1 November 2022
INTERNATIONAL BIOTECHNOLOGY TRUST PLC
(“IBT” or the “Company”)
Annual Report for the year ended 31 August 2022
WHO WE ARE
International Biotechnology Trust plc offers investors access to the fast- growing biotechnology sector through an actively managed, diversified fund.
Our award-winning Investment Managers at SV Health Managers LLP are scientifically, medically and financially experienced with over 75 years of experience between them. As well as investing in a wide-ranging portfolio of global quoted biotechnology stocks, we include a small proportion of otherwise inaccessible carefully selected unquoted investments which have the potential to deliver additional returns over the long-term. Excellent management teams, unique innovative products and strong potential for outperformance are the key criteria for inclusion in our diversified portfolio of assets. The six key attributes of the Company are detailed below:
· Strong Fundamentals: Driven by the strong fundamental demand and supply of the Biotechnology sector
· Diversified portfolio: Access to a broad spectrum of quoted and unquoted investments
· Growth and yield: Provides investors exposure to both growth and an attractive yield
· Active management: Bottom up stock selection with diversification overlay
· Expert team: Medically, scientifically and financially experienced Investment Managers with access to specialists at SV Health Investors
· Innovation: Invested in some of the most innovative companies in the world, developing therapies to improve and save lives
FUND FACTS
FINANCIAL HIGHLIGHTS
| 31 August 2022 | 31 August 2021 | |
| Total equity/Net asset value (NAV) (£’000) | 284,889 | 323,775 |
| NAV per share | 697.2p | 782.4p |
| Share price | 651.5p | 729.5p |
| Share price discount | (6.6)% | (6.8)% |
| Gearing | 14.0% | 6.3% |
| Ongoing charges* | 1.3%** | 1.2%** |
| Ongoing charges including performance fee | 1.5%** | 1.3%** |
For detailed calculations on the discount/premium, gearing and ongoing charges, please refer to Alternative Performance Measures (APMs) on page 106.
* Calculated in accordance with the Association of Investment Companies (the AIC) guidance. Based on total expenses excluding finance costs and performance fee and expressed as a percentage of average daily net assets. The ratio including performance fee has also been provided, in line with the AIC recommendations. Research costs under MiFID II borne by the Company are included in the ongoing charges calculation.
** Includes management fees paid directly to SV Health Managers LLC from the investment in SV Fund VI (Fund VI) of £392,000 (2021: £377,000) and directly to SV Health Managers LLP from the investment in SV Biotech Crossover Opportunities Fund LP (BCOF) of £231,000 (2021: nil).
FIVE YEAR PERFORMANCE (Cumulative Total Return)
| 1yr (%) | 3yr (%) | 5yr (%) | |
| Share price total return to 31 August | (6.4) | 14.8 | 27.8 |
| NAV per share total return to 31 August | (6.9) | 24.1 | 25.6 |
| NASDAQ Biotechnology Index (NBI) to 31 August | (13.8) | 27.6 | 26.7 |
| FTSE All-Share Index to 31 August | 1.0 | 12.0 | 17.7 |
For detailed calculations on the Share price total return and the NAV per share total return, please refer to Alternative Performance Measures (APMs) on page 107. Data for NBI and FTSE All-Share Index sourced from Bloomberg. All sterling-adjusted and on a shareholder returns basis.
