22 November
2022
LONDON STOCK EXCHANGE ANNOUNCEMENT
Worldwide
Healthcare Trust PLC
Unaudited Half
Year Results for the six months ended
30 September 2022
This Announcement is not the Company’s Half Year Report &
Accounts. It is an abridged version of the Company’s full Half Year
Report & Accounts for the six months ended 30 September 2022. The full Half Year Report
& Accounts, together with a copy of this announcement, will
also shortly be available on the Company’s website:
www.worldwidewh.com where up to date information on the Company,
including daily Net Asset Value, share prices and fact sheets, can
also be found.
The Company's Half Year Report & Accounts for the six months
ended 30 September 2022 has been
submitted to the UK Listing Authority, and will shortly be
available for inspection on the National Storage Mechanism (NSM):
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
For further information please contact: Mark Pope, Frostrow Capital LLP 020 3 008
4913.
Performance
|
|
Six months to |
One year to |
|
|
30 September |
31 March |
|
|
2022 |
2022 |
Net asset value per share (total
return)* # |
|
3.1% |
(5.8%) |
Share price (total return)* # |
|
1.9% |
(10.8%) |
Benchmark (total return)^ # |
|
2.1% |
20.4% |
|
|
|
|
|
30 September |
31 March |
Six months |
|
2022 |
2022 |
change |
Net asset value per share |
3,550.7p |
3,465.2p |
2.5% |
Share price |
3,315.0p |
3,275.0p |
1.2% |
Discount of share price to the net
asset value per share* |
6.6% |
5.5% |
|
Leverage* |
11.5% |
10.9% |
|
Ongoing charges* |
0.8% |
0.9% |
|
Ongoing charges (including
performance fees crystallised during the period)* |
0.8% |
1.4% |
|
# Source – Morningstar.
^ Benchmark – MSCI World Health
Care Index on a net total return, sterling adjusted basis (see
Glossary)
* Alternative Performance Measure.
Leverage calculated under the Commitment Method (see Glossary)
Board Chair’s Statement
Doug
McCutcheon
Performance
This is my first report to shareholders, having succeeded Sir
Martin Smith as Chair of the Board
of the Company in July 2022. I would
like to thank Sir Martin for his leadership, wise counsel and
friendship during his time on the Board, a period during which the
Company achieved excellent performance over many years.
As a sector, healthcare again demonstrated its defensive
qualities during the first half of the Company’s financial year.
It was a challenging period for stock markets globally, with
the MSCI World and the FTSE All-Share Indices producing sterling
based total returns of -7.3% and -8.3%, respectively. In contrast,
the Company’s Benchmark, the MSCI World Healthcare Index, measured
on a net total return, sterling adjusted basis rose by 2.1%.
In this context, I am pleased to report that the Company’s net
asset value per share total return of +3.1% outperformed its
Benchmark during the period. In absolute terms, net asset value
performance was helped by the continued weakness of sterling, which
depreciated by 15.2% against the U.S. dollar, the currency in which
the majority of the Company’s investments are denominated. The
Company’s share price total return of +1.9%, while still positive,
fared slightly less well and, as a result, the discount of the
Company’s share price to its net asset value per share widened to
6.6% as at 30 September 2022 (from 5.5% at the beginning of
the half year), having been wider at times during the period.
The principal reason for the Company’s positive performance was
its continuing significant overweight position in Emerging
Biotechnology*. The strategy had not worked well during the
Company’s previous financial year, but is now benefitting from
investors beginning to again focus more on sector related news flow
and fundamentals rather than on macro-related issues.
Looking at specific names in the portfolio, the largest
contributions during the reporting period came from Global Blood
Therapeutics, the U.S. biopharmaceutical company that was
acquired by Pfizer, and the U.S. health insurance company
Humana. The principal detractors from performance were the
U.S. pharmaceutical company Horizon Therapeutics and
Intuitive Surgical, which focusses on the development
and manufacture of robotic technology used in medical procedures.
Further information regarding the Company’s investments and
performance can be found in the Review of Investments.
The Company had, on average, leverage of 11.3% during the
period, which contributed 0.4% to performance. As at the half
year-end leverage stood at 11.5% compared to 10.9% at the beginning
of the period. Our Portfolio Manager continues to adopt both a
pragmatic and a tactical approach to the use of leverage, which
adds to performance in periods of rising portfolio share
prices.
As has been mentioned previously, the Company is able to invest
up to 10% of the portfolio, at the time of acquisition,
in unquoted securities. Our Portfolio Manager, through its
extensive private equity research capabilities, continues to
identify unquoted opportunities for the portfolio. Exposure to
unquoted equities accounted for 7.1% of the total portfolio at the
half year-end, and these holdings made a positive contribution of
0.7% to the Company’s performance during the period under
review.
* See Glossary.
Performance Fee
No performance fee was accrued as at 30
September 2022 and no performance fee can become payable
within the next year. The performance fee arrangements are
described in detail in the Company’s Annual Report.
Capital
Challenging stock market conditions since the beginning of 2022
have had a negative impact on share price discounts across the
investment company sector, with the average level of discount
currently standing at c.11%*.
The Company began buying back shares, in line with the Board’s
discount management policy, starting in the last quarter of the
previous financial year and there were 80,509 shares held in
treasury at the beginning of the half year. The Company has
continued to buy back shares where necessary throughout the period
under review. A total of 1,093,997 shares were repurchased for
treasury during the period at a cost of £36.1m and at an average
discount of 8.4%. At the half year-end there were 64,363,249 shares
in issue (excluding the 695,529 shares held in treasury).
It is the Board’s policy to try to limit the share price
discount to the net asset value per share to no more than a 6% on
an ongoing basis. Shareholders should note, however, that it
remains possible for the discount to be greater than 6% on any
given day. Short-term share price volatility is influenced by the
overall supply and demand for the Company’s shares in the secondary
market. In addition, short-term volatility in the Company’s net
asset value per share is driven by share prices in the broader
healthcare sector worldwide. Since the end of the half year, a
further 220,615 shares have been bought back for treasury and, at
the time of writing, the share price discount stands at 6.0%.
In line with the Company’s stated policy, I confirm that 478,977
shares held in treasury following the date of the Company’s Annual
General Meeting in July 2022, were
cancelled. The Company currently holds 916,144 shares in
treasury.
*Source: Winterflood Investment Trusts
Dividends
The Board has declared an unchanged interim dividend of 7.0p per
share, for the year to 31 March 2023,
which will be payable on 11 January
2023 to shareholders on the register of members on
25 November 2022. The associated
ex-dividend date is 24 November
2022.
I remind shareholders that it remains the Company’s policy to
pay out dividends at least to the extent required to
maintain investment trust status. These dividend payments are
paid out of the Company’s net revenue for the year and,
in accordance with investment trust rules, a maximum of 15% of
income can be retained by the Company in any
financial year.
It is the Board’s continuing belief that the Company’s capital
should be deployed rather than paid out as dividends to achieve a
particular target yield.
