International Biotechnology Trust (LSE:IBT) — Half Year Results

0:01 Good morning, ladies and gentlemen, and welcome to the INTERNATIONAL BIOTECHNOLOGY TRUST PLC Half Year Results Investor Presentation. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish our responses where it's appropriate to do so on the Investor Meet company platform.

0:27 Before we begin, as usual, we would just like to submit the following poll. And if you'd give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand over to the team from IBT. Elsa, good morning. Good morning, everyone, and thank you, Jake, and thank you, Investor Meet, for allowing us to do this today. So thank you for everyone who... For dialing in. We announced this morning our interim results to the end of February twenty twenty six, and we've got some slides just to run through the results, how we're positioned in the outlook. I'm here with Merrick, co lead fund managers of IBT. So just to kick off, hopefully, you can see these slides. The interim results is a six months to February, end of Feb. The share price was up 39%.

1:16 The net asset value was up 35 PARTICINDEX point 7%, and the index, the Nasdaq BIOTECHNOLOGY was up just under 30%. We had five acquisitions in the six months to the end of Feb. Eighty nine BIO was acquired by Roche, Metcera by Pfizer. Those two names are metabolic names. Meris was acquired by European company, Genmab. Akerro was acquired by Novo Nordisk, another metabolic company, and IBT was acquired by Novartis. The discount narrowed to 6.7% from just under 9% at the beginning of the financial year. And performance generally has been quite strong on an absolute and relative basis. Outlook, we continue to see strong m and a.

2:04 So since the period end, we've had a further five acquisitions out of the fund. And calendar year to date, we've had 15% of the whole fund acquired. And for those of you that have followed us for for longer, you'll know that last year, we had a a record year of m and a with 10 acquisitions in the calendar year, nine or 10. So the outlook on the m and a front is still strong. And, of course, the fundamentals of the biotech sector as well are looking incredibly strong right now. So summary slide, performance of the trust has outperformed our benchmark over one, three, five, and ten years to the end of March. Innovation is driving the biotech sector at the moment. We're gonna talk about the supply and demand for the sector and the different factors that are driving the performance further on in the presentation.

2:54 Yields, we have announced an interim dividend of 15.6 p in the report that you can find this morning, backed by Schroders Unit Trust Limited. And of... Some of you may be aware Schroeder's has been acquired or at least bid for by Naveen.

3:14 So this slide is just an introductory slide. Both America and I have over thirty years combined in investment experience. And at the bottom, what we've done is little histograms of each fiscal year that we've managed the trust. So it's over five years now. We've had four full fiscal years, and each year, we have managed to outperform the benchmark, the Nasdaq BIOTECH index in down markets and up markets. So when we first took over, there was a bit of a bear market in biotech. I've mentioned before, but just as a reminder, there were three punches to our sector. The initial punch was really valuations. Things got too ahead of themselves during the COVID era. Lots of excitement around vaccines and and new treatments for COVID. We had a drawdown as a result of that.

4:02 The second punch was rising interest rates in the back of inflation. And then the third punch was politics. So you'll be aware there's been some controversial changes over in The US.

4:14 But all those three factors really are kind of yesterday's news and we've had a nice recovery within the biotech space. And we've managed to capture that upside as well coming out. And here's a more granular tabular form of the performance, which you can see on our fact sheet, which we should have out for the end of April relatively soon. So I'm gonna hand over to Marek to talk about the biotech sector fundamentals. Thank you, Alsan. So before we dive into biotech details, we we thought it would be very good to give you kind of a long term tailwind description of what's going on in the biotech sector and health care in general. I mean, what the oil prices and interest rates and macro and geopolitical background, I think it's worthwhile mentioning that health care has been a relative stable industry for many years, and we have had big a growth over that period.

5:12 So to begin with, disease... Diseases starts to occur in the middle when you reach a middle age of around 50. And as you can see on this slide, what what has happened during the last fifty to hundred years in the world is that infection diseases all but have disappeared, was the bigger killer for for many, many centuries. Then cardiovascular diseases came up because we got better health, but, unfortunately, cardiovascular diseases took over. But we have been very good at treating those, and many of these diseases or drugs that treat those disease have become generic. So it's very cheap for for the industry or for the world to treat with these treatments. And following that, cancer, unfortunately, has become a big killer.

