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Pharmaceuticals & Biotechnology INTL. BIOTECHNOLOGY TRUST
Investing in a broad spectrum of the drug industry
IBT was established in 1994 to provide institutional and retail investors with the opportunity to participate in global biotechnology and life science companies, from early-stage development via venture capital (SV Health Investors funds) through to global, multinational biotechnology companies. The main aim of the trust is to Source: Refinitiv generate capital growth, while minimising risk, through a diversified portfolio and with an experienced investment management team. Over the last five years, IBT’s Market data NAV has increased 62%, while the share price has increased 92% over the same EPIC/TKR IBT period – the superior returns generally reflected by a share price premium. Price (p) 755 12m high (p) 862 12m low (p) 653 ► Strategy: IBT’s investment objective is to achieve long-term capital growth by Shares (m) 41.38 investing in biotechnology companies that address unmet medical needs. The Mkt cap (£m) 312 trust offers a diversified portfolio of listed and private companies on a global NAV (£m) 293 basis, although the vast majority of investments are currently in the US. NAV/share (p) 710 Premium/discount to NAV 6% ► Market updates: With 89% of the investment portfolio currently in listed Country of listing UK companies, the NAV changes on a daily basis. IBT has a daily update on its Market Main website, produces informative monthly factsheets (https://ibtplc.com/investor#
factsheets), and shows the full portfolio of US listed investments quarterly in Description filings with the SEC (https://ibtplc.com/portfolio). International Biotechnology Trust Portfolio management: The experienced team at SV Health Managers LLP was (IBT) is a well-established investment ► trust with the key objective of appointed investment manager of the trust on 1 January 2005. Recent achieving long-term capital growth by evolution within the team has seen the promotion of Ailsa Craig and Marek investing in a global portfolio of Poszepczynski to co-lead managers; both bring specific industry expertise. biotechnology and life sciences companies that address unmet ► Risks: Risk is minimised through portfolio diversification, geographical spread medical needs. and active specialist investment management. In addition, many valuation inflection points in the drug industry are around the time of binary outcomes Investment management team (e.g. clinical trial results), so the trust aims not to be holding an overweight Lead manager Ailsa Craig position in the shares of companies around such time points. Lead manager Marek Poszepczynski Manager (UQ) SV Partners IBT provides investors with the opportunity to Senior advisor Carl Harald Janson ► Investment summary: Investor Lucy Costa Duarte participate in the drug industry, from early-stage development through to full relations [email protected] commercialisation of regulatory approved drugs. The focus is on companies that address unmet medical needs. The five-year CAGR in NAV has been 7.0%, and +44 20 7421 7070 the trust pays an annual dividend of 4% of NAV at the preceding year-end www.ibtplc.com (CAGR 5.4%). Corporate diary January 1H dividend April Interim results Financial summary August 2H dividend Year-end Aug (£m) 2016 2017 2018 2019 2020 *2021E October Final results Gains/(losses) on investments -1.73 48.53 21.59 -13.94 54.13 32.00 December AGM Effect of forex -2.33 0.00 1.05 -0.52 1.77 -20.00 Total expenses -3.52 -3.51 -2.79 -3.44 -3.17 -3.43
Expenses as % NAV 1.6% 1.4% 1.1% 1.4% 1.1% 1.2% Operating profit/(loss) -6.90 45.53 20.23 -17.23 53.85 9.64 NAV 216.7 252.7 262.5 239.6 283.9 293.5 NAV/share (p) 575.1 672.9 699.0 623.9 738.6 709.2 DPS (p) 0.0 23.0 27.0 28.0 24.8 28.4
Yield 0.0% 3.1% 3.7% 3.8% 3.4% 3.8% Analyst *Based on share prices and forex at close of business on 2 July 2021
Martin Hall 020 3693 7075 Source: Hardman & Co Life Sciences Research
Disclaimer: This research has been paid for by the company. Please read the important disclaimers at the end of this document. Intl. Biotechnology Trust
% NAV by size % NAV by development stage
Mid-cap Revenue ($2bn to Small-cap growth $10bn) (<$2bn) 35% 38% 9%
SV Fund VI Profitable 6% 34% Unquoted Large-cap 4% ($10bn- $30bn) Mega-cap Early-stage 22% (>$30bn) 31% 21%
% NAV by therapeutic area % NAV by geography
Rare diseases Oncology CNS Europe/UK Auto-immune 4% Infectious diseases US 95% Ophthamology RoW Metabolic 1% SV Fund VI Other
0% 10% 20% 30% 40%
Top 10 quoted investments* 2020 Global Company Ticker Size Therapeutic focus Stage sales % NAV rank ($m) 1 Horizon Ther. HZNP >$10bn<$30bn Rare diseases Profitable 2,200 35 7.1% 2 Gilead Sciences GILD >$30bn Infectious diseases Profitable 24,355 14 6.4% 3 Seagen SGEN >$10bn<$30bn Oncology Profitable 1,001 38 5.4% 4 Exelixis EXEL <$10bn Oncology Profitable 742 - 5.2% 5 Alnylam ALNY >$10bn<$30bn Rare diseases Revenue-generating 493 - 5.1% 6 Neurocrine Bio NBIX <$10bn Central nervous system Profitable 994 40 4.8% 7 Regeneron REGN >$30bn Ophthalmology Profitable 5,568 28 4.5% 8 PTC Ther. PTCT <$10bn Rare diseases Revenue-generating 333 - 4.2% 9 Vertex VRTX >$30bn Rare diseases Profitable 6,203 25 3.8% 10 Biohaven BHVN <$10bn Rare diseases/CNS Revenue-generating 63 - 3.7% *Based on share prices and forex on 31 May 2021
NAV and share price Dividends
16 14.0 14.2 14 13.5 12.4 12 11.5
10
8
6
4 Dividend per share (p)
2
0 2016/17 2017/18 2018/19 2019/20 2020/21 First interim dividend Second interim dividend Source: Company data, Hardman & Co Life Sciences Research
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Why invest?
