27 March
2024
BIOPHARMA CREDIT PLC
("BPCR" or "the
Company")
FINAL RESULTS FOR THE YEAR ENDED 31
DECEMBER 2023
BioPharma Credit PLC (LSE: BPCR), the
specialist life sciences debt investor, is pleased to present its
Final Results for the period ended 31 December 2023.
The full Annual Report and Financial Statements
can be accessed via the Company's website at
www.bpcruk.com or
by contacting the Company Secretary by telephone on 01392
477500.
INVESTMENT
HIGHLIGHTS
·
Over the course of 2023, the Company and its subsidiaries
invested a total of $270.0 million into new and existing
investments:
o $120.0 million
senior secured loan agreement with BioCryst.
o $62.5 million
senior secured loan agreement with Reata.
o $37.5 million
senior secured loan agreement with ImmunoGen.
o The remaining
$50 million invested during period was split equally between two
existing investments:
§ $25.0 million for
Evolus.
§ $25.0 million for
LumiraDx.
·
Additionally, the Company has unfunded commitments for
Immunocore and BioCryst of $25.0 million and $60.0 million
respectively that may be funded over the next six
months.
· The
year saw an increase in cash flow of $179.6 million, attributed
to:
o The prepayment
of $62.5 million from Reata on 29 September 2023, accompanied by
prepayment and make-whole fees as of the closing of the Reata
acquisition that totalled a further $15.5 million.
o Scheduled
amortisation payments were received from:
§ the Collegium 2022
loan of $81.2 million.
§ the Akebia loan of
$16.0 million.
§ the BMS purchased
payments of $19.9 million.
· On
29 December LumiraDx and Roche Diagnostics Limited announced that
Roche Diagnostics would acquire select parts of LumiraDx for a
purchase price of $295.0 million. The LumiraDx investment was
written down as of 31 December 2023 to reflect the expected
recoverable net proceeds discounted at a 21.7 per cent rate to
account for remaining risks.
· In
December, the Company's investment in ImmunoGen was marked up by
$10.7 million as of 31 December 2023 to account for the discounted
value of expected prepayments and make-whole fees following the
announcement of AbbVie's definitive agreement to acquire
ImmunoGen.
· The
investment manager continues to develop a pipeline of additional
potential investments to further diversify the portfolio that may
be capitalised upon following adjustments to the Company's Discount
Control Mechanism ("DCM") announced this morning following
consultation with shareholders on their preferences for capital
allocation.
FINANCIAL
HIGHLIGHTS
· Net
income return on ordinary activities for the year (after finance
costs and before taxation) of $108.4 million.
· A
1.5% increase in NAV per ordinary share, from 101.39 cents to
102.93 cents.
·
Ordinary shares closed at 84.0 cents at year end, an 11.6%
decrease from 95.0 cents from 31 December 2022.
·
Including assets and liabilities from its financing
subsidiary, BPCR Limited Partnership, the Company ended the year
with total net assets of $1,340.9 million, comprising $1,102.1
million of investments and $260.8 million of cash less $22.0
million of other net liabilities.
· The
Company has maintained a record of paying a dividend of at least
1.75 cents per share every quarter since that quarter ending 30
June 2018. Three dividends paid during the year totalled 7.25 cents
per share, with a fourth dividend paid after the year end of 2.96
cents per share comprising a 1.75 cent ordinary dividend and a
special dividend of 1.21 cents per share. Total dividends from 2023
results therefore equated to 10.21 cents per share.
· The
Company repurchased a total of 16,499,477 ordinary shares at an
average price of $0.92 per share and a total cost of $15.3 million
from 9 January 2023 to 11 July 2023. Further purchases were not
possible as the Company was in a closed period from 12 July 2023
until 29 December 2023 due to information received on the LumiraDx
investment.
POST PERIOD
END HIGHLIGHTS
·
Following the completion of AbbVie's acquisition of
ImmunoGen, the loan balance of $37.5 million was repaid to the
Company in February, this was accompanied by prepayment and
make-whole fees totalling a further $13.1 million.
· As
per the Company's DCM policy, which states that if the Company's
shares trade at a discount to NAV of greater than 10% over a
six-month period, 100% of the proceeds received from debt
repayments must be used to repurchase the Company's shares. This
must continue until the discount to NAV at which the Company's
shares trade over a two-week period is less than 5%.
·
From 1 January 2024 to 26 February 2024, in accordance with
the Company's DCM the Company executed significant buyback
activity, with 49,041,347 shares repurchased at an average price of
$0.93 per share, amounting to $45.9 million.
· As
announced this morning, the Company has amended its DCM policy to
provide for greater flexibility as to when the Company can freely
deploy capital.
·
Following the end of the year, the Company declared a further
dividend in respect of the last quarter of 2023 of 2.96 cents per
share, made up of an ordinary dividend of 1.75 cents per share in
combination with a special dividend of 1.21 cents per
share.
SUMMARY
as at 31
December 2023
Share Price
|
Net Assets
|
$0.8400
|
$1,340.9m
|
(31 December 2022:
$0.9500)
|
(31 December 2022:
$1,337.5m)
|
|
|
NAV per Share
|
Shares outstanding (m)
|
$1.0293
|
1,302.7m
|
(31 December 2022:
$1.0139)
|
(31 December 2022:
1,319.2m)
|
|
|
Discount to NAV per Share
|
Leverage
|
18.4%
|
0%
|
(31 December 2022: 6.3%)
|
(31 December 2022: 0%)
|
|
|
Net income per share
|
Target Dividend
|
$0.0828
|
7
cents per annum
|
(31 December 2022:
$0.01336)
|
(31 December 2022: 7 cents per
annum)
|
|
|
PORTFOLIO COMPOSITION
|
As at 31
December 2023 ($m)
|
As at 31
December 2022 ($m)
|
As at 31
December 2023 (%)
|
As at 31
December 2022 (%)
|
|
|
|
|
|
Cash and cash equivalents
|
260.8
|
333.0
|
19.4%
|
24.9%
|
Collegium senior secured
loan
|
206.3
|
287.5
|
15.4%
|
21.5%
|
Insmed senior secured
loan
|
151.0
|
140.0
|
11.3%
|
10.5%
|
LumiraDx senior secured loan and
warrants
|
136.0*
|
150.1
|
10.1%
|
11.2%
|
BioCryst senior secured
loan
|
125.5
|
-
|
9.4%
|
0.0%
|
Coherus senior secured
loan
|
125.0
|
120.5
|
9.3%
|
9.4%
|
BMS purchased payments
|
83.6
|
103.5
|
6.2%
|
7.7%
|
OptiNose senior secured note, shares
and warrants
|
71.5
|
72.5
|
5.3%
|
5.4%
|
Evolus senior secured
loan
|
62.5
|
37.5
|
4.7%
|
2.8%
|
UroGen senior secured
loan
|
50.0
|
50.0
|
3.7%
|
3.7%
|
ImmunoGen senior secured
loan
|
48.2
|
-
|
3.6%
|
0.0%
|
Immunocore senior secured
loan
|
25.0
|
25.0
|
1.9%
|
1.9%
|
Akebia senior secured
loan
|
17.5
|
33.5
|
1.3%
|
2.5%
|
Other net liabilities
|
(22.0)
|
(20.1)
|
-1.6%
|
-1.5%
|
Total net assets
|
1340.9
|
1337.5
|
100%
|
100%
|
* Discount Rates are as set forth in
the full Annual Report. For LumiraDx, the investment was written
down as of 31 December 2023 to reflect the expected recoverable net
proceeds discounted at an 21.7 per cent. rate to account for
remaining risks.
Pedro Gonzalez
de Cosio, CEO and co-founder of Pharmakon Advisors, LP, the
Investment Manager of BioPharma Credit PLC, said:
"We are pleased to be reporting on another
positive year for the Company, with three new investments
successfully completed and further capital allocated to existing
investments.
The Company and its managers remain committed
to providing attractive returns and sustainable income to our
investors, uncorrelated to economic cycles and market movements and
we are happy to have again delivered dividends that were in excess
of our annual target with 10.21 cents per share paid to
shareholders as a result of income received during the period. Our
cash position remains strong, with an increase in cash flow of
$179.6 million.
Following shareholder feedback, we have
announced adjustments to the Company's DCM and accordingly we look
forward to capitalising on an active pipeline of new investment
opportunities to ensure that the Company has the potential to
participate in attractive new investments."
Results
presentation
As announced previously, a management
presentation for sell side analysts will be held via a webcast
facility at 2pm GMT today. To request details or to register to
attend please RSVP
biopharmacredit@buchanan.uk.com
Enquiries
Buchanan
David Rydell / Mark Court / Jamie Hooper / Henry
Wilson
+44 (0) 20 7466 5000
biopharmacredit@buchanan.uk.com
Notes to
Editors
BioPharma Credit
PLC is London's only listed specialist investor in
debt from the life sciences industry and joined the LSE
on 27 March 2017. The Company seeks to provide long-term
shareholder returns, principally in the form of sustainable income
distributions from exposure to the life sciences industry. The
Company seeks to achieve this objective primarily through
investments in debt assets secured by royalties or other cash flows
derived from the sales of approved life sciences
products.
LEI: 213800AV55PYXAS7SY24
CHAIRMAN'S STATEMENT
INTRODUCTION
2023 marks the sixth full year since
the Company's Initial Public Offering ("IPO") on the London Stock
Exchange in March 2017. I am pleased to be able to report on
another year of consistent returns and targets met. During 2023,
the Company generated net income per share of $0.0828, which
includes the impact of the mark-up of the ImmunoGen investment and
mark-down of the LumiraDx investment described below. The Company
was able to benefit from higher interest rates as the portfolio has
gradually transitioned to floating coupons.
INVESTMENTS
Over the course of 2023, the Company
and its subsidiaries invested a total of $270.0 million into new
and existing investments. The new investments totaling $220.0
million are comprised of $37.5 million for ImmunoGen, $120.0
million for BioCryst, and $62.5 million for Reata. The
remaining
$50 million was split between two
existing investments, $25.0 million for Evolus, and $25.0 million
for LumiraDx. The Company has additional unfunded commitments for
Immunocore and BioCryst of $25.0 million and $60.0 million
respectively that may be funded over the next six
months.
Including assets and liabilities
from its financing subsidiary, BPCR Limited Partnership, the
Company ended the year with total net assets of $1,340.9 million,
comprising $1,102.1 million of investments, $260.8 million of cash
less $22.0 million of other net liabilities.
The Company and its subsidiaries saw
a $179.6 million increase in cash flow due to the prepayment of
$62.5 million from Reata on 29 September 2023, as well as the
scheduled amortisation payments from the Collegium 2022 loan of
$81.2 million, Akebia loan of $16.0 million and the BMS purchased
payments of $19.9 million. The Reata prepayment was accompanied by
prepayment and make-whole fees totaling $15.5 million as of the
closing of the Reata acquisition, which had a positive material
impact on the overall rate of return of this investment. The Gross
IRR for the prepayment of the Reata loan was 141.4 per cent.* and
the Net IRR was 106.1 per cent.*
At 30 November 2023, AbbVie
announced it had entered into a definitive agreement to acquire
ImmunoGen, Inc. for a total equity value of approximately $10.1
billion. The loan balance of $37.5 million
was repaid to the Company upon the
closing of the acquisition on 12 February 2024. The ImmunoGen
repayment was accompanied by prepayment and make-whole fees
totaling $13.1 million. The ImmunoGen investment was marked up by
$10.7 million as of 31 December 2023 to account for the discounted
value of the expected prepayment and the make-whole
fees.
