In this weekly series, investment reporter Elliot Gulliver-Needham sits down with a fund manager for a Q&A. This week, we’re hearing from Ailsa Craig, co-portfolio manager of International Biotechnology Trust.
How does your fund stand out from others in the same market?
While many companies in the biotechnology sector are proven, cash-generating businesses, those at an earlier stage of drug development can see their success hinge on binary events like clinical trial results.
At International Biotechnology Trust, we aim to mitigate this risk by lowering our exposure to companies approaching these binary events. While we are predominantly bottom-up stock pickers, we also employ a top-down overlay which allows us to tilt the fund between defensive large cap stocks and higher growth earlier stage stocks depending on the market backdrop.
This approach has helped us outperform the benchmark Nasdaq Biotechnology Index over each of the last three years across rising, falling and flat markets while maintaining lower volatility compared to the index and other trusts in the sector.
Another key differentiator is our exposure to unquoted biotech companies, which currently accounts for around 10 per cent of our portfolio. A wealth of innovation in biotech comes from early-stage unlisted companies, often spun out of universities.
We aim to offer investors access to the whole spectrum of the global biotech sector, from these early-stage private businesses through to mega-cap listed companies. Finally, many of IBT’s investors are attracted by our dividend of four per cent of NAV. This equates to a 2025 prospective dividend yield of around 4.5 per cent.
Which of your holdings are you most excited about?
We have high hopes for our holding in Intracellular, a company that addresses schizophrenia, depression and bipolar disorder. It has succeeded at every milestone and now has a product launched on the market.
Its product, Caplyta, has been shown to work across several clinical areas, so the potential expansion of the addressable market could be significant for the company. We suspect this will not have escaped the notice of the large pharmaceutical companies, looking to replenish their product pipelines following patent expiries, so we are hopeful of an M&A deal for Intracellular in the future.
What is the biggest mistake you’ve ever made in the fund?
We aim not to hold “elephants” in our fund, which means that we generally only have relatively modest holdings in each of our portfolio companies. There have been occasions where larger holdings in companies when they are acquired would have generated higher returns for our shareholders.
However, while we have an idea about which sorts of companies are likely to make good acquisition targets, nothing is ever certain and some companies never manage to strike an acquisition deal, so our prudent approach has stood us in good stead over the years.
What’s one change you made in the fund recently? Why didn’t you make it sooner?
We have tilted the weighting of the fund away from defensive larger cap biotech companies in favour of smaller, earlier stage companies. The biotech investment environment is cyclical, so during periods of contraction and higher volatility it makes sense to allocate towards the more stable, slower growth large cap companies.
However, there now appear to be signs that the sector is coming out of its prolonged drawdown. The prospect of lower interest rates could also provide a positive catalyst for the sector, so we have increased the portfolio’s exposure to earlier-stage companies to capture this potential growth.
What’s the biggest change you’ve seen in the industry since you started?
Pharmaceutical companies reduced their research and development budgets dramatically around 10-15 years ago and so the healthcare sector has evolved. Nowadays, the vast majority of drug discovery takes place within biotech companies and the successful products are either in-licenced or acquired by pharmaceutical companies, which have far superior manufacturing and distribution capabilities.
From an investment perspective, we now have an ecosystem in which M&A is commonplace and biotech companies are flourishing. When we started investing in biotech, the industry was still nascent and comprised mainly earlier-stage companies, few of which had had successful product approvals or launches.
As the sector has matured, we see substantially more biotech companies with products on the market, many of which are turning a profit and offer attractive and visible earnings streams. Well over half of our portfolio is now invested in companies with products that are approved and launched on the market.
This is positive for our shareholders, who gain exposure to the whole spectrum of the biotech industry, from the early-stage companies in our unquoted portfolio through to the mega-cap companies with multiple products launched on the market, some of which, like Amgen, are the same size or bigger than pharmaceutical companies.