TOP TEN HOLDINGS
| As at 31 August 2022 | As at 31 August 2021 | ||||
| Investment | Therapeutic area | Geographic location | £’000 % of NAV | % of NAV | |
| Horizon Therapeutics | Rare diseases | United States | 23,151 | 8.1 | 5.8 |
| Seagen | Oncology | United States | 22,036 | 7.7 | 6.8 |
| SV Fund VI | Venture Fund | United States | 18,866 | 6.6 | 6.7 |
| Incyte Genomics | Oncology | United States | 14,644 | 5.1 | 3.7 |
| Regeneron Pharmaceuticals | Ophthalmology | United States | 11,830 | 4.2 | 1.2 |
| Gilead Sciences | Infectious diseases | United States | 11,387 | 4.0 | 6.6 |
| Neurocrine Biosciences | Central nervous system | United States | 11,150 | 3.9 | 6.2 |
| Harmony Biosciences | Rare diseases | United States | 9,981 | 3.5 | 1.3 |
| Mirati Therapeutics | Oncology | United States | 9,461 | 3.3 | 2.8 |
| Supernus Pharmaceuticals | Central nervous system | United States | 8,752 | 3.1 | 1.8 |
| 141,258 | 49.5 |
At 31 August 2021 the top ten holdings represented 52.7% of NAV.
PORTFOLIO OVERVIEW
| 31-Aug-22 | 31-Aug-21 | |
| Number of total portfolio companies* | 72 | 82 |
| Number of quoted holdings | 64 | 74 |
| Number of unquoted holdings** | 8 | 8 |
| NAV | £284.9m | £323.8m |
| Quoted investments | £285.5m | £314.4m |
| Unquoted investments | £28.0m | £31.0m |
| Net (debt)*** | (£40.0m) | (£20.3m) |
* Excluding unquoted companies fully written off (2022: 11; 2021: 10).
** Includes two SV unquoted funds. SV Fund VI and SV BCOF have a further 20 and 4 companies, respectively, in their portfolios.
*** Debt as at 31 August is a result of the Investment Managers’ investment strategy. Please refer to Glossary on pages 104 and 105 and APMs on page 106 for more information.
PORTFOLIO COMPOSITION
AS AT 31 AUGUST 2022
NAV% by Size*
| Mega Cap > $30bn | 11% |
| Large Cap =$10-30bn | 32% |
| Mid cap = $2-10bn | 28% |
| Small cap < $2bn | 20% |
| Unquoted funds | 7% |
| Directly-held unquoted | 2% |
*Adjusted for cash/(debt) balance
NAV% by Development Stage
| Profitable | 32% |
| Revenue Growth | 31% |
| Early-stage | 37% |
NAV% by Therapeutic Area
| Oncology | 29% |
| Rare diseases | 21% |
| Central Nervous system | 14% |
| Infectious diseases | 11% |
| Auto-immune | 5% |
| Ophthalmology | 4% |
| Other* | 16% |
*Other includes unquoted funds.
NAV% by Geography
| US/Canada | 86% |
| Europe/UK | 11% |
| Rest of World | 3% |
AS AT 31 AUGUST 2021
NAV% by Size*
| Mega Cap > $30bn | 15% |
| Large Cap =$10-30bn | 18% |
| Mid cap = $2-10bn | 42% |
| Small cap < $2bn | 16% |
| SV Fund VI | 6% |
| Directly-held unquoted | 3% |
*Adjusted for cash/(debt) balance
NAV% by Development Stage
| Profitable | 26% |
| Revenue Growth | 41% |
| Early-stage | 33% |
NAV% by Therapeutic Area
| Oncology | 33% |
| Rare diseases | 27% |
| Central Nervous system | 15% |
| Infectious diseases | 7% |
| Auto-immune | 5% |
| Ophthalmology | 1% |
| Other* | 12% |
*Other includes unquoted funds.
