Biotech investing - the red flags to avoid

We would like to draw your attention to the important announcement made about the future of IBT on 3^rdAugust. A link to the announcement, and other recent and forthcoming events, are included at the end of this blog.

This financial promotion is issued and approved by SV Health Managers LLP ("SVHM"). Notwithstanding that this document is being provided to you as a financial promotion, you should be made aware that the opportunity described in the document is not suitable for all investors. Before investing in the Company, or any other investment product, you should satisfy yourself as to its suitability and the risks involved, and you may wish to consult a financial adviser. 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. Past performance is not a guide to future performance and exchange rate changes may cause the value of overseas investments to rise or fall. Please see Risk Warning on the attached Factsheet.

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Separating the wheat from the chaff in development stage biotech companies

The investment cycle in the biotech sector appears to have advanced to an equilibrium stage where green shoots, such as public offerings, are more frequent and well received. Currently, the biotech market has recovered c20% from its low in the summer of 2022, propelled by increased activity in mergers and acquisitions. However, the managers feel there is plenty of room for further returns as the sector remains c30% below the highs reached in 2021 during the post-Covid boom. The equilibrium stage is a relatively stable part of the investment cycle and for that reason IBT’s managers have redeployed some of the profits they made from takeover activity in the portfolio into development stage companies, a little lower down the size scale.

The post-Covid boom led to lower-quality IPOs

The 2021 boom resulted in numerous early-stage companies emerging due to investor demand for biotech equity surpassing supply. As a result, many drug development companies opted to IPO sooner than they might otherwise have done, meaning that companies went public in an earlier, more risky stage of development than normal. With more early-stage, riskier and arguably lower-quality companies on the public markets (and included in the XBI and NBI ETFs), experienced biotech investors with scientific expertise will be well placed to identify which of these might become the gems of the future – and avoid those that will not.

Narrowing down the field

One of the first jobs of a specialist investor looking to invest in development-stage companies will be narrowing down the field by ruling out companies they consider “uninvestable”. IBT’s managers have identified a series of “red flags” and “amber warnings”, which help them narrow down the large pool of investment opportunities.

Red flags

Some company characteristics that preclude IBT’s managers from investing are outlined below.

• Limited cash – companies should have near to medium term cash requirements covered by current cash balances that will stretch not only to cover the next important value-enhancing milestones but that can also withstand a financing drought.
• Limited management experience – companies led solely by scientists with limited commercial or regulatory experience rarely navigate the complex clinical and approval process successfully. Individuals or teams with a history of failed programs or questionable integrity must be avoided.
• Trial re-design – a drug is unlikely to succeed in a clinical trial if the management feels it is necessary to change the design of trials moving from earlier to later stages of the approval process. The more changes that are introduced and the more trials diverge from the original data, the higher the risk of failure.
• Open-label trials – the most robust trials are double-blinded, placebo-controlled trials where neither the participants nor the clinicians are aware of which patients have the tested treatment and which have the placebo. Open-label trials, in which all parties know who receives the treatment, are usually affected by bias. It is therefore hard to interpret their efficacy or replicate their results in subsequent clinical trial phases, especially when efficacy is gauged subjectively.
• Shareholder issues – sometimes investors put pressure on management to release data earlier than they might have wanted, often to prop up the share price. Companies need to be run by experienced management and not influenced by investors during these sensitive early stages. Any evidence of meddling by the investor community is a strong deterrent and a sign of management weakness. Professional investors with deep pockets and a strong skillset are preferable.
• Data mining – a release of data in which management has clearly had to cherry-pick trial data to find a positive statistic. If a study has failed it has failed, and companies that use statistical flukes – like very specific subgroups of patients benefiting from a treatment in a trial where most patients were negatively affected – do not meet IBT’s standards.
• Expensive financing methods – companies that have resorted to convertible notes or at the money (ATM) instruments are likely to be struggling to meet their financing needs, and these last resort methods of financing generally prove expensive in the long run. This implies current investors have run out of patience, and new ones are not willing to take on the risk.
• Gut feeling – this is harder to quantify but experience brings a gut feeling about companies that will not make it to fruition. Often companies present their data in the best way, but avoid mentioning certain elements in the program that should be present. These omissions are a telltale sign something is not right.

Amber warnings

Some characteristics would increase IBT’s managers’ wariness about a company but might not, in isolation, preclude an investment. In these cases, if the science is compelling, IBT’s managers may choose to make a small initial investment and monitor progress carefully.

• Looming clinical event – in early-stage companies, it is better to have some time to build up a position while getting to know the company and management before a clinical milestone is reached. Clinical risk is real and highly unpredictable, so this approach provides a way for the company to qualify itself over time before the fund takes on a larger position.
• Partnering – if a development stage company chooses to partner with a pharma company at a very early period in their journey, it might suggest the company is struggling to access finance and limits the possibility of a lucrative M&A deal, capping potential future upside.

While investing in development-stage companies comes with inherent risks, IBT’s seasoned managers use their expertise to navigate potential pitfalls and choose a basket of promising companies for the fund.

IBT Company News

Announcement of future arrangements for the management of IBT by Schroders plc:

We would like to draw your attention to the announcement made by the Board of IBT on 3^rd August which can be read here. https://www.londonstockexchange.com/news-article/IBT/appointment-of-new-fund-manager/16068124. The press release announces that IBT will be moving to Schroders from SV Health Investors later this year and the current investment managers, Ailsa Craig and Marek Poszepczynski, will be moving across to Schroders with the trust to continue in their role as joint lead investment managers.

A presentation explaining the Board’s process and the outlook for the trust is available on IBT’s website here. https://ibtplc.com/investor/vi...

Please vote! AJ Bell’s Fund and Investment Trust Awards 2023

We are delighted that IBT has been shortlisted in the Technology/Biotech Fund category of the AJ Bell Fund and Investment Trust Awards for 2023. This is an award we were privileged to have won in 2022. Please vote for IBT in “Category 15 Technology/Biotech – Active” at the following page https://investmentawards.ajbell.co.uk/vote. Thank you!

IBT participation in the AIC Investment Company Showcase 20 October 2023

Our joint lead investment manager, Marek Poszepczynski, will be participating in the "Opportunities in Biotech" panel at the 2023 AIC Investment Company Showcase on 20th October 2023. You can register to join online or in person via the AIC's website https://www.theaic.co.uk/the-investment-company-showcase-2023.

Disclaimer:

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.

Every effort is taken to ensure the accuracy of the data used in this document, but no warranties are given.

All views expressed in this document are current as of the date of this presentation and may be subject to change.

Full details of the Company, including risk warnings, are published in the Key Information Document and Investor Disclosure Document which are available on request and at www.ibtplc.com.