Composition of the Board
I am pleased to confirm the two new additions to the Board that
were announced in September. Tim
Livett is a qualified accountant and the Chief Financial
Officer at Caledonia Investments PLC. Jo
Parfrey is a Chartered Accountant, a non?executive Director
and Chair of the Audit Committee of Henderson International Income
Trust plc and a non?executive Director of Octopus AIM VCT. Their
financial, investment management and life sciences experience will
be invaluable to the Board’s deliberations going forward.
Outlook
With the recent enactment of the Inflation Reduction Act* in the
U.S., our Portfolio Manager believes that a key overhang
to the healthcare sector relating to drug pricing has been
reduced. They further believe that this, together with continued
high levels of innovation and merger and acquisition activity, will
support sustained attractive performance by the Company.
Your Board believes that long-term investors in the Company will
continue to be rewarded.
Doug McCutcheon
Chair
22 November 2022
* See the Review of Investments and also the Glossary.
Review of Investments
Markets
Major macro events have dictated the performance of global
equity markets in the first half of the financial year ending
31 March 2023. The Russian invasion of Ukraine was perhaps the biggest shock of all,
with numerous ripple effects including falling equity prices,
rising bond yields, increased commodity prices, increased
inflation, and further supply chain disruption. As the year
progressed, inflation worsened, interest rates continued to rise,
and recessionary fears increased. This was accompanied by extreme
currency moves across markets, including the pound reaching a new
low against the U.S. dollar (reaching almost parity in late
September, a level not seen since 1985). Continued geopolitical
uncertainty over China’s intentions with respect to Taiwan compounded the situation, complicating
the macro backdrop even further.
The result was precipitous declines across all major equity
indices. The MSCI World Index (measured on a sterling total return
basis) fell more than 7% and over 21% in U.S. dollar terms for the
six-month reported period. Similarly, in the UK the FTSE
All-Share index fell more than 8% whilst in the U.S. the S&P
500 index fell over 20%, again differences reflecting volatility in
currencies.
Healthcare stocks proved typically defensive during the broader
market turbulence in the first half of the financial year.
On the plus side, therapeutic stocks (biotechnology and
pharmaceuticals) moved higher in sterling terms, as did healthcare
services. On the negative side, medical technology and life science
tools stocks moved lower in sterling terms, as supply chain and
other macro concerns impacted valuations.
Performance
For the six-month period ended 30
September 2022, we are pleased to confirm both positive
absolute and relative performance. Specifically, the net asset
value per share total return was 3.1%, outperforming the Benchmark
return of 2.1% (MSCI World Healthcare Index measured on a net total
return sterling adjusted basis). The share price total return was
1.9%.
The primary driver of this positive performance – both absolute
and relative – was Emerging Biotechnology stocks, via both
allocation and stock picking. Another driver of import was stock
picking in Japanese Pharmaceutical stocks. Additional performance
was generated in Life Science Tools (allocation and stock picking)
and Medical Technology (stock picking). We would also note the
very noticeable impact of currencies on absolute returns in the
period. With sterling reaching all-time lows versus the U.S. dollar
in late September 2022, and the
portfolio denominated predominantly in U.S dollars, currency
impacted returns by 15.2%.
The primary source of negative performance – both absolute and
relative – was Pharmaceuticals (allocation and stock picking)
whilst Medical Technology detracted materially on an absolute basis
only (allocation). Overall Emerging Markets investments were down
slightly, with both Indian and Chinese based investments detracting
from performance.
During the first half of the financial year, the Company made no
new investments in unquoted companies as a continued challenging
public offering market for small and mid-capitalisation
therapeutics companies made pre-Initial Public Offering (IPO)
crossover investments unattractive. Notwithstanding the market
environment, one of the existing unquoted investments,
DingDang Health Technology Group, completed its IPO
in mid-September at a step-up value of c.26% on its cost in U.S.
dollars.
As at 30 September 2022,
investments in unquoted companies accounted for 7.1% of the
Company’s net assets versus 7.0% as of 31
March 2022. For the period ended 30
September 2022, the Company’s unquoted strategy contributed
gains of £14.6m, a return of 8.7%. DingDang Health
Technology Group represented a large portion of those gains,
£5.6m, a return of c.45%, in sterling, for the period. The other
unquoted positions were up an average of 5.8%, in sterling,
over the period, largely due to currency effects.
Overall, the Company’s reported returns were not linear in the
period. The first two months of the financial year were similar to
the end of calendar year 2021 and early 2022. That is, macro
factors continued to be the dominant influence on equity markets,
including parts of healthcare. This resulted in continued selling
pressure on Emerging Biotechnology stocks – our key strategic
overweight – in April and May 2022,
impacting our performance. In fact, the SPDR S&P Biotech ETF
(or “XBI”) sold off an additional 23.5% in this two-month period
alone, extending the calendar year losses to 38.5% by the end
of May (U.S. dollar terms). Consequently, additional
underperformance was accrued to start the current financial year,
continuing a trend observed in the previous financial year.
However, the environment changed significantly in June and beyond,
when Mergers & Acquisitions (M&A) activity accelerated
significantly.
As specialist investors, we are perpetually optimistic about
M&A. That said, 2021 was clearly a down year for M&A and
the pace slowed even more at the beginning of 2022. However, during
the first half of the calendar year we noted that large
capitalisation pharmaceutical executives were particularly vocal
about the need for additional M&A, noting looming patent
expirations across the industry in 2025 and beyond. This talk
finally turned into action and a material inflection in M&A
finally emerged in the biopharmaceutical sector in June 2022 that carried well into September. The
number of deals reported through mid-October
2022 was tracking above a 10-year high (2020) with the
highest annual average deal value in recent memory.
In turn, the Company’s performance also inflected, not only
through a direct contribution from specific M&A targets,
but also through the rising tide of the U.S. Biotechnology XBI
ETF. Biotechnology stocks further shook-off the macro overhang that
had persisted for well over a year. A number of positive clinical
catalysts (Alzheimer’s disease, oncology, orphan disorders, among
others) occurred in this four-month period which saw share prices
respond accordingly, a phenomenon that was lacking in the previous
15 months. As a result, absolute and relative performance moved
higher with net asset value returns of 11.0% for the four-month
period of June through September
2022, outperforming the Benchmark by almost 9%.
Overall, we are pleased to update the Company’s performance
since inception, as of 28 April 1995,
where the Company’s net asset value has posted a 4,362%
return, or an average of 14.9% per annum through 30 September 2022. This compares to a Benchmark
return of 2,181% and 12.1% over the same investment horizon. This
compares to the FTSE All-Share Index return of +505% and +6.8% over
the same investment horizon.
Major Contributors to Performance
The top five contributors to absolute performance were a
combination of therapeutic and non-therapeutic stocks, but the
impact of M&A in the biopharmaceutical sector on performance
was an undeniable feature.