6:02 But with the scientific breakthroughs we have seen the last, I would say, the last decade, we have really start to addressing this in in big ways. The world is graying and getting older, but the... An incidence of cancer is increasing. But fortunately enough, the... We are not dying at the same speed anymore. But one one big... Unfortunately, the biggest and the next frontier is is the central nervous system with Alzheimer's, Parkinson's, and other age related disease that's coming up. Actually because of we are treating all the other diseases in such a good way. So moving on to the next slide, you can see that demographic tailwind for the industry or for the world. 1950, only five percent of the global population were age 65.

6:52 In the coming seventy five years, one quarter of the global population will be above the age 65, and this is when you saw the previous slide where we actually need treatment. So it's a massive tailwind. The world is getting richer as well. So as long as a a country gets richer, they tend to spend a higher proportion of the GDP on health care. So there's a big, big demand for new drugs that addresses a lot of these diseases. Coming back to the kind of feed through in the system, do we have new drugs? Do we satisfy the world with with new innovative drugs? And this slide, can see that we have been fairly consistent, at least in The US with the FDA, which is the biggest industry. As you can see, around 50 drugs a year are approved.

7:41 What is interesting with this slide is that you can see that biotech ten years ago constituted around 20 to 30% of all drug approvals. Last year and the last three years, approximately 70% of all new drugs emanated from BIOTECH as the initial source. And one interesting fact, this is a very, very busy slide, but what what it entails is that the pharma industry will run out of patent time of their major selling drugs, and it will be a 200,000,000,000 revenues at risk over the coming five years. And how will that industry deal with that? We have already seen m and a is coming up. They need to refill the pipeline.

8:27 This slide is another business slide, but also shows you that new drugs coming out usually comes from BIOTECH, and those in the red are already the... Those ones that have been acquired the last twelve months, which is an interesting fact. We believe many more of the... In... On that list will be taken out going forward because pharma needs to refill their pipelines. When it comes to m and a, as previously stated, pharma really need need to do something, and we have seen over the last five, ten years an increase in m and a activity. We had some breaks during that... During COVID when people couldn't meet and agree on price or negotiate offers. So what what happened was the biotech companies grew larger, meaning that they became bigger in sense that can launch the drugs on themselves.

9:21 And during the last two years, we have seen a resurgence of m and a activity with pharma stepping up to the plate. Also, in the IPO market has finally started to open up. We have had a drought of the last five years. We personally as a fund manager didn't see this as a initially so negative because we we had a very, very active m... IPO market through the pandemic, which probably flooded the market with lower quality companies, and we have had a five year of consolidation. And finally, we have seen some IPOs coming through. And those IPOs... Those companies have a higher maturation grade than previously, which means that the quality of them are probably higher.

10:10 Okay. I'm gonna jump in and just give an overview of our investment process. So these are the three factors that we take into account when we manage IBT. We do look at macro. This is something we've done for many years, and we can adjust the funds depending on where we think we are in the business cycle. Interest rate changes do have an impact on some of the earlier stage biotech companies. So if we feel that the interest rate environment is gonna change dramatically, the gradient of increases up and down is really what impacts, then we can position the fund from a top down basis. Idea generation, this is a case of traveling to where the companies are based and going to investor conferences, etcetera.

10:59 We can also pick up the phone. So a lot of our meetings are afternoon calls because most of the fund is based in The US. Keeping in touch with management teams, understanding when their next event is gonna be, etcetera. So that's kind of our day job if you like. Risk mitigation. What we don't want to do is have great big positions in the fund going into what we call as a binary event. So this is where you'll have a clinical data readout, and the data could be positive or negative. The whole point of doing a trial is to understand something new, is to something safe and effective. It's not something we think we can predict. So we reduce our positions or sometimes completely sell out of a position if there is a binary event ahead of them. Every case is nuanced though, but that's certainly something we try to do to to mitigate risk.

