Investment Manager’s Blog
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.”