On 29 December 2023, LumiraDx
announced the appointment of joint administrators for two of its
subsidiaries and Roche Diagnostics Limited ("Roche") announced that
it would acquire select parts of LumiraDx for a purchase price of
$295.0 million. As part of the acquisition, the Company agreed to
provide up to $29.6 million in funding for LumiraDx until the
closing of the acquisition, with Roche agreeing to reimburse up to
$27.5 million to the Company in the period to completion of the
acquisition which is expected on or before 30 June 2024. The
LumiraDx investment was written down as of 31 December 2023 to
reflect the expected recoverable net proceeds discounted at a 21.7
percent rate to account for remaining risks.
DCM
AND SHARE BUYBACKS
During 2023, the discount control
mechanism ("DCM") was triggered, and the Company was required to
use its capital to repurchase shares. The Company was in a closed
period from 12 July 2023 until 29 December 2023 due to information
received on the LumiraDx investment. The Company was not able to
implement the DCM but resumed post year end after the acquisition
announcement. The Company repurchased a total of 16,499,477
Ordinary shares at an average price of $0.92 per share and a total
cost of $15.3 million from 9 January 2023 to 11 July 2023. From 1
January 2024 through 26 February 2024 the DCM continued to be in
force and the Company repurchased an additional 49,041,347 shares
at an average price of $0.93 per share and a total cost of $45.9
million. The current policy of the DCM will remain in place until
the shares trade at an average price that reflects a discount to
NAV of less than 5 per cent. for a two week rolling period. Until
such time, the Company will be restricted from making additional
investments. Please see the full Annual Report for a full
description of the current discount mechanism.
In addition, the share price
triggered a general meeting and continuation resolution under the
DCM. Following a general meeting on 28 December 2023, the Company
announced that shareholders approved the continuation of the
Company's business as a closed- ended investment trust with 94 per
cent. of shares voting, in favor.
SHAREHOLDER RETURNS
The Company reported net income
return on ordinary activities after finance costs and before
taxation for the year-ended 2023 of $108.4 million. On 31 December
2023, the Company's Ordinary Shares closed at 84.0 cents, below the
closing price on 31 December 2022 of 95.0 cents. Net Asset Value
("NAV") per Ordinary Share increased over the same timeframe by
1.54 cents from 101.39 cents to 102.93 cents. The Company made
three dividend payments over the calendar year, relating to 2023,
totaling 7.25 cents per share, referencing net income for the three
quarters ending 30 September 2023. The Company was therefore able
to maintain its record of
paying a dividend of at least 1.75
cents per share in every quarter since that ending 30 June
2018.
Following the end of the year, the
Company declared a further dividend in respect of the last quarter
of 2023 of 2.96 cents per share made up of an ordinary dividend of
1.75 cents per share together with a special dividend of 1.21 cents
per share that was paid on 15 March 2024. Total dividends from 2023
results reached 10.21 cents per share. The 2023 dividends were
covered from profits.
ESG
The Board has supported the
Environmental, Social and Governance ("ESG") programme of Pharmakon
Advisors, LP ("Pharmakon" or the "Investment Manager") during 2023,
with progress made in further incorporating ESG as part of the
investment process.
GEOPOLITICAL STATEMENT
The effects of major geopolitical
and social risks, including the invasion by Russia of Ukraine and
the war between Israel and Hamas, may have economic consequences
that extend beyond the short term. However, the Company does not
have any direct investments in Russia, Ukraine, or Israel. We will
continue to monitor the situation and will inform shareholders of
any material changes to this assessment.
OUTLOOK
The Investment Manager reports a
growing pipeline of investment opportunities as new products and
companies enter the market in 2024 and beyond. However, future
growth and further diversification of the Company's portfolio will
be limited by the Company's ability to raise additional funds and
use cash for new investments under the terms of the current
DCM.
On behalf of the Board, I should
like to express our thanks to Pharmakon for their continued efforts
and achievements on behalf of the Company in 2023, in particular
with regards to the complex process involved in attempting to
maximize the recovery to the Company from the LumiraDx loan, and to
our shareholders for their continued support.
Harry Hyman
Chairman
26 March 2024
*Gross IRR and Net IRR are as of the
acquisition date. The definitions of Gross IRR and Net IRR are set
forth in the Glossary, available in the full Annual Report. Past
performance is not an indication of future performance.
INVESTMENT MANAGER'S REPORT
Another year of strong investment returns
INTRODUCTION TO THE INVESTMENT MANAGER
Pharmakon is pleased to present an
update on the Company's portfolio and investment
outlook.
New investments, together with
Reata's prepayment and higher reference interest rates, led to
total income and net income on the portfolio during 2023 of $136
million and $108 million respectively. Pharmakon's engagement with
counterparties during 2023 resulted in $850 million of new
transactions(1) for the Company. One investment was
prepaid during 2023, Reata. As of the acquisition closing date,
this prepayment generated $16 million in a combination of
make-whole and prepayment fees. The Gross IRR for the prepaid
investment was 141.4 per cent.(2) and the Net IRR was
106.1 per cent(3)
(1) New investments figure represents overall commitments
inclusive of any unfunded commitments.
(2) Gross IRR is as of the acquisition date. The definition of
Gross IRR is set forth in the Glossary, available in the full
Annual report . Past performance is not an indication of future
performance.
(3) Net IRR is as of the acquisition date. The definition of Gross
IRR is set forth in the Glossary available in the full Annual
report . Past performance is not an indication of future
performance.
BioCryst
On
17 April 2023, the Company and a Private Fund also managed by the
Investment Manager (the "Private Fund"), entered into a definitive
senior secured term loan agreement for up to $450 million with
BioCryst Pharmaceuticals Inc. ("BioCryst") (Nasdaq: BCRX), a
biopharmaceutical company that discovers and commercializes novel,
oral, small molecule medicines.
BioCryst drew down $300 million at
closing on 16 April 2023. The Company's share of the transaction is
$180 million, of which $120 million was funded at closing by the
Company and its subsidiaries. BioCryst has elected the option to
accrue 50 per cent. of their interest due from closing through 31
December 2023 as a payment-in-kind as allowed in the loan
agreement. The remaining three tranches of up to $50 million each
will be available through 30 September 2024. The Company's share of
the remaining three tranches is $20 million each. The loan has a
coupon of 3-month secured overnight financing rate ("SOFR") plus 7
per cent.
(subject to a 1.75 per cent. floor)
and up to 50 per cent. of the interest during the first 18 months
may be paid-in-kind (PIK) at a rate of 3-month SOFR plus 7.25 per
cent., with an
additional consideration of 1.75 per
cent. of the total loan amount.
BioCryst's commercial product,
Orladeyo, is indicated for prophylaxis to prevent attacks of
hereditary angioedema (HAE) in adults and pediatric patients 12
years and older. BioCryst also has one pipeline product for
BCX10013, a factor D inhibitor being studied in atypical hemolytic
uremic syndrome (aHUS), IgA nephropathy (IgAN), and complement 3
glomerulopathy (C3G).
Investment type
|
Total loan amount
|
Secured loan
|
$450m
|
|
|
Date invested
|
Company commitment
|
17 April 2023
|
$180m
|
|
|
Maturity
|
|
April 2028
|
|
ImmunoGen
On
6 April 2023, the Company and the Private Fund entered into a
definitive senior secured loan
agreement for up to $125 million with ImmunoGen, Inc.
("ImmunoGen") (Nasdaq: IMGN), a biotechnology company focused on
developing and commercializing the next generation of antibody-drug
conjugates (ADCs) to improve outcomes for cancer
patients.
ImmunoGen drew down $75 million at
closing on 6 April 2023. The Company and its subsidiaries' funded
$37.5 million. The loan would have matured in April 2028 and bore
interest at SOFR plus 8 per cent. (subject to a 2.75 per cent.
floor), with an additional consideration of 2 per cent. of the
total loan amount.
On 30 November 2023, AbbVie
announced it had entered into a definitive agreement to acquire
ImmunoGen, Inc. The ImmunoGen investment was marked up by $10.7
million as of 31 December 2023 to account for the discounted value
of the expected prepayment and the make-whole fees. The ImmunoGen
repayment was accompanied by prepayment and make-whole fees
totaling $13.1 million.
On 12 February 2024, ImmunoGen
repaid its remaining $37.5 million balance to the Company and the
Company received $13.2 million of accrued interest, additional
consideration, and prepayment and make-whole fees.
ImmunoGen's commercial product,
Elahere, is indicated for the treatment of Fra positive,
platinum-resistant ovarian cancer and is currently being
commercialized in the US. ImmunoGen is also developing pivekimab
sunirine for the treatment of blastic plasmacytoid dendritic cell
neoplasm (BPDCN) and acute myeloid leukemia (AML).
Investment type
|
Total loan amount
|
Secured loan
|
$125m
|
|
|
Date invested
|
Company commitment
|
6 April 2023
|
$63m
|
|
|
Maturity
|
|
April 2028
|
|
Immunocore
On
8 November 2022, the Company and the Private Fund, entered into a
definitive senior secured loan agreement for up to $100 million
with Immunocore Limited (Nasdaq: IMCR), a biopharmaceutical company
focused on developing a novel class of TCR bispecific
immunotherapies designed to treat a broad range of diseases,
including cancer, infectious and autoimmune diseases
("Immunocore").
The Company and its subsidiaries
funded $25 million of Tranche A of $50 million on 8 November 2022.
The remaining $50 million may be drawn by 30 June 2024. The
Company's share of Tranche B is $25 million and will be available
through 30 September 2024. Tranche A will mature in November 2028
and bears interest at 9.75 per cent. per annum along with an
additional consideration of 2.5 per cent. paid at
funding.
Investment type
|
Total loan amount
|
Secured loan
|
$100m
|
|
|
Date invested
|
Company commitment
|
8 November 2022
|
$50m
|
|
|
Maturity
|
|
November 2028
|
|
|
|
Insmed
On
19 October 2022, the Company and the Private Fund entered into a
definitive senior secured loan agreement for $350 million with
Insmed Incorporated (Nasdaq: INSM), a biopharmaceutical company
focused on treating patients with serious and rare diseases
("Insmed").
The Company and its subsidiaries
funded $140 million of the $350 million loan on 19 October 2022.
Insmed elected the option to accrue 50 per cent. of their interest
due from closing through 31 December 2023 as a payment-in-kind as
allowed in the loan agreement. The loan will mature in October 2027
and bears interest at a rate based upon the 3-month SOFR, plus 7.75
per cent. per annum subject to a SOFR floor of 2.5 per cent. with a
one-time additional consideration of 2 per cent. of the total loan
amount paid at funding. 50 per cent. of the interest during the
first 24 months may be paid-in-kind (PIK).
Investment type
|
Total loan amount
|
Secured loan
|
$350m
|
|
|
Date invested
|
Company commitment
|
19 October 2022
|
$140m
|
|
|
Maturity
|
|
October 2027
|
|
UroGen
On
7 March 2022, the Company and the Private Fund entered into a
definitive senior secured loan agreement for up to $100 million
with UroGen Inc. (Nasdaq: URGN), a biopharmaceutical company
dedicated to creating novel solutions that treat urothelial and
specialty cancers ("UroGen").