11:50 We are also very valuation sensitive. So if we think that companies are looking expensive in our view, then we will take profits or exit. And then vice versa, if we think a company is looking incredibly good value, we can increase our holding.

12:07 We take a basket approach to various different disease areas. You've got four examples on this slide ahead of you. Rare diseases, oncology, metabolic, and central nervous system. You remember at the beginning of the presentation, I mentioned a number of names that were in our metabolic basket. That's a Cairo 89 BIO and then central nervous system. This is where intracellular was, which is a acquisition we had last year in January. And oncology, we prefer a different, not just all oncology because it's very crowded. There's a lot of investment in in early stage accounts companies. We tend to invest in ones that are relatively later stage or in rare cancers.

12:54 And then rare diseases. And this is a quite a large bucket for us. We think that this is incredibly exciting area. Although each disease is a small population, hence the name rare disease, cumulatively, it it does affect a lot of people. There is a lot of price protection for rare diseases and lots of m and a potential, and companies can stay independent. So you may ask, you know, later on when we have q and a, a lot of your companies are getting picked up. You know, is that a bad thing, good thing? Obviously, it's a good thing for returns, but many of our companies, if not all, could remain independent, especially in rare diseases. They only need handful of reps to launch. They don't need to manufacture much. So it's an area we particularly like.

13:44 So how are we positioned? On this slide, hopefully, you can see this is basically the life cycle of a company from discovering an asset very, very early stage on the left hand side of the slide. Then this asset or drug, for example, a therapeutic is put into phase one development, then phase two, which begins to look at safety and efficacy, and phase three where it determines finally the safety and efficacy for a drug. The manufacturer then goes to the regulator, the Food and Drug Administration, and applies for approval. And that approval process can take about twelve months. There are exceptions, but it's broadly twelve months. Then the company launches the drug. The launch will then grow at the fastest rate at the beginning, hopefully.

14:32 The sales growth will then flatten out as you'd expect as the patient population is addressed.

14:39 And then the patent will expire and sales will drop. So that's the life cycle of a drug. And where you can see the shaded areas, the light blue areas where we're positioned at the moment. So late clinical development and actually most of them now are post clinical development. FDA either at the regulator or just launched, and that's kind of where we've been sat for a year or so and it's paid off. So pharma is looking and shopping in that area, which is probably why we've had all this m and a.

15:12 So this slide shows the m and a deals that we've had in the in the trust. So on the left, twenty twenty each discrete year, and it tends to be sort of five or six a year. Last year was unusual with nine. And then like I said at the beginning, we've had 15% of the fund this year taken out with five deals. And when I say this year, mean calendar year. Sorry. It's confusing because our fiscal year is not calendar year. Next slide. So this is a interesting slide. It looks a bit busy, but ultimately what it was was our positions versus the benchmark in these late stage derisked clinically derisked assets. Now we, when we present this to shareholders such as yourself, we'll say this is kind of where pharma's shopping.

16:00 And sure enough, these four companies, Seleno, Calvista, Appellis, and Day One have all been acquired in the last two months Mhmm. I'd say. So they are clearly looking for these derisked assets in the same kind of strategy and thought process that we have. A third of the fund are invested in these companies, these derisked companies versus, you know, seven percent of the benchmark. So that's helping our performance if we've waited to these more de risked names at the moment. This slide, this pie chart on the left shows how two thirds of the fund, is that right?

16:38 Yes. Are invested in companies that have either launched or about to launch, I e, derisked assets, clinically derisked assets, and the rest in more traditional biotech companies. A little overview of the unquoted portfolio. At the end of the interim period, so end of Feb, it was around 7%. It's, around... It's just the same really, with an updated slide. Invested across three funds. So SP fund six, which is now rolling off, BECOF, which has had a a really incredible IRR, actually. They've had two major exits in that fund. They're both managed by SP. And then a new fund, Traders Capital, which we've just started investing in. And the board board's goal is to have between 515%.

17:26 So it's still kind of on the left hand side of that range at the moment.

