Purpose
This Engagement Policy sets out how SV Health Managers LLP (“SV”) undertakes stewardship and shareholder engagement for its public equities fund – International Biotechnology Trust plc (“IBT”) although the Voting Policy also applies to the small number of listed company investments held by its venture funds.
This policy has been written in accordance with the requirements of Directive (EU) 2017/828 and its implementing measures (together, the “Shareholder Rights Directive II”).
This Engagement Policy complements and supplements SV’s ESG/Sustainability and Proxy Voting Policy in relation to the integration of stewardship into our investment strategy. More information about the investment approach, investment strategy, investment objective and policy can be found in the Investor Disclosure Document on IBT’s website at www.ibtplc.com
This Engagement Policy does not apply to investments made through SV’s venture capital strategies, a small percentage of which are investments held by IBT, both directly and indirectly through SV’s venture funds.
Introduction
The SV team which manages the public equities portfolio of IBT is a highly skilled and experienced team of investment professionals who have both scientific backgrounds as well as financial qualifications.
IBT’s current investment objective is to achieve long-term capital growth by investing in healthcare companies with a main focus on biotechnology and other life sciences. companies.
The investee companies are predominantly US based biotechnology companies listed on the NASDAQ, and which form part of the NASDAQ Biotechnology Index (“NBI”) which is the benchmark index, against which IBT measures its performance. IBT has a small unquoted portfolio comprising biotechnology, medtech and devices investments.
The diversity of the quoted portfolio can be seen in a number of ways:
Market Capitalisation – the breakdown of the portfolio by size is currently measured in X-Large caps >$30bn; Large caps >$10bn; Medium caps >$2bn and Small cap companies >$2bn. As mentioned above, there is also a small percentage of unquoted investments.
Therapeutics area – the investee companies are either the owners of drugs on the market for a large range of diseases or exploring potential ways of treating such diseases either at clinical or pre-clinical stages.
Geography – although predominately invested in US and Canada, the trust holds a small number of UK and European investments. The fund managers have the ability to invest more globally if they choose to.
Development stage – this is broken down into profitable, growth and early-stage and the trust holds a range of investments within each stage.
How SV monitors investee companies
The key investment criteria are based around financial performance, a company’s portfolio of products and the unmet medical need that those products are addressing together with its sales data, management team, projects in the clinic (if any), and its M&A prospects.
- Financial and non-financial performance and risk
During meetings with company management - which take place at least once a year - the team may discuss a variety of topics, such as progress in their field of scientific and medical expertise, operating performance, future financings, financial performance, ownership structure and issued Guidance. They may also discuss the management team governance issues and other matters that may present a potential material risk to a company’s long-term financial performance.
The team use the following resources to help monitor the financial and non-financial performance and risk exposure of investee companies:
- company financial reports, earnings calls and company issued guidance
- regulatory filings,
- press releases, company presentations and company newsflow;
- information platforms including Bloomberg;
- healthcare, medical investment conferences;
- Sell-side research including key opinion leaders [KOLs]
- Proxy research reports from ProxyEdge
- Strategy
SV believes that a disciplined strategy is one of the most important drivers of long-term shareholder value creation. The team take the following rigorous approach to value creation:
- Investment process – stock selection and monitoring
SV’s approach is proactive. Generally, the team meets the management team of a company before investing in it, as well as scrutinising their public statements. This allows the team to understand management’s strategy, their existing and future product prospects, whether the product meets a high unmet medical need* criteria, sales forecasts and their capital requirements.
*A focus on companies which are developing drugs where there is unmet need in the market provides the greatest opportunity for shareholder value. These small or mid cap companies may be M&A targets which, if acquired, produce good returns for the target investors.
For biotech stocks, valuations are also a key issue, often due to the fact that the companies are either under or overvalued as has been the recent case during 2020 where some early-stage companies without clinical data have seen high valuations. The team is cautious of these pockets of what it deems to be high valuations.
The team monitors the strategy and capital structure of investee companies, analysing news flow, namely financial statements as they are produced, attending earnings calls, assessing execution of a stated strategy, and paying close attention to financial results announcements. Additionally, the fund managers monitor changes in issued Guidance, clinical trials progress and results, changes in management teams and potential M&A activity.
The team also seeks to understand the important features of capital structure such as the term structure of borrowing, access to working capital and other financial obligations the company may have and monitor changes in them over time. The team pays close attention to changes in governance structures (board composition, voting rights, pre-emption rights etc) and management incentives.
For biotech companies, the majority of which are domiciled in the US, there is also the political environment to consider as changes in political power can impact the healthcare sector. The team monitored and reported to investors throughout the run up to the recent general election on each candidate’s personal campaign with respect to healthcare.
Due to the volatile nature of Biotechnology investments, the team has adopted a risk mitigation strategy, with a bottom-up stock selection strategy and applying a top-down diversification overlay.
- Social and environmental impact and corporate governance
SV’s ESG/Sustainability Policy is currently under review following the various ESG related pieces of legislation both within the UK (TCFD) and from the EU (SFDR).
IBT is not an ESG fund and neither its strategy nor investment objectives include any prescribed ESG metrics that measure ESG risks and opportunities.
However, SV believes that, with a biotechnology and healthcare investment strategy, the overall goal of the investee companies is to benefit society by discovering, manufacturing and distributing drugs that will improve and, in some cases, save patient lives. Along with the health goal of the underlying investee companies, the team focuses much of its diligence and engagement with investee companies on Governance issues such as management teams, the quality of Boards, their strategies and reputations as these present material Governance risks and opportunities which impact the financial health and performance of those companies which in turn may directly impact society.
An updated ESG/Sustainability Policy will be issued in the second half of 2021 which will describe this in more detail.
How SV engages with investee companies – Voting
As well as meeting with companies and their management teams, as investors SV must also activate the Trust’s voting rights.
The aim is to understand SV’s ability to influence corporate decision-making and whether the interests of management are aligned with those of the Trust.
SV recognises that minority equity investors do not have control over a company’s strategy, capital allocation or capital structure. Decision-making authority lies with the company’s management and ultimately its board of directors, and shareholders have influence through the periodic election or re-election of board members or through votes on specific resolutions at annual or extraordinary general meetings.
The team uses ProxyEdge services to monitor forthcoming shareholder decisions which require their attention.
How SV manages actual or potential conflicts
SV has conflicts of interest policies that apply to its investment strategy and proxy voting activity.
In its unquoted portfolio, since 2016 IBT has only made direct investment into an unquoted fund – SV Fund IV. Prior to that it made several direct investments into unquoted companies some of which have now become public companies. Two of these are held by other SV venture funds.
SV’s Investments Policy governs how SV will behave when dealing with the same investment across more than one fund. Decisions will be carried out by the individual investment team who will act in accordance with the strategy of that fund.
Transparency
Annual implementation of this Engagement Policy
SV will annually disclose how this Engagement Policy has been implemented, including:
- a description of its voting behaviour;
- an explanation of the most significant votes;
- the use of the services of proxy advisors; and
- a description of how SV has cast votes in the general meetings of investee companies.
Review
This Engagement Policy is reviewed and approved annually or more frequently as needed and is publicly available on SV’s website.