UroGen drew down $75 million at
closing and the remaining $25 million on 16 December 2022. The
Company and its subsidiaries funded $50 million across the two
tranches. The loan will mature in March
2027 and bears interest at 3-month
LIBOR plus 8.25 per cent. per annum subject to a 1.25 per cent.
floor along with a one-time additional consideration of 1.75 per
cent. of the total loan amount paid at funding of the first
tranche.
On 29 June 2023, the UroGen loan was
amended with a new term loan rate of 3-month SOFR plus an 8.25 per
cent. coupon.
On 13 March 2024, the Company
entered into an Amendment and Restatement of its Loan Agreement
with UroGen. The Amended and Restated Loan Agreement includes an
additional third and fourth tranche of senior secured loans of
$25,000,000 and $75,000,000 respectively. In addition, the interest
rate was reduced from 3‑month SOFR plus 8.25 per cent. per annum to
3‑month SOFR plus
7.25 per cent. per annum, and the SOFR floor was increased from
1.25 per cent. to 2.5 per cent. Under the Amended and Restated Loan
Agreement, the third and fourth tranches were allocated in full to
the Private Fund.
UroGen markets JELMYTO (mitomycin),
a prescription medicine used to treat adults with a type of cancer
of the lining of the upper urinary tract including the kidney
called low-grade Upper Tract Urothelial Cancer (LG-UTUC). UroGen is
also developing UGN-102 (mitomycin) for the treatment of low-grade
intermediate risk non-muscle invasive bladder cancer.
Investment type
|
Total loan amount
|
Secured loan
|
$200m
|
|
|
Date invested
|
Company commitment
|
16 March 2022
|
$50m
|
|
|
Maturity
|
|
March 2027
|
|
Collegium 2022
On
14 February 2022, the Company along with the Private Fund provided
Collegium Pharmaceutical, Inc. (Nasdaq: COLL), a biopharmaceutical
company focused on developing and commercialising new medicines for
responsible pain management ("Collegium"), with a commitment to
enter into a new senior secured term loan agreement for $650
million.
On 22 March 2022, proceeds from the
new loan were used to fund Collegium's acquisition of BDSI as well
as repay the outstanding debt of Collegium and BDSI. At closing,
the Company and its subsidiaries invested $325 million in a single
drawing.
The four-year loan will have $100
million in amortisation payments during the first year and the
remaining $550 million balance will amortize in equal quarterly
installments. The loan will mature in March 2026 and bears interest
at 3-month LIBOR plus 7.5 per cent. per annum subject to a 1.2 per
cent. floor along with a one-time additional consideration of 2 per
cent. of the loan amount paid upon signing and a one-time
additional consideration of 1 per cent. of the loan amount paid at
funding. On 23 June 2023, the Company and the Private Fund entered
into an amendment which modified the loan interest rate to 3-month
SOFR plus 7.50 per cent.
Collegium currently markets Xtampza
ER, an abuse-deterrent, extended-release, oral formulation of
oxycodone, Nucynta (tapentadol), a centrally acting synthetic
analgesic, and Belbuca (buprenorphine
buccal film), for chronic pain
management.
Investment type
|
Total loan amount
|
Secured loan
|
$650m
|
|
|
Date invested
|
Company Commitment
|
22 March 2022
|
$325m
|
|
|
Maturity
|
|
March 2026
|
|
Coherus
On
5 January 2022, the Company and the Private Fund entered into a
definitive senior secured loan agreement for up to $300 million
with Coherus BioSciences, Inc. (Nasdaq: CHRS), a biopharmaceutical
company building a leading immunooncology franchise funded with
cash generated by its commercial biosimilars business
("Coherus").
Coherus drew down $100 million at
closing, another $100 million on 31 March 2022, and an additional
$50 million on 14 September 2022. The remaining $50 million
commitment, of which the Company's share was $25 million, lapsed so
there are no additional funding commitments. The Company and its
subsidiaries funded $125 million across the first three tranches.
The loan will mature in January 2027 and bears interest at 3-month
LIBOR plus 8.25 per cent. per annum subject to a 1 per cent. floor
along with a one-time additional consideration of 2 per cent. Of
the total loan amount paid at funding of the
first tranche.
On 6 February 2023, the Coherus loan
was amended to allow for a short-term waiver to the sales covenant,
as well switching the LIBOR component of the loan coupon to
SOFR.
On 19 January 2024, Coherus
announced that it had entered into a Purchase and Sales Agreement
with Sandoz Inc. (the "Purchase Agreement"). On 5 February 2024,
Coherus announced that it had entered into a Consent, Partial
Release and Third Amendment to the Coherus loan agreement, under
which certain subsidiaries and assets of Coherus were released in
connection with the Purchase Agreement. Further, Coherus is
permitted to make a partial prepayment of the principal of the
loans outstanding under the Coherus loan agreement in the amount of
$175,000,000 of the outstanding principal balance of $250,000,000,
and the minimum net sales covenant was adjusted. The Company's
portion of such partial principal prepayment would be $87,500,000.
Coherus anticipates making such partial prepayment in Q2
2024.
Coherus markets UDENYCA®
(pegfilgrastim-cbqv), a biosimilar of Neulasta in the United
States, YUSIMRY (adalimumab-aqvh), a biosimilar of Humira in the
United States, CIMERLI (ranibizumab-eqrn), a biosimilar of Lucentis
in the United States, and LOQTORZI (toripalimab-tpzi), for the
treatment of adults with metastatic or recurrent locally advanced
nasopharyngeal carcinoma.
Investment type
|
Total loan amount
|
Secured loan
|
$250m
|
|
|
Date invested
|
Company commitment
|
5 January 2022
|
$125m
|
|
|
Maturity
|
|
January 2027
|
|
Evolus
On
14 December 2021, the Company and the Private Fund entered into a
definitive senior secured loan agreement for up to $125 million
with Evolus Inc (Nasdaq: EOLS), a biopharmaceutical company that
develops, produces, and markets clinical neurotoxins for aesthetic
treatments ("Evolus").
The Company and its subsidiaries
funded $37.5 million of the first tranche of $75 million on 29
December 2021. The remaining $50 million was drawn down in two
installments of $12.5 million each on 13 May 2023 and on 14
December 2023. The Company's share of the final tranche
was
$25 million. The loan will mature in
December 2027 and bears interest at 3-month LIBOR plus 8.5 per
cent. per annum subject to a 1 per cent. floor along with a
one-time additional consideration of 2.25 per cent. Of the total
loan amount paid at funding of the first tranche.
On 5 December 2022, the Evolus loan
was amended to extend the draw down date for Tranche B in exchange
for a $500,000 amendment fee, of which 50 per cent. was allocated
to the Company.
On 9 May 2023, the Evolus loan was
amended to: (i) allow Tranche B to be drawn in two installments,
(ii) switching the LIBOR component of the loan coupon to SOFR, with
an additional 0.170 per cent. adjustment, (iii) certain
modifications to the amortization schedule, and (iv) subject to
specified conditions, allow for up to a $15 million revolver
facility to be secured by accounts
receivables and inventory. On 31 May
2023 and 15 December 2023, the Company funded installments of
Tranche B of $12.5 million each. Evolus currently markets Jeuveau
(prabotulinumtoxinA-xvfs), the first and only neurotoxin dedicated
exclusively to aesthetics.
Investment type
|
Total loan amount
|
Secured loan
|
$125m
|
|
|
Date invested
|
Company commitment
|
14 December 2021
|
$63m
|
|
|
Maturity
|
|
December 2027
|
|
LumiraDx
On
23 March 2021, the Company and the Private Fund entered into a
definitive senior secured loan agreement for $300 million with
LumiraDx Investment Limited and LumiraDx Group Limited
(collectively "LumiraDx").
The Company and its subsidiaries
funded $150 million of the $300 million loan on 29 March
2021.
The loan was originally due to mature
in March 2024 and bore interest at 8 per cent. per annum along with
an additional consideration of 2.5 per cent. of the loan amount
paid at funding and an additional 1.5 per cent. of the loan payable
at maturity. On 28 September 2021, LumiraDx became public via a
SPAC transaction with CA Healthcare Acquisition Corp. and began
trading on NASDAQ under the ticker LMDX. The Company and Private
Fund both received 742,924 warrants at a strike price of $10.00,
exercisable into common stock of LumiraDx under the terms of the
transaction.
On 17 June 2022, the LumiraDx loan
was amended to provide LumiraDx with certain waivers in exchange
for increasing the fee payable at maturity from 1.5 to 3 per cent.
of the loan. On 25 July 2022, LumiraDx raised $100 million in a
follow-on offering at a price of $1.75. As part of the financing,
Pharmakon re-tiered its sales covenants, received a facility fee,
and was issued new five-year warrants with a strike price of $1.75,
with the original warrants being cancelled.
On 22 February 2023, the LumiraDx
loan was amended to provide LumiraDx with certain waivers in
exchange for increasing the fee payable at maturity from 3 to 9 per
cent. of the loan. The LumiraDx loan was amended fourteen times
during the year ended 31 December 2023.
On 29 December 2023, LumiraDx
announced the appointment of joint administrators for two of its
subsidiaries and Roche announced that it would acquire select parts
of LumiraDx for a purchase price of $295 million. As part of the
acquisition, the Company agreed to provide up to $29.6 million in
funding for LumiraDx to fund the business until the closing of the
acquisition, Roche agreed to reimburse up to $27.5 million to the
Company in the period to completion of the acquisition. It is
anticipated that all of the sale proceeds of the acquisition will
be used to repay certain amounts outstanding under the Company's
loan agreement, and that no sale proceeds will be distributed to
LumiraDx or its shareholders. The investment was written down to
its estimated recoverable value at 31 December 2023 and the
acquisition is anticipated to close on or before 30 June
2024.
Investment type
|
Total loan amount
|
Secured loan
|
$350m
|
|
|
Date invested
|
Company commitment
|
23 March 2021
|
$175m
|
|
|
Maturity
|
|
See Text*
|
|
|
|
*Further details of the investment
in LumiraDx are set forth in the full Annual Report.
Akebia
On
11 November 2019, the Company and the Private Fund entered into a
definitive senior secured term loan agreement for up to $100
million with Akebia Therapeutics Inc. (Nasdaq: AKBA), a fully
integrated biopharmaceutical company focused on the development and
commercialisation of therapeutics for people living with kidney
disease ("Akebia").
Akebia drew down $80 million at
closing and an additional $20 million on 10 December 2020. The
Company and its subsidiaries funded $50 million across both
tranches. The loan would have matured in November 2024 and bore
interest at LIBOR plus 7.5 per cent. per annum along with a
one-time additional consideration of 2 per cent. of the total loan
amount paid at funding. The Akebia loan began amortising in
September 2022.
On 18 February 2022, the Akebia loan
was amended to provide Akebia certain waivers. On 15 July 2022, the
Akebia loan was amended to provide Akebia with certain waivers. As
a result of this amendment, Akebia made a $25 million pre-payment,
of which $12.5 million went to the Company, as well as a 2 per
cent. prepayment fee.
