With the end of 2022 now behind us, it seems a good opportunity to reflect on the year’s events. Please be aware when reading information relating to the performance of IBT that an investment in our trust is considered to be high risk and capital invested and associated income may go down as well as up. Please remember that past performance may not be indicative of future results.
At the time of writing, International Biotechnology Trust’s net asset value (NAV) return for the year sits at +1%, which does not reflect the heightened market turbulence we have witnessed over the past 12 months. Surging inflation, rising interest rates and the outbreak of war in Europe have all played a part in the volatility suffered by the biotechnology sector in 2022. However, innovation in the space continues to abound, with numerous potentially trailblazing drugs having been approved to tackle diseases desperately in want of better treatment options.
Four seasons of macro challenges
The start of the year was characterised by a considerable market sell-off, with all major indices falling for the majority of the first half of 2022. This was driven by elevated inflation, aggressive interest rate hikes by most leading central banks, war in Europe, and the associated spike in European energy prices.
Biotech was not spared from the effects of these headwinds. By the start of summer, the NASDAQ Biotechnology Index had fallen by about 30%, and around a quarter of its constituent companies were trading at or below the value of their cash holdings. A short-lived summer rally then ensued, with valuations plateauing at a higher level.
The autumn was defined by the real economy feeling the strain of increased interest rates. The large-cap biotech companies, with their solid sales outlooks and predictable cashflows, benefitted from this environment, as investors sought out ‘safe havens’.
Even though we believe inflation is set to slowly abate, interest rates may remain higher for longer, which will limit growth prospects and could tip economies into recession. Businesses offering revenue growth are most likely to benefit in this setting, and fortunately, plenty of companies within the biotech space fit this profile.
Biotech breakthroughs of 2022
Despite the pronounced market turbulence witnessed in 2022, it has been an exciting year for our portfolio companies. International Biotechnology Trust has seen a number of its holdings receive drug approvals this year, most notably including a potentially ground-breaking gene therapy to treat haemophilia B by uniQure, and a new targeted lung cancer treatment developed by Mirati Therapeutics – both of which will be discussed in greater detail below.
As of December 2022, 31 novel drugs have been approved by the regulator this year. While all drug approvals represent a positive development for the biotech sector, fewer approvals have been achieved in 2022 than in previous years. However, this is most likely the result of trial delays incurred during the Covid-19 pandemic.
In May 2021, uniQure partnered the rights to etranacogene dezaparvovec (etranadez) with CSL, and then in November 2022, it was announced the US Food and Drug Administration (FDA) had approved its Haemophilia B drug ‘Hemgenix’ for use in the US. The companies have since announced a positive recommendation for approval in Europe. One infusion of Hemgenix demonstrated a stable and durable increase in Factor IX levels, which led to a 64% reduction in annualised bleeding rates. Following the infusion of the new drug, 96% of patients were able to discontinue their routine Factor IX clotting agent prophylactic injections – a majorly positive transformation to the lives of Haemophilia B sufferers.
In December, Mirati Therapeutics announced the FDA approval of its drug adagrasib to treat KRAS G12C-mutated locally advanced or metastatic non-small cell lung cancer. There is only one other drug available to patients that targets this mutation, marketed by Amgen, making Mirati second to market.
Expectations for 2023
Looking forward to 2023, we will be closely following the launches of the exciting new treatments mentioned above. In addition, the FDA will decide whether to approve Biogen’s lecanemab, which demonstrated a reduction in the rate of cognitive decline in Alzheimer’s patients in September 2022. The number of Alzheimer’s patients is enormous, so the next key consideration, should the treatment be approved by the FDA, will be the decision from payors at some point in early 2023. Other pharmaceutical companies will also be reporting their data for competitor drugs in this space, such as donanemab from Lilly, which will be major sentiment-driving events for the sector.
During 2022, a drug pricing bill was passed in the US under the Biden administration. The Inflation Reduction Act of 2022 attempts to address best-selling drugs that have been on the market for a lengthy time period and come under the government-funded ‘Medicare’ system. These drugs will be subject to price negotiations starting 2027. However, much of the detail is being contested, and we will receive greater clarity on the legislation in 2023.
