International Biotechnology Trust plc (IBT) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and welcome to the International Biotechnology Trust Manager Update coming to you today from the Schroders headquarters in the heart of the city of London. My name is Roland Jones. I work on the investment trust side here for Schroders. It's my pleasure to be your host for today's presentation. Now crucially, I'm also joined by your 2 fund managers, Ailsa Craig and Marek Poszepczynski, who will be running through the outlook and themes for 2026 in a short while. But I should just remind you that today's presentation is available online. There's also a survey, which would be really grateful if you could complete because it allows us to tailor future presentations to your requirements. So please do that. Now today's presentation should take around 15 to 20 minutes, but there is also -- we've allowed plenty of room for questions. So please do submit your questions. I will pick them up on my iPad, and hopefully, we'll get through them all in the time allocated. I should also say that IBT over the last 4 years -- over the 4 fiscal years has outperformed the benchmark every single year in some very difficult markets. And I'm pleased to report that the trust was also the top-performing trust in its sector in 2025. So we do these conferences, these webinars every year, around about this time because Ailsa and Marek go to San Francisco for the JPMorgan Healthcare Conference. And it's always a really good event to pick up sentiments and theme and the tone for the year. So what Ailsa and Marek are going to do now is just talk through some of the themes, some of the -- talk about the sentiment and explain why we think that biotechnology represents a potentially good investment for 2026. So Ailsa, Marek, over to you. How was San Francisco?

Thank you, Roly. Yes, absolutely. And thank you, everyone, for dialing in today. We really do appreciate your interest. I think we've got a record number of people registered for the webinar this year. And as Roly said, we've just come back from San Francisco. It is the largest health care conference in the sort of calendar for our industry. It's not just an investor conference. Many people go there venture or companies trying to maybe make deals for the future, M&A deals, which is one of the main themes that we have for 2026. And it certainly was a theme last year as well. So this presentation will be going through a little summary of 2025 and talk about how we're positioned in the fund and how we think we can capture value over the next 12 months. So the first slide, last year, biotech had a nice recovery. It was a bit of a year of 2 halves, which I'll come on to, but the sector was up 24%, and the IBT share price was up almost 50%. In terms of the biotech sector, we've mentioned many times that biotech has taken over as the innovative engine for pharmaceutical drug development. And sure enough, last year, 40 of the 55 drugs that were approved by the U.S. regulator, the FDA, emanated from biotech companies. Last year also, we saw a record level of M&A activity. So I think there were something like 40 M&A transactions. And our fund and if you are shareholders, you would have benefited from 9 acquisitions out of holdings from IBT. Here, we've got a very sort of detailed slide, but this is the performance within a table, and this is what we show on our fact sheet each month. So just as a little reminder of what's been going on with biotech in the last few years. Roly mentioned that Marek and I took over in almost 5 years ago. So 5 years in March of this year will be the fifth year we have been managing the trust. That period has been pretty -- initially, performance has just been pretty much flat, as you can see from this slide on an absolute basis, but we're beginning to see a recovery, and I'll talk about what's been driving that and why we think it should continue. However, the reason we've had this sort of period of flat performance has been driven by a number of factors. And if you've heard our webinars before, you'll be familiar with that. There was a bit of a sort of bubble during COVID times where valuations did get carried away in our view. And then since then, we have a correction coming out of COVID. Then we've had a period of rising interest rates, and this sector doesn't generally perform that well in that sort of backdrop. The third punch, if you like, for the sector was driven by politics, and we've discussed that at length in the past. Coming out of JPMorgan, we feel a lot happier about that, and we can go again into a bit more detail. So with all those 3 things behind us, we think that's what's driven the beginnings of the recovery that we're seeing. The first question people ask us at the moment is you've had this strong performance in the end of last year. Are valuations still looking attractive? Because the sector is accumulation of various different stages of development, you've got some companies that don't earn any profits, some companies that have revenues and some companies that are highly profitable. So with these different buckets, we look at different valuation metrics. For the profitable companies, we'll look at PEs, price to earnings ratio. For the unprofitable companies, we'll look at the ratio of cash they have versus the value of the company, so enterprise value. And then for the revenue growth names, we look at price to sales. So they've got sales and we know the valuation, what's that multiple. This slide, you can see that the -- if you look at the average EV to cash, we're not above that average at the moment. So for that part of the index, we're still comfortable with the valuations. And you'll remember, if you've been following us for a while, that back in 2021, we felt that things did look expensive, and we tilted the fund into areas where we felt that was better value, which is why we outperformed in the down market that came after COVID. Last year, we actually outperformed the market quite materially, and that's because we did the inverse of that positioning. So we went into the lower end of the market cap spectrum and that way, you capture more of the upside. So we managed to outperform in the upmarket environment as well. There's a few characteristics of the sector that we watch quite closely, which can signify whether we're in a bubbly environment or still coming out of a low or in a recovery environment. And we think we're in a recovery environment because if you look at this slide, you can see that the IPO window has been not completely shut, but pretty closed since sort of 2021 era. Things felt very bubbly then. So many companies listed that possibly shouldn't have. However, this year, the IPO window looks like it's opening. We've had 5 companies list already this calendar year. And when we spoke to the bankers at the JPMorgan Healthcare Conference, they were very confident that companies will begin listing again this year with "20 to 30" in the pipeline. So that's a really encouraging more green shoots that this sector really is in for a recovery, and it's not just a blip. So this slide, I mentioned at the beginning that the biotech sector has become the innovation engine for new drug development. And you can see the dark shaded blue represent biotech innovation and drug approvals. And you can see the trend, it's rising over time. And we've heard this a lot. Pharma R&D budgets are being reduced, and they recognize that they're not necessarily great at innovating drugs successfully, whereas biotech really is. And we think that, that could be possibly why the M&A and need for M&A is going up over time. And we've got a slide on some of those numbers as well. So this just pictorially explains that. And on this slide, horribly busy, sorry, but it's a great slide. It shows the sales per year of these new drugs that are coming from biotech. So if you remember, if you've seen any of our peers or our presentations before, the pharma industry are facing a wave of patent expiries coming up. And on this slide, it shows the biotech company sales projections going to 2034, a huge number with revenue growth over 100 billion in sales expected. So you can see the little red dotted and highlighted companies, those are the names that have been acquired and the rest all still independent. So just keep that in your head when we go on to the slides talking about patent expiries and here it is. So on this slide, again, busy, but these are the magnitude of sales coming off patent in each discrete year. So 2028, around the corner, really 2 years is a bumpy year. So what are pharma going to do? They're going to have to acquire companies. And this is the inverse, if you like. So if you remember the slide showing about innovation coming from biotech, Here, you've got a nice increase in M&A, reflecting that biotech innovation. So last year, I said it was a bumpy year, 2025, with 40 acquisitions. 9 of them were in IBT. So it's been fantastic. And then another thing we took away from the JPMorgan conference, talking to the bankers and company management teams, the feedback was absolutely, they are even busier, they said, than last year. So that's a striking -- we weren't expecting that sort of comment, but they are. And this is bankers doing deals with the biotech and pharma companies. So I'm going to hand over to Marek to finish the presentation. Marek?