17:33 A reminder that this... The biotech sector does move inversely with interest rates, so we try and monitor that. We keep an eye on things like that. And the reason is because many companies will have cash flows way out into the future. So when analysts or whatever are analyzing a company's value, they will be discounting those future cash flows at a higher rate if interest rates go up. So naturally, the valuations today will come down. It's not that these companies have debt. It's purely a valuation perspective.

18:06 Finally, this slide now feels slightly out of date. So we talked about this for the last twelve months. I mentioned the third punch to the biotech sector politics, and this very much encompasses everything on this slide. So what the US administration has thrown at at the sector, health care sector, not just biotech. But we do feel that many of these issues have sort of are behind us. Certainly, MFN and tariffs, there have been deals made between the administration and major pharma companies. The NIH news headlines and cuts, what have you seems to have settled down. FDA, as we've continuously said, is a moving thing still. There's rumors that the commissioner might be out over the weekend, so we'll see what happens there. So the FDA is still kind of murmuring along as as a headline grabber.

18:55 But on a functional basis, we had a really decent strong number of new drugs approved last year. So we're not too concerned about the practicalities of those headlines.

19:07 So in summary... Good. Okay. In summary, the sector is nicely recovering in biotech. We've had lots of m and a in the fund and just generally across the sector. Biotech is the innovative engine. You remember Merrick's slides talking about how these these guys are actually getting drugs approved and not so much pharma. We've had a strong start to the fiscal year 2526. And I mentioned calendar year to date, 15% of the fund has been acquired, by major pharma companies. And we are positioned in a clinically derisked companies, which I mentioned after the investment process. So hopefully that was clear, and please do come in with any questions. I know we've got one question. How competitive have valuations become for takeover candidates following the rebound?

19:58 So this is a great question and completely logical thing to ask. Pharma is valuation sensitive in the same way that we are. They're not gonna overpay. And so what we're seeing, historically, you tend to get a multiple of peak sales is how we think about it and how... Merrick needs to work in business development and he'll come in after me. But basically, they think in price to peak sales multiples, so do we. And they won't, you know, ideally, according to their shareholders and their board, they shouldn't be overpaying. So with this... With a rebound in valuations, you'd expect maybe that to tail off. But that's not what we're seeing. And I think it's because the valuations aren't at the multiples that we've seen before. So there's a good chart actually that Jefferies do showing that, like, cash to market cap, etcetera, and price to peak sales is still looking very interesting. So if you go back to our slide showing valuations here, you can see two and a half times on average price to peak sales for the names in that list and pharma pay between, say, three and eight sometimes. But three is pretty low. That... That's a bit of a steal. So four, five tends to be the number. Maybe, Marik, you should talk about That's perfectly fine. So what what what tends to happen is that the industry starts to... When one starts to bid, we have kind of a plethora of m and a's coming through, and we... What we have seen the last couple of months has been a a kind of flurry of m and a's.

21:28 And when when you get proper premiums when you have a bidding war. But the last two, three years, what we have noted is very few bidding wars have occurred, which means the premiums have actually, to... At least according to us, not been that great. So valuations are not that high according to us at the moment because when... If you look at this slide, 2.5 times sales when industry or pharma tends to be be paying between per ASUS point, between three and eight times peak sales, we are fairly confident that we have not hit the kind of area where the valuations are overheated in any way, shape, or form at the moment. And when INSMED, that got really expensive. One of our positions, you'll see it widely owned across many funds, got to eight times, didn't it? Mhmm.

22:17 As an independent company. And so we reduced our position on the back of that. So it just gives you an example of how we can... We're valuation sensitive. Alright. Next question. You mentioned baskets investing in emerging therapeutic categories. How do you determine position sizing, and when do you scale? Okay. I'll start and then maybe... So the... This kind of feeds into what we're talking about binary events. So let's say, for example, we're waiting for a major binary event readout. We would... In theory, this is just a kind of case study. We could see if it... We like the data. And if it's positive, we would increase our position. And let's say they don't have data for another two to three years, or they're going to file the drug if it's phase three. We're very happy to add at that point and hold. Many of our competitors don't do this. They like to buy ahead of events.