Portfolio diversification IBT gives investors exposure to the complete spectrum of pharmaceutical development, from venture capital (VC) into very early-stage companies, via its investment in SV Fund VI through to multi-billion-dollar market capitalisation biotechnology companies. As such, its investment portfolio provides diversity of maturity of a company, therapeutic focus and geographical location.
Experienced management team IBT has been associated closely with the experienced team at SV Health Managers LLP for many years. Even though there has been some evolution of the management team recently, the current trust managers still have considerable experience, and possess specific strengths with respect to company analysis and biotechnology market knowledge. This positions it well to deliver the key objective of achieving long-term capital growth.
Risk mitigation Apart from portfolio diversification, the managers have adopted a specific strategy to avoid holding overweight positions in companies around the time of a binary outcome, such as an important clinical trial outcome, or a regulatory decision on a new drug. This is a key differentiator from its peers. Harman & Co views this as a very sensible strategy, because history tells us that there are more failures than wins in the development of new drugs. This suggests that, on balance, exposure is much reduced when something goes wrong, although upside potential is also missed when things go well. Even the best and most experienced industry experts do not get everything right, as evidenced recently when the FDA approved, unexpectedly, Biogen’s new drug for dementia, even though the clinical evidence of efficacy was weak. Biogen’s shares closed with a rise of 40% on the day, adding $17bn to its valuation.
Active portfolio management Although the trust managers are naturally long-term holders, as part of the risk mitigation process surrounding binary outcomes, there will be active portfolio management. However, it should be noted that the SV team has reduced the churn rate form over 200% a few years ago to ca.100% in each of the last three years.
Performance Given that IBT was established in 1994, it has a very long track record. However, the trust has been associated closely with SV (and its predecessor) for about 15 years, during which time the performance has been solid. Performance figures are updated regularly, and can be monitored easily, but, over the last five years, IBT’s NAV has increased 62%, while the share price has increased 92% over the same period.
ESG principles There is recognition within IBT of the importance of environmental, social and governance (ESG) issues. The board encourages managers to consider the ESG approach taken by investee companies. Given that the aim of biotech companies is to address the unmet medical needs of patients, there is a natural bias to bring about positive social change. Consequently, there is a natural leaning of the biotech industry to ESG principles.
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Latest results – 2021 interims
Key features Active portfolio management Evidence of the investment managers’ strategy to limit risk by not owning shares in companies that are expected to announce binary outcomes can be seen in the active portfolio management.
► Of the top 10 investments at the close of business on 31 August 2020, only four were still significant holdings at the end of February 2021.
► In December 2020, portfolio company, Alexion, agreed to be bought out by AstraZeneca (AZN) for $175 per share (45% premium) in cash and AZN shares, propelling it into the top 10. IBT has used the recent clearance by the US Federal Trade Commission (FTC) to reduce its holding in Alexion, such that it is no longer a top 10 investment.
► In anticipation of a regulatory read-out, IBT has been reducing its holding in BioMarin, which is developing a gene therapy (valoctocogene roxaparvovec) for the treatment of adults with severe haemophilia A, aimed at reducing the need for regular injections of Factor VIII. In August 2020, the FDA said that it needed more data before it would be willing to consider this novel therapy for approval, which resulted in a sharp fall in value. BioMarin is no longer a top 10 holding for IBT.
