Unquoted investments dispensed double-digit returns for International Biotechnology Trust (IBT) during its 25th year, while its quoted investments bled capital amid the wider biotech market sell-off.

The £227 million trust made 16.3% from its unquoted portfolio during the year to end August, while its quoted holdings lost 8.6% as the threat of significant legislation that could escalate under a Democratic presidency weighs on the sector.

Investors in IBT were nevertheless treated to market-beating performance, with shares in the trust slipping 2.1% compared to a 9.8% decline in the Nasdaq Biotechnology index.

The closed-end structure of investment trusts enables managers to take a longer-term view as they do not need to buy or sell assets to manage inflows and outflows, and IBT’s results illustrate their suitability for illiquid assets, which have come under increased scrutiny following the demise of Woodford Investment Management.

‘Unquoted investments can give managers access to some of the most dynamic technologies and businesses,’ said Ben Johnson, collectives analyst at Charles Stanley, a wealth manager that owns nearly 8% of IBT.

‘The trend of companies staying private for longer is well recognised and is particularly prevalent in higher-growth businesses with high levels of intellectual property – attributes that are applicable to the biotech sector.

‘International Biotech is an example of an investment trust making use of its flexibility and recognising the changing market structure by investing in unquoted businesses. The success of these investments will only be judged over the longer term, but IBT appears to be building a solid record in this area.’

The trust has 15% of its assets in unquoted investments, at the top of a guideline range of 5% to 15%, up from 10% last August. Its largest investment, accounting for 9.4% of net assets, is SV Life Sciences Fund VI, a fund run by the trust’s investment manager. IBT has invested 68.7% of a $30 million (£23 million) commitment to the fund, on which it has made ‘impressive gains’ averaging 16.6%, according to the fund’s latest quarterly valuation report.

The trust’s directly-held unquoted portfolio also continues to yield positive results, with the approval of Ikano Therapeutics’ nasal spray – the first of its kind to treat epileptic seizures – being a particular highlight.

Takeover activity

Mergers and acquisitions are a hallmark of biotechnology. Eight of the trust’s holdings have been acquired in the last 18 months, with investors ‘repeatedly benefitting from the premium paid by acquiring companies’, according to IBT’s lead manager, Carl Harald Janson.

The quoted portfolio was subject to three acquisitions during the year – GlaxoSmithKline (GSK) of Tesaro in January, Pfizer (PFE.N) of Array BioPharma in July and Bristol-Myers Squibb’s (BMY.N) of Celgene (CELG.O), which is expected to complete in late 2019 or early 2020.

Meanwhile, the crystallisation of gains made in previous years from the sale of unquoted holdings, KalVista and TransEnterix, triggered a performance fee of £970,000 – significantly higher than £93,000 a year earlier. That pushed the trust’s ongoing charges up from 1.4% to 1.7%.

‘As large companies struggle to maintain earnings growth, small companies are busy discovering and developing the next new innovative treatment,’ said Janson. ‘The problem is that small companies don’t have the platforms from which to launch that treatment. That’s why two-thirds of drug development takes place in small companies, but two-thirds of distribution takes place in large companies.’

IBT is firmly focused on developmental stage biotechnology and although this has its own unique benefits – drugs at this stage are much less easy for the makers of mature drugs to copy – it is higher risk.

‘Biotechnology is certainly a “risk-on” sector,’ said Dzmitry Lipski, an investment analyst at Interactive Investor, an investment platform on which IBT was the 39th most bought investment trust during September.

‘A lot of innovations produced by companies in the sector fail to generate enough mainstream traction to become profitable. For every Coca-Cola idea, there are a considerable number of “Virgin Cola” type innovations that fizzle into obscurity.’

The upside reward has more than compensated the potential downside risk in recent history. Shares in the trust are up 45.3% and 129.9% respectively in the three and five years to end August, compared to rises of 20.7% and 55.7% for the Nasdaq Biotechnology index.

‘We are living longer, meaning that the demand for innovations in healthcare shows no sign of waning in the near future, which serves as a long-term tailwind for the trust and the sector,’ added Lipski.


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