On 30 June 2023, the Akebia loan was
amended to end the use of the LIBOR rate and set a new term loan
rate of 3-month SOFR plus a coupon of 7.5 per cent. and an
additional per annum rate of 0.30316 per cent.
On 31 October 2023, the Akebia loan
was amended to extend the maturity of the senior secured loan to 31
March 2025, delayed the payment of additional principal until 31
October 2024 and if certain pre-specified events occurred, required
Akebia to make payments of principal commencing on the original
maturity date through the new extended maturity date and repay all
unpaid principal that would have been due or payable on or after 1
July 2024.
On 29 January 2024, Akebia prepaid
$17.5 million to the Company, including $87,500 in prepayment
fees.
Akebia currently markets Auryxia®
(ferric citrate) which is approved in the US for hyperphosphatemia
(elevated phosphorus levels in blood serum) in adult patients with
chronic kidney disease ("CKD") on dialysis and iron deficiency
anaemia in adult patients with CKD not on dialysis.
Investment type
|
Total loan amount
|
Secured loan
|
$100m
|
|
|
Date invested
|
Company commitment
|
25 November 2019
|
$50m
|
|
|
Maturity
|
|
March 2025
|
|
|
|
OptiNose
On
12 September 2019, the Company and the Private Fund entered into a
definitive senior secured note purchase agreement for the issuance
and sale of senior secured notes in an aggregate original principal
amount of up to $150 million by OptiNose US, Inc. a wholly owned
subsidiary of OptiNose Inc. (Nasdaq: OPTN), a commercial stage
specialty pharmaceutical company ("OptiNose").
OptiNose drew a total of $130
million in three tranches: $80 million on 12 September 2019, $30
million on 13 February 2020 and $20 million on 1 December 2020.
There are no additional funding commitments.
The Company and its subsidiaries
funded a total $72 million across all tranches. The notes mature in
September 2024 and bore interest at 10.75 per cent. per annum along
with a one-time additional consideration of 0.75 per cent. of the
aggregate original principal amount of senior secured notes which
the Company was committed to purchase under the facility and
445,696 warrants exercisable into common stock of OptiNose at a
strike price of $6.72. In prior years, there were two amendments to
the OptiNose note purchase agreement, resulting in re-tiered sales
covenants, permission for an equity issuance, amended amortisation
and make-whole provisions, and the issuance of new three-year
warrants with a strike price of $1.60, with the original warrants
being canceled.
On 10 August 2022, the OptiNose note
and purchase agreement was amended resulting in re-tiered sales
covenants in exchange for an amendment fee of $780,000, payable
upon repayment, of which the Company was allocated
$429,000.
On 9 November 2022, OptiNose
negotiated certain waivers in exchange for a waiver fee, of which
the Company earned $715,000 of the total $1.3 million waiver
fee.
On 21 November 2022, OptiNose
entered into an Amended and Restated Note Purchase Agreement (the
"A&R NPA"). In the A&R NPA, the sales covenant was revised
and the amortization and make-whole were both modified. The loan
interest was modified from a fixed rate of 10.75 per cent. to a
floating rate equal to 3-month SOFR plus 8.5 per cent., subject to
a 2.5 per cent. floor, in exchange for an amendment fee.
On 5 March 2024, OptiNose negotiated
an amendment which waived the no 'going concern' requirement with
respect to the 2023 fiscal year and first quarter of 2024. On 8
March 2024, OptiNose negotiated an additional amendment which
extended the Make‑Whole period by 6 months and revised the sales
covenants.
On 15 March 2024, the FDA approved
XHANCE (flucticasone propionate) nasal spray for the treatment of
chronic rhinosinusitis without nasal polyps in patients 18 years of
age or older. OptiNose's leading product, XHANCE (flucticasone
propionate), had already been approved by the FDA in September 2017
for the treatment of chronic rhinosinusitis with nasal polyps in
patients 18 years of age or older.
Investment type
|
Total loan amount
|
Secured loan
|
$130m
|
|
|
Date invested
|
Company commitment
|
12 September 2019
|
$72m
|
|
|
Maturity
|
|
September 2024
|
|
|
|
Bristol-Meyers Squibb Company
On
8 December 2017, the Company's wholly-owned subsidiary entered into
a purchase, sale and assignment agreement with a wholly-owned
subsidiary of Royalty Pharma Investments ("RPI"), an affiliate of
the Investment Manager, for the purchase of a 50 per cent. Interest
in a stream of payments (the "Purchased Payments") acquired by
RPI's subsidiary from BristolMyers Squibb Company (NYSE: BMY)
through a purchase agreement dated 14 November
2017.
As a result of the arrangements,
RPI's subsidiary and the Company's subsidiary are each entitled to
the benefit of 50 per cent. of the Purchased Payments under
identical economic terms. The Purchased Payments are linked to
tiered worldwide sales of Onglyza and Farxiga, diabetes agents
marketed by AstraZeneca, and related products. The Company was
expected to fund $140 million
to $165 million during 2018 through
2020, determined by product sales over that period, and will
receive payments from 2020 through 2025. The Purchased Payments are
expected to generate attractive risk-adjusted returns in the high
single digits per annum.
The Company funded all of the
Purchased Payments based on sales from 1 January 2018 to 31
December 2019 for a total of $162 million.
REALISED INVESTMENTS
GBT
On 17 December 2019, the Company and
the Private Fund entered into a definitive senior secured term loan
agreement for up to $150 million with Global Blood Therapeutics
Inc. (Nasdaq: GBT), a biopharmaceutical company focused on
innovative treatments that provide hope to underserved patient
communities ("GBT"). GBT drew down $75 million at closing and an
additional $75 million on 20 November 2020. On 14 December 2021 the
loan agreement was amended and restated. The amendment increased
the aggregate principal amount of the loan to $250 million through
a $100 million third tranche, which was drawn on 22 December 2021.
The Company and its subsidiaries funded $132.5 million across all
three tranches. The loan was due to mature in December 2027 and
bore interest at three-month LIBOR plus 7 per cent. per
annum
subject to a 2 per cent. floor along
with a one- time additional consideration of 1.5 per cent. of the
total loan amount paid upon funding and an additional 2 per cent.
payable upon the repayment of the loan. The third tranche also
incurred additional consideration of 1.5 per cent. at the time of
funding. As a part of the amendment in 2021, the Company and its
subsidiaries received a one-time fee equal to 1.25 per cent. of the
first two tranches and the three-year make- whole period was reset
to December 2021. On 5 October 2022, Pfizer acquired GBT and, as a
result, GBT repaid its $250 million senior secured loan. The
Company received its $133 million of principal and $43 million in
prepayment and make-whole fees. The Company and its subsidiaries
earned a 27.6 per cent. gross internal rate of return* and a 20.7
per cent net internal rate** of return on its GBT
investment.
Sarepta
On 13 December 2019, the Company and
the Private Fund entered into a definitive senior secured term loan
agreement for up to $500 million with Sarepta Therapeutics, Inc.
(Nasdaq: SRPT), a fully integrated biopharmaceutical company
focused on precision genetic medicine ("Sarepta"). On 24 September
2020 the Sarepta loan agreement was amended, and the
loan
amount was increased to $550
million. Sarepta drew down the first $250 million tranche at
closing and an additional $300 million on 2 November 2020. The
Company and its subsidiaries funded $175 million of each tranche
for a total investment of $350 million. The first tranche was
originally due to mature in December 2023 and the second tranche in
December 2024. The loan bore interest at 8.5 per cent. per annum
along with a one-time additional consideration of 1.75 per cent. of
the first tranche and 2.95 per cent. of the second
tranche paid upon funding and an
additional 2 per cent. payable upon the repayment of the loan. On
12 September 2022, Sarepta announced the early termination and
repayment of its existing senior secured debt with proceeds from
the issuance of $1 billion in convertible bonds. On 12 September
2022, Sarepta repaid its $550 million senior secured
loan.
The Company received its $350
million of principal and $22 million in prepayment, paydown fees,
make-whole fees, and accrued interest. The Company and its
subsidiaries earned a 12 per cent. gross internal rate of return*
and 9 per cent net internal rate of return** on its Sarepta
investment
Epizyme
On 4 November 2019, the Company and
the Private Fund entered into a definitive senior secured term loan
agreement for up to $70 million with Epizyme, Inc. (Nasdaq: EPZM),
a late-stage biopharmaceutical company developing novel epigenetic
therapies for cancer ("Epizyme").
On 3 November 2020 the Epizyme loan
agreement was amended, and the loan amount was increased to $220
million. Epizyme drew down $25 million at closing and an additional
$195 million during 2020. The Company and its subsidiaries funded a
total of $110 million of the Epizyme loan. The loan was originally
due to mature in November 2024 and bore interest at LIBOR plus 7.75
per cent. per annum along with a one-time additional consideration
of 2 per cent. of the total loan amount paid upon funding. On 27
June 2022, Ipsen announced a definitive agreement pursuant to which
Ipsen would acquire Epizyme. On 12 August 2022, Epizyme repaid its
$220 million senior secured loan.
The Company received its $110
million of principal and $8 million in prepayment and make-whole
fees. The Company and its subsidiaries earned a 15.2 per cent.
gross internal rate of return* and 11.4 per cent net internal rate
of return** on its Epizyme investment.
Collegium 2020
On 6 February 2020, the Company and
the Private Fund entered into a definitive senior secured term loan
agreement for $200 million with Collegium Pharmaceutical, Inc.
(Nasdaq: COLL), a biopharmaceutical company focused on developing
and commercialising new medicines for responsible pain management
("Collegium 2020"). The Company and its subsidiaries funded $165
million of the $200 million loan on 13 February 2020. The secured
loan began amortising immediately and was due to fully mature in
February 2024. The loan bore interest at three month LIBOR plus 7.5
per cent. per annum subject to a 2 per cent. LIBOR floor with a
one-time additional consideration of 2.5 per cent. of the loan
amount paid upon funding. The loan was repaid in its entirety on 22
March 2022. The Company and its subsidiaries earned a 11.9 per
cent. gross internal rate of return* and 8.9 per cent net internal
rate of return** on its Collegium 2020 investment
Biodelivery Sciences
On 23 May 2019, the Company entered
into a senior secured loan agreement for up to $80 million with
BioDelivery Sciences International (Nasdaq: BDSI), a commercial-
stage specialty pharmaceutical company ("BDSI"). In addition, the
Company acquired 5,000,000 BDSI shares at $5.00 each for a total
cost of $25 million in a public offering that took place on 11
April 2019. The first tranche of the loan for $60 million was
funded on 28 May 2019 and the second $20 million tranche was funded
on 22 May 2020. The loan was due to mature in May 2025 and bore
interest at LIBOR plus 7.50 per cent., along with 2 per cent.
additional consideration paid at closing. On 23 September 2021,
BDSI made an early prepayment of $20 million, and made its final
payment for the remainder of the loan on 22 March 2022. The Company
earned a 11.9 per cent. gross internal rate of return* and a 9 per
cent net internal rate of return** on the BDSI loan. The Company
sold 46 per cent of its BDSI shares during 2019 at an average price
of $6.50 and received $5.60 per remaining shares on the date of the
M&A Transaction. The Company earned
a 11.6 per cent. gross internal rate
of return* and a 8.7 per cent net internal rate of return** on the
BDSI equity investment
Reata
On 5 May 2023, the Company and the
Private Fund, entered into a definitive senior secured term loan
agreement for up to $275 million with Reata Pharmaceuticals Inc.