The largest contributor in the six-month period was Global
Blood Therapeutics. The California based small-mid-cap biotechnology
company focuses on clinical medicines used to treat blood-based
disorders, such as sickle cell disease (SCD). The company was
acquired by Pfizer in an announced transaction in
August 2022. The agreed upon price
was for a total enterprise value of U.S.$5.4
billion, a 100% premium to the unaffected share price. In
addition to an already marketed product for the treatment of SCD,
Oxbryta (voxelotor), Pfizer also gained important pipeline
assets, including GBT601, an oral, once-daily, next-generation
sickle haemoglobin (HbS) polymerisation inhibitor in the Phase 2
portion of a Phase 2/3 clinical study. GBT601 has the potential to
be a best-in-class agent targeting improvement in both haemolysis
and frequency of vaso-occlusive crisis (VOC). Another promising
pipeline asset is inclacumab, a fully human monoclonal antibody
targeting P-selectin which is being evaluated in two Phase 3
clinical trials as a potential quarterly treatment to reduce the
frequency of VOCs and to reduce hospital readmission rates due to
VOCs. The transaction officially closed in early October 2022.
The second largest contributor to performance was Humana,
one of the largest and pre-eminent managed care companies in the
U.S. Following a negative update in January
2022, that Medicare Advantage enrolment would be below
expectations, Humana’s primary goal for the rest of 2022 had
been to return to market-leading growth while maintaining or
improving margins. Subsequently, the company unveiled an ambitious
U.S.$1 billion value creation plan
and has steadily executed on that plan, with better-than-expected
quarterly earnings reports throughout the remainder of 2022.
Additionally, in September 2022, the
company hosted an investor event in which they announced a
long-term guidance target of U.S.$37.00 in earnings per share for 2025, with
subsequent earnings growth of 14% or better. This news was well
received by investors.
Another key contributor of import was Shanghai Bio-Heart
Biological Technology, a cardiovascular medical device startup
in China that held its IPO in late
2021. The company sells two product lines: Renal Denervation (RDN)
and Bioresorbable Vascular Scaffold System (BVS). Together, these
technologies address the unmet medical needs of Chinese patients
for the treatment of coronary and peripheral artery diseases and
uncontrolled hypertension. Bio-Heart’s line of RDN products
is a “best-in-class” product in China, with a unique catheter design which is
the only one that can be inserted by both radial artery and femoral
artery (unlike the competition). The investment into the company
was an unquoted investment. The company listed on the Hong Kong
Exchange in December 2021 at
HKD 21.25, peaked at HKD 75.55,
before closing on 30 September 2022
at HKD 59.00, a return of +178%.
Turning Point Therapeutics is another California based small-mid-capitalisation
biotechnology company that was acquired during the period. In
June 2022, Bristol-Myers Squibb announced a definitive
agreement to acquire the company for a total equity value of
U.S.$4.1 billion, representing a
+125% premium to the previous closing share price. Turning Point
Therapeutics is a clinical-stage precision oncology company
with a pipeline of investigational medicines designed to target the
most common mutations associated with oncogenesis. Their lead
asset, repotrectinib, is a next generation, potential best-in-class
tyrosine kinase inhibitor, targeting the ROS1 and NTRK oncogenic
drivers of non-small cell lung cancer (NSCLC) and other advanced
solid tumours. Repotrectinib is expected to be approved in the U.S.
in the second half of 2023 and become a new standard of care for
patients with ROS1-positive NSCLC in the first line setting. The
merger transaction closed in the third quarter of 2022.
BioMarin Pharmaceutical, yet another California based small-mid-capitalisation
biotechnology company, rounds out the top five contributors. The
company is well known for developing and commercialising
therapeutic enzyme products but has more recently added efforts in
gene therapy. Their lead asset, Roctavian (valoctocogene
roxaparvovec), is the first gene therapy for the treatment of
severe haemophilia A. A recent approval for Roctavian in
Europe (August 2022) and an imminent submission to the
U.S. Food & Drug Administration (FDA) (confirmed by the company
in October 2022), helped push the
share price higher in the reported period. Additionally, the
company’s new product launch for achondroplasia, Voxzogo
(vosoritide), has been very successful. Multiple upward sales
revisions for Voxzogo through 2022 was also an important tailwind
for the share price.
Major Detractors from Performance
Investments that experienced negative returns were very diverse
in nature, including both sub-sector and geographic diversity, but
all stocks seemingly faced idiosyncratic events that pressured
their respective share prices.
Horizon Therapeutics is a U.S. based specialty
pharmaceutical company that presided over one of the most
successful drug launches ever in 2020. Tepezza (teprotumumab) was
developed by the company to treat “TED” or thyroid eye disease, a
painful, disfiguring, and debilitating disorder of the musculature
of the eye. Launched in January 2020,
the drug was well on its way to blockbuster status despite the
commercial headwinds of the COVID-19 pandemic. Despite a temporary
government-mandated shutdown in the manufacturing of Tepezza due to
the prioritisation of COVID-19 vaccine production in early 2021,
the re-launch of the product in April
2021 exceeded expectations. Whilst this success continued
into early 2022, the sales growth for Tepezza then began to
unexpectedly flatten, and the company reported second quarter sales
that were disappointing and full year sales guidance was lowered.
Additionally, investors learned that a key study (Tepezza usage in
chronic patients) was delayed into 2023. As a result, the stock
fell. We exited the position as the company pondered new marketing
initiatives and increased spend to re-invigorate Tepezza sales in
2023, whilst awaiting trial results for the chronic indication.
One of the true pioneers of robotic-assisted surgery is
Intuitive Surgical, a medical equipment company based in
California that developed the da
Vinci Surgical System – a combination of software, hardware, and
optics that allows doctors to perform robotically aided surgery
from a remote console. In recent months, tightening economic
conditions and the rising interest rate environment have fuelled
investor concerns around a slowdown in the hospital capital
equipment spending cycle. In addition, growth stocks with high P/E
based valuations have come under pressure as investors have weighed
the impact of rising interest rates on discounted cash flow-based
valuation models. Both factors have adversely impacted the
company’s share price. On the positive side, Intuitive
Surgical’s procedure volumes have continued to grow at a very
strong rate, which over time should increase current system
utilisation levels and result in hospitals acquiring additional
systems. Also, heightened research and development (R&D) levels
over the past several years and historical system launch timelines
suggest the company is on the verge of another new system launch,
an event that would be a strong catalyst for Intuitive shares.
The French global pharmaceutical company, Sanofi, is a
worldwide leader in the treatment of inflammatory diseases, orphan
medicines, and vaccine development. However, increasing investor
concerns over product liability claims from a drug that was first
approved in the 1980s took the stock lower in the reported period.
Zantac (ranitidine) was first launched by GSK in 1983 as a novel
medication for the treatment of stomach ulcers and soon became one
of the bestselling prescription medications of its era. The
combination of well-established efficacy and safety provided the
confidence to the FDA to approve over the counter (OTC) versions of
Zantac in 2004. Sanofi subsequently acquired the OTC marketing
rights to Zantac from Boehringer Ingelheim in 2017. However, On
September 13, 2019, the FDA issued a
statement alerting the public that some ranitidine medicines,
including OTC Zantac, contained a nitrosamine impurity called
N-nitrosodimethylamine (NDMA) at low levels. NDMA, at certain
levels of exposure, is considered a “probable” human carcinogen.
