Harness the power of biotech for income and growth in uncertain times – What Investment

International Biotechnology Trust (IBT) invests primarily in US-based drug-makers with a global reach that meet a medical need for consumers. IBT is also the only biotech trust which caters to income-seeking investors, offering an attractive dividend of 4% of NAV as well as the potential for rapid capital growth.

Led by Carl Harald Janson, a medical doctor by background, IBTs investment team seeks out those businesses which can produce strong top-line growth. For this they need intellectual property which gives them pricing power and a competitive edge or monopoly. More than half the portfolio is invested in companies working in the specialisms of oncology (the treatment of cancer) and rare diseases, where barriers to entry are high. For example, one of the largest positions in the fund is in Vertex. A growth story in the treatment of rare diseases, it dominates the cystic fibrosis space, treating around 90% of patients.

At the geographical level, the fund is heavily skewed towards the US, the home of the biotech industry. It is well diversified across the market-cap spectrum, and holds, directly and indirectly, approximately 100 companies at different stages of development working in a range of therapeutic areas. The portfolio is predominantly in large and mid-caps, although it also holds some small-cap companies of less than $1bn in size.

Alongside the names in its listed company portfolio, IBT also has a smaller portfolio of unquoted biotech stocks, most of which are held through an investment in a venture fund, SV Fund VI. This unquoted portfolio has proven itself to be an excellent diversifier, making a significant contribution to performance last year when biotech stocks as a whole struggled.

Roughly two-thirds of the development of new drugs happens within smaller companies, while two-thirds of their commercialisation happens in large companies. This explains why merger and acquisition activity is so frequent within the biotech space. For IBT, this has been a happy side effect of choosing the strongest companies with the best valuations: 16 of the portfolios holdings have been M&A targets since 2017, with an average 58% premium paid on the deals.

Biotech is naturally volatile because a companys fortunes can pivot on the results of a single drug trial. IBTs managers attempt to reduce the impact of binary events that could send share prices up or down. What this means in practice is that they will reduce their exposure before the results of a critical trial, for example. While they might lose out on some of the last bit of outperformance from a stock by doing this, it also means they wont be so affected by a sharp share price fall if the trial ends unsuccessfully.

The International Biotechnology Trust is the only one of its peers to pay a yield. Following a dividend policy introduced in 2016, the dividend of 4% of NAV per annum is paid from capital effectively converting some of the underlying holdings capital growth into income each year making the trust a compelling option for income-seekers as well as growth investors. Given that this dividend is paid from capital, it is not contingent on receipt of income from underlying portfolio companies.

Delivering an annualised return of 15% a year over the last decade, biotechnology has outperformed the annualised 8.75% return from the MSCI World over the long term*. The sector offers diversification, innovation and compelling growth potential for those investors willing to take some risk over the long term.

*Source: SharePad and MSCI (annualised % change of the Nasdaq Biotechnology Index versus the MSCI World 28/02/2010- 28/02/2020)

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Harness the power of biotech for income and growth in uncertain times - What Investment