Biotech Companies Are Issuing More Dividends


People who doubt about the energizing effect dividends have on an investment trust’s share price should take a look at International Biotechnology Trust (IBT). Directors of the £223 million closed-end fund promise that the company will soon be able to issue shares for the first time, thanks to the seemingly excited response to its suggestion last September to begin paying shareholders a 4% dividend from the capital.

Biotech funds and dividends aren’t commonly associated because biotech companies seldom give income to the shareholder. Instead, they reinvest the money into research and development of new drugs.

A similar payment at the end of January will follow the entrance of an 11.5p per share dividend. The decision seems to have made investors happy, even if some people doubt the purpose of establishing an income stream where none really exists.

Because of the dividend payment, the difference between IBT’s share price and its net asset value (NAV) – has dropped massively, from 16% to below 4%, a strong sign of rehabilitated investor demand.

Lazard dropped its holding from 26% to below 18% as it trades into a 12-month rally, implying another expansion of shareholder base.

Last time IBT’s discount was this thin was early 2007 when the investment trust raised £36 million in a ‘C’ (conversion) share issue to satisfy investor’s need following an excellent period of performance.

Ailsa Craig, one of three managers of the company, predicts that a similar rise could happen soon. “I see no reason why we shouldn’t be able to issue more shares,” she told Investment Trust Insider recently.

If the share price is issued above NAV, another share issue would be beneficial for shareholders, increasing liquidity in the stock and reducing the proportion they pay in charges.

If IBT succeeds in a new share issue, it would be a great achievement for an investment trust that, since the company has issued nearly 25 million shares 10 years ago, now they are able to buy them back again.
IBT’s 2007 fund raising was followed by the 2008 financial crisis. However, the biotech industry did not do too bad because of the market crash.

IBT’s shares dropped 11.7% in 2007 and 9.4% in 2008. It was disappointing but many equity funds fell 30% before the great bank bailouts signaled a powerful rebound, much more severe than IBT’s loss.

IBT’s discount increased to 24% as cautious investors had some faith in the biotech industry. The company started began a period of sporadic buybacks as the board of directors wanted to reduce too much supply of stock and decrease its discount to the 8% level investors was promised at the C-share issue.

At the same time, performance since then looks astonishing – a 328.5% total shareholder return makes the FTSE All-Share’s post-crisis gain of 86% look depressing – the number of IBT shares in issue has nearly split to 37.5 million.
The obvious difference is not as strange as it seems. On the one hand, buying back shares at a discount would have boosted shareholder returns. On the other hand, the fact the shares often traded more than 10% below net asset value reflects that IBT was actually the weakest of the four-biotech investment companies at the time.

Swiss-listed BB Biotech (BION.S) impressed the investors with a 765% total return. Meanwhile, the Orbimed-managed Biotech Growth (BIOG) and Worldwide Healthcare (WWH) trusts have brought epic returns of 662% and 506%. IBT was the only one that did not exceed the Nasdaq Biotechnology index return of 538%.

Almost all of the biotechnology trusts have chosen discounts during different times recently. At the same time, IBT’s ranking has gone up since the appointment in 2013 of lead fund manager Carl Harald Janson, former manager of the top-performing Carnegie Biotechnology Fund.
Because IBT invests more in unquoted and smaller biotech companies than some of its rivals, the fund has returned almost 120% to shareholders, ranking it second out of six funds in its sector and doubling the gain in its Nasdaq standard.

IBT’s decision to pay dividends is certainly a factor of why IBT has improved but so is the investors’ sense of the political trends that have rocked the sector in the past two years. US president Donald Trump said drugs companies are “getting away with murder” over the pricing of their treatments but has drafted an executive order influenced by big pharma’s lobbyists.
Trump may not implement tax cuts, therefore, no return of the corporate cash can be hidden offshore. That could cause consolidation in a drugs industry that has flourished on mergers and acquisition in the past.

Health care can be better without the influences of politics because it draws investors attention to the fundamental sides of the industry. Biotech companies are becoming more and more innovative in making new drugs for the people around the world. Because biotech companies are trading below the U.S stock market, their shares can be bought at an affordable price.
Because of Donald Trump’s policy, biotech share prices are getting closer and closer to NAV, except for Syncona (SYNC). It has reached a 26% premium since since the end of last year when its emerged from the Battle Against Cancer trust.

In addition, more and more dividends are being issued in biotech. For several years, BB Biotech has issued dividends, and last year its partner BB Health Care was just established in London and started a semi-annual distribution policy.

Polar Capital Global Healthcare’s (PCGH) share price is getting closer to standard adopting a growth-based strategy.

Obviously, investors value a proper growth strategy more than just dividends.


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