With insufficient evidence as to the immediate risk posed to
individuals taking Zantac, the agency did not institute a recall.
Nevertheless, Sanofi, “out of an abundance of caution”
issued a voluntary recall of all Zantac products they marketed in
the U.S. and Canada in 2019. As is
customary in the U.S., an onslaught of lawsuits quickly began to
pile up against Sanofi (and all other manufacturers). Yet
inexplicably, three years later on 11 August
2022, despite no new news or headlines, a sudden and rapid
rise of investor concerns over imminent legal decisions around
Sanofi’s potential financial liability led to a precipitous
fall in the company’s share price. Whilst the company responded
swiftly and strongly with a very rational defence through a
comprehensive press release, the share price remained depressed. We
viewed the share price drop as excessive and not representative of
any future liabilities, if any.
The medical technology company, Edwards Lifesciences, is
a developer of tissue replacement heart valves, and more
specifically transcatheter heart valves (THV). The company’s
current valve portfolio is largely comprised of transcatheter
aortic heart valves (TAVR), a market which has been growing solidly
in the double-digit range but experienced some disruption in the
second quarter of the year due to medical imaging agent shortages
and elevated summer vacation schedules for physicians. This has
fuelled investor concerns that the market is maturing and is one of
the primary reasons for prolonged weakness in the share price
during the reported period. Other headwinds on the stock were
mostly macro in nature, including the negative sentiment for growth
stocks and rising interest rates. That said, whilst some investors
remain concerned that the slowdown in the TAVR market will
continue, we believe the recent slowdown is more one time in
nature. Moreover, as the company enters 2023, a significant new
product cycle in the transcatheter mitral heart valve (TMVR) market
will launch, which has the potential to accelerate top line
growth.
Located in the Pacific-Northwest of the United States, NanoString
Technologies is a life science tools company that develops
technology for gene expression and spatial biology analysis (the
study of human tissues within their own 2D or 3D context, a new
frontier of molecular biology). However, the company reported
negative preliminary first quarter results in April, due to uneven
quarterly sales execution, as well as negative impacts from a
re-alignment of the commercial team. The stock fell in response,
and we exited the position. The share price continued to sell off
into the end of the reported period.
Derivative Strategy
The Company has the ability to use equity swaps and options.
During the half year the Company employed single stock equity swaps
to gain exposure to emerging market Chinese and Indian stocks. In a
difficult market environment for emerging market securities, these
detracted £21.8m from performance.
In addition, the Company invested in a customised tactical
basket swap looking to take advantage of depressed valuations in
small and mid-capitalisation therapeutics companies that, in our
view, would be attractive acquisition targets for larger companies.
Merger activity has started to increase during the period and this
tactical basket contributed gains of £5.1m despite unprecedented
market turmoil.
Further explanation regarding swaps can be found in the
Glossary.
Leverage Strategy
Historically, the typical leverage level employed by the Company
has been in the mid-to-high teens range. Considering the market
volatility during the past three financial years, we have, more
recently, used leverage in a more tactical fashion. For example,
around the beginning of the COVID-19 pandemic in March 2020 after the dramatic “V”-shape market
recovery of April 2020, leverage was
significantly reduced by over 10% month-over-month, to 3% and
ultimately to 1% in May 2020. Another
example includes lowered leverage ahead of and into the U.S.
Presidential election, under the threat of a Democratic “sweep” of
the U.S. Congress.
More recently, we have increased leverage back into the
low-to-mid-teens, a reflection of our overall bullishness on the
portfolio, a turn in biotechnology stocks, and the relative outlook
for healthcare ahead of a potential recession. One caveat that
keeps us from extending leverage even further, is the volatile and
uncertain macro backdrop, either economic in nature or even further
geopolitical unsettlement in the east.
Sector Developments
Whilst 2021 was a difficult year for many parts of healthcare
equities given excessive macro headwinds, 2022 saw many of these
overhangs begin to lift. Certainly, one of those overhangs was the
perception that the FDA was “rudderless”; without a commissioner
since January 2021 and still
pressured by the demands brought by the COVID-19 pandemic. However,
in February 2022, a new (albeit
recycled) commissioner was finally confirmed. Dr. Robert Califf, a world?renowned cardiologist and
previous FDA commissioner in the Obama Administration, was approved
by the U.S. Senate just ahead of the Company’s current financial
year. He is viewed as “industry friendly” and we expect his efforts
to continue to align with the impressive productivity that the FDA
has achieved over the past five plus years.
Also of import at the FDA is the continued record-breaking pace
of new drug approvals. With another 50 novel prescription medicines
approved by the agency in 2021, the past five years have been the
most productive period in the past two decades. Overall, we think
investor perception of the FDA is going to improve immensely and
any misperception of a slow down at the agency should continue to
diminish.
Perhaps the largest sector development that has occurred during
the period under review is new legislation that was approved by the
U.S. Senate and signed into law in July
2022 – the Inflation Reduction Act of 2022 (“IRA”) – which
settled concerns about prescription drug price reform. The threat
of drug price reform in the U.S. has been a persistent source of
uncertainty and negative sentiment, an overhang for the
biopharmaceutical sector for decades, but particularly over the
past two years since President Biden took office. Given the narrow
Democratic congressional majorities, the IRA was modest in scope
and included a mix of positive and negative factors for the
biopharmaceutical industry.
On the negative side, a selected group of up to 10 drugs per
year will be subject to price negotiation beginning in 2026. The
legislation narrowly focuses on older drugs (9 to 13 years after
FDA approval) with no generic competitors. As a result of these
restrictions, we estimate a modest mid-single-digit reduction in
pharmaceutical industry revenues in the coming decade.
On the positive side, the IRA provided additional funding to
limit “out-of-pocket” spending on drugs for Medicare beneficiaries,
which should increase the affordability (and usage) of many
medicines. Additionally, the IRA includes a drug price inflation
cap, which will require pharmaceutical companies to pay rebates to
Medicare if they increase drug prices faster than inflation or face
penalties for doing so. We view this as neutral as price increases
have not been a major revenue driver for the industry for some
time. In fact, this may be construed as a positive as it will curb
some small company bad actors who sometimes grab headlines for
egregious price increases. Overall, we view the IRA as very
manageable for the biopharmaceutical sector, with limited impact on
profits into the end of the decade, and perhaps the issue of drug
price reform can now begin to dissipate as an overhang on the
sector.
