International Biotechnology beats benchmark on strong listed portfolio performance

International Biotechnology beats benchmark on strong listed portfolio performance – In the year ended 31 August 2017, International Biotechnology Trust’s NAV rose from 575.1p to 672.9p, including a significant currency gain, equivalent to 14.4 pence per share. The NAV returned 20.9% in. Over the same period, the Shareholders total return was 30.5%. This compares to a rise in the Nasdaq Biotech Index of 21.7% and a gain in the All-Share of 14.4%. The fund’s first dividend payment was made to shareholders on 31 January 2017 at a rate of 11.5p per share. They paid out a dividend equal to 4% of NAV as at 31 August 2016 in two equal tranches on 31 January 2017 and 31 August 2017.

The return on the quoted portfolio was 31.2%, which outperformed the benchmark Index, the NBI, by 9.5%.

Five bids

Five portfolio holdings were the subjects of successful bids during the year under review Ariad, Actelion, CoLucid, Neuroderm and Kite Pharma.

Ariad Pharmaceuticals was acquired by Takeda on 9 January for $24 per share, a 75% premium to the share price at the close of the previous day. Ariad Pharmaceuticals had been identified as a potential M&A target and the Company held a 3.6% position, resulting in a gain of GBP6.5m on our holding.

Eli Lilly announced the acquisition of a portfolio company CoLucid for $960m in an all cash transaction. CoLucid is a neurology company that had a late-stage acute migraine drug in development and Lilly paid a 30% premium to the previous closing share price.

In late January, Actelion, a Swiss biotechnology company and a long-term holding of the Company, was acquired by Johnson and Johnson for $30.0bn, a 23% premium to the previous closing share price.

Neuroderm, a clinical-stage company developing drug-device combinations for the central nervous system, was acquired by Mitsubishi Tanabe Pharma for a 17% premium to previous closing share prices and a total of $1.1bn in July.

On 28 August, Gilead announced it had agreed to buy Kite Pharmaceuticals for $11.9bn in a deal, a 29% premium to the previous share price, in a move that was welcomed by investors. Kite Pharmaceuticals is a leader in the emerging field of cell therapy, CAR-T.

Positive contributors

Exelixis is in the launch phase of its kidney cancer drug Cabometyx. The launch performance has been stronger than expected, beating analyst estimates. We took some profits during the year as the company had reached its price target.

Vertex’s share price rose after announcing positive clinical data for its triple drug therapy in late-stage trials to treat Cystic Fibrosis.

Incyte, a biopharmaceutical company specialising in oncology product development, increased by GBP6.2m after upping the guidance on sales of its lead product, Jakafi, and on M&A speculation.

The Company had a significant position in Tesaro, another oncology company, whose drug niraparib was approved by the FDA on 27 March 2017. Niraparib is a PARP inhibitor which is a potential new treatment for ovarian cancer. Due to the exciting data that has been generated in late-stage trials, Tesaro was in discussions with acquirers. News of the bid speculation helped boost the share price and we chose to lock in profits at that point in time.

FX gains also added to the value of the quoted portfolio, with a gain of GBP5.6m, or 15.0 pence per share in the year.

Negative contributors

The Company’s investment in Shire Pharmaceuticals was the negative contributor to performance. This has been due to investor concerns over competition of its haemophilia franchise from Roche’s drug ACE910 and fears that the company would not deleverage its debt post the acquisition of Baxalta. The other top four negative contributors are discussed in the unquoted portfolio review.

Unquoted portfolio

The return for the unquoted portfolio over the year ended 31 August 2017 was a negative return of 25.7%. The combined effect of gains and losses on the unquoted investments was to decrease NAV by 20.1 pence per share. This is due to several factors.

ReShape Medical was written down by GBP1.1m in August based on a term sheet received from a potential acquirer. After the year end, on 2 October 2017, the company completed a merger with EnteroMedics, a publicly listed entity traded on the NASDAQ exchange. The shares in the combined company will be valued as a quoted stock, however, the investment will remain in the unquoted portfolio for performance measurement purposes.

EBR Systems was written down by GBP1.3m based on the latest financing term sheet. A significant financing round is required to finance the clinical trial for the wireless heart pacemaker, which is resulting in earlier investments being down valued.

Kalvista Pharmaceuticals completed a reverse merger in the period into Carbalyn Therapeutics on 23 November 2016 and is now listed on the NASDAQ Stock Market. The valuation of Kalvista fell by GBP1.2m following the listing while the company establishes itself. Following the year end, on 10 October 2017, Kalvista and Merck announced a collaboration for the Company’s investigational intravitrealy (IVT) injection candidate currently in development for potential treatment of diabetic macular edema. The share price has risen significantly following the announcement and as at 1 November 2017, the investment was valued at GBP2.9m. For performance measurement purposes, it remains in the unquoted portfolio, as do Entellus and Transenterix.

In January 2017, Merck notified them that it would be discontinuing development of the assets acquired with OncoEthix due to toxicity concerns. The contingent milestones relating to this investment were written off in full, with an impact on the NAV of GBP1.2m. Although no further proceeds will be received relating to this investment, the overall return was a multiple of 2.4x.

It wasn’t all bad news though, Atopix was sold to Chiesi Farmaceuticals in November 2016, and they received upfront proceeds of GBP0.6m. Contingent milestones relating to the commercialisation of the CRTH2 antagonist are currently valued at GBP0.4m. A recapitalisation of NCP Holdings led to a sale of 47.5% of IBT’s holding for proceeds of GBP1.2m. Entellus completed a secondary equity offering in January 2017 and they sold 15.3% of our holding for GBP0.8m. Following the secondary offering, earnings missed analyst expectations and the share price fell, decreasing our valuation by GBP0.3m at the year end. They believe the fundamentals of the company remain strong with commercial activities ramping up.

IBT : International Biotechnology beats benchmark on strong listed portfolio performance

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