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International Biotechnology Trust (IBT) - 31 Aug 2002 (Page 4)

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International Biotechnology Trust (IBT) - 31 Aug 2002
INVESTMENT ADVISERS REVIEW

Schroder Ventures Life Sciences

Schroder Ventures advised funds have invested in the life sciences industry since the early
1980's and to date have backed over 100 life science companies internationally. Schroder
Ventures Life Sciences ("SVLS") was established in 1993 and currently has offices in Boston,
London and San Francisco, in order to take advantage of the global nature of life sciences
opportunities. The SVLS team is comprised of 24 professionals with a deep base of scientific,
clinical, operational and life sciences investment experience.

In addition to IBT, SVLS advises three private equity funds with total commitments of
approximately $680m, focused on providing seed, start-up, early stage and expansion capital to
life sciences companies primarily in the US and Europe.

Market Review

The year under review has seen a severe correction in the biotech market with the NASDAQ
biotech index falling by 47.7% in sterling terms. The backdrop to this poor performance has
been a slump in the general markets and the growing intolerance of risk by investors.
Technology stocks have generally held up better than biotech with the NASDAQ composite
index falling by 31.7% in sterling terms during the reporting period.

The fall in the sector follows a frenzy of initial public offerings ("IPO's") and high valuations in
2000, which were driven by strong global market conditions and by the sequencing of the
human genome and the perception that this would result in the rapid development of new
therapeutics, driving earnings and profitability at a fast pace. The reality of the genomics
revolution is that it is transformational but the fruits of this knowledge will not be commercialised
for some years to come.

There have only been three biotech IPOs this year and the IPO window looks firmly closed for
the coming months. A portfolio company, Aderis Pharmaceuticals, completed a series of
investor roadshows in preparation for an IPO earlier this year, but the listing did not go ahead.
Investor confidence in the IPO market was soured by the poor performance of the listing of DOV
Pharmaceuticals, immediately before the Aderis listing was to become effective. This was
disappointing but Aderis continues to make progress with its product pipeline and is well
financed.

The biotech sell-off has contracted earnings multiples for profitable companies and lowered
technology values for development stage companies. For loss-making companies, attention is
focused on current cash positions and burn rates, with little value being accorded to future
products. Many companies (including a number of portfolio companies) are trading at a discount
to cash asset values and a number of companies have restructured to focus on their lead
programs in order to conserve cash in the face of difficult market conditions. Overall, companies
within the IBT portfolio remain generally well financed with twenty-two companies having two or
more years of cash, seven with one or more and five with less than a year of cash. The
remaining two companies have been written off. Of the five with less than a year of cash, one is
expecting to start commercialisation of a product within the next year and to sign a marketing
agreement, two are currently raising money, one is looking to partner out early stage programs
and another has been sold since the end of the reporting period.

The most extreme falls in share prices have been seen in companies with very small market
capitalisations (microcaps) and early stage pipelines, despite good operational progress in
many cases. In times of uncertainty investor interest concentrates on the larger, profitable
companies or those with very late stage product pipelines and a near term chance of earnings.

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