Active portfolio management # @31 August 2020 @28 February 2021 Current (31 May 2021) 1 Horizon Therapeutics Horizon Therapeutics Horizon Therapeutics 2 Immunomedics Gilead Sciences Gilead Sciences 3 Gilead Sciences Regeneron Seagen 4 BioMarin Exelixis Exelixis 5 Acadia Therapeutics PTC Therapeutics Alnylam 6 Vertex Vertex Neurocrine Bio 7 PTC Therapeutics Amgen Regeneron 8 Genmab Alnylam PTC Therapeutics 9 Neurocrine Bio BioMarin Vertex 10 Chemocentryx Alexion Biohaven % NAV 47.3% 45.0% 50.2% Source: IBT factsheets and reports
Financial performance The first-half financial performance is shown in the following table, although this has already been superseded by release of the March 2021 factsheet. Financial performance – income statement Half-year to Feb’20 Aug’20 Feb’21 (£000) (1H’20) (2H’20) (1H’21) Gains/losses on investments 9.84 44.29 20.44 Effect of forex 0.59 1.18 -0.07 Other income 0.49 0.65 0.45 Total income 10.92 46.11 20.92 Management fee -0.84 -1.03 -1.19 Performance fee 0.00 -0.24 0.00 Administration expenses -0.52 -0.53 -0.55 Total expenses -1.36 -1.81 -1.73 EBIT 9.55 44.30 19.18 Finance costs -0.20 -0.06 -0.07 Profit before tax 9.35 44.25 19.11 EPS (p) 24.08 115.01 47.92 NAV (p) 635.6 738.6 775.7 Source: IBT reports, Hardman & Co Life Sciences Research
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Investment strategy
Current direct portfolio of 79 companies, IBT’s investment portfolio is currently comprised of 79 companies – 70 listed and nine unquoted – and a holding in SV Fund VI, which has a portfolio of 25 companies, plus 25 via SV Fund VI… of which six are quoted. This provides a diversified portfolio, covering everything from early-stage drug and life sciences development through to full …encompasses broad spectrum of drug commercialisation of regulatory approved drugs. The consistent theme within the development and commercialisation portfolio is that all the companies attempt to address unmet medical needs, which gives them greater pricing flexibility, with the main objective of generating long-term capital growth, as well as being consistent with ESG principles.
Churn rate reduced… The portfolio is actively managed, and has seen a churn rate of approximately 100% in each of the last three years, although this is expected to ease back slightly in the
future, by taking slightly longer-term views. A key differentiator of IBT is that it tries …stable at around 100% for each of past to minimise exposure to stocks around the time of binary outcomes (e.g. three years announcement of clinical trial results), which can cause large volatility in share prices, in both an upward and a downward direction. This reduces the risk to investors. Exposure minimised around time of binary outcomes Investment process The experienced investment team adopts a range of criteria as part of its investment process; these are shown in the following graphic. Key is the idea generation, which could come from a number of internal and external sources. Ideas are monitored, and valuation is constantly assessed to determine a suitable in-price and when to take profits. This provides important trading discipline and risk mitigation.
Investment process – overview
Source: IBT presentation
Stock selection The investment team uses both a bottom-up and a top-down approach with stock selection.
Bottom-up By their very nature, assets need to have a strong IP position and be wholly-owned by the company. Given the competitive nature of the healthcare industry, it is preferable for the asset to address an unmet medical need, thereby presenting, potentially, a monopoly position. Alternatively, if there are already drugs on the market addressing a particular need, the asset needs to be a “disrupter”, with the potential to alter the market dynamics – e.g. an oral therapy where all existing drugs are given by injection.
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Apart from strong IP and financial Management teams are also very important. The IBT managers proactively meet the management of portfolio companies and other companies in the sector regularly, prospects, management teams are very arranging around 250 such meetings per year, mostly over videoconference. important Financial position is particularly important in the development-stage portfolio companies, and is, therefore, an area of close attention for the IBT managers. The managers’ risk mitigation strategy requires them to be able to trade in and out of their positions nimbly, and stock liquidity is also an important consideration.
Investment process – stock selection
Source: IBT presentation
Top-down Apart from the size of a company – mega-capitalisation companies struggle to grow and tend to have very diversified medical targets – the team also takes a keen interest in the macroeconomic environment that might affect the sector’s performance. The managers seek to ensure an appropriate balance across the three areas of size, development stage and therapeutic area.
Sector drivers Ageing population Outlook supported by strong sector The underlying drivers for the sector are strong. The change in age demographics over time, together with predictions about future expectations, is shown in the drivers following graphic.
Sector drivers – demographics
Source: United Nations, World Population Prospects: the 2019 Revision, reproduced by IBT
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The graphic highlights changes over the last 50 years. For example, 75-100 years ago, before antibiotics, people would often die at a relatively young age from serious infections; 50 years ago, people lived longer in the western population, but there was a trend towards death from cardiovascular disease; today, populations live to a much older age (ca.80 years), but this has become associated with greater incidence of cancer and CNS disorders.
