Healthcare companies around the world are scrambling to produce drugs and vaccines to treat and immunise people against Covid-19. However, the managers of International Biotechnology Trust (IBT) are not necessarily investing in these companies as their share prices are volatile, shooting up on reports of possible treatments in development.
For example, Carl Harald Janson, lead manager of International Biotechnology Trust, recently reduced the trust’s holding in Gilead Sciences (US:GILD) – which accounted for 6 per cent of its assets at the end of March – when its share price hit $85 (£68.41), up from $65 at the start of the year. He says there is a risk that vaccine developers will become overvalued as there is pressure to make drugs as affordable as possible.
Dr Janson and his team have also sold some of the trust's holdings in small, early-stage companies with little cash, which might struggle to refinance over the next 18 months. And, due to falls in world markets, the trust's board reduced its gearing – debt – from 8 per cent at the start of the year to zero. This is because if an investment trust borrows money to invest in more stocks than it can buy with its assets, and thenmarkets fall, it can compound the trust's losses.
However, Dr Janson says that they are now looking for opportunities to increase gearing again. Although the trust's share price plummeted as the market fell in March it has since recovered, and over the three months to 24 April made a total return of 7.5 per cent.
Dr Janson and his team generally take a ‘bottom up’ approach to stock selection – picking holdings on the basis of their individual merits rather than because they operate in a particular sector or geography. But they like therapeutics companies with good long-term growth prospects and strong management teams. He says this area is benefiting because ageing populations and scientific advancements are boosting demand for new drugs. He believes that biotechnology companies in general are undervalued, and notes that they have not returned to their price peaks of 2015.
Ailsa Craig, an investment manager on the trust, says that although some of the companies the trust holds have delayed drug trials due to lockdowns, this hasn’t had much effect on their share prices because the delays have not been caused by problems with the drugs. She adds that most trials that had got under way before lockdowns were imposed are continuing – as long as patient safety can be maintained.
International Biotechnology Trust has benefited, meanwhile, from not having exposure to companies that sell drugs people don’t need or are less essential, such as those for cosmetic, dental or elective procedures. This is because these areas have ground to a halt as a result of the coronavirus lockdowns.
Companies that conduct research on drugs and treatments for rare diseases, including a number of the trust’s largest holdings, account for 31 per cent of its assets. Ms Craig says she favours these because there is much less pressure on pricing than in other biotech areas. The trust's managers look to invest in companies that have completed clinical trials for drugs they are producing. “We like to buy companies that have the data already,” she says. “There are still regulatory and manufacturing risks, but [with these] we do not carry the clinical risk.”
Examples of companies that work on rare diseases include the trust's largest holding, Vertex Pharmaceuticals (US:VRTX), which makes treatments for patients with cystic fibrosis and is developing treatments for the underlying cause of the disease. Ms Craig says it has no competition, so has a monopoly in its field. Vertex Pharmaceuticals has been one of International Biotechnology Trust’s best performing stocks in recent months because it secured approval for a triple combination therapy to treat cystic fibrosis in October 2019 – five months earlier than expected.
PTC Therapeutics (US:PTCT), meanwhile, is creating an oral version of a drug for spinal muscular atrophy. Ms Craig says that it will be used for seriously ill children and is well placed to take market share from existing medication, which has to be injected into the spine.
Companies involved with research on the central nervous system account for 17 per cent of the trust's assets and one of its most promising holdings in this area is ACADIA Pharmaceuticals (US:ACAD). Ms Craig says that it has completed successful trials on treatments for dementia-related psychosis, which should come to market within a year.
Many healthcare funds only invest in listed equities, but International Biotechnology Trust can also invest in unquoted companies, in which it had 15 per cent of its assets at the end of March. This is mainly via a venture fund run by SV Health Investors, the company where Dr Janson and his team work. SV Fund VI accounted for 8.2 per cent of the trust's assets at the end of February. Dr Janson explained that in 2016 they decided not to make any new direct investments in unquoted companies because these are “pretty much illiquid” – hard to buy and sell – and difficult to value. “The venture fund is much more liquid as it has a secondary market,” he says.
SV Fund VI also has an internal rate of return (IRR) of 18.1 per cent since inception (sterling adjusted to 29 February 2020), while the trust's seven direct investments in unquoted companies have a fair value gain of 14.4 per cent. And although International Biotechnology Trust pays a 2 per cent management fee for its investment in SV Fund VI, the total management fee for this never exceeds 0.9 per cent of the trust’s NAV.
Despite investing in a growth area, International Biotechnology Trust targets an annual dividend equivalent to 4 per cent of its net asset value (NAV) as at the last day of its preceding financial year. It does this by paying the dividend out of capital reserves in two instalments each year. Despite the headwinds posed by coronavirus, as long as “there is not a complete Armageddon, the board will stick to its dividend policy,” adds Dr Janson.
