International Biotechnology Trust (IBT) 22 sept 2003 Page 3
CHAIRMAN'S STATEMENT
PERFORMANCE AND REVIEW
After three years of falling stock markets I am pleased to be able to report better results
following the recovery in the markets generally and specifically the biotech sector. During the
year to 31 August 2003, the net asset value (NAV) per share of International Biotechnology
Trust (IBT) rose by 14.5% from 98.5p to 112.8p with the share price rising by 11.1% from
76.5p to 85.0p. During the period under review the NASDAQ Biotechnology Index (NBI)
rebounded strongly and rose 48.1%, the Merrill Lynch Small Cap Biotech Index (MLSCI) rose
by 26.5% and the Bloomberg UK Biotechnology Index fell by 5.0%, all in sterling terms.
We measure the performance of the Company in a number of different ways. The portfolio is
predominantly composed of smaller biotech companies, which makes it difficult to compare
the performance of IBT directly with the NBI, which is heavily weighted towards larger
companies. We believe that an index which is more small cap focused is more useful,
especially when looking at the performance of the quoted portfolio. The Merrill Lynch Small
Cap Biotech Index currently consists of 117 biotech companies with market caps of less than
US$1bn. As mentioned previously, this index rose by 26.5% in sterling terms during the
period under review.
IBT's smaller quoted holdings were hit badly during the correction in the market following the
boom of 1999 and 2000, as investor focus moved towards the larger, profitable companies or
those with projected near term earnings. The recent rally is the first post-bubble rally in which
all the tiers of the market have benefited, although smaller biotech companies have still
lagged their larger peers during the year under review. The performance of IBT's quoted
portfolio has been calculated on a monthly time-weighted return basis (assuming mid-month
cash flows) and showed a rise of 46.4%. The return on an unweighted basis (ignoring the
timing of transactions) was 29.9%.
So far 2003 has been a much better year for the biotech market than 2002. The recovery in
the value of biotech stocks has been driven by better general stock market conditions and an
improvement in newsflow from the sector. There have been a run of regulatory approvals,
strong clinical data (especially in the area of cancer) and better than anticipated earnings
from a number of large, profitable companies.
At 31 August 2003, IBT's unquoted portfolio represented 42% of net assets (value £22.7m)
against 43% (value £20.8m) at the previous financial year end. The valuations of the
unquoted companies are based on tangible third party priced events, which include trade
sales, initial public offerings (IPOs) and third party financings. We are encouraged that three
of our unquoted companies, Aderis Pharmaceuticals, CancerVax and Eyetech
Pharmaceuticals, (together representing 16% of net assets at 31 August 2003) have recently
filed to go public on NASDAQ, market conditions permitting.
BASIS OF VALUATION
As is practice in the venture capital industry, the IBT portfolio is valued in accordance with
the British Venture Capital Association guidelines. The carrying valuations of 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. In certain circumstances quoted holdings are valued at discounts to
their mid market prices.
Ahead of each investment considerable due diligence is undertaken, making use of a
comprehensive network of scientific and clinical advisers, with particular focus on
management, science and valuation. Members of Schroder Ventures Life Sciences (SVLS),
the investment adviser to IBT, have board seats on eight of the portfolio companies, at the