Over 65 age group growing fast and The graphic also shows the prediction that the number of people in the world aged 65 or over will increase four-fold during the remainder of this century. Coupled with forecast to double by 2050 this, the Kaiser Family Foundation estimates that, in the US, the ca.30% of the population aged 65 and over consumes 55% of healthcare spending. Consequently, demand for ever-more innovative medication is secure and set to increase, and pharmaceutical companies need to be ready to adapt in order to reflect these changing medical needs.
Drug development CAGR in R&D spend by top 15 companies In 2020, the top 38 pharmaceutical and biotechnology companies invested $138.5bn in R&D, an increase of 7.3%, and representing 20.2% of net drug sales. has been 1.6% over past decade Over the past 10 years, the top 15-ranked companies have increased investment in R&D at a CAGR of 1.6%, from $90.7bn (19.7% of pharma sales) to $106.5bn (20.8%).
Pharmaceutical R&D investment, 1990-2020
160,000 20.0%
140,000 19.0%
120,000 18.0%
100,000 17.0%
80,000 16.0%
60,000 15.0% R&D spend (USDbn) 40,000 14.0% R&D as % Rx drug sales
20,000 13.0%
0 12.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Hardman & Co Life Sciences Research
However, the question remains about whether they are getting value for money. Although the drug approval process at the FDA has become more efficient, with 410 new chemical entities (NCE) being approved over the past 10 years, of which 97 (24%) were therapeutic biologicals (biopharmaceuticals), this equates to just 1.14 new drug approvals p.a. for each of the ca.40 companies monitored within our pharmaceutical database – which is insufficient to generate the expected level of sales growth. Consequently, big pharma needs the expertise and greater efficiency of biotech to provide the sales impetus from new drugs.
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Sector drivers – FDA approvals
70 59 60 53 48 50 45 46 41 39 40 30 30 27 21 22 20 FDA approvals (#)
10
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Small molecule NCEs Biopharmaceuticals
Source: FDA, Washington Analysis Group, Hardman & Co Life Sciences Research
M&A activity 16 M&A deals among IBT’s portfolio The major pharmaceutical players need the small players with the new technologies to help them generate sales and profit growth. Consequently, M&A activity remains companies since March 2018 a key driver of performance within the biotechnology sector, and the features that make a biotech company attractive to a potential acquiror are also attractive to the IBT investment managers.
Over the past three years, IBT has been invested in 16 listed companies that have been acquired by the major players. This activity greatly boosts the performance of the trust, with an average takeover price at a 69% premium to the previous close before the deal was announced. In addition, some of the unquoted companies in IBT’s portfolio have also been taken over.
M&A – a major theme of the biotech industry since March 2018
*In the cases of GSK/Tesaro and Sanofi/Principia, the market price rose sharply before the announcement **Premium not disclosed; private portfolio M&A Source: IBT presentation
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Unquoted investments
SV Fund VI – sector split Until recently, IBT only updated the market with details about its unquoted investments at the time of its interim and final results each year, but in a bid to be more transparent, it has now started including details of the unquoted portfolio in its monthly factsheet. Exposure of IBT to innovative, early-stage drug development and healthcare services and technologies tends to be via holdings in small, private companies. These are held either directly or through its investment in SV Fund VI. Currently, it has 34 investments in its unquoted portfolio, as shown in the following table. Since a strategy change in 2016, IBT has not made any direct investments in private companies, in the belief that its investment via the unquoted SV funds provides a broader exposure to the opportunities that exist.
IBT – unquoted portfolio @28 Feb 2021 @31 Aug 2020 SV Fund VI 25 25 Unquoted 19 21
Source: IBT presentation Listed 6 4 Direct private holdings 5 6 Exited with milestones due 4 5 Current unquoted portfolio 34 36 Previously unquoted, now quoted 2 3 Number of investments for unquoted performance 36 39 Contribution to NAV (£m)* SV fund VI valuation 22.5 21.6 Exited investments with contingent milestones 9.6 9.9 Directly-held investments 2.0 3.8 NAV of unquoted portfolio 34.1 35.3 % IBT NAV 10.7% 12.3% *Excludes companies fully written off Source: Hardman & Co Life Sciences Research
SV Fund VI – company maturity Portfolio companies within the SV Fund VI are diversified among biotechnology, healthcare services and medical devices; this was similar to IBT’s existing unquoted investments, but with smaller allocations to each individual company. This allows for greater diversification and, thereby, reduces the impact of individual company failures inherent in the early-stage biotech space. IBT originally committed $30m to the fund, of which $22.4m (75%) has been drawn down. Given the maturity of the fund, it seems unlikely that the $30m commitment will be drawn down in full.