Thank you, Ailsa. So what has happened with the biotech industry, it has evolved over the last 20 years. When pharma was dominating the approvals and launches also early stage, what we have seen is that biotech is taking over as an engine, as Ailsa pointed out to. But also we have seen they have started to compete on the market with approvals. And the conception has been the biotech is early high-risk endeavor. But if you look at this slide, our core positioning in IBT, we focus on, at the moment, at least the more mature companies, meaning they are clinically derisked or have a drug approved on the market and growth. The majority actually of our portfolio is in this bracket, which we believe pharma is really poaching. They are relatively desperate when it comes to fill the pipelines and top line revenues. And we have seen that last year, we had 9 acquisitions. Many of them were exactly in that sweet spot, as we see it at the moment. And as you can see on this slide, the last 5 years, we have seen 34 acquisitions in our portfolio. Obviously, there are many more that have been done. But it's interesting to see that this trend, momentum has continued on, and we don't see any end to it. To Ailsa's point, a lot of patent expiries coming through in the coming years. Either biotech will become the next wave, what we see with maybe some of these biotech companies will become the new pharmas or pharma needs to step up and acquire them. In either way, we believe biotech is a great place to be at the moment where you -- either way, you win. Very busy slide, I apologize for that. But what's interesting is that we have been seeing that a lot of companies have development becoming quite big in its own merits and many of them have launched drugs. And as you can see on this slide, that our positioning of these Biotech 2.0, what we call them, the [ drugs ] that have a drug approved or and is launching, it constitutes around 1/4 of our portfolio holdings. And the MBI, which is the reference index is approximately 5%. So if you want to have exposure to this new wave of approvals, you can see that you clearly get that through the IBT portfolio. And many of these companies considered small, but as you can see, many are in the multibillion dollar range, and that's impressive because that wasn't the case 15 years ago. And to summarize the presentation, we have seen the biotech sector is recovering. We have had 4 years of consolidation where we -- the MBI index has gone from around 300 companies to around 200, meaning that we have proved the portfolio of high-quality names are still there. And financing is on the rise. So they get the money to fulfill their milestones and clinical trials. M&A, which has been a feature for many years, is just becoming more and more entrenched in this industry, and we will see more of that. And biotech innovation is compounding to Ailsa's point, 70% of new drugs emanate from biotech, and we don't see that stopping. We at IBT, we're very proud to have 4 years of consecutive outperformance versus the index and also very positive to see that our discount and also other peers have come down in the discount, which has been a very hard work by our Board and also other boards to limit the kind of discount blowing out and very disciplined in that sense because it's important for our shareholders and for us. And to finalize this, we are positioned in a relatively late-stage development, meaning Phase III, launch or regulatory stage and focus on clinically derisked companies to limit the volatility in the portfolio. So I'll hand over to Roland.