It is key to note the legislation is focused on older, more established drugs and does not challenge the launch prices of new drugs. This is to prevent disincentivising innovative companies from investing in and developing new medicines. Given the Trust’s main focus is on younger, more innovative companies addressing areas of high unmet medical need, rather than the more established pharmaceutical companies selling drugs towards the end of their life cycle, we believe the legislation will have a minimal impact on IBT’s performance moving forward.
M&A heating up
As we have mentioned in previous IBT blogs, M&A is and will continue to be a hallmark of the biotech industry’s dynamics. We have seen five companies acquired in the fund during 2022:
- Zogenix acquired by UCB – January 2022 for $1.9bn
- Biohaven acquired by Pfizer – May 2022 for 11.6bn
- Nordic Consulting acquired by Accrete Health Partners (deal value undisclosed)
- Chemocentryx acquired by Amgen – August 2022 for $3.7bn
- Horizon acquired by Amgen – December 2022 for $27.8bn
The most recent deal in IBT’s quoted portfolio came with the news Amgen would acquire portfolio holding Horizon Therapeutics for $28bn. Followers of IBT will know this was the fund’s largest position, and the premium received in the transaction has made a materially positive impact to the company’s NAV.
It has been a tough year for capital markets, with few biotech initial public offerings and secondary offerings. High quality established public companies that have had successful clinical trial readouts have been able to return to the markets and raise money. However, struggling companies with no positive news have not. Many of the companies that floated during the hype of 2021 at unjustifiably high valuations have since struggled to stay afloat. We expect to see the least successful of these drop out of the index over the coming year.
With many uncertainties on the horizon, we continue to focus on companies developing compelling new treatments aimed at tackling currently ‘untreatable’ ailments, as well as those delivering disruptive technologies and methods of drug delivery, which we hope will greatly improve the lives of patients taking today’s already available treatments. We particularly like assets that have demonstrated success in clinical trials, and those making good progress towards – or having already achieved – drug approval. We believe M&A will continue in the sector, as large, cash-rich biotech and pharma players look to put money to work. These transactions seem to be favouring the relatively derisked companies with a shorter timeframe to profitability.
We will continue to focus on mitigating volatility risk within our portfolio by trading nimbly around our holdings’ binary events, as well as by tilting our portfolio on a top-down basis away from riskier areas during periods of high volatility, and then back again when growth is expected. We also place significant emphasis on quality of management and ESG. As such, we will continue working closely with the senior leadership teams of sector companies to accurately gauge what drives their business and to fully grasp the science behind their pipeline of innovations. Additionally, we will continue to draw from our team of Key Opinion Leaders. Their expertise in dynamic and complex sector areas will be critical moving forward, especially where they possess insights into the relevant regulation, clinical trial design, or novel science.
In our February 2022 blog titled ‘Not a cyclical sector but a cyclical investment environment’, we presented an infographic detailing the cycle of the sector’s investment environment, which builds from Depression in Stage 1 to Boom in Stage 4, then on to Correction in Stage 5 and back to Stage 1. As we enter 2023, we feel confident the M&A transactions of recent months offer strong evidence we are well into Stage 2, and we are hopeful the more stable investment environment of Stage 3 will be beckoning in the not-too-distant future.
Finally, we would like to express our gratitude for your continuing support and trust. We hope you had a wonderful festive period, and we look forward to speaking to you again soon in 2023.
This financial promotion is issued and approved by SV Health Managers LLP (“SVHM”) which is authorised and regulated by the Financial Conduct Authority. Notwithstanding that information in this presentation is being provided to you as a financial promotion, you should be made aware that the opportunity described herein is not suitable for all investors. It should not be relied upon to make an investment decision; any such investment decision should be made only on the basis of the fund scheme documents and appropriate professional advice.
The value of investments, and the income from them, may go down as well as up, and is not guaranteed, and investors may not get back the full amount invested.
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.
The Company’s portfolio companies are subject to change and should not be construed as research or investment advice. Similarly, any reference to a specific company does not constitute a recommendation to buy, sell, hold or subscribe in any company or its securities.
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 Source: Bloomberg
 Source: Bloomberg
 Source: Bloomberg
 Source: US Food and Drug Administration
 Company press releases on each company’s websites and Bloomberg