In 1H’21, the unquoted portfolio saw a modest decline in value to £34.1m. However, this belies the strong performance from SV Fund VI, which has a total return of 26.4%, including three net distributions during the period totalling £4.7m, contributing significantly to the overall performance if IBT.
Source: IBT presentation Key features ► In February 2021, AdaptHealth Corp (AHCO) completed the acquisition of SV Fund VI portfolio company, AeroCare Holdings Inc, for $2.0bn in cash and shares. The subsequent holding in AHCO now forms one of the fund’s quoted holdings.
► Progress in clinical trials contributed to an uplift at Ikano Therapeutics, a company developing drugs in the form of nasal sprays to treat pain and central nervous system disorders, with a particular emphasis on epilepsy.
Unquoted portfolio – 1H’21 highlights SV Fund VI Directly-held investments Positive contributions AeroCare, Aligned Ikano Therapeutics Performance detractors Misonix Karus, Autifony, Atopix Distributions £4.7m £0.3m Source: IBT report and presentation, Hardman & Co Life Sciences Research
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Focus on rare diseases
IBT’s strategy of development and Over the past 50+ years, the pharmaceutical industry has had to adapt to the changing medical needs of the population. Historically, disease and cardiovascular commercialisation of drugs for rare events were major causes of death, so the emphasis was on developing anti- diseases has been successful infectives and drugs that reduced the risk of major cardiac events. However, today, although resistance to antibiotics is a growing concern, the risk of death from infection, notwithstanding the COVID-19 pandemic, is considerably reduced. In addition, it is difficult to see any need for a new drug to treat high blood pressure, or high cholesterol, because the drugs that were developed to successfully treat/control these conditions are effective and readily available.
During this period, the pharmaceutical industry had little interest in drugs that might treat a condition where the global incidence was very low, often referred to as orphan or rare diseases. This was because the industry could not predict the commercial opportunity of such diseases. However, as highlighted earlier, the top ca.40 players spent $138.5bn on R&D in 2020 and, over the last 10 years, the average cost of developing each new drug has been $2.67bn. Such numbers are well out of reach of new companies.
Consequently, encouragement was given to the sector to focus on rare diseases through a favourable pricing regime, longer patents, marketing protection through orphan drug designation and an adapted regulatory process, e.g. trials with a smaller number of participants being acceptable. Thus, a new part of the industry was spawned, with new companies established that were highly focused on rare diseases, where limited resources could be dedicated to one specific asset. The rest is now history, and there have been an enormous number of such companies, which have become the fuel to the major players’ sales machines.
About one third of IBT’s portfolio of quoted companies are involved in the development and commercialisation of drugs for rare diseases. Within the company’s top 10 investments, it is nearer 50%. This has been a successful strategy, given the number of investee companies that have been acquired over the past three years.
Growth drivers Drugs to treat rare diseases are forecast Some industry commentators expect that drugs for rare diseases (CAGR sales 2020- 26: 10.5%) are going to be a key driver to overall global pharmaceutical growth to be an important contributor to sector (CAGR: 7.5%) over the same period. growth Impact of rare diseases on global pharma
1,600 CAGR: 4.4% 1,400 1205 1160 1,200 1107 1055 1015 1,000 985 931 864 891 800 825 600 Net sales ($bn) 400 CAGR: 12.2% 200 225 248 270 119 130 135 158 181 205 0 110 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Rare diseases Global pharma
Source: Hardman & Co Life Sciences Research
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In our opinion, we concur broadly with the sales growth expectations for drugs being targeted to rare diseases, but feel that the overall global market forecast is too optimistic – to put the forecast in perspective, the global prescription drug market has registered a CAGR of 3.7% (local currency) over the past six years.
Cell and gene therapies Breakthrough technologies driving trend A sub-classification of rare diseases might be cell and gene therapies, where new technologies are being focused on bringing new medicine to the individual patients. towards personalised medicine Relatively speaking, cell and gene therapies are very much in their infancy, with only 11 approved by the FDA and/or EMA regulators (there are a further five approved in other territories that are not approved by the FDA or EMA). These therapies do offer significant opportunities to drive future growth; therefore, it is not surprising to find that IBT is taking an interest in these technological breakthroughs.
Investing in innovation
Source: IBT presentation – company names shown form part of IBT’s current portfolio
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Important considerations
Pharmaceutical and biotechnology The pharmaceutical and biotechnology industry in incredibly captivating, and has the added potential of being able to change lives. Consequently, it represents an industry carries high risk, but also has high interesting investment. Because of the binary outcomes in clinical trials, it carries a rewards for success high risk. However, it also has high rewards for success, as evidenced by the average weighted pre-R&D margin of ca.50%. Historically, this used to be nearer 60%, when drugs tended to be small molecules and were easy to manufacture. However, having followed the sector for over 30 years, I am no longer surprised when something comes along unexpectedly to dent these margins, especially in a cost-conscious environment.
