International Biotechnology Trust (IBT) 31 Aug 2002 Page 2
It was another year of significant stock market falls, particularly in the biotech sector, and our
results reflect these difficult times. During the year to 31 August 2002, the net asset value
("NAV") per share of International Biotechnology Trust plc ("IBT") fell by 51.5% from 203.1p to
98.5p alongside a fall in the share price of 56.7% from 176.5p to 76.5p. This is in comparison to
a fall in the NASDAQ Biotechnology Index ("NBI") of 47.7% in sterling terms and a fall in the
Bloomberg UK Biotechnology Index of 46.4% during the same period.
Whilst the fall in NAV was predominantly due to the fall in the biotech market, an element was
due to write-downs in the values of some of the inherited unquoted companies in the portfolio,
as announced at the half year. Changes in the valuations of unquoted companies have resulted
in a net fall in net assets for the year of £6.1 million or 6.2% of net assets at 31 August 2001.
The fall in NAV during the year under review was 45.3% excluding these write-downs.
The year under review has been disappointing in performance terms for IBT. However, this
should be viewed in the context of the weak overall market conditions, which have reduced
investor tolerance for the type of risk found in the biotech sector. The biotech market typically
goes through extreme cycles and the fall in the NBI during the last year follows the boom years
of 1999 and 2000 when the index (in US dollar terms) rose from 437 and peaked at around
1600. At the end of the period under review the NBI had fallen back down to 489, close to the
levels of early 1999.
Sentiment towards the sector seems worse than at any time in recent history with investors
focusing on a number of high profile disappointments, and largely ignoring recent successes.
The widening of the discounts for the biotech-focused investment trusts reflects this poor
sentiment. At the time of writing, shares in IBT are trading on a discount of 31% to NAV, after
widening from 13% to 22% during the reporting period.
IBT has a number of holdings in smaller quoted companies with very early stage pipelines, and
these companies have been hit particularly hard as investor focus has moved towards the
larger, profitable companies or those with projected near term earnings.
At 31 August 2002 the percentage of NAV in unquoted companies was 43%. Whilst new
investments during the reporting period account for some of this increase, a large part is due to
the falls in share prices of the quoted companies in the portfolio. Given that the guideline for
unquoted investments was originally set at approximately 25% NAV, further unquoted
investments are not planned in the near term. The Board keeps this matter under regular
review, which includes monitoring the progress of the unquoted investments. If concerns arise
regarding the valuation of these investments, appropriate action is taken immediately.
As is practice in the venture capital industry, the IBT portfolio is valued in accordance with the
British Venture Capital Association (BVCA) guidelines. In certain circumstances quoted
holdings are valued at discounts to their mid market prices. 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.