23:09 So once... If it's a company that we think is very de risked, ticks all the boxes in terms of monopoly, unmet medical need, that's when we will go in big. So that... We we try and position our size after an event. And if it's on the cusp of launching, we really would add to it then, which we have done if we monitor our top 10 things like Calvista. Did that. What

23:33 revenue? Oh, no. Sorry. What do you... Do you want to take that? What are your views on GLP ones changing the likely outlook for major disease progression, the split between them going forward? I mean, what... What's great about the GLP ones is that they are actually changing the projections what we had ten years ago. Obesity has become such a big culprit. And if you just go back twenty years, we... I don't know how many how many people... How big proportion of population were obese, but that has increased all the time. With GLP ones introduced, we might stem that a bit. But in the end, as you remember the previous slide, the mammography is actually

24:16 going full tilt. So it's an... Diseases are age related. So what what GLP ones will do, they might defer those diseases maybe a couple of years down the line. But in the end, it's a it's a volume play at the moment. GLP ones will make a big difference for those affected, but it will not change the big trajectory for the health care spending. Next question, capital reserve. So this will be because of our dividend. So we don't have natural income in the fund. There are a couple of biotech companies, Gilead and Amgen, that have dividends, but it's de minimis because we rarely own those two names. So we pay it out of capital. And I think it's over 300,000,000 in... Is capital reserves in the fund now.

25:01 So it's the majority of the trust, really. So we we don't really have a problem on that front. Do you have exposure to biotech companies in China? Do you want to do that one?

25:09 Yeah. I mean, we we tend to invest in in the e... ADRs, which means they are listed in The US because that takes away some of the accounting complexities because you you need to adhere to Nasdaq rules. Secondly, China is such a massive market. And when when it comes to early stage investing, which which probably the majority of Chinese deals are made, is mainly preserved for big teams. Like, big pharma is doing this. I I had read today the GSK is doing a deal with Hang Ruid. So it's only for the large caps, but also some of the venture capitalists that go over and in license early stage drugs. Such a vast market, very opaque at the moment. We have no doubt China is coming as the next next big thing. But at the moment, it's it's not for the public markets at that sense. We we are invested in a couple of these late stage Chinese companies, but not the early stage.

26:08 Okay. We have one last question about the Nuveen acquisition of Schroders. So there's been a lot of consolidation in our shareholders and also on the... On our side of things, so asset managers. This is where the industry is going. The Nuveen acquisition, what we've been told has been is very much a complimentary setup. So Nuveen, many of you may have even heard of them. American asset manager, they wanted to to move into Europe. And so instead of building everything themselves, they decided to pally up with Schroders. Schroders would remain as, the the brand will stay the same, and pretty much it's business as usual. So we don't see an impact. You say, is it frustrating for you? Not at all. So, everything we're hearing, if this closes, which it will sort of autumn time, we expect, it should be... Certainly for us, there's no sort of overlap with this team. No change on the unquoted element that that... Which is a specific part you asked for. So we've invested in Schroders Capital Fund. And then in

27:12 two or three years time, the board may decide to invest in another fund, and they'll do a review. That's... There's no change on that front. Opportunities, well, we can't market this fund in in The US, so not so much opportunities on that front. But I'm sure there are many ways, multiple ways that we could maybe try and leverage either teams or on the sales side. Who knows? But that... We'll we'll find out in due course. So I think that's the last question. So I will hand over... Well, thank you very much for dialing in, first of all, and hand over back to Jake. Perfect, guys. That's great. And thank you very much indeed for being so generous of your time then, addressing all of those questions that came in from investors this morning. And, of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. But, also, perhaps before really now just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that'd be great.

28:09 Yes. So I guess, this... We're halfway through to the end of Feb, our fifth new... Our fifth fiscal year, and we're thrilled with the results. It's been a strong return, and it would be great to have a a fifth outperformance of the year. So thank you very much for your support. Perfect. That's great. And thank you both once again for updating investors, this morning. Could I please ask investors not to close this session? Shall now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This won't take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of the International Biotechnology TRUST PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.