothesis, clearly has the odds firmly stacked against it. Based on our assessment of the results presented we remain unconvinced that BAN2401 will become a drug in the future, and we have invested accordingly.
Thanks for reading!
Carl Harald Janson
Lead Investment Manager, International Biotechnology trust plc
“In July 2018, the Trust’s NAV per share increased by 3.8% (GBP) while the NASDAQ Biotechnology Index increased by 6.7% (GBP). The FTSE All-Share Index increased by 1.3% (GBP) and the S&P 500 Index increased by 4.3% (GBP). IBT’s share price increased 9.5% (GBP). The USD strengthened by 0.6% vs the GBP.
The main positive contributors to NAV in July were Illumina, Celgene and Biogen. Celgene announced positive Phase III data for Luspatercept in Myelodysplastic Syndrome, in their partnership with Acceleron Pharma, followed by data showing improved overall survival for lymphoma patients when treated with its drug Revlimid. Celgene then ended the month with a strong second quarter earnings release. Illumina also reported strong revenue and earnings growth for the second quarter, sending shares higher. Biogen announced results in Alzheimer’s Disease for the drug candidate BAN-2401.
The main negative contributors to NAV in July were Array BioPharma, Adamas Pharmaceuticals and Abiomed. Array BioPharma announced the failure of Selumetinib in thyroid cancer. Adamas Pharmaceuticals shares fell due to lack of clarity regarding the potential future competitive landscape for its lead asset Gocovri. Abiomed shares fell in line with a sector rotation out of high growth medical technology names.”
Welcome to the International Biotechnology Trust monthly blog for July.
Before we review the all-time highs experienced by International Biotechnology Trust (“the Trust”) this month, I’d like to remind our readers about the upcoming dividend payment. In accordance with the dividend policy, on 11 July 2018 the Directors declared the second Interim Dividend for the period ended 31 August 2018, of 13.5p per Ordinary Share. The second Interim Dividend will be payable on 31 August 2018 to holders of Ordinary Shares on the Register at the close of business on 3 August 2018 (ex-dividend Thursday, 2 August 2018).
Turning our attention to performance, reaching new heights is always a positive. On 20 June 2018, the share price of the Trust reached an all-time high (total return with dividends reinvested) whilst the NAV was equally successful, reaching an all-time high on 22 June 2018*. And in July this trend has continued with the Trust reaching all-time highs for both share price and NAV on 13 July 2018*. Whilst performance has been strong, part of the reason for this success is the recent weakness of the Pound Sterling, triggered by political turbulence as the UK Government struggles to agree on the terms for its departure from the EU. The Trust is focused on global healthcare so exposure to Brexit-related issues is envisaged to be minimal.
Regarding the Trust’s portfolio, it is worth remembering that the large cap (>10bn USD) biotech companies have seen both their growth rates and performance begin to falter. The Trust has therefore reduced exposure to large caps in favour of an increased weighting in mid-caps (1-10bn USD), which made up 42% of the portfolio at 30 June 2018. We expect to find the outperforming stocks of the future amongst these small and mid-caps in the coming months.
Thanks for reading!
Carl Harald Janson
Lead Investment Manager, International Biotechnology trust plc
“In June 2018, IBT’s NAV per share rose by 3.2% (GBP) while the NASDAQ Biotechnology Index rose 2.2% (GBP). The FTSE All-Share Index decreased by 0.2% (GBP) and the S&P 500 Index increased by 1.4% (GBP). IBT’s share price rose 2.5% (GBP). The USD strengthened by 0.7% vs the GBP.
During the month, the main positive contributors to NAV were Morphosys, Regeneron Pharmaceuticals and Vertex Pharmaceuticals. Morphosys presented at the European Hematology Association Annual Meeting, displaying positive clinical data from a Phase 2 COSMOS trial evaluating its candidate, MOR208, in combination with idelaisib in patients with relapsed or refractory chronic lymphocytic leukemia. Regeneron reversed its downtrend in anticipation of strong second quarter earnings, following better than expected sales of its drug Eylea. Vertex shares rose after Galapagos, its main competitor, reported disappointing cystic fibrosis data.
The main negative contributors to NAV were Stemline Therapeutics, Adamas Pharmaceuticals and Nektar Therapeutics. Stemline shares retreated after reporting clinical results at a medical conference, compounded by a lack of near-term catalysts. Adamas shares fell as launch expectations of its drug Gocovri have tempered, whilst Nektar reported disappointing data for its candidate, NKTR-214.”
Investors should bear in mind that investment in biotechnology shares can be subject to risks not normally associated with more developed markets or stocks. Investing in the biotechnology sector carries some particular risks and investment in the Company should be regarded both as long term and as carrying a high level of financial risk. In addition, there is no guarantee that the market price of shares in investment trusts will fully reflect their underlying NAV and it is not uncommon for the market price of such shares to trade at a substantial discount to their NAV.