U.S. Drug Price Reform Impact: Mixed
but Manageable
We are perennial optimists about the pace of M&A activity in
the biopharmaceutical sector. With the insatiable need for the
large capitalisation companies to continue to fill their pipelines
and replace revenues lost to patent expirations, this is a logical
view. However, there is, ultimately, a natural ebb and flow to
M&A activity due to a variety of external factors. With that,
2021 was a down year for M&A and there was a dearth of activity
at the beginning of 2022. However, come mid?year, M&A activity
has virtually exploded. With the historic small-mid-capitalisation
biotechnology stock sell-off and large capitalisation executives
talking up the need to execute deals, a plethora of transactions
began in earnest, inflecting in June
2022 and beyond. We expect total deal volumes to eclipse
recent highs, with significant average deal value and premiums
paid. We expect this recent acceleration to continue into 2023, as
evidenced by this recent comment by Johnson & Johnson CFO
Joseph Wolk and their most recent
quarterly call (18 October 2022) when
asked about M&A: “We still hold U.S.$34
billion of cash, which positions us extremely well to
continue exercising that lever of capital allocation around
acquisitions or significant collaborations, going forward. So, our
priorities have not changed. In fact, maybe we are even a little
bit more bullish and eager to do something (M&A wise)”.
Across healthcare, innovation remains a critical theme, and the
biopharmaceutical sector continues to deliver essential new
therapies for unmet medical needs at a blistering pace. In
particular, two highly anticipated clinical catalysts occurred this
period for which investor expectations were decidedly negative, yet
both were notably positive. The first was Alnylam
Pharmaceuticals’ Phase 3 study of Onpattro (patisiran) in the
treatment of patients with amyloidosis-induced cardiomyopathy, a
rare disease that weakens heart muscle. Data showed unequivocal
improvement in walk test scores and quality of life for these very
sick patients.
More dramatically, Eisai and Biogen released positive
results in a Phase 3 Alzheimer’s disease trial for the
beta?amyloid?targeted antibody, lecanemab, that showed a remarkable
27% reduction in cognitive decline after 18 months. This data
was precedent setting; the first registrational trial ever to show
true disease modification in the treatment of Alzheimer’s disease.
The benefits of lecanemab therapy began to appear as early as six
months – and the benefit continued to increase at 12 and 18 months
– suggesting a duration of efficacy beyond the parameters of the
trial. Moreover, the results were highly statistically significant,
indicating that this effect should be very reproducible across the
spectrum of patients with mild-to-moderate disease and provide
confidence to prescribing physicians and caregivers that a
clinically meaningful impact will be observed. Finally, we note
that the safety of lecanemab also exceeded expectations, with the
incidence of symptomatic brain swelling being exceptionally low.
The full data set will be released in late November 2022 and is likely sufficient to warrant
FDA approval. Overall, we view this result as an unequivocal win
for the companies and patients, but a big win for the healthcare
sector as the consensus expectation was that this trial would
fail.
Importantly, this clinical trial further validates the amyloid
beta hypothesis for treating Alzheimer’s, increasing the odds of
success for similar therapies from Eli Lilly, and others. Based on
our team’s proprietary assessment of the molecule and Phase 3
clinical trial design, the portfolio was well positioned for this
event, with important equity positions in Eisai and
Roche. Whilst Roche disclosed in November 2022 that their antibody failed to show
a statistical difference in treated patients, we do note there was
a positive trend for clinical benefit versus placebo in patients
receiving Roche’s experimental medicine, a modest but
supportive observation. Dementia from Alzheimer’s is a genuinely
staggering unmet medical need, with over six million afflicted in
the U.S. alone and we remain optimistic about the commercial
opportunity new therapies will present.
Outlook
Finally, we note that the equity markets remain challenging due
to many volatile factors, including rising interest rates,
accelerating inflation, currency fluctuations, and significant
geopolitical risks. With recession risk looming, we take this
opportunity to remind investors of the defensive qualities among
various healthcare sub-sectors. Overall, we view the
biopharmaceutical sector as the most resilient to recessionary
pressures given consistent demand across economic volatility and
prior track record of maintaining revenue growth during economic
slowdowns.
Moreover, the history of share price outperformance during prior
downturns is evident for therapeutic stocks as the outlook for
these companies is primarily driven by their ability to bring new
drugs to market to meet unmet medical needs – either
through internal R&D or external M&A. Government and
private payers have shown consistent willingness to reimburse new
prescription medicines regardless of the economic climate. Whilst
there may be moderate utilisation and pricing downside, we expect
the extent of the headwinds to be manageable, particularly when
comparing with those during the 2008 period and when considering
the group’s ability to maintain margins during the 2008 downturn.
To note, a positive outlook for healthcare is evidenced by the
group’s outperformance vs. the S&P 500 in each of the last four
recessions.
Sven H. Borho and Trevor M. Polischuk
OrbiMed Capital LLC
Portfolio Manager
22 November 2022
Principal Stock Contributors to and
Detractors from Absolute Net Asset Value Performance
For the Six Months Ended 30 September
2022
|
|
|
|
Contribution |
|
|
|
Contribution |
per
share* |
Top Five
Contributors |
Country |
Sector |
£’000 |
£ |
Global Blood
Therapeutics** |
USA |
Biotechnology |
30,805 |
0.5 |
Humana |
USA |
Healthcare Services |
27,962 |
0.4 |
Shanghai Bio-Heart
Biological Technology |
China |
Healthcare Equipment/Supplies |
22,129 |
0.3 |
Turning Point
Therapeutics** |
USA |
Biotechnology |
19,464 |
0.3 |
BioMarin
Pharmaceutical |
USA |
Biotechnology |
18,353 |
0.3 |
Top Five
Detractors |
|
|
|
|
Nanostring
Technologies** |
USA |
Life
Sciences Tools/Services |
(8,766) |
(0.1) |
Edwards
Lifesciences |
USA |
Healthcare Equipment/Supplies |
(12,316) |
(0.2) |
Sanofi |
