International Biotechnology Trust : Themes for 2021

After a period of extreme volatility during 2020, it unexpectedly turned out to be a positive year for the equity markets and an extraordinary year for scientific progress. During the year, the Trust's share price appreciated 36.1% (share price total return, GBP) versus the benchmark, Nasdaq Biotech Index, that appreciated 23.2% - an outperformance of 12.9%. Similarly, the net asset value of the Trust appreciated 29.8%, outperforming the benchmark by 6.6% (all total return).

We can all agree that 2021 will be very difficult to predict with a pandemic raging the world, initial vaccination campaigns having just started, and a virus mutating and changing its infectability (Source: www.nextstrain.org).

The prevailing consensus view predicts that vaccination campaigns, with several vaccines on a global scale, will eventually lead to a broad immunity that will change the pandemic-nature of the Covid-19 infection to become endemic and manageable in a manner similar to many other viral infections. The view, at least from equity markets' perspective, is that they would have a strong finish at the end of 2021, on the back of strong economic recovery.

However, negative scenarios can also be envisioned: In the near-term, China might see a rise in the number of infected people which would lead to another hard lockdown resulting in negative economic impact. Given Japan's recent historical negative experiences of vaccinations, the nation's government may not be able to convince its citizens to vaccinate, creating a lingering national epidemic. The Covid-19 virus might mutate to increase the severity of the infection rate or render the current vaccination programs less effective - a scary scenario but as an investor one needs to take these potential outlier events into consideration.

Our outlook is positive, but as always, we closely monitor any developments which may impact our view. It is difficult not to have a positive outlook for the sector in the near-, mid-, and long-term, as innovation is constantly delivering more and more therapies, evidenced by:

• the increasing number of drugs approved by the FDA, with 53 drugs approved in 2020 - the second highest number of drugs approved annually in any of the last 20 years (see figure 1 below),
• the unprecedentedly advanced pace of development of several Covid-19 vaccines, and
• The fact that M&A was slow in 2020 and is expected to be on the upturn in 2021.

Figure 1: New drug approvals in the US 2010-2020

Figure 1

Data sourced from Food and Drug Administration (FDA)

The result of the U.S. election was a narrow, but still decisive, win for the Democrat Party. In addition, the Senate was a tie, but with Vice President Kamala Harris having the final vote, the Democrats gained control of the Senate. Healthcare is clearly on the agenda for the Democrats, with Obamacare in focus. We do not expect to see new legislation introducing major changes to the healthcare system, but we keep a close eye on legislation leading to price pressure in particular subsectors. We remain agnostic to therapeutic areas but see more opportunities in oncology and rare diseases, with short- to mid-term scientific advancements in neurology and psychiatry leading to increased therapies for these historically difficult to treat areas. Additionally, gene sequencing is generating new genetic targets to a variety of diseases at record speed.

Biotech valuations are said by some to be in a 'bubble'. Clearly the small cap names have become more expensive - an area we currently are cautious about. Larger companies, with proven sales and revenue track records, are less expensive compared to the small cap names and we see more investment opportunities in this subsector. Interest rates are low, with Central Banks declaring that they will be lower for longer and monetary policy is expected to remain lax. Fiscal policy remains a focal point with stimulus packages being announced in response to the pandemic. Money Supply in response to the pandemic has had a sharp expansion (see figure 2 below). In our view, inflation of financial and other fixed assets is inevitable in the short to medium term.

Figure 2: Federal Reserve Money Supply M2 - 5 years

Figure 2

Source: Bloomberg