NAV% by Geography
| US | 92% |
| Europe/UK | 5% |
| Rest of World | 3% |
LONG-TERM RECORD
TEN YEAR PERFORMANCE as at 31 August
| TEN YEAR PERFORMANCE as at 31 August | ||||||||
| NBI Index | ||||||||
| As at | Total NAV | Number of shares | NAV per share | NAV** | Share price | Share price** | (Discount)/ | Total Return |
| 31-Aug | £’000 | in issue* | pence | total return % | pence | total return % | premium % | % |
| 2022 | 284,889 | 40,863,009 | 697.2 | (6.9) | 651.5 | (6.4) | (6.6) | (13.8) |
| 2021 | 323,775 | 41,383,817 | 782.4 | 9.8 | 729.5 | 3.8 | (6.8) | 24.8 |
| 2020†| 283,897 | 38,436,817 | 738.6 | 22.4 | 730.0 | 18.7 | (1.2) | 18.6 |
| 2019 | 239,579 | 38,397,663 | 623.9 | (6.8) | 636.0 | (2.1) | 1.9 | (9.8) |
| 2018 | 262,473 | 37,547,663 | 699.0 | 8.6 | 680.0 | 13.7 | (2.7) | 10.1 |
| 2017 | 252,651 | 37,547,663 | 672.9 | 20.9 | 624.0 | 30.5 | (7.3) | 21.7 |
| 2016 | 216,651 | 37,672,663 | 575.1 | (1.7) | 497.5 | (9.8) | (13.5) | (6.5) |
| 2015 | 236,001 | 40,247,663 | 586.4 | 48.2 | 551.5 | 75.4 | (6.0) | 38.0 |
| 2014 | 214,970 | 54,332,663 | 395.7 | 26.4 | 314.5 | 16.9 | (20.5) | 33.8 |
| 2013 | 172,672 | 55,157,663 | 313.1 | 34.7 | 269.0 | 31.5 | (14.1) | 46.8 |
* Excludes treasury shares.
** On a total return basis (with all dividends reinvested since 2017).
†Share price as at and total return to 28 August 2020 (31 August 2020 being a UK Bank Holiday).
TEN YEAR PERFORMANCE
Share Price/NASDAQ Biotechnology Index Total Return (%)
[GRAPHIC REMOVED]
CHAIRMANS STATEMENT
SUMMARY
I am honoured to present the Company’s Annual Report for the year ended 31 August 2022.
In difficult markets, the Company has performed well over the year, significantly outperforming the NBI benchmark. The Company’s NAV per share and share price returned -6.9% and -6.4% respectively, whilst the NBI returned -13.8% and the FTSE All-Share Index returned 1.0%. All figures are on a total return basis, including costs and assuming dividends reinvested, and are sterling-adjusted. Although negative returns are always disappointing, it is encouraging that IBT has outperformed its comparator index over this challenging period for biotechnology’ shares.
The past year has seen two strong trends, with significant sell-offs and a very weak biotechnology sector in the first part of the year, followed by a strong recovery since June. After a difficult first half, the Company’s NAV has risen 7% in the second half of the year.
Despite the turbulence of the past few years and the unfortunate but necessary challenges caused by a restriction on investing in COVID-19 vaccine producers at the height of the pandemic, the Company has demonstrated its resilience with its NAV outperforming the NBI Index over the past year.
QUOTED PORTFOLIO
The quoted portfolio fell by 7.6% in a very volatile period, outperforming the benchmark which fell by 13.8%. In the first six months, fears of rising interest rates and high levels of inflation hit the biotechnology sector especially hard in the stock market fall which occurred at the end of 2021. This was followed by significant further weakness across the whole market when Russia invaded Ukraine. Since then, the sector has seen a substantial recovery, largely driven by a number of high value M&A transactions and a pick-up in positive clinical data readouts. The Company has benefited from this recovery. The main drivers of the Company’s performance are discussed in more detail in the Fund Manager’s Review.
The Fund Manager uses active management and tactical asset allocation to cushion the portfolio from some of the more extreme swings in the biotech sector. This has contributed to the outperformance against the benchmark index over the financial year, as well as lower volatility than the index (see Figure 4 in the Fund Manager’s Review on page 12).
UNQUOTED PORTFOLIO
The Company’s unquoted portfolio, a key feature which allows shareholders to gain exposure to differentiated returns continues to perform well.