("Reata") originally due to mature in May 2028. Tranche A of $75
million was funded at closing. Tranche B of $50 million and Tranche
C of $75 million were originally due to be drawn after achieving
certain performance-based milestones, and Tranche D of $75 million
was originally due to be available at the Company's discretion
after achieving certain sales-based milestones. The loan had a
coupon of 3-month secured overnight financing rate ("SOFR"), plus
7.5 per cent. (subject to a 2.5 per cent. floor).
There was also a 2 per cent. upfront
fee upon each draw. The interest only period for the loan was for 3
years but could have been extended to 4 years if trailing twelve
month sales are greater than $250 million. The Company's share of
the transaction was $137.5 million, of which $37.5 million was
funded at closing.
On 10 July 2023, the Company funded
Tranche B of the Reata loan for $25 million.
On 28 July 2023, Inc. ("Biogen")
Biogen announced a definitive agreement pursuant to which Biogen
will acquire Reata for an enterprise value of approximately $7.3
billion. The acquisition closed on 29 September 2023. As of the
acquisition closing date, the Company received prepayments
including $15.5 million in prepayment and make-whole
fees.
MARKET ANALYSIS
The life sciences industry is
expected to continue to have substantial capital needs during the
coming years as the number of products undergoing clinical trials
continues to grow. All else being equal, companies seeking to raise
capital are generally more receptive to non-dilutive debt financing
alternatives at times when equity markets are soft, increasing the
number and size of fixed-income investment opportunities for the
Company, and will be more inclined to issue equity or convertible
bonds at times when equity markets are strong. A good
indicator
of the life sciences equity market
is the New York Stock Exchange Biotechnology Index ("BTK Index").
While there was substantial volatility during the period, the BTK
index increased 3 per cent. during 2023, compared to a 4 per cent.
decrease during 2022.*** Global equity issuance by life sciences
companies during 2023 was $45 billion, a 31 per cent. increase from
the $34.4
billion issued during 2022.****
Similarly, convertible bond issuance by life sciences companies
increased to $9.7 billion in 2023 from $7.3 billion in 2022.**** We
anticipate 2024 equity and convertible bond issuance to remain
comparable to 2023 levels which should continue to support appetite
for non-dilutive debt during the remainder of 2024.
Acquisition financing is an
important driver of capital needs in the life sciences industry in
general and a source of investment opportunities. An active M&A
market helps drive opportunities for investors such as the Company,
as acquiring companies need capital to fund acquisitions. Global
life sciences M&A volume during 2023 was $189 billion, a 108
per cent. increase from the $91 billion witnessed during 2022,
driven mainly by the volatility in the equity markets. We are
encouraged by the number of M&A opportunities that are starting
to build up
which should lead to a more active
market in the near term.****
USD
LIBOR
On 5 March 2021, the Financial
Conduct Authority ("FCA"), the regulatory supervisor of USD LIBOR's
administrator ("IBA") announced in a public statement the future
cessation of the 3-month USD LIBOR tenor setting. As of that date,
30 June 2023, all available tenors of USD LIBOR have either
permanently or indefinitely ceased to be provided by IBA. As of 30
June 2023 the benchmark replacement rate is based on Secured
Overnight Financing Rate ("SOFR"), and all LIBOR-based interest
payments will now be calculated with SOFR beginning on the
respective effective date. The Company has eleven loans with
coupons that reference 3-month USD SOFR and five have a 2.5 per
cent. floor or greater and six have a floor ranging from 1 per
cent. to 2.00 per cent. As of 31 December 2023, the 3-month SOFR
rate was 5.33 per cent, significantly above the floors in the
eleven loans.
INTERNATIONAL OUTLOOK
The invasion of Ukraine by Russia
and the war between Israel and Hamas has led to increased market
volatility and widespread sanctions on Russian assets and
individuals, contributing to the high inflation introduced by the
pandemic. While the portfolio has no direct exposure to Russia,
Ukraine, Belarus, or Israel, we remain vigilant in monitoring these
major events closely and will inform investors of any material
changes.
INVESTMENT OUTLOOK
We expect our investment pipeline to
grow as new products and companies enter the market in 2024 and
beyond. Pharmakon's extensive network and thorough approach will
continue to identify strong investment opportunities. We remain
focused on our mission of creating the premier dedicated provider
of debt capital to the life sciences industry while generating
attractive returns and sustainable income to investors.
Although the global economic outlook
remains uncertain, Pharmakon remains confident of its ability to
deliver its target dividend yield to its investors.
Pedro Gonzalez de Cosio
Co-founder and CEO,
Pharmakon
26 March 2024
* Gross IRR is set forth in the
Glossary available in the full Annual Report. Past performance is
not an indication of future performance.
** Net IRR is set forth in the
Glossary available in the full Annual Report. Past performance is
not an indication of future performance.
*** Source: BTK Index
**** Source: Bloomberg
The
ESG policy is set out in the full Annual Report.
STRATEGIC
OVERVIEW
INVESTMENT OBJECTIVE
The Company aims to generate
long-term Shareholder returns, predominantly in the form of
sustainable income distributions from exposure to the life sciences
industry.
INVESTMENT POLICY
The Company will seek to achieve its
investment objective predominantly through direct or indirect
exposure to Debt Assets, which include Royalty Investments, Senior
Secured Debt, Unsecured Debt and Credit Linked Notes.
THE
COMPANY MAY ACQUIRE DEBT ASSETS:
·
Directly from the entity issuing the Debt Asset (a
"Borrower"), which may be: (i) a company operating in the life
sciences industry (a "LifeSci Company"); or (ii) an entity other
than a LifeSci Company which directly or indirectly holds an
interest in royalty rights to certain products, including any
investment vehicle or special purpose vehicle ("Royalty
Owner");
·
Or in the secondary market.
The Company may also invest in
equity issued by a LifeSci Company, acquired directly from the
LifeSci Company or in the secondary market. "Debt Assets" will
typically comprise:
·
Royalty debt instruments
Debt issued by a Royalty Owner where
the Royalty Owner's obligations in relation to the Debt are secured
as to repayment of principal and payment of
interest by Royalty Collateral.
·
Priority royalty tranches
Contract with a Borrower that
provides the Company with the right to receive payment of all or a
fixed percentage of the future royalty payments receivable in
respect of a Product (or Products) that would otherwise belong to
the Borrower up to a fixed monetary amount or a pre-set rate of
return, with such royalty payment being secured by Royalty
Collateral in respect of that Product (or Products).
·
Senior secured debt
Debt issued by a LifeSci Company,
and which is secured as to repayment of principal and payment of
interest by a first priority charge over some or all of such
LifeSci Company's assets, which may include: (i) Royalty
Collateral; or (ii) other intellectual property and marketing
rights to the Products of that LifeSci Company.
·
Unsecured debt
Debt issued by a LifeSci Company
which is not secured or is secured by a second lien on assets of
the Borrower.
·
Credit linked notes
Derivative instruments referencing
Debt Assets, being a synthetic obligation between the Company and
another party where the repayment of principal and/or the payment of interest is based on the
performance of the obligations under the underlying Debt
Assets.
"Royalty Collateral" means, with
respect to a Debt Asset, (i) future payments receivable by the
Borrower on a Product (or Products) in the form of royalty payments
or other revenue sharing arrangements; or (ii) future distributions
receivable by the Borrower based on royalty payments generated from
a Product (or Products); or (iii) both (i) and
(ii)"Debt" includes loans, notes, bonds and other debt instruments
and securities, including convertible debt, and Priority Royalty
Tranches.
Borrowers will predominantly be
domiciled in the US, Europe and Japan, though the Company may also
acquire Debt Assets issued by Borrowers in other
jurisdictions.
INVESTMENT RESTRICTIONS AND PORTFOLIO
DIVERSIFICATION
The Company will seek to create a
diversified portfolio of investments by investing across a range of
different forms of Debt Assets issued by a variety of Borrowers. In
particular, the Company will observe the following restrictions
when making investments in accordance with its investment
policy:
· no
more than 25 per cent. of the Company's gross assets will be
exposed to any single Borrower or investment;
· no
more than 35 per cent. of the Company's gross assets will be
invested in Unsecured Debt;
· no
more than 15 per cent. of the Company's gross assets will be
invested in equity securities issued by LifeSci Companies;
and
· the
Company will invest no more than 10 per cent., in aggregate, of
gross asset value at the time of acquisition in other listed
closed‐ended
investment funds.
Each of these investment restrictions
will be calculated at the time of each proposed investment. In the
event that any of the above limits are breached at any point after
the relevant investment has been made (for instance, as a result of
any movements in the value of the Company's total assets), there
will be no requirement to sell any investment (in whole or in
part).
CASH MANAGEMENT
The Company's uninvested capital may
be invested in cash instruments or bank deposits for cash
management purposes.
HEDGING
The Company does not propose to enter
into any hedging or other derivative arrangements other than as may
from time to time be considered appropriate for the purposes of
efficient portfolio management. The Company will not enter into
such arrangements for investment purposes.
BUSINESS AND STATUS OF THE COMPANY
The Company is registered in England
as a public limited company and is an investment company in
accordance with the provisions of Section 833 of the Companies Act
2006.
The principal activity of the Company
is to carry on business as an investment trust. The Company intends
at all times to conduct its affairs so as to enable it to qualify
as an investment trust for the purposes of Sections 1158/1159 of
the Corporation Tax Act 2010 ('S1158/1159"). The Directors do not
envisage any change in this activity in the foreseeable
future.
The Company has been granted approval
from HM Revenue & Customs ('HMRC") as an investment trust under
S1158/1159 and will continue to be treated as an investment trust
company, subject to there being no serious breaches of the
conditions for approval. The Directors are of the opinion that the
Company has conducted its affairs for the year ended 31 December
2023 so as to be able to continue to qualify as an investment
trust.
The Company has two wholly-owned
subsidiaries, BPCR Limited Partnership and BPCR GP Limited, and one
indirectly wholly-owned subsidiary, BPCR Ongdapa Limited, details
of which can be found in Note 14 to the financial
statements.
STAKEHOLDER ENGAGEMENT - SECTION 172(1)
STATEMENT
OVERVIEW
The Directors' overarching duty is
to promote the success of the Company for the benefit of its
shareholders, having regard to the interests of its stakeholders,
as set out in section 172(1) of the Companies Act 2006. The
Directors have considered each aspect of this section of the Act
and consider that the information set out below is particularly
relevant in the context of the Company's business as an externally
managed investment company which does not have any employees or
suppliers.
The importance of stakeholders is
taken into account at every Board meeting. All discussions involve
careful consideration of the longer-term consequences of any
decisions and their implications for stakeholders.
STAKEHOLDERS
The Board seeks to understand the
needs and priorities of the Company's stakeholders and these are
taken into account during all its discussions and as part of its
decision-making. The Board believes that the Company's key
stakeholders comprise its shareholders, clients and service
providers. The section below discusses why these stakeholders are
considered of importance to the Company and the actions taken to
ensure that their interests are taken into account. The Company
recognises the importance of maintaining high standards of business
conduct and seeks to ensure that these are applied in all of its
business dealings and in its engagement with stakeholders. Further
information on the impact of the Company's operations on the
community and the environment is set out below.