Yes, wonderful. Well, we got -- thank you, ladies and gentlemen. Thanks, Marek, and thanks, Ailsa. We've had lots of questions coming in already. So please keep them coming. Just one question. I mean, you present a very strong outlook for '26 and going on for the rest of the decade from what I can understand. Is there a danger that the politics may come back to bite us that the problems that we saw in the last year or so may reoccur? Is there a bear case for any of this?

Yes. And we normally have a slide on the bear case. But at the moment, it's amazing how that's kind of gone away. It's ebbed away as a discussion. And it's multifactorial as to why that is. On our bear case slide, we have various different aspects of what's going on in politics. So MFN, most favored nation, trying to match drug prices in the U.S. and Europe. We had tariffs, which everyone will be familiar with. We had NIH cuts. And then -- we don't have it on this one. And we had FDA. We've actively taken it out because it's -- when we went to the conference and everyone sees it as something that's behind us now. I would pull out the FDA and say that one is still murmuring along. But last year, we had a good number of drugs approved. So it seems they've outwardly said it's business as usual, even though they've had lots of cutbacks in staffing. And to be fair on them, they've had a normal amount of drugs approved. However, the tariff and MFN issue, big pharma companies have done deals with the administration. So that has very much been put to bed. And then the NIH cuts, again, that's something that's kind of gone off the agenda as a concern. And that really wouldn't have been a concern for a trust like this because this is much later stage investments. We're talking much earlier stage, so ideas coming out of university stage. But certainly, the FDA is something that's you get sort of negative headlines, although it feels a bit like there's a wanting to attack what the administration are doing. So we're not -- when you look at the data, delays haven't been higher than normal and drug approvals are in line with historical -- actually higher than historical averages. So we're certainly feeling those conditions are behind us now, those negative headlines. You can never predict with the type of administration...

Hopefully, that provides our listeners with some reassurance. We have quite a lot of questions about the ongoing M&A trend as if -- or sort of concern, we've seen a big upswing in M&A now. Will that -- are we expecting that to continue at the same intensity? Or will drug companies become a little bit more consistent in their levels of acquisition?

Well, certainly, the feedback, I mean what you comment after me, the feedback from the bankers who do these deals, like I said, it's busier than they were last year. Whether that manifests and happens and comes out with deals, then who knows. But the feedback we're getting because we ask exactly that question to the bankers is that absolutely this year is going to be another big year. And you can see the need. They really desperately do need new revenues. And of course, they stopped doing internal R&D in that sense.

Yes. For the sentiment for the biotech sector near term, M&A is quite important. But in the long run, I mean, if you look at our portfolio with the busy slide, these companies are not -- it's not a prerequisite they get acquired. They can actually launch on their own. The difference is that we will be rewarded in 2, 3 years down the road rather than front-load the kind of M&A premium has come through. But when we look at companies, we look at the unmet medical need, the patent protection they have and the market they are addressing. So in that sense, yes, it's always great to have an M&A because it bumps your alpha. But over the long run, you need to be consistent, think about long term. And coming back to the big market, demography is working in favor of the industry. Innovation is working in favor. The challenge as well will be can we afford it? And that is the kind of big dilemma. And this is what U.S. is addressing and Europe is addressing. But in the end, we spend a high proportion of GDP on health care for every year that goes. So in that sense, biotech is -- and pharma in general is beneficial in the long run.