The Company’s strategy is to maintain between 5%-15% exposure to unquoted companies in the sector. In December 2021, the Board announced its decision to allocate funds to SV Health Investors’ biotechnology focused private fund, SV Biotech Crossover Opportunities Fund LP. It predominantly invests in later stage, pre-IPO opportunities and invests in clinical and near clinical stage biotech companies that have the potential to deliver excellent investor returns and address significant unmet medical need in patients. The Board is confident that this new allocation to unquoted funds managed by SV will complement the existing investment in SV Health Investors’ Fund VI. By the end of the financial year the Company had invested £3.3m ($4.2m) in BCOF, which has drawn $35m from its current total commitments of $212m and it invested the drawn capital in three unquoted companies and one quoted company.
Our most significant unquoted investment, SV Fund VI, has delivered a currency adjusted internal rate of return (IRR) of 22.3% per annum since the date of the Company’s first investment into the fund in 2016. During the year ended 31 August 2022, SV Fund VI made five distributions totalling $7.8m (£5.8m) and two capital calls of $1.2m (£0.9m). The strength of the dollar in the year contributed to the overall performance of £3.2m in GBP terms to deliver an annual return of 9.0%.
In June 2022 the sale of Nordic Consulting Partners (a directly held unquoted stock) to Accrete Health Partners was completed, from which IBT received gross proceeds of £3.5m. This investment generated a 6x multiple on its initial US dollar denominated investment, including the prior proceeds received in 2016.
The remainder of the unquoted portfolio comprises investments directly held and those with a carrying value representing contingent milestones expected to be received. There was a negligible fair value loss, net of foreign exchange gains, of £0.3m from these holdings.
ESG
This report includes the Company’s second ESG report detailing the outcome of the Company’s ESG engagement process. The initial screening process delivered a meaningful insight for investors into the level of ESG compliance among the major investments in the Company’s portfolio. We intend to use this information as a foundation on which to build our future ESG engagement with portfolio companies. This most recent screening process encountered a significantly lower level of compliance with the process from the portfolio companies. Instead of responding individually to their many shareholders, companies are now referring investors to their standard ESG policies on their websites. This appears to be in response to the increasing interest in ESG from investors, which is positive for the sector overall. A discussion of the responses received and the Fund Manager’s view on the ESG compliance of the Company’s portfolio is set out in more detail on page 27. In order to make a meaningful comparison between companies and to allow the Fund Manager to screen investments effectively in the future, the Company is reviewing the screening process described in its ESG policy and will update shareholders when that process is complete. The Board remains convinced that active engagement on these matters remains the most effective way to have an impact.
I am delighted that our work on ESG has been recognised by Capital Finance International with the Company being awarded Best Biotechnology Investment Strategy (UK) in its 2022 Responsible Investing Award. I have every confidence that the Fund Manager will continue to develop its ESG strategy in this rapidly evolving area to enable them to continue to incorporate ESG considerations into the investment process and to report on ESG matters to the Company’s shareholders.
PERFORMANCE FEE
The strong performance in 2021/2022 has not yet totally offset the relative underperformance that was detailed in the 2020/2021 report, which was, in part, due to restrictions to trading vaccine stocks. Therefore, a performance fee will not be paid on the quoted portfolio for the financial year ended 31 August 2022.
A performance fee of £471,000 (£2021: £353,000) is payable on the unquoted portfolio due to net realisation gains offsetting a fair value loss.
SHARE PREMIUM AND DISCOUNT, SHARE ISSUANCES AND BUYBACKS
The Board believes that keeping the Company’s share price and NAV close is a benefit to existing shareholders and regularly reviews the methods for managing both discount and premium, as appropriate. Conducting share buybacks when the share price is at a discount* to NAV is accretive to shareholders. Likewise, the Company will continue to issue shares at a premium to the NAV, when there is demand. The Board also believes growing the Company increases liquidity and spreads the costs amongst a greater number of shareholders.
During the period under review, the Company’s discount widened at times, but closed the year at 6.6%, not dissimilar from the 6.8% discount at the start of the year. The Company executed 22 share buybacks of 520,808 shares in aggregate during the year to 31 August 2022. No shares have been issued during the year under review.