The Company's mechanisms for
engaging with its stakeholders are set out below. These are kept
under review by the Directors and are discussed on a regular basis
at Board meetings to ensure that they remain effective. The Company
is an investment trust and has no employees. It has therefore not
identified employees as a stakeholder group.
For more information on the purpose,
culture and values of the Company, and the processes which the
Board has put in place to ensure these, see the Corporate
Governance Statement as set out in the full Annual
Report.
SHAREHOLDERS
Importance
Continued shareholder support and
engagement are critical to the existence of the Company and the
delivery of its long-term strategy and engagement with shareholders
is given a high priority by both the Board and the Investment
Manager.
How
the Company engages
The Chairman ensures that the Board
as a whole has a clear understanding of the views of shareholders
by receiving regular updates from the Brokers and Investment
Manager. The Investment Manager and the Company's Brokers are in
regular contact with major shareholders and report the results of
all meetings and the views of those shareholders to the Board on a
regular basis. The Investment Manager provides regular investor
updates and presentations to shareholders. The Chairman and the
other Directors are available to attend these meetings with
shareholders if required. Relations with shareholders are also
considered as part of the annual Board evaluation process. For
further details regarding this process see the full Annual
Report.
All shareholders are encouraged to
attend and vote at annual general meetings ("AGM"), during which
the Board and the Investment Manager will be available to discuss
issues affecting the Company and answer any questions. Further
information regarding the AGM is detailed in the full Annual
Report.
Shareholders wishing to raise
questions or concerns directly with the Chairman, Senior
Independent Director or Company Secretary, outside of the AGM,
should do so using the contact details provided below.
Although the Company has been
established with an indefinite life, the Articles provide that a
continuation vote be put to shareholders periodically. The next
continuation vote will be put to shareholders in 2025.
During the year, as the Company's
shares had on average, traded at a discount in excess of 10 per
cent. to the Net Asset Value per Ordinary Share over a rolling 12
month period, the Company was required to propose a Continuation
Resolution to shareholders. The Continuation Resolution was
proposed to shareholders as an ordinary resolution at the general
meeting held on 28 December 2023 at which 94.06 per cent. of total
votes were cast in favour of the continuation of the
Company.
CLIENTS
Importance
The investments made by the Company
support the large capital needs of its portfolio companies,
supporting their research and development budgets for life sciences
products and enable them to achieve their investment
objective.
How
the Company engages
The Company's clients are
pharmaceutical and biotechnology companies within the life sciences
industry to which it provides debt capital. The Investment Manager
is highly experienced in this area with a strong track record of
meeting the capital needs of its clients. The Investment Manager
meets regularly with the management teams of current and
prospective investee companies to enhance relationships and to
understand their views and capital requirements.
The Directors receive updates from
the Investment Manager on the companies within its investment
portfolio at all Board meetings, and outside of meetings as
appropriate.
Further information on the Company's
engagement with investee companies during the year, including case
studies regarding their products, is set out above.
SERVICE
PROVIDERS
Importance
In order to function as an investment trust on the Premium Segment
of the London Stock Exchange, the Company relies on a number of
reputable advisers for support in complying with all relevant legal
and regulatory obligations.
How
the Company engages
The Company's day-to-day operational
functions are delegated to a number of third-party service
providers, each engaged under separate contracts. The Company's
principal service providers include the Investment Manager, Company
Secretary, Joint Brokers, Administrator, Legal Adviser, Auditor and
the Registrar.
The Board keeps the ongoing
performance of the Investment Manager under continual review and
conducts an annual appraisal of the Investment Manager, along with
the performance of all other third-party service providers in
December each year. The Investment Manager has executed the
investment strategy according to the Board's expectations and it is
the opinion of the Directors that the continuing appointment of
Pharmakon, as the Investment Manager, is in the interests of
shareholders as a whole.
The Audit and Risk Committee reviews
and evaluates the control environments in place at each service
provider. Further details regarding the role of the Audit and Risk
Committee are set out in the full Annual Report.
Further information about the review
of service providers and the culture of the Investment Manager is
set out in the full Annual Report.
KEY
PERFORMANCE INDICATORS
The Company assesses its performance
in meeting its investment objectives using the following Key
Performance Indicators ("KPIs"):
NAV
PERFORMANCE
The NAV at 31 December 2023 was
$1.0293 per Share, compared to $1.0139 per Share at 31 December
2022.
A full description of the Company's
performance for the year ended 31 December 2023 is included in the
Investment Manager's Report above.
SHARE PRICE RETURN
The Company's Share price at 31
December 2023 was $0.8400, compared to $0.9500 at 31 December 2022.
The Company's Share price at 31 December 2022 was $0.9500, giving a
return since 31 December 2021 of -1.9 per cent.
SHARE PRICE DISCOUNT/PREMIUM TO NAV PER
SHARE
Under the terms of the Discount
Control Mechanism ("DCM"), described in the Company's Prospectuses
dated 1 March 2017 and 14 March 2018, if the shares of the Company
trade at a discount greater than 5 per cent. over a three-month
period (the "First Trigger"), the Company is required to apply up
to 50 per cent. of proceeds from debt repayments in purchasing
Company shares until such time that the two-week discount is less
than 1 per cent. In addition, if the discount is greater than 10
per cent. over a six-month period (the "Second Trigger"), the
Company is required to apply up to 100 per cent. of proceeds from
debt repayments until such time that the two-week discount is less
than 1 per cent. If the Company's shares trade at a discount in
excess of 10 per cent. to the net asset value per share over a 12
month rolling period, a general meeting and continuation resolution
under the DCM is triggered.
On 7 November 2022, the DCM was
updated so that the trigger levels remain at previous levels but
provide for greater flexibility as to when the Company can freely
deploy capital:
· The
First Trigger will remain at a 5 per cent. discount to NAV and the
Company will be required to apply 50 per cent. of the principal
being returned to repurchase shares until such time that the
discount to NAV over a two-week period is less than 5 per cent.
(compared with less than 1 per cent. previously).
· The
Second Trigger will remain at a 10 per cent discount to NAV and the
Company will be required to apply 100 per cent. of the principal
being returned to repurchase shares until such time that the
discount to NAV over a two-week period is less than 5 per cent.
(compared with less than 1 per cent. previously).
During the 12 month rolling period
ended 1 November 2023, the Company's shares traded at a discount in
excess of 10 per cent. to the net asset value per share triggering
a general meeting and continuation resolution under the DCM. On 28
December 2023, the Company announced at the general meeting that
shareholders approved the continuation of the Company's business as
a closed-ended investment trust with 94 per cent. of shares voting,
in favor.
ONGOING CHARGES
The Company's ongoing charges ratio
is shown in the table below.
|
Year
ended
|
Year
ended
|
|
31
December 2023
|
31
December 2022
|
|
%
|
%
|
Ongoing charges excluding
performance fee*
|
1.1
|
1.1
|
Performance fee
|
0.9
|
1.5
|
Ongoing charges including
performance fee
|
2.1
|
2.6
|
|
|
|
* Ongoing charges are the Company's
expenses (excluding performance fees) expressed as a percentage of
its average monthly net assets and follow the AIC recommended
methodology.
DIVIDENDS
Dividend payments totaling 5.25
cents per Ordinary Share, including one special dividend totaling 2
cents have been paid during the year ended 31 December 2023. A
dividend was paid in respect of the last quarter of 2023 totaling
1.75 cents per Ordinary Share, including a special of 1.21 cents on
15 March 2024. Dividends totaling 11.50 cents per Ordinary Share,
including one special dividend of 4.50 cents, were paid during the
year ended 31 December 2022.
RISK MANAGEMENT AND THE INTERNAL CONTROL
ENVIRONMENT
The
role of the Board
A formal risk identification and
assessment process has been adopted by the Company resulting in a
risk framework document which summarises the key risks and their
mitigation.
The Board undertakes a formal risk
review with the assistance of the Audit and Risk Committee at least
twice a year in order to robustly assess the effectiveness of the
Company's risk management and internal control systems. During the
course of its review in respect of the year ended 31 December 2023,
the Board has not identified, nor been advised of any failings or
weaknesses which it has determined to be of a material nature. The
principal risks and uncertainties which the Company faces are set
out below.
Principal risks and uncertainties
The Board of Directors has overall
responsibility for risk management and internal control of the
Company. The Board recognises that risk is inherent in the
operation of the Company and that effective risk management is key
to the success of the organisation. The Board has delegated
responsibility for the assurance of the risk management process and
the review of mitigating controls to the Audit and Risk
Committee.
The principal risks and the Company's
policies for managing these risks are set out below and the policy
and practice with regard to financial instruments are summarised in
Note 16 to the financial statements.
There were no changes to these risks
in the current year or at the date of this report.
The recent events surrounding the
LumiraDx investment help illustrate some of the risks and mitigants
described below. LumiraDx faced financial difficulties that exposed
the Company to counterparty risk as it became clear that the
Company will be unable to recover the full principal and fees owed.
However, the positive attributes of the collateral and the
investment manager's diligent efforts are expected to result in the
Company being able to ultimately recover a significant portion of
its investment.
Risk
|
Description and mitigation
|
Failure to achieve target returns
|
The target returns are targets only
and are based on financial projections that are themselves based on
assumptions regarding market conditions, economic environment,
availability of investment opportunities and investment-specific
assumptions that may not be consistent with conditions in the
future.
The Company seeks to achieve its
investment objective predominantly through direct or indirect
exposure to debt assets. Debt assets typically comprise royalty
debt instruments, priority royalty tranches, senior secured debt,
unsecured debt and credit-linked notes. A variety of factors,
including lack of attractive investment opportunities, defaults and
prepayments under debt assets, inability of the Company to obtain
debt at an appropriate rate, changes in the life sciences industry,
exchange rates, government regulations, the non-performance (or
underperformance) of any life sciences product (or any life
sciences company) could adversely impact the Company's ability to
achieve its investment objective and deliver the target returns. A
failure by the Company to achieve its target returns could
adversely impact the value of the Shares and lead to a loss of
investment.
The Company has an investment policy
to achieve a balanced investment with a diversified asset base and
has investment restrictions in place to limit exposure to potential
risk factors. These factors enable the Company to build a
diversified portfolio that should deliver returns that are in line
with its stated target return.
|
The
success of the Company depends on the ability and expertise of the
Investment Manager
|
In accordance with the Investment
Management Agreement, the Investment Manager is responsible for the
investment management of the Company's assets. The Company does not
have its own employees and all of its Directors are appointed on a
non-executive basis. All investment and asset management decisions
are made by the Investment Manager (or any delegates thereof) and
not by the Company or the Directors and, accordingly, the Company
is completely reliant upon, and its success depends on, the
Investment Manager and its personnel, services and resources. The
Investment Manager is required, under the terms of the Investment
Management Agreement, to perform in accordance with the Service
Standard. The Investment Manager does not submit individual
investment decisions to the Board for approval and the Board does
not supervise the due diligence performed by the Investment
Manager. As part of its asset management decisions, the Investment
Manager may from time to time make commitments for future
investments for which the Company may need to raise funds in the
future by issuing equity and/or debt or by selling all or part of
other investments to raise liquidity.
