Selecting for growth in a growth sector
Now in its 21st year, International Biotechnology Trust (LONDON:IBT) is a specialist investor in biotechnology companies globally. In the year to end February 2015, it returned c 50% in NAV and 49% in share price terms, ahead of the Nasdaq Biotechnology Index’s 39% return. IBT is differentiated from its peers by its holdings in unquoted stocks (c 8% at present), a part of the portfolio that has recently contributed to the trust’s strong performance, reflecting successful exits and a milestone payment. The long-term growth drivers for the biotech sector remain in place and the managers expect strong sector earnings growth to outpace market growth over the long term.
Investment strategy: Focus on growth, novel drugs
IBT invests in a diversified portfolio of biotech companies from mature earnings-driven companies to earlier-stage private companies. From Q414 investments in new unquoted companies have been halted in favour of quoted investments where the managers see opportunities for continued strong performance. Lead manager, Carl Harald Janson, appointed in September 2013, applies a stock selection process that focuses on well-financed companies with experienced management, strong intellectual property, products addressing areas of high medical need, possessing pricing power and trading at a reasonable valuation. The managers seek to reduce risk by limiting exposure to high-risk therapeutic areas and binary events; they are also able to draw on the extensive experience of their colleagues in the 30-strong SV Life Sciences investment team.
Market outlook: Above-average secular growth
The long-term reasons for optimism on the prospects for the biotechnology sector remain in place; acceleration of innovation in the industry itself combined with rising demand from ageing populations and increasingly wealthy emerging markets. There are risks to monitor, including pricing pressures. The sector has also experienced sharp corrections in the past but has subsequently resumed its ascent. P/E valuations for biotech stocks relative to growth appear moderate compared with top pharmaceuticals. The prospect of further partnerships and M&A in the sector seems likely to help underpin valuations and could provide profitable exits for some of IBT’s unquoted and smaller cap holdings.
Valuation: Discount could contract further
The current discount of 13.2% is narrower than the 15-20% seen following the correction last year but is above some of its peers. Value-additive transactions in the unquoted segment and a continued reduction in exposure to this area could prompt a further narrowing in the discount.
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