Biotechnology Trust Reports Strong Investor Returns
By Nuala Moran
LONDON – International Biotechnology Trust (IBT) reported strong returns for shareholders, driven by new drug approvals, high levels of merger and acquisition activity and the resilience of leading biotech companies in the current growth-stunting environment.
The London-based investment trust saw net asset value (NAV) rise by 41.9 percent to £2.32 (US$3.70) per share in the year ended August 2012. And while – inevitably – the unquoted investments in IBT's portfolio mean the shares trade at a discount, the share price rose by 43 percent over the year, significantly outperforming the FTSE All-share index, which produced a total return of 10.2 percent in the same period.
The performance of the quoted portfolio, which is dominated by U.S. investments, including stakes in Amgen Inc., Gilead Sciences Inc. and Affymax Inc., reflects increased investor interest in the biotech sector, said David Pinniger, investment manager. New product launches and the fact that leading companies are achieving strong growth is bringing new investors into what is a "long-overlooked" sector. "The technical aspects of evaluating biotech stocks are falling away and it is more appealing to nonspecialists," Pinniger told BioWorld International. "Brokers say the level of generalist interest in mid- and large-size biotechs is much greater than it has been."
Nor is that just a case of biotech representing "the best house in a bad neighborhood," Pinniger said, noting that central bank quantitative easing programs are underpinning equity markets at present, resulting in positive – if muted – price gains in the broader stock market. Biotech, however, offers the prospect of internally fueled growth that is independent of economic stimulus measures.
"The big guys have put their houses in order, they are pulling products through their pipelines, or like Amgen with the acquisition of Micromet, or Gilead buying Pharmasset, are bringing products in from outside; there's strong cash flow and earnings growth," Pinniger said.
In fact, the big biotechs now look like big pharma companies – but with one crucial distinction – they are exhibiting higher growth. Pinniger said he expects to see compound annual growth rates of up to 40 percent over the next five years, with average earnings per share up by 20 percent to 25 percent.
That growth is being driven by the approval of new drugs to treat diseases such as hepatitis, multiple sclerosis, prostate cancer and cystic fibrosis. "The last couple of years have seen products getting approved, and in the past 12 months, things have been getting through the FDA with barely a scratch," Pinniger said.
Those products are filling areas of real unmet medical need, are specialist rather than primary care treatments, and are serving relatively small patient populations. "As a result, there is less pressure on pricing," Pinniger noted. And while it may not be good for much, the current economic climate creates ideal conditions for capturing the value of medical innovation, as providers are required to deliver more health care with constrained resources. That is increasing demand for the higher quality, more effective products that biotech is delivering, Pinniger said.
During the year four companies in the quoted portfolio were acquired, including the largest holding, Micromet Inc., a company that IBT first invested in at venture-stage. IBT also did well out of Gilead Sciences' $11 billion acquisition of Pharmasset Inc., and exited Caliper Life Sciences Inc. and Ardea Biosciences Inc. In addition, one company in the unquoted portfolio, EUSA Pharma Inc., was acquired for $700 million.
Other unquoted investments are maturing, and Pinniger expects to see more trade sales over the next two to four years. "Some unquoted companies are struggling, but others are delivering clinical data," he said.
As a result of EUSA's acquisition, IBT has a low weighting in nonquoted investments at 16 percent of the portfolio. The long-term target is an average of 30 percent, and Pinniger said IBT will be "restocking" and putting money into new companies. Oxford and Cambridge universities and Imperial College London are good sources of start-ups, as are assets coming out of pharma as a result of restructuring.
The investment thesis for venture capital investing in the life sciences area remains intact, with creative and efficient small biotechs continuing to provide novel products so desperately needed by pharma. In the year to the end of August, IBT made one new venture-stage investment and 18 follow-on investments.
However, with IBT's share price trading at a 12 percent discount to NAV and the unquoted portfolio making up 16 percent of the total fund, the market sees little value in the unquoted assets.
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