And we have a couple of other questions about what sort of companies are the best takeouts or whether we can differentiate. And I think you kind of hinted at this. Is M&A always the best option? Can't they not just launch and distribute themselves? Why do we need to do a deal with pharmaceutical companies?

They don't need to. And this kind of our theme is that they don't need to. But for us, for our shareholders, it's a quick M&A bound. Pharma, on the other hand, they need to buy these companies to prop up the top line. Otherwise, they need to reconstruct or consolidate. So we are in a sweet spot, we believe we are not dependent on M&A. And we had a couple of years previously, like the year before, which we outperformed, we had like 2 or 3 deals in our portfolio. So that's not a need from our side, but it's always nice.

And in terms of the sort of companies that have been picked up last year and we think may get picked up this year, this slide here would be a sort of short list. And the reason is because you remember from the IP slide, the sales at risk of patent expiry are now around the corner. So pharma don't have time to develop a drug from scratch. They need these revenues next year and the year after. And these guys that we have in the fund make up almost 1/3 of the fund versus the benchmark, which obviously can't dictate to tilt them it's a tracker. So we can push more money into this sweet spot. And these names are the ones that we would highlight.

In the particular areas as well, the disease areas you've listed them...

Oncology, there's a lot of M&A in oncology and rare diseases. Those tend to be the most attractive acquisition targets -- and CNS as well, actually.

We've got a couple of questions about China and increasingly more approvals emanating from China. What sort of exposure do we have, if any? And -- if none, should we have more?

We have China exposure in the ADRs listed on the U.S. market because it's kind of a quality stamp. But what I have seen and through my kind of historically is that what pharma tends to do also biotech is they in-license projects from China. And what happens is the Chinese companies, they develop their product for the Chinese market and license or sell the product for U.S. and the rest of the world to a pharma company. And then they put in the effort and launch in the U.S. And we have seen, I think, Rapport Therapeutics, relatively recent approval was an in-licensed project or company from China and was then consequently sold for, I think, 10x the kind of acquisition price. which is interesting. And we see it's a wave of Chinese innovation coming through. At the moment, in the beginning, it was more generics. Now they do me-too and me better. So we keep track on China. They are coming for sure.

And at the moment, we're sort of -- we have about just over 5% exposure, and it's hovered between sort of 5% and 10%. But to Marek's point, we are invested mostly in the ones that are listed in the U.S.

Got it. And from that perspective, we have another question, just a very simple question. Why don't we get U.K. biotech? Why is it all U.S. It appears to be predominantly U.S. dominated. Is there a reason for this?

Well, that's not strictly true. So if you were to speak to the venture teams in the U.K., SV, Abingworth, whoever, they would argue that early-stage biotech is about half and half. And not just U.K., Europe, but U.K. is one of the, if not the top ones. And that's really stemming from the fact that the universities here are very strong, and that's where you get genuine innovation. However, the point at which companies need more funding, it's much more advantageous environment in America. There's a lot more money there. So when you need more funding for larger, more expensive trials, they'll hop over and list in the U.S., like these American companies we're talking about and these Chinese companies rather. So the capital environment is more supportive in the U.S. But innovation environment is still -- it's very strong over in the U.K. But our fund is weighted towards later-stage clinically derisked assets. So we're not playing around that way, although there's a U.K. company on that list.

Which one is.

Autolus.

Autolus. Okay. Actually, we've had a question about that. What excites you about Autolus?

Well, they're making money. They've got, as in revenues, top line. So they've launched their drug, which is a CAR-T therapy, CD19 leukemia, and it's highly effective. There's another company, Gilead, that has a similar approach, a similar technology, also treating the same disease and Autolus' approach is considered much better. It's safer and more effective. And so they are taking share from Gilead, which is no mean feat. So we like them. And also the valuation is incredibly cheap. So we -- those 2 things make up why we invest in companies, valuation and technology.

Sounds pretty good. Yes. Okay. There's a question about AI -- or a couple of questions about AI and biotech. Some view it as a positive, others less so. What are your thoughts on that particular topic?

I mean, truly, AI is a great tool for scientists and how to create new drugs from scratch. I mean it will probably improve hit rate when it comes to finding targets, diseases, et cetera. That will probably shorten some time, maybe a year or 2, who knows. But the challenges we have is that you still have to go through the clinical process, which in itself is 5 to 7 years. So even if you cut everything with half in the AI space in the beginning, you may gain maybe 1 or 2 years in the total process. But it's a fantastic tool and many are using it. And we're only in the early innings, I would say, in how to kind of use that tool.