The Company is entitled to terminate
the Investment Management Agreement if the Investment Manager has
(i) committed fraud, gross negligence or wilful misconduct in the
performance of its obligations under the Investment Management
Agreement, or (ii) breached its obligations under the Investment
Management Agreement, and the Company is reasonably likely to
suffer a loss arising directly or indirectly out of or in
connection with such breach of an amount equal to or greater than
10 per cent. of the NAV as at the date of the breach. The
Investment Management Agreement may also be terminated at the
Company's discretion on not less than six months' notice to the
Investment Manager.
Under the terms of the Investment
Management Agreement, the Investment Manager is only liable to the
Company (and will only lose its indemnity) if it has committed
fraud, gross negligence or wilful misconduct or acted in bad faith,
or knowingly violated applicable securities' laws. The performance
of the Company is dependent on the diligence, skill and judgement
of certain key individuals at the Investment Manager, including
Pedro Gonzalez de Cosio and other senior investment professionals
and the information and investments' pipeline generated through
their business development efforts. On the occurrence of a Key
Person Event (as defined in the Investment Management Agreement),
the Company may be entitled to terminate the Investment Management
Agreement with immediate effect (subject to the Investment
Manager's right to find an appropriate replacement to be approved
by the Board (such approval not to be unreasonably withheld or
delayed) within 180 days)).
However, if the Company elects to
exercise this right, it would be required to pay the Investment
Manager a termination fee equal to either 1 per cent. or 2 per
cent. of the invested NAV (depending on the reason for the Key
Person Event), as at the date of such termination. If the Company
elects not to exercise this right, the precise impact of a Key
Person Event on the ability of the Company to achieve its
investment objective and target returns cannot be determined and
would depend inter alia on the ability of the Investment Manager to
recruit individuals of similar experience, expertise and calibre.
There can be no guarantee that the Investment Manager would be able
to do so and this could adversely affect the ability of the Company
to meet its investment objective and target returns and may
adversely affect the NAV and Shareholder returns and result in a
substantial loss of a Shareholder's investment.
The Investment Manager has extensive
expertise and a track record of successfully investing in debt and
other cash flows backed by life sciences products. The Investment
Management Agreement provides attractive incentives for the
Investment Manager to perform prudently and in the best interests
of the Company. In addition, the Investment Manager and its
affiliates own approximately 6 per cent. of the Company as at 31
December 2023, creating a strong alignment of interests between the
Investment Manager and its affiliates and Shareholders of the
Company.
|
The
Company may from time to time commit to make future investments
that exceed its current liquidity
|
From time to time, the Company may
commit to make future investments for which the Company will need
to raise funds by issuing equity and/or debt, or by selling all or
part of other investments. Investment opportunities may require the
Company to fund transactions in two or more tranches, with the
later tranches to be funded six or more months in the future.
Refusing to offer such later tranches would decrease the
attractiveness of the Company's investment proposals and harm the
Company's ability to successfully deploy its capital. Requiring the
Company to maintain low-yielding cash balances sufficient to fund
all such later tranches at the time of the initial commitment would
decrease the average yield on the Company's assets, adversely
impacting the returns to investors, and may also result in missed
investment opportunities. However, in order to fund all such later
tranches, the Company could be forced to issue debt, sell assets or
renegotiate with the party to which it has committed the funding on
unattractive terms. Furthermore, there can be no assurance that the
Company will always be able to raise sufficient liquidity (by
issuing equity and/or debt, or by selling investments) to meet its
funding commitments. If the Company were to fail to meet its
funding commitments, the Company could be in breach of its
contractual obligations, which could adversely affect the Company's
reputation, could result in the Company facing legal action from
its counterparty, and could adversely affect the Company's
financial results.
The Investment Manager believes that
the risks associated with such unfunded commitment is manageable
without undue risk. The Investment Manager has extensive expertise
in raising debt secured by cash flows from life sciences products
and has extensive relationships with banks and other financial
institutions who can be called on to provide debt financing to the
Company in order to raise liquidity. In addition, the Investment
Manager has expertise purchasing and selling life sciences debt
assets in the secondary market and has extensive relationships with
the major participants in the life-sciences debt market who would
be the likely purchasers of any assets offered for sale by the
Company in order to raise liquidity.
|
The
Investment Manager's ability to source and advise appropriately on
investments
|
Returns on the shareholders'
investments will depend upon the Investment Manager's ability to
source and make successful investments on behalf of the Company.
There can be no assurance that the Investment Manager will be able
to do so on an ongoing basis. Many investment decisions of the
Investment Manager will depend upon the ability of its employees
and agents to obtain relevant information. There can be no
guarantee that such information will be available or, if available,
can be obtained by the Investment Manager and its employees and
agents. Furthermore, the Investment Manager will often be required
to make investment decisions without complete information or in
reliance upon information provided by third parties that is
impossible or impracticable to verify. For example, the Investment
Manager may not have access to records regarding the complaints
received regarding a given life science product or the results of
research and development related to products. Furthermore, the
Company may have to compete for attractive investments with other
public or private entities, or persons, some or all of which may
have more capital and resources than the Company.
These entities may invest in
potential investments before the Company is able to do so or their
offers may drive up the prices of potential investments, thereby
potentially lowering returns and, in some cases, rendering them
unsuitable for the Company. An inability to source investments
would have a material adverse effect on the Company's
profitability, its ability to achieve its target returns and the
value of the Shares.
The Investment Manager believes that
sourcing investments is one of its competitive advantages. The
Investment Manager's professionals, together with those at its
affiliate RP Management LLC, accessible through the Shared Services
Agreement, have complementary scientific, medical, licensing,
operating, structuring and financial backgrounds which the
Investment Manager believes provide a competitive advantage in
sourcing, evaluating, executing and managing credit investments in
the life sciences industry.
|
There can be no assurance that the Board will be able to find
a replacement investment manager if the Investment Manager
resigns
|
Under the terms of the Investment
Management Agreement, the Investment Management Agreement may be
terminated by: (A) the Investment Manager on not less than six
months' notice to the Company, such notice not to expire earlier
than 18 months following Admission; or (B) the Company on not less
than six months' notice to the Investment Manager, such notice not
to expire earlier than: (i) 36 months following Admission, unless
approved by Shareholders by ordinary resolution; and (ii) 18 months
following Admission, in any event. The Board would, in these
circumstances, have to find a replacement investment manager for
the Company and there can be no assurance that a replacement with
the necessary skills and experience would be available and/or could
be appointed on terms acceptable to the Company. In this event, the
Board may have to formulate and put forward to Shareholders
proposals for the future of the Company which may include its
merger with another investment company, reconstruction or winding
up. It is possible that, following the termination of the
Investment Manager's appointment, the Investment Manager will
continue to have a role in the investment management of certain
assets, where a debt asset is shared with one or more other entity
managed by the Investment Manager that continue to retain the
Investment Manager's services.
In the event the Investment Manager
resigns, the Board will put forward to Shareholders proposals for
the future of the Company which may include its merger with another
investment company, reconstruction or winding up. Entities
affiliated with the Investment Manager own approximately 6 per
cent. of the Company as at 31 December 2023. This affiliate
ownership level, coupled with the fact that the Investment Manager
is fairly compensated, provide further incentive for them to remain
as Investment Manager to the Company.
|
Concentration in the Company's portfolio may affect the
Company's ability to achieve its investment
objective
|
The Company's published investment
policy allows the Company to invest up to 25 per cent. of the
Company's assets in a single debt asset or in debt assets issued to
a single borrower. While the investment limits in the investment
policy have been set keeping in mind the debt capital requirements
of the life sciences industry and the investment opportunities
available to the Investment Manager, it is possible that the
Company's portfolio may be significantly concentrated at any given
point in time.
Concentration in the Company's
portfolio may increase certain risks to which the Company is
subject, some or all of which may be related to events outside the
Company's control. These would include risks around the
creditworthiness of the relevant borrower, the nature of the debt
asset and of any life sciences product(s) in question. The
occurrence of these situations may result in greater volatility in
the Company's investments and, consequently, its NAV, and may
materially and adversely affect the performance of the Company and
the Company's returns to shareholders. Such increased concentration
of the Company's assets could also result in greater losses to the
Company in adverse market conditions than would have been the case
with a less concentrated portfolio, and have a material adverse
effect on the Company's financial condition, business, prospects
and results of operations and, consequently, the Company's NAV
and/or the market price of the Shares.
|
Life sciences products are subject to intense competition and
various other risks
|
The biopharmaceutical and
pharmaceutical industries are highly competitive and rapidly
evolving. The length of any life sciences product's commercial life
cannot be predicted. There can be no assurance that the life
sciences products will not be rendered obsolete or non-competitive
by new products or improvements made to existing products, either
by the current marketer of the life sciences products or by another
marketer. Adverse competition, obsolescence or governmental and
regulatory life sciences policy changes could significantly impact
royalty revenues of life sciences products which serve as the
collateral or other security for the repayment of obligations
outstanding under the Company's investments. If a life sciences
product is rendered obsolete or non-competitive by new products or
improvements on existing products or governmental or regulatory
action, such developments could have a material adverse effect on
the ability of the borrower under the relevant debt asset to make
payment of interest on, and repayments of the principal of, that
debt asset, and consequently could adversely affect the Company's
performance. If additional side effects or complications are
discovered with respect to a life sciences product, and such life
sciences product's market acceptance is impacted or it is withdrawn
from the market, continuing payments of interest on, and repayment
of the principal of, that debt asset may not be made on time or at
all. It is possible that over time side effects or complications
from one or more of the life sciences products could be discovered,
and, if such a side effect or complication posed a serious safety
concern, a life sciences product could be withdrawn from the
market, which could adversely affect the ability of the borrower
under the relevant debt asset to make continuing payments of
interest on, and repayment of the principal of, that debt asset, in
which case the Company's ability to make distributions to investors
may be materially and adversely affected.
Furthermore, if an additional side
effect or complication is discovered that does not pose a serious
safety concern, it could nevertheless negatively impact market
acceptance and therefore result in decreased net sales of one or
more of the life sciences products, which could adversely affect
the ability of borrowers under the relevant debt asset(s) to make
continuing payments of interest on, and repayment of the principal
of, that debt asset(s), in which case the Company's ability to make
distributions to investors may be materially and adversely
affected.
The Investment Manager engages in a
thorough diligence process before entering into any debt instrument
with the counterparty and interacts with each counterparty as
needed to evaluate the status of its investment on an ongoing
basis.
|
Investments in debt obligations are subject to credit and
interest rate risks
|
Debt instruments are subject to
credit and interest rate risks. Credit risk refers to the
likelihood that the borrower will default in the payment of
principal and/or interest on an instrument. Financial strength and
solvency of a borrower are the primary factors influencing credit
risk. In addition, lack or inadequacy of collateral or credit
enhancement for a debt asset may affect its credit risk. Credit
risk may change over the life of an instrument. Interest rate risk
refers to the risks associated with market changes in interest
rates. Interest rate changes may affect the value of a debt asset
indirectly (especially in the case of fixed rate debt assets) and
directly (especially in the case of debt assets whose rates are
adjustable). In general, rising interest rates will negatively
impact the price of a fixed rate debt asset and falling interest
rates will have a positive effect on price. Adjustable rate
instruments also react to interest rate changes in a similar manner
although generally to a lesser degree (depending, however, on the
characteristics of the reset terms, including the index chosen,
frequency of reset and reset caps or floors, among other factors).