Factors that might affect performance In IBT’s results presentation, a really useful graphic was provided to highlight the factors that need to be considered when thinking about sector performance, which is shared below, since we agree with the vast majority of these points.
Factors that might affect performance
Source: IBT presentation
Upcoming events that might affect performance As stated earlier, the investment managers have a differentiating strategy to avoid, wherever possible, binary events. In some cases, this strategy might limit upside potential, whereas, in others, it reduces downside risk. Also, by adopting active management of its portfolio, the trust managers can take advantage of a run-up in the share price of a portfolio company, in anticipation of a positive outcome to reduce exposure, and to repurchase at a lower risk-weighted valuation following positive news – thereby only missing out on a small part of the upside, while limiting exposure to the downside.
In the next few months, the following significant events are expected from portfolio companies:
► Gilead: Additional Phase III Trodelvy data, and TIGIT immunoncology updates – both due in 2H’21.
► Amgen: Following FDA approval in May 2021, AMGN is expected to launch Lumakras – for the treatment of adult patients with KRAS G12C-mutated locally advanced or metastatic non-small cell lung cancer (NSCLC) – in 2H’21.
► Mirati Therapeutics: Clinical data on Adagrasib (targeting specific KRAS G12C mutations) in NSCLC and IND filing of MRTX1133 (targeting KRAS G12D mutations) for various cancers (e.g. pancreatic, colorectal) – due in 2H’21.
► CRISPR Therapeutics: Release of data from a number of clinical trials in 2H’21.
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Financial summary Income statement
► P&L drivers: The main drivers of the P&L account are the gains and losses made on investments, offset by the general operating expenses.
► Operating expenses: In absolute terms, the annual operating expenses are ca.£3m. This equates to a little over 1% of NAV. The main variable is the performance fee.
► Performance fee: There are two components to the performance fee, based on the quoted and unquoted portfolios. The fee on the quoted pool is 10% of relative outperformance above the sterling-adjusted NASDAQ Biotechnology Index (NBI), plus a 0.5% hurdle. The fee on the unquoted pool, excluding SV Fund VI (already deducted from the NAV calculation), is 20% of net realised gains, taking into account any unrealised losses, but not unrealised gains. The maximum fee in any one year is 2% of the average net assets.
► Forex: Given that the majority of the quoted portfolio is in dollar-denominated stocks, there is sensitivity to forex for translational purposes into GBP. The recent strengthening of GBP relative to USD is having a negative impact on the NAV in fiscal 2021.
Income statement Year-end Aug (£m) 2016 2017 2018 2019 2020 2021E Gains/(losses) on investments -1.73 48.53 21.59 -13.94 54.13 32.00 Effect of forex -2.33 0.00 1.05 -0.52 1.77 -20.00 Income 0.68 0.51 0.38 0.67 1.13 1.08 Total income -3.38 49.03 23.02 -13.79 57.03 13.08 Management fee -1.89 -1.11 -1.61 -1.61 -1.88 -2.10 Performance fee -0.58 -1.37 -0.09 -0.97 -0.24 -0.25 General expenses -0.62 -0.60 -0.70 -0.47 -0.62 -0.64 Directors’ fees -0.16 -0.16 -0.14 -0.13 -0.15 -0.16 Administration fees -0.22 -0.23 -0.22 -0.22 -0.23 -0.24 Audit fee -0.04 -0.04 -0.04 -0.04 -0.05 -0.05 Administration expenses -1.05 -1.03 -1.10 -0.86 -1.05 -1.08 Total expenses -3.52 -3.51 -2.79 -3.44 -3.17 -3.43 Expenses as % NAV 1.62% 1.39% 1.06% 1.44% 1.12% 1.17%
EBIT -6.90 45.53 20.23 -17.23 53.85 9.64 Interest payable -0.21 -0.20 -0.22 -0.21 -0.26 -0.26 Profit before tax -7.11 45.32 20.01 -17.44 53.59 9.38 Reported taxation -0.11 -0.07 -0.05 -0.10 -0.17 -0.17 Net income -7.22 45.25 19.96 -17.54 53.42 9.21
Ordinary shares of 25p In issue 37.67 37.55 37.55 38.40 38.44 41.38 Weighted average (m) 38.96 37.55 37.55 37.85 38.46 41.02
EPS (p) -18.52 120.52 53.16 -46.34 138.91 22.46 DPS (p) 0.00 23.00 27.00 28.00 24.80 28.40 Source: IBT reports, Hardman & Co Life Sciences Research
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Balance sheet Debt: The management team does have the flexibility to use local debt facilities when appropriate to do so. For example, at the end of fiscal 2020, IBT had short- term debt of £18.1m, all USD-denominated. This had been halved by the end of 1H’21. Use of debt can also act as a hedge against forex movements.