USA |
Pharmaceuticals |
(16,586) |
(0.3) |
Intuitive
Surgical |
USA |
Healthcare Equipment/Supplies |
(26,149) |
(0.4) |
Horizon
Therapeutics** |
USA |
Pharmaceuticals |
(29,324) |
(0.5) |
*Based on 65,045,376 shares being the weighted average number in
issue during the period.**Not held at 30
September 2022
Source: Frostrow Capital LLP
Portfolio
As At 30 September 2022
|
|
Market value |
% of |
Investments |
Country |
£’000 |
investments |
Bristol-Myers Squibb |
USA |
139,570 |
6.0 |
AstraZeneca |
United Kingdom |
138,762 |
6.0 |
Humana |
USA |
115,701 |
5.0 |
UnitedHealth Group |
USA |
101,578 |
4.4 |
Boston Scientific |
USA |
98,263 |
4.2 |
BioMarin Pharmaceutical |
USA |
80,246 |
3.5 |
Pfizer |
USA |
77,273 |
3.3 |
Intuitive Surgical |
USA |
76,266 |
3.3 |
Vertex Pharmaceuticals |
USA |
76,092 |
3.3 |
Roche Holding |
Switzerland |
73,586 |
3.2 |
Top 10 investments |
|
977,337 |
42.2 |
AbbVie |
USA |
72,206 |
3.1 |
Thermo Fisher Scientific |
USA |
71,597 |
3.1 |
Sanofi |
France |
71,124 |
3.1 |
Stryker |
USA |
69,458 |
3.0 |
Shanghai Bio-Heart Biological
Technology |
China |
68,686 |
3.0 |
Seagen |
USA |
62,055 |
2.7 |
Edwards Lifesciences |
USA |
59,497 |
2.6 |
Mirati Therapeutics |
USA |
57,977 |
2.5 |
Neurocrine Biosciences |
USA |
52,171 |
2.2 |
Sarepta Therapeutics |
USA |
50,600 |
2.2 |
Top 20 investments |
|
1,612,708 |
69.7 |
Argenx |
Netherlands |
48,636 |
2.1 |
Evolent Health |
USA |
47,190 |
2.0 |
Caris Life Science (unquoted) |
USA |
46,029 |
2.0 |
Eisai |
Japan |
42,758 |
1.8 |
Natera |
USA |
42,263 |
1.8 |
Daiichi Sankyo |
Japan |
40,874 |
1.8 |
Guardant Health |
USA |
35,881 |
1.5 |
SI-BONE |
USA |
29,669 |
1.3 |
Progyny |
USA |
28,912 |
1.2 |
Alnylam Pharmaceuticals |
USA |
24,179 |
1.0 |
Top 30 investments |
|
1,999,099 |
86.2 |
Tenet Healthcare |
USA |
24,087 |
1.0 |
Shanghai Kindly Medical
Instruments |
China |
20,556 |
0.9 |
Crossover Health (unquoted) |
USA |
19,399 |
0.8 |
uniQure |
Netherlands |
18,963 |
0.8 |
Chugai Pharmaceutical |
Japan |
18,684 |
0.8 |
Dingdang Health Technology
Group |
China |
18,073 |
0.8 |
EDDA (unquoted) |
China |
17,803 |
0.8 |
WuXi AppTec |
China |
17,378 |
0.7 |
API Holdings (unquoted) |
India |
15,943 |
0.7 |
Ruipeng Pet Group (unquoted) |
USA |
15,907 |
0.7 |
Top 40 investments |
|
2,185,892 |
94.2 |
|
|
Market value |
% of |
Investments |
Country |
£’000 |
investments |
Beijing Yuanxin Technology
(unquoted) |
USA |
15,539 |
0.7 |
Joinn Laboratories China |
China |
15,016 |
0.6 |
Visen Pharmaceutical (unquoted) |
China |
14,020 |
0.6 |
RiMAG (unquoted) |
USA |
12,247 |
0.5 |
Arrail Group |
China |
11,975 |
0.5 |
Xenon Pharmaceuticals |
Canada |
11,577 |
0.5 |
RxSight |
USA |
9,930 |
0.4 |
Apollo Hospitals Enterprise |
India |
9,094 |
0.4 |
Shanghai Fosun Pharmaceutical
Group |
China |
8,673 |
0.4 |
Alphamab Oncology |
China |
8,158 |
0.3 |
Top 50 investments |
|
2,302,121 |
99.1 |
Ionis Pharmaceuticals |
USA |
7,774 |
0.3 |
MeiraGTx |
USA |
7,162 |
0.3 |
Shenzhen Hepalink Pharmaceutical
Group |
China |
6,725 |
0.3 |
MabPlex International
(unquoted) |
China |
6,583 |
0.3 |
New Horizon Health |
China |
5,824 |
0.2 |
Ikena Oncology |
USA |
5,084 |
0.2 |
Iovance Biotherapeutics |
USA |
5,055 |
0.2 |
Abbisko Cayman |
China |
3,270 |
0.1 |
Achilles Therapeutics |
USA |
2,617 |
0.1 |
Passage |
USA |
2,341 |
0.1 |
Top 60 investments |
|
2,354,556 |
101.2 |
Burning Rock Biotech |
China |
1,481 |
0.1 |
Harpoon Therapeutics |
USA |
1,266 |
0.1 |
Clover Biopharmaceuticals |
China |
1,232 |
0.1 |
MicroTech Medical Hangzhou |
China |
633 |
– |
Peloton Interactive
(DCC*-unquoted) |
USA |
538 |
– |
Vor BioPharma |
USA |
399 |
– |
Total equity investments |
|
2,360,105 |
101.5 |
OTC Equity Swaps^ |
|
|
|
Healthcare M&A Target Swap |
USA |
112,322 |
4.8 |
Apollo Hospitals |
India |
36,951 |
1.6 |
Pharmaron Beijing |
China |
17,587 |
0.8 |
Ningbo Menudo Pharmaceutical |
China |
11,178 |
0.5 |
Air Eye Hospital |
China |
9,435 |
0.4 |
Less: Gross exposure on financed
swaps |
|
(223,740) |
(9.6) |
Total OTC Swaps |
|
(36,267) |
(1.5) |
Total investments including OTC
Swaps |
|
2,323,838 |
100.0 |
* DCC = deferred contingent
consideration.
^ See Glossary for further
information on swaps.
Summary
|
Market value |
% of |
Investments |
£’000 |
investments |
Quoted equities |
2,196,097 |
94.4 |
Unquoted equities |
164,008 |
7.1 |
Equity swaps |
(36,267) |
(1.5) |
Total of all investments |
2,323,838 |
100.0 |
Interim Management Report
Principal Risks and Uncertainties
The Directors continue to review the Company’s key risk
register, which identifies the risks and uncertainties that the
Company is exposed to, and the controls in place and the actions
being taken to mitigate them.
A review of the half year and the outlook for the Company can be
found in the Chair of the Board’s Statement and the Review of
Investments. The principal risks and uncertainties faced by the
Company include the following:
· Exposure to market risks and
those additional risks specific to the sectors in which the Company
invests, such as political interference in drug pricing.
· The Company uses leverage (both
through derivatives and gearing) the effect of which is to amplify
the gains or losses the Company experiences.
· Macro events may have an adverse
impact on the Company’s performance by causing exchange rate
volatility, changes in tax or regulatory environments, and/or a
fall in market prices. Emerging markets, which a portion of the
portfolio is exposed to, can be subject to greater political
uncertainty and price volatility than developed markets.
· Unquoted investments are more
difficult to buy, sell or value and so changes in their valuations
may be greater than for listed assets.
· The risk that the individuals
responsible for managing the Company’s portfolio may leave their
employment or may be prevented from undertaking their duties.
· The risk that, following the
failure of a counterparty, the Company could be adversely affected
through either delay in settlement or loss of assets.
· The Board is reliant on the
systems of the Company’s service providers and as such disruption
to, or a failure of, those systems could lead to a failure to
comply with law and regulations leading to reputational damage
and/or financial loss to the Company.
· The risk that investing in
companies that disregard Environmental, Social and Governance (ESG)
factors will have a negative impact on investment returns and also
that the Company itself may become unattractive to investors if ESG
is not appropriately considered in the Portfolio Manager’s decision
making process.