Interest rate sensitivity is generally more pronounced and less
predictable in instruments with uncertain payment or prepayment
schedules. In addition, interest rate increases generally will
increase the interest carrying costs to the Company (or any entity
through which the Company invests) of leveraged
investments.
The Company will often seek to be a
secured lender for each Debt Asset. However, there is no guarantee
that the relevant borrower will repay the loan or that the
collateral will be sufficient to satisfy the amount owed under the
relevant Debt Asset. Credit risk will be assessed on an ongoing
basis along with interest rate risk, and is further mitigated by
the Company's investment policy permitting up to 25 per cent. of
the Company's assets to be invested in a single Debt Asset or in
Debt Assets issued to a single borrower. Interest rate risk can be
managed in a variety of ways, including with the use of
derivatives.
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Counterparty risk
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The Company intends to hold debt
assets that will generate an interest payment. There is no
guarantee that any borrower will honour their obligations. The
default or insolvency of such borrowers may substantially affect
the Company's business, financial condition, results of operations,
the NAV and Shareholder returns.
The Company will often seek to be a
secured lender for each Debt Asset. However, there is no guarantee
that the collateral will be sufficient to satisfy the amount owed
under the relevant Debt Asset.
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Sales of life sciences products are subject to regulatory
actions that could harm the Company's ability to make distributions
to investors
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There can be no assurance that any
regulatory approvals for indications granted to one or more life
sciences products will not be subsequently revoked or restricted.
Such revocation or restriction may have a material adverse effect
on the sales of such products and on the ability of borrowers under
the relevant Debt Asset to make continuing payments of interest on,
and repayment of the principal of, that Debt Asset, in which case
the Company's ability to make distributions to investors may be
materially and adversely affected. Changes in legislation are
monitored with the use of third-party legal advisers and the
Investment Manager will maintain awareness of new approvals or
revoked approvals.
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Net
asset values published will be estimates only and may differ
materially from actual results
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Generally, there will be no readily
available market for a significant number of the Company's
investments and hence, the majority of the Company's investments
are not valued based on market- observable inputs.
The valuations used to calculate the
NAV on a monthly basis will be based on the Investment Manager's
unaudited estimated fair market values of the Company's
investments. It should be noted any such estimates may vary (in
some cases materially) from the results published in the Company's
financial statements (as the figures are published at different
times) and that they, and any NAV figure published, may vary (in
some cases materially) from realised or realisable
values.
The Investment Manager sends
valuations on a monthly basis to the administrator for calculation
of the NAV. The NAV is prepared by the administrator on the basis
of information received from the Investment Manager and, once
finalised, is reviewed and approved by a representative of the
Investment Manager. Once approved, the Investment Manager notifies
the Board and the NAV is released to the market.
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Changes in taxation legislation or practice may adversely
affect the Company and the tax treatment for Shareholders investing
in the Company
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Any change in the Company's tax
status, or in taxation legislation or practice in the UK, US or
elsewhere, could affect the value of the Company's investments and
the Company's ability to achieve its investment objective, or alter
the post-tax returns to Shareholders. It is the intention of the
Directors to conduct the affairs of the Company so as to satisfy
the conditions for approval of the Company by HMRC as an investment
trust under section 1158 of the Corporation Tax Act 2010 (as
amended) and pursuant to regulations made under Section 1159 of the
Corporation Tax Act 2010. However, although the approval has been
obtained, neither the Investment Manager nor the Directors can
guarantee that this approval will be maintained at all times. The
Company has been granted approval from HMRC as an investment trust
and will continue to have investment trust status in each
subsequent accounting period, unless the Company fails to meet the
requirements to maintain investment trust status, pursuant to the
regulations. For example, it is not possible to guarantee that the
Company will remain a non-close company, which is a requirement to
maintain investment trust status, as the Shares are freely
transferable. Failure to maintain investment trust status could, as
a result, (inter alia) lead to the Company being subject to UK tax
on its chargeable gains. Existing and potential investors should
consult their tax advisers with respect to their particular tax
situations and the tax effects of an investment in the
Company.
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Global pandemics may affect the operation and performance of
the Company
|
Global pandemics have the potential
to affect the daily operations of the Investment Manager and its
service providers. The Company's Investment Manager and current
service providers may rely on their business continuity plans for
remote work and there is an increased risk of control deficiencies.
The ultimate impact of a pandemic or a similar health epidemic is
highly uncertain, subject to change and may affect the credit
quality of the loans in the Company's portfolio.
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GOING CONCERN
The Directors consider that it is
appropriate to adopt the going concern basis in preparing the
financial statements. After making enquiries, and bearing in mind
the nature of the Company's business and assets, the Directors
consider that the Company has adequate resources to continue in
operational existence for the foreseeable future. In arriving at
this conclusion, the Directors have considered the liquidity of the
portfolio and the Company's ability to meet obligations as they
fall due for a period of at least 12 months from the date that
these financial statements were approved.
VIABILITY STATEMENT
The Board has assessed the principal
risks facing the Company over a five-year period, including those
that would threaten its business model, future performance,
solvency or liquidity. The five-year period was selected to align
with the average duration of the Company's existing investments.
The Board has developed a matrix of risks facing the Company and
has put in place certain investment restrictions which are in line
with the Company's investment objective and policy in order to
mitigate these risks as far as practicable. The principal risks
which have been identified, and the steps taken by the Board to
mitigate these risks, are presented above.
The Company believes its borrowing
capabilities provide further flexibility and help ensure it is in a
position to finance its funding obligations in the event that
internally generated cash flow in the period is insufficient to
finance the unfunded portion of a lending commitment. The Board
reviews the Company's financing arrangements quarterly to ensure
that the Company is in a strong position to fund all outstanding
commitments on existing investments as well as being able to
finance new investments. In addition, the Board regularly reviews
the prospects for the Company's portfolio and the pipeline of
potential investment opportunities which provide comfort that the
Company is able to continue to finance its activities for the
medium-term future.
Based on this assessment, the
Directors have a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall
due over the next five-year period
ENVIRONMENTAL, HUMAN RIGHTS, EMPLOYEE, SOCIAL AND COMMUNITY
ISSUES
The Board recognises the requirement
under the Companies Act 2006 to detail information about employees,
human rights, environmental and community issues, including
information about any policies it has in relation to these matters
and the effectiveness of these policies. These requirements do not
apply directly to the Company as it has no employees, all the
Directors are non-executive and it has outsourced all its functions
to third-party service providers. The Company has therefore not
reported further in respect of these provisions.
While the Company is not within the
scope of the Modern Slavery Act 2015 and it is not, therefore,
obliged to make a slavery and human trafficking statement, the
Company considers its supply chains to be of low risk as its
principal service providers are the professional advisers set out
in the Corporate Information section below. Further information on
the Company's anti-bribery and corruption policy is set out in the
full Annual Report.
There are six Directors, four male
and two female. Further information on the composition and
operation of the Board is detailed in the full Annual
Report.
This Strategic Report has been
approved by the Board and signed on its behalf by
Harry Hyman
Chairman
26 March 2024
EXTRACTS FROM THE DIRECTORS' REPORT
The Directors are pleased to present
the Annual Report and audited financial statements for the year
ended 31 December 2023.
Directors
The Directors of the Company who
were in office during the year and up to the date of signing the
financial statements are listed below:
Harry Hyman - Chairman
Duncan Budge - Senior Independent
Director
Colin Bond - Chairman of the Audit
and Risk Committee
Stephanie Léouzon -
Director
Rolf Soderstrom -
Director
Sapna Shah - Director (appointed 22
March 2023)
Share capital
An allotment authority for the
issuance of up to 131,865,488 ordinary or C shares was passed at
the Company's Annual General Meeting held on 30 May 2023. This
authority will expire at the conclusion of, and renewal will be
sought at, the annual general meeting to be held on 12 June 2024.
No shares were issued during the year.
At the Annual General Meeting held on
30 May 2023, the Company was granted authority to purchase up to
14.99 per cent. of the Company's Ordinary Share capital in issue at
that date, amounting to 205,952,416 Ordinary Shares. This authority
will expire at the conclusion of, and renewal will be sought at,
the Annual General Meeting to be held in June 2024. No shares were
purchased for cancellation during the year.
As set out in the Chairman's
Statement above, during the year, the Company's discount control
mechanism was triggered and the Company was required to use its
capital to repurchase shares. During 2023, 16,499,477 shares of
$0.01 were bought back at a total cost of $15,162,792 and are held
in treasury. This represented 1.2 per cent. of the issued share
capital as at 31 December 2023. No shares were purchased for
cancellation.
At 31 December 2023, and as at the
date of this report, there are 1,373,932,067 Ordinary Shares in
issue. As at 31 December 2023 there were 71,252,875 Ordinary Shares
held in treasury. Since 31 December 2023, a further 49,041,347
shares have been repurchased and the total number of shares held in
treasury is 120,294,222. At general meetings of the Company,
shareholders are entitled to one vote on a show of hands and on a
poll, to one vote for every Share held. Shares held in treasury do
not carry voting rights. The total voting rights of the Company at
31 December 2023 was 1,302,679,192 and as at the date of this
report 1,253,637,845.
Further information on the Company's share capital is set out in
Note 13 to the financial statements.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
In
respect of the financial statements
The directors are responsible for
preparing the Annual Report and the financial statements in
accordance with applicable law and regulation.
Company law requires the directors
to prepare financial statements for each financial year. Under that
law the directors have prepared the financial statements in
accordance with UK adopted International Accounting Standards ("UK
IAS").
Under company law, directors must not
approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the company for that period.
In preparing the financial statements, the directors are required
to:
·
select suitable accounting policies and then apply
them consistently;
·
state whether applicable UK IASs have been
followed, subject to any material departures disclosed and
explained in the financial statements;
·
make judgements and accounting estimates that are
reasonable and prudent; and
·
prepare the financial statements on the going
concern basis unless it is inappropriate to presume that the
company will continue in business.
The directors are also responsible
for safeguarding the assets of the company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The directors are responsible for
keeping adequate accounting records that are sufficient to show and
explain the Company's transactions and disclose with reasonable
accuracy at any time the financial position of the company and
enable them to ensure that the financial statements and the
Directors' Remuneration Report comply with the Companies Act
2006.The directors are responsible for the maintenance and
integrity of the Company's website. Legislation in the United
Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other
jurisdictions.
DIRECTORS' CONFIRMATIONS
The Directors consider that the
Annual Report and accounts, taken as a whole, are fair, balanced
and understandable and provide the information necessary for
shareholders to assess the Company's position and performance,
business model and strategy.
Each of the directors, whose names
and functions are listed in the Board of Directors above confirm
that, to the best of their knowledge:
· the
company financial statements, which have been prepared in
accordance with UK IASs, give a true and fair view of the assets,
liabilities, financial position and profit of the Company;
and
· the
Strategic Report includes a fair review of the development and
performance of the business and the position of the company,
together with a description of the principal risks and
uncertainties that it faces.
On behalf of the Board
Harry Hyman
Chairman
26 March 2024