Balance sheet @31 Aug (£m) 2016 2017 2018 2019 2020 2021E Share capital 10.41 10.34 10.34 10.34 10.34 10.40 Share premium account 18.81 18.81 18.81 19.99 20.43 29.00 Capital redemption reserve 31.41 31.48 31.48 31.48 31.48 31.48 Capital reserves 188.18 226.09 238.49 216.53 262.63 264.94 Revenue reserve -32.15 -34.06 -36.64 -38.76 -40.98 -42.33 Total equity 216.65 252.65 262.47 239.58 283.90 293.49 NAV/share (p) 575.09 672.88 699.04 623.94 738.61 709.19
Non-current assets Investments at fair value 221.79 269.37 263.03 237.36 302.22 312.49 Current assets Receivables 9.24 2.84 0.05 2.62 0.16 3.00 Cash & deposits 0.09 0.13 0.14 0.89 0.32 1.00 Total assets 231.12 272.34 263.22 240.86 302.71 316.49
Current liabilities Short-term debt -11.81 -6.39 -0.37 0.00 -18.10 -22.00 Payables -2.66 -13.29 -0.37 -1.28 -0.72 -1.00 Total liabilities -14.47 -19.69 -0.74 -1.28 -18.81 -23.00
Net assets 216.65 252.65 262.47 239.58 283.90 293.49 Net cash/(debt) -11.72 -6.26 -0.23 0.89 -17.77 -21.00 Source: IBT reports, Hardman & Co Life Sciences Research
Cashflow Churn rate: Historically, the churn rate of the portfolio has been as high as 204%. However, in recent years, this has been brought down, and appears stable at ca.100%.
Cashflow statement Year-end Aug (£m) 2016 2017 2018 2019 2020 2021E EBIT -6.90 45.53 20.23 -17.23 53.85 9.64 (Inc.)/dec. in investments 25.14 -47.59 6.35 25.67 -64.86 13.08 Receivables 5.21 6.41 2.79 -2.57 2.46 2.84 Payables -1.67 10.64 -12.92 0.91 -0.57 -18.00 Interest -0.21 -0.20 -0.22 -0.21 -0.26 -0.26 Tax -0.11 -0.07 -0.05 -0.10 -0.17 -0.10 Cashflow from operations 21.47 14.71 16.17 6.47 -9.55 7.20 Dividends paid 0.00 -8.64 -10.14 -10.62 -9.55 -10.93 Share buybacks -11.62 -0.62 0.00 0.00 -1.13 0.00 Shares issued 0.00 0.00 0.00 5.26 1.57 0.50 Effect of forex 0.00 0.00 0.00 0.00 0.00 0.00 Financing activities -11.62 -9.25 -10.14 -5.35 -9.11 -10.43
Change in net cash/(debt) 9.85 5.46 6.03 1.12 -18.66 -3.24
Opening net cash/(debt) 0.00 -11.72 -6.26 -0.23 0.89 -17.77 Closing net cash/(debt) -11.72 -6.26 -0.23 0.89 -17.77 -21.01
Disposals during year 311.6 441.4 254.2 267.9 236.1 - Churn rate 132% 204% 101% 102% 99% - Source: IBT reports, Hardman & Co Life Sciences Research
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Intl. Biotechnology Trust
Company matters
Registration IBT was established in 1994 as an independent investment trust whose shares are listed on the London Stock Exchange (Ordinary shares: ISIN No: GB0004559349; EPIC Code: IBT). The company is incorporated in England and Wales with company registration number 2892872.
Fund manager: SV Health Managers LLP 71 Kingsway London WC2B 6ST
+44 20 7421 7070 www.ibtplc.com
Investor relations: Lucy Costa Duarte [email protected]
Board of Directors Board of Directors Position Name Chairman Jim Horsburgh Chair of audit committee Caroline Gulliver Senior independent director Dr Véroniuque Bouchet Independent director Kate Cornish-Bowden Independent director Patrick Magee Source: Company reports
Investment managers Investment management team Position Name Lead investment manager Ailsa Craig Lead investment manager Marek Poszepczynski Unquoted investment manager Kate Bingham & SV Partners Senior adviser Carl Harald Janson Source: Company reports
Ailsa Craig Ailsa joined SV Health Investors in November 2006 as an investment analyst for IBT, and became an Investment Manager in 2008, where she is part of the public markets-focused team. Ailsa was appointed as joint lead investment manager of the trust in March 2021. Previously, Ailsa worked at Baring Asset Management for two years as a research analyst, covering pharmaceutical and biotechnology stocks. Prior to this, Ailsa worked for Insight Investment/Rothschild Asset Management (merged 2003) within the Global/US investment team. Ailsa has a BSc (Hons) in Biology from the University of Manchester. She was awarded the IMC in 2002 and the Securities Institute Diploma in 2007.