And it's been around for many decades. So machine learning, et cetera, this industry has been using that sort of technology and know-how to develop drugs in the very early stages. But exactly to Marek's point, you can't replace clinical -- human clinical trials. It needs to be tested.

On human, they see the reaction. Of course, of course, of course. Here's quite a good question. I like this one. It just moves away from the clinical trials and therapeutics and stuff. And it's more about what's our USP compared to other biotech trust? What are we doing? Where is our edge do you think that we can bring to investors looking to get involved in this area?

Sure. So when we first started and took over as co-lead fund managers in March '21, we were very vocal that we do a top-down management of the trust as well as bottom up. So we don't just sort of invest in companies on an individual thought process basis and disregard valuations or where we are in the macro cycle. So that's one sort of aspect. And I mentioned at the beginning how we went into slightly defensive names in 2021 when we felt valuations too high, and we did the opposite 2022, '23, and then we could capture the upside. We also pay a dividend out of capital, 4% each year of NAV, twice a year, 2%, 2%. So that's another differentiating factor. We had venture in the fund.

How much do we have?

High single digit at the moment. And we just initiated a new fund investment through Schroders Capital. So that too and binary events. What we try to do, you can't always -- this isn't full proof. You can get clinical holds out of the blue, for example, but we do try and reduce exposure into individual companies when they're going through a readout. And that way, if a trial goes wrong or the drug isn't seen safe, we don't want to lose 80% of the value proposition. We would rather reduce that exposure and buy it back even if it's more expensive.

So that reduces the volatility.

Yes, and preserves capital, absolutely. Anything else?

We have also a basket approach. When we like a specific therapeutic area, we -- I mean, working in this industry for many years, we understand that it's very hard to actually pick a winner relatively early on. So we try to focus on maybe 5 to 8 companies and invest in small portions. And over time, when we see a winner, we try to focus and put more money into the winner. And that has actually proven to be kind of an interesting and well-functioning strategy because when one of these companies get acquired, it tends to lift the whole basket. So we benefit even when we have an M&A that we didn't own, it has happened that we actually gain more from owning the competitor.

And one factor, I think, which differentiates us is that Marek's background is that he's worked in the industry, actually developing drugs, going to the regulator, understanding the FDA. And I think that's quite unique. You don't often see that sort of industry know-how.

So it's not necessarily just a fund management background. It's an industry background as well.

And business development. He used to work in business development teams. It's great having that sort of experience and knowledge when you're selecting stocks.

A winning combination. We're rapidly coming to the end. We've got so many questions. I mean, thank you. Thank you. And we will -- if we can't answer them, we will try and get an answer to you one way or the other. But anyway, let's see what we can do. I will just remind you, there is a blog. You're getting a blog that's coming out very shortly. So if you subscribe to the IBT mailing, you will get this blog. And what we can probably try and do is -- maybe try and answer some of these questions in that way. But just -- we've got room for just one more. And I think it's -- I thought it's quite an interesting one because we kind of touched on it, I haven't really discussed too much. Where are the -- what are the sort of sectors, the therapeutic sectors that we are most excited about where we see the best value and are generating the -- or creating the best drugs.

I can start. I think the area of orphan drugs, it's not one specific orphan drugs, it means that a drug that is -- or a disease that is very uncommon, maybe one in 100,000 or whatever number is very rare. And often when you develop a drug for such a disease, there is nothing out there. So if you can create something and addressing usually a very high unmet medical need, you tend to have a monopoly position, you can command a higher price because you actually provide some relief to these patients. And there are a lot of diseases out there, sadly enough, several thousands of them. And we believe that's an area where you actually have innovation coming through, you start to understand the biology, the science behind the diseases. So you can now -- and with the help of AI, you can address this disease in a different way than you could 10 years ago.

And it really is a growing market, this area. And many of the companies, I'm not going to put that slide back up, but that were on that list of Biotech 2.0 are working in orphan diseases. And that means they can actually launch on their own because you don't need a great big sales force and you don't need a great big manufacturing capacity. And so you can get the growth of these new sales and launches and remain independent.

Wonderful. Well, ladies and gentlemen, we've just come up just over our allotted time. Once again, thank you so much for all your questions. Look out for that blog, where we'll try and answer as many as we can within that document. Ailsa, Marek, thanks so much for coming in today. Keep up the great performance. And ladies and gentlemen, all that remains for me to say is please do that survey. And then thank you for support once again, both of today's webinar and of the trust, if you are a shareholder. We look forward to speaking to you again throughout the year. But for now, have a great rest of the day. Goodbye.