International Biotechnology Trust (IBT) 22 sept 2003 Page 11
VALUATION
During the year under review the net effect of the change in the Directors valuations of
unquoted companies was a net reduction in NAV for the year of £1.4m. This represents a
decrease of 6.7% on the valuation of the unquoted portfolio at 31 August 2002. The value of
unquoted investments at 31 August 2003 was £22.7m (£20.8m at 31 August 2002). The
holdings in CancerVax and Axxima were written down by £0.2m (total cost £2.5m) and
£1.2m (cost £1.4m) respectively during the period under review. CancerVax was written
down to the price of the August 2003 financing round in which IBT invested £0.4m. The
valuation of Axxima was written down to a best estimate of a fair market value. Currency
gains increased the valuation of the unquoted portfolio by £0.6m during the period under
review.
The valuation of Essential Therapeutics was changed during the year under review to an
unquoted basis and is included as an unquoted holding. This change in valuation basis was
because the company was delisted from NASDAQ. While the common shares of Essential
are still thinly traded, IBT holds a preferred redeemable instrument that is not quoted. The
preferred shareholders have issued redemption notices and the SVLS representative on the
board of the company has resigned. Since Essential could not repay the $60m originally
invested by the preferred shareholders, the Chapter 11 process was initiated to enable the
company to reorganise. The holding is valued at £0.9m (cost £5.3m) taking into account the
stage the company has reached in Chapter 11 proceedings. The valuation is believed to be a
conservative estimate of IBT's interest in Essential following the resolution of the court
process after which it is expected that the preferred shareholders will own 100% of the
company. The company reported $16m of cash and marketable securities at end June 2003.
At 31 August 2003 the holdings in Aderis, Affibody, Auxilium, EyeTech, Genosis, KuDOS and
Sunesis are held at cost (total value £15.0m), Axxima, CancerVax and Essential
Therapeutics have been written down from their original cost (total value £4.0m), and
Micromet has been written up (value £3.7m). This equates to 66% of the unquoted portfolio
held at cost, 18% written down and 16% written up by value. The unquoted portfolio,
excluding ValiGen and Entigen, is now valued at 81% of original cost (including the initial
cost of Essential).
To recap, the carrying valuations of each of the unquoted companies are reviewed weekly
and incorporate consideration of the progress of the underlying company against milestones
made at the time of investment and any upcoming need to raise capital. Strategic equity
investments, such as Pfizer's equity investment in EyeTech are not used as a basis for
valuing unquoted companies.
Of the 25 quoted investments, five are held at a discount to their mid market prices at 31
August 2003, due to disposal restrictions, including limited liquidity AnorMED, Epimmune,
Galen, Inflazyme, and LION. The effect of these discounts was to reduce the NAV by £0.9m
at 31 August 2003.
INVESTMENT ACTIVITY
UNQUOTED COMPANIES
As the percentage of NAV invested in unquoted investments remains high, no new
investments have been made in the unquoted portfolio during the year under review. An
investment of £0.4m was made in August 2003 in existing portfolio company, CancerVax
(total investment £2.1m). CancerVax raised $41m in the financing and has subsequently filed
to go public on NASDAQ, market conditions permitting.
Following a commitment made in August 2001, the second tranche of an investment (£1.4m)
was made in Affibody (total investment £2.7m). Affibody continues to make good progress