DIVIDENDS
Paying a dividend out of capital returns gives the Company’s shareholders a reliable source of income which is unusual from growth orientated investments. The Company’s dividend policy is to issue dividends equal to 4% of NAV as at the end of each preceding financial year, paid in two equal instalments in January and August each year. In 2022, the Company paid two dividends of 15.7 pence per share in accordance with this policy, an increase of 10.6% from the dividend paid in the previous year. We are pleased to have been able to offer our shareholders another dividend during this period of extreme uncertainty. As the audited net asset value as at 31 August 2022 declined from the previous financial year, the absolute value of the dividend will fall next year although the prospective dividend yield as at 31 August 2022 remains unchanged at 4.3% versus the prospective dividend yield one year previously.
BOARD OF DIRECTORS
During the year the Company announced the appointment of Professor Patrick Maxwell as a Non-executive Director with effect from 1 January 2022. Professor Maxwell is one of the pre-eminent UK scientists in the biotechnology sector. Please refer to page 33 for his biography.
I will be retiring from the Board at the conclusion of the AGM, having had the honour of serving nine years on the Board. I am pleased to announce that Kate Cornish-Bowden will succeed me as Chairman. She has been on the Board since 2020 and is a highly valued colleague. Kate has deep knowledge of the fund management and investment industries and a strong personal interest in biotechnology. Patrick Magee will become the Senior Independent Director and the Board has commenced a recruitment process to bring the Board size back to five members. I wish my Board colleagues every success in their new roles.
OUTLOOK
The Fund Manager and Directors will continue to monitor actively the global economic and geopolitical situation and any potential impact on the biotechnology sector’ s prospects, financial condition, and outlook.
Our Annual Reports in 2020 and 2021 were dominated by the effects of the COVID-19 pandemic which disrupted investment markets and the wider economy. Russia’s invasion of Ukraine has resulted in similarly seismic shocks, creating a sharp rise in political instability, economic disruption and an increase in the inflationary pressures that many predicted would follow the pandemic. Despite this, the fundamentals of the biotechnology industry remain intact. The companies that we are invested in remain strong, with innovation still continuing apace and demand for new therapies rising as the elderly population grows and developing markets gain better access to medicines. Indeed, the COVID-19 pandemic highlighted both the increasingly important role of the life sciences industry, including biotechnology, and the scale and speed of innovation this industry can provide.
The past year has seen volatility in the market which looks set to continue although, as predicted in the previous Interim Report, the past few months have seen signs of a rebound from which the Company has been well placed to benefit. This volatile landscape will likely assist some biopharmaceutical companies more than others. As an investment fund that actively manages a diverse portfolio across the industry, the Company provides investors with access to the biotechnology sector with a significantly reduced risk of volatility than would be present if one directly purchased a small portfolio of biotechnology company shares. The Company’s closed-end structure allows it to gear, which prudently takes advantage of varying market conditions and, because of greater stability of capital, allows a longer-term approach to investment.
Further catalysts for the year ahead could include the growth of M&A transactions fuelled by a combination of cash rich big pharmaceutical companies looking to replenish their pipelines by acquiring smaller biotechnology companies which are now trading at attractively low valuations and whose management may now have more realistic ideas about the achievable exit price. Indeed, M&A has picked up substantially towards the end of the financial year ended 31 August 2022 with seven transactions benefiting the Company in the whole financial year. The Fund Manager’s active investment strategy should ensure that the Company is well placed to identify the greatest beneficiaries of growth over the coming years.
As noted above, I retire from the Board post the AGM. The Company has many strengths. The fund management team are highly skilled both in quoted and unquoted stocks. The strong Board with many and varied talents is well-positioned to lead the Company’s strategy for the benefit of shareholders and to provide effective governance. Finally, the Company has many differentiating features that make it attractive to new investors: the regular dividend; the ability to invest in the full spectrum of biotechnology companies from start-ups to multinationals; and the strong focus on ESG. With the fundamentals for the biotechnology sector looking attractive, I am optimistic that the Company can look to the future with confidence.
Jim Horsburgh | Chairman
31 October 2022