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Marek Poszepczynski Marek joined SV Health Investors in 2013, working as a portfolio manager for International Biotechnology Trust plc, and was appointed as joint lead investment manager of the trust in March 2021. One of his strengths lies in analysing companies, with a particular attention on identifying potential M&A targets. Marek has more than 15 years of international experience in the life sciences industry, with a focus on licensing and financing. He held management positions at Handelsbanken (2010-12) as lead equity analyst, VP Business Development at Karolinska Development AB (2008-10) and Licensing Director at Biovitrum AB (2002-08). Marek has participated in two initial public offerings and a number of licensing and asset transfer transactions, and he received the Swedish Entrepreneurial Distinction 2015 through the founding, running and divesting of a profitable contract research organisation. Marek holds a MSc in Biochemistry and MSc in Business Management from the Royal Institute of Technology, Stockholm, Sweden.
Kate Bingham Kate has been with SV Health Investors for 29 years, where she has co-led biotech investments and activities into a number of diverse companies, including small- molecule, biotherapeutic and gene therapy drug discovery and development projects, as well as drug discovery platforms in a broad range of clinical areas. Kate played an active role in setting up the Dementia Discovery Fund (managed by SV), and serves on its investment committee. Prior to joining SV, Kate worked in business development for Vertex Pharmaceuticals, a biotechnology company in Cambridge, MA, and at Monitor Company, a strategy consulting firm, also in Cambridge, MA. Kate has a first-class degree in Biochemistry, from the University of Oxford, and an MBA from Harvard Business School (Baker Scholar).
Outside of SV, Kate won the Lifetime Achievement Award, presented by the BioIndustry Association UK in January 2017. She also serves on the board of the Francis Crick Institute. In May 2020, Kate was appointed Chair of the UK Vaccine Taskforce reporting to the Prime Minster to lead UK efforts to find and manufacture a COVID-19 vaccine, on a six-month engagement, stepping down as Chair in December 2020, after the UK became the first western country to commence COVID-19 vaccinations.
Houman Ashrafian Houman joined SV Health Investors in 2016 as a Venture Partner, was promoted to Partner in 2017, and became a Managing Partner in 2018. He has founded and serves on the board of seven SV investee companies: Alchemab, Catamaran Bio, Enara Bio, Mestag, Sitryx, TrexBio and Zarodex. Houman also serves on the Dementia Discovery Fund (DDF) Investment Committee and as a director of Karus Therapeutics and Imbria.
Prior to joining SV, Houman co-founded the services company, Cardiac Report, in 2003, as well as Heart Metabolics, in 2008. Heart Metabolics successfully repositioned perhexiline, as a treatment for hypertrophic cardiomyopathy and heart failure. Perhexiline is now in advanced clinical trials and has orphan drug designation. Houman went on to become Vice President and head of the Clinical Science Group at UCB Pharma.
Houman is a graduate of the University of Cambridge, and qualified as a medical doctor at the University of Oxford. He also has a PhD in medical sciences from the University of Oxford. He is Visiting Professor and Head of Experimental Therapeutics at the University of Oxford.
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Intl. Biotechnology Trust
Carl Harald Janson Carl Harald Janson joined SV Health Investors in September 2013. In March 2021, Carl Harald passed on responsibility of management of the Trust to Ailsa Craig and Marek Poszepczynski, and remains involved in the business as a strategic advisor to SV Health Managers and the Trust. Carl Harald qualified as a medical doctor in 1981, completed his PhD in 1990 at the Karolinska Institutet, and qualified as Certified European Financial Analyst from the Stockholm School of Economics in 1999.
Among Carl Harald’s many achievements, the outstanding performance of the Carnegie Biotechnology Fund stands out as a key highlight. During his six years and four months as its Principal Fund Manager, Carl Harald was recognised by Bloomberg as the top-performing biotech fund manager worldwide. During this period, the fund had a total return of 54% (USD), while the NASDAQ Biotechnology Index returned -26%, to give a relative outperformance of approximately 80%.
In 2008, Carl Harald was appointed Investment Manager at Karolinska Development in Stockholm, and has served as a member of the board of various Swedish biotechnology companies. Since 2012, he has held various Chief Executive roles for the Karolinska Development portfolio.
Share capital On 22 June 2021, there were 41,383,817 Ordinary shares in issue. There are currently no shares being held in treasury (529,846 at 28 February 2021).
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Notes
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