· The risk, particularly if the
investment strategy and approach are unsuccessful, that the Company
may underperform, resulting in the Company becoming unattractive to
investors and a widening of the share price discount to the net
asset value per share. Also, falls in stock markets, such as those
experienced as a consequence of the COVID-19 pandemic, and the risk
of a global recession, are likely to adversely affect the
performance of the Company’s investments.
Further information on these risks is given in the Annual Report
for the year ended 31 March 2022. The
Board has noted that global markets are continuing to experience
unusually high levels of uncertainty and heightened geopolitical
risks. Russia’s invasion of Ukraine has created near-term risks for
markets such as high energy prices, rising food prices and also
disrupted supply chains, contributing to a substantial increase in
global inflation. Against a background of rising interest rates and
slowing economic growth, risks associated with leverage and
illiquid assets, especially in combination, have become more
elevated. The Board has investment guidelines in place to mitigate
these risks.
Related Party Transactions
During the first six months of the current financial year no
material transactions with related parties have taken place which
have affected the financial position or the performance of the
Company during the period.
Going Concern
The Directors believe, having considered the Company’s
investment objectives, risk management policies, capital management
policies and procedures, the nature of the portfolio and
expenditure projections, that the Company has adequate resources,
an appropriate financial structure and suitable management
arrangements in place to continue in operational existence for the
foreseeable future and, more specifically, that there are no
material uncertainties relating to the Company that would prevent
its ability to continue in such operational existence for at least
12 months from the date of the approval of this half yearly
financial report. For these reasons, they consider there is
reasonable evidence to continue to adopt the going concern basis in
preparing the accounts. In reviewing the position as at the date of
this report, the Board has considered the guidance issued by the
Financial Reporting Council.
As part of their assessment, the Directors have given careful
consideration to the next continuation vote to be held in 2024. As
previously reported, stress testing was carried out in May 2022, which modelled the effects of
substantial falls in markets and significant reductions in market
liquidity, on the Company’s net asset value, its cash flows and its
expenses.
Directors’ Responsibilities
The Board of Directors confirms that, to the best of its
knowledge:
- the condensed set of financial statements contained within the
Half Year Report have been prepared in accordance with Financial
Reporting Standard 104 (Interim Financial Reporting); and
- the interim management report includes a true and fair review
of the information required by:
- DTR 4.2.7R of the Disclosure Guidance and Transparency Rules,
being an indication of important events that have occurred during
the first six months of the financial year and their impact on the
condensed set of financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the year; and
- DTR 4.2.8R of the Disclosure Guidance and Transparency Rules,
being related party transactions that have taken place in the first
six months of the current financial year and that have materially
affected the financial position or performance of the entity during
that period; and any changes in the related party transactions
described in the last annual report that could do so.
The Half Year Report has not been reviewed or audited by the
Company’s auditors.
This Half Year Report contains certain forward-looking
statements. These statements are made by the Directors in good
faith based on the information available to them up to the date of
this report and such statements should be treated with caution due
to the inherent uncertainties, including both economic and business
risk factors, underlying any such forward?looking information.
For and on behalf of the Board
Doug
McCutcheon
Chair
22 November 2022
Income Statement
For the Six Months Ended 30 September
2022
|
(Unaudited) |
(Unaudited) |
|
Six months ended |
Six months ended |
|
30 September 2022 |
30 September 2021 |
|
Revenue |
Capital |
|
Revenue |
Capital |
|
|
Return |
Return |
Total |
Return |
Return |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Gains/(losses) on
investments |
– |
82,697 |
82,697 |
– |
(5,449) |
(5,449) |
Foreign exchange
losses |
– |
(15,052) |
(15,052) |
– |
(4,482) |
(4,482) |
Income from investments
(note 2) |
9,295 |
– |
9,295 |
11,246 |
– |
11,246 |
AIFM, portfolio
management, and performance fees (note 3) |
(444) |
(8,430) |
(8,874) |
(483) |
9,706 |
9,223 |
Other expenses |
(579) |
(22) |
(601) |
(467) |
– |
(467) |
Net return/(loss)
before finance charges and taxation |
8,272 |
59,193 |
67,465 |
10,296 |
(225) |
10,071 |
Finance charges |
(61) |
(1,157) |
(1,218) |
(16) |
(308) |
(324) |
Net return/(loss)
before finance |
8,211 |
58,036 |
66,247 |
10,280 |
(533) |
9,747 |
Taxation |
(323) |
– |
(323) |
(1,287) |
– |
(1,287) |
Net return/(loss)
after taxation |
7,888 |
58,036 |
65,924 |
8,993 |
(533) |
8,460 |
Return/(loss) per
share (note 4) |
12.1p |
89.2p |
101.3p |
13.8p |
(0.8)p |
13.0p |
The “Total” column of this statement is the Income Statement of
the Company. The “Revenue” and “Capital” columns are supplementary
to this and are prepared under guidance published by the
Association of Investment Companies.
All revenue and capital items in the above statement derive from
continuing operations.
The Company has no recognised gains and losses other than those
shown above and therefore no separate Statement of Total
Comprehensive Income has been presented.
The accompanying notes are an integral part of these
statements.
Statement of Changes in Equity
For the Six Months Ended 30 September
2022
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2022 |
2021 |
|
£’000 |
£’000 |
Opening shareholders’
funds |
2,268,233 |
2,381,425 |
Issue of new
shares |
– |
41,676 |
Shares purchased for
treasury |
(36,086) |
– |
Return for the
period |
65,924 |
8,460 |
Dividends paid –
revenue |
(12,721) |
(10,085) |
Closing
shareholders’ funds |
2,285,350 |
2,421,476 |
Statement of Financial Position
As at 30 September 2022
|
(Unaudited) |
(Audited) |
|
30
September |
31
March |
|
2022 |
2022 |
|
£’000 |
£’000 |
Fixed
assets |
|
|
Investments |
2,360,105 |
2,379,848 |
Derivatives – OTC
swaps |
2,189 |
283 |
|
2,362,294 |
2,380,131 |
Current
assets |
|
|
Debtors |
3,367 |
14,724 |
Cash and cash
equivalents |
55,105 |
26,594 |
|
58,472 |
41,318 |
Current
liabilities |
|
|
Creditors: amounts
falling due within one year |
(96,960) |
(147,804) |
Derivative – OTC
Swaps |
(38,456) |
(5,412) |
|
(135,416) |
(153,216) |
Net current
liabilities |
(76,944) |
(111,898) |
Total net
assets |
2,285,350 |
2,268,233 |
Capital and
reserves |
|
|
Ordinary share capital
– (note 5) |
16,265 |
16,385 |
Capital redemption
reserve |
8,341 |
8,221 |
Share premium
account |
841,599 |
841,599 |
Capital reserve |
1,402,988 |
1,381,038 |
Revenue reserve |
16,157 |
20,990 |
Total shareholders’
funds |
2,285,350 |
2,268,233 |
Net asset value per
share – (note 6) |
3,550.7p |
3,465.2p |
Cash Flow Statement
For the Six Months Ended 30 September
2022
|
|
(Unaudited) |
(Unaudited) |
|
|
Six months
ended |
Six months
ended |
|
|
30
September |
30
September |
|
|
2022 |
2021 |
|
Note |
£’000 |
£’000 |
Net cash
inflow/(outflow) from operating activities |
8 |
3,678 |
(13,453) |
Purchases of
investments and derivatives |
|
(460,385) |
(540,411) |
Sales of investments
and derivatives |
|
580,399 |
384,014 |
Realised losses on
foreign exchange |
|
(14,343) |
(1,770) |
Net cash
inflow/(outflow) from investing activities |
|
105,671 |
(158,167) |
Issue of shares |
|
– |
44,253 |
Shares repurchased |
|
(36,086) |
– |
Equity dividends
paid |
|
(12,721) |
(10,085) |
Interest paid |
|
(1,218) |
(324) |
Net cash
(outflow)/inflow from financing activities |
|
(50,025) |
33,844 |
Decrease/(increase)
in net debt |
|
59,324 |
(137,776) |
Cash flows from operating activities includes interest received
of £592,000 (2021: £780,000) and dividends received of £9,235,000
(2021: £10,650,000).
