The International Biotechnology Trust is a strong performer and offers an attractive way to invest in the biotech sector.
I said last month that I was upbeat about the biotech sector and I still am. So I thought it made sense to take a closer look at The International Biotechnology Trust
(LSE: IBT)
which announced its annual results yesterday.
This investment trust has certainly performed well in recent years. Over the last three years its share price has jumped 52% and things have gone even better over the last year. The share price has risen 31% to 136p while the value of underlying portfolio or Net Asset Value (NAV) has moved up 17% to 142.25p. That's way ahead of the Nasdaq Biotech index which has slipped 3% over the same period.
Much of IBT's success stems from the recent wave of mergers and acquisitions in the biotech sector. The fund had stakes in Kudos and Cambridge Antibody Technology, which were both acquired by AstraZeneca
(LSE: AZN)
during the year.
There could be more such deals in the years to come as many big pharma companies aren't developing enough new drugs. Indeed a recent report by Ernst and Young says that pharma companies spent about four times as much as the biotech sector on research and development between 1998 and 2005, yet in 2005, pharma companies only obtained two thirds as many approvals for "new chemical entities" as the biotech sector.
I think IBT looks well placed to benefit from this trend with a nicely spread portfolio. At the end of August it had shares in 36 quoted companies along with investments in 13 unquoted businesses.
I'm especially attracted by the unquoted part of the portfolio as funds such as IBT are the only way private investors can gain exposure to these kinds of business. Unquoted investments can be extremely lucrative -- an investment in a company called Glycofi delivered a 900% return for IBT in less than a year.
There are several interesting quoted companies in the portfolio too -- the fund's second largest holding is ProgenicsPharmaceuticals
(NASDAQ: PGNX)
. It has a deal with Wyeth
(NYSE: WYE)
on a late-stage treatment for constipation following an operation.
But the really exciting product is a high-risk HIV drug that has blockbuster potential.
IBT, however, isn't the only biotech fund available to private investors. There's also the Finsbury Emerging Biotechnology Trust
(LSE: FEB)
which is 90% invested in the US whereas the IBT has more of a global spread with only 60% of its fund in American stocks. More importantly, the IBT has delivered stronger performance than the Finsbury trust in recent years.
The FramlingtonBiotech unit trust also has its fans although once again the IBT has done better over the last three years. It looks like the performance of the fund has suffered since star manager, Anthony Milford, left in February 2005.
The biggest downside with the IBT is that its share price now trades on a slim discount to net assets, just 4%. Ideally, I'd like a bigger discount, but the current price reflects the recent investment successes, and, remember, this fund owns plenty of companies with multi-bagger potential.
Of course, I should stress that biotech investments are high-risk and can be very volatile. Still, the potential rewards are large and I think the IBT offers an attractive way to gain some exposure to the sector.
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