International Biotechnology Trust (IBT)

13/05/2025

Results analysis from Kepler Trust Intelligence

International Biotechnology Trust (IBT) has reported strong results for the half-year ending 28/02/2025. Its positive NAV total return of 2.9% came during a negative period for its reference index, the Nasdaq Biotechnology Index, which ended it down 3.0%.

Ailsa Craig and Marek Poszepczynski, co-managers of the trust since March 2021, have delivered a NAV total return of 14.7% to the period end, well ahead of the reference index' 2.9% return.

The quoted portfolio (92.4% of the total investments) performed even better during the half-year, up 4.3%. The successful identification of M&A targets was a major driver of returns, with the takeout of IBT's then largest-holding Intra-Cellular Therapies by Johnson & Johnson being the most meaningful of these.

Since the period end, uncertainty about US policy on tariffs and drug approvals have hit biotechs. Ailsa and Marek argue the dislocation is unlikely to persist for long given the strength of the sector on a fundamental basis, and they continue to look for opportunities in the smaller companies in their space.

Kepler View

These are impressive results which continue Ailsa and Marek's strong performance since taking over the portfolio, during which period they have outperformed in a variety of environments, and in both rising and falling markets. We think this resilience reflects in part the basket approach the managers take to therapeutic areas, which avoids too much dependence on single stock picks in an area in which returns are driven by developing medical science and uncertain trial results.

Another factor has been the successful identification of likely M&A candidates. M&A is always an important driver of returns in the biotech sector, but the managers argue that upcoming patent expiries mean the need for large-cap pharma to find revenue-generating new ideas is especially acute. Some evidence can be seen in the acquisitions by Johnson & Johnson of Intra-Cellular Therapeutics and by Immedica of Marinus Pharmaceuticals during the period as well as Merck's agreement to acquire Springworks, another International Biotechnology Trust (IBT) holding, post period-end. Promising medical research, patent expiries and easing funding costs are all structural factors which would seem to support the growth of M&A as a trend, and IBT's tilt to the smaller end of the biotech market should increase the chances of it benefitting.

In our view, the current uncertainty is creating a valuation opportunity in what should remain an attractive growth market. Ailsa and Marek report valuations in the smaller companies in their universe are at historically low levels, while IBT's shares can be bought at a discount of around 9% at the time of writing. Wherever policy settles, we think biotechnology is likely to prove a source of attractive returns to investors, particularly as and when interest rates decline. We think IBT offers access to an exciting growth market well supported by sector fundamentals, a sector that is cheap thanks to policy uncertainty, but which should be a prime beneficiary of a lower interest rate environment. And IBT offers active management under a team who have demonstrated their ability to add value through varied and difficult environments.

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