Reconciliation of Net Cash Flow
Movement to Movement in Net Debt
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2022 |
2021 |
|
£’000 |
£’000 |
Decrease/(increase) in
net debt resulting from cashflows |
59,324 |
(137,776) |
Losses on foreign
currency cash and cash equivalents |
(709) |
(2,712) |
Movement in net
debt in the period |
58,615 |
(140,488) |
Net debt at 1
April |
(87,003) |
(20,301) |
Net debt at period
end |
(28,388) |
(160,789) |
Notes to the Financial Statements
1. Accounting Policies
The condensed Financial Statements for the six months to
30 September 2022 comprise the
financial statements together with the related notes below. They
have been prepared in accordance with FRS 104 ‘Interim Financial
Reporting’, the AIC’s Statement of Recommended Practice published
in February 2021 (‘SORP’) and using
the same accounting policies as set out in the Company’s Annual
Report and Financial Statements at 31 March
2022.
Going Concern
After making enquiries, and having reviewed the Investments,
Statement of Financial Position and projected income and
expenditure for the next 12 months, the Directors have a reasonable
expectation that the Company has adequate resources to continue in
operation for the foreseeable future. The Directors have therefore
adopted the going concern basis in preparing these condensed
financial statements.
Fair Value
Under FRS 102 and FRS 104 investments have been classified using
the following fair value hierarchy:
Level 1 – Quoted market prices in active
markets
Level 2 – Prices of a recent transaction for identical
instruments
Level 3 – Valuation techniques that use:
(i) observable market data; or
(ii) non-observable data
|
Level
1 |
Level
2 |
Level
3 |
Total |
AS AT 30 SEPTEMBER
2022 |
£’000 |
£’000 |
£’000 |
£’000 |
Investments held at
fair value through profit or loss |
2,196,097 |
– |
164,008 |
2,360,105 |
Derivatives: OTC swaps
(assets) |
– |
2,189 |
– |
2,189 |
Derivatives: OTC swaps
(liabilities) |
– |
(38,456) |
– |
(38,456) |
Financial
instruments measured at fair value |
2,196,097 |
(36,267) |
164,008 |
2,323,838 |
|
Level
1 |
Level
2 |
Level
3 |
Total |
AS AT 31 MARCH
2022 |
£’000 |
£’000 |
£’000 |
£’000 |
Investments held at
fair value through profit or loss |
2,207,375 |
– |
172,473 |
2,379,848 |
Derivatives: OTC swaps
(assets) |
– |
283 |
– |
283 |
Derivatives: OTC swaps
(liabilities) |
– |
(5,412) |
– |
(5,412) |
Financial
instruments measured at fair value |
2,207,375 |
(5,129) |
172,473 |
2,374,719 |
2. Income
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2022 |
2021 |
|
£’000 |
£’000 |
Investment income |
9,295 |
11,246 |
Total |
9,295 |
11,246 |
3. Aifm, Portfolio Management and
Performance Fees
|
(Unaudited) |
(Unaudited) |
|
Six months ended |
Six months ended |
|
30 September 2022 |
30 September 2021 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
AIFM fee |
76 |
1,444 |
1,520 |
82 |
1,565 |
1,647 |
Portfolio management
fee |
368 |
6,986 |
7,354 |
401 |
7,617 |
8,018 |
Performance fee charge
for the period* |
– |
– |
– |
– |
(18,888) |
(18,888) |
|
444 |
8,430 |
8,874 |
483 |
(9,706) |
(9,223) |
* During the six months ended
30 September 2021, due to
underperformance against the Benchmark in the period, a reversal of
prior period provisions totalling £18,888,000 occurred.
As at 30 September 2022 no
performance fees were accrued or payable (31
March 2022: nil accrued).
No performance fee could become payable by 30 September 2023.
See the Glossary for further information on the performance
fee.
4. Return/(Loss) Per Share
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2022 |
2021 |
|
£’000 |
£’000 |
The return per share
is based on the following figures: |
|
|
Revenue return |
7,888 |
8,993 |
Capital
return/(loss) |
58,036 |
(533) |
Total
return |
65,924 |
8,460 |
Weighted average
number of shares in issue for the period |
65,053,457 |
65,108,269 |
Revenue return per
share |
12.1p |
13.8p |
Capital return/(loss)
per share |
89.2p |
(0.8)p |
Total return per
share |
101.3p |
13.0p |
The calculation of the total, revenue and capital returns per
ordinary share is carried out in accordance with IAS 33, “Earnings
per Share (as adopted in the EU)”.
5. Share Capital
|
|
|
Total |
|
|
Treasury |
shares |
|
Shares |
shares |
in
issue |
|
number |
number |
number |
Issued and fully paid
at 1 April 2022 |
65,457,246 |
80,509 |
65,537,755 |
Shares purchased for
treasury |
(1,093,997) |
1,093,997 |
– |
Shares cancelled from
treasury |
– |
(478,977) |
(478,977) |
At 30 September
2022 |
64,363,249 |
695,529 |
65,058,778 |
|
|
(Unaudited) |
(Audited) |
|
|
30
September |
31
March |
|
|
2022 |
2022 |
|
|
£’000 |
£’000 |
Issued and fully
paid: |
|
|
|
Nominal value of
ordinary shares of 25p |
|
16,265 |
16,385 |
During the period ended 30 September
2022 1,093,997 Ordinary Shares were bought back by the
Company into treasury at a cost of £36,086,000 (Year ended
31 March 2022: 80,509 bought back at
a cost of £2,544,000) and 478,977 (31 March
2022: nil) shares were cancelled.
6. Net Asset Value Per Share
The net asset value per share is based on the assets
attributable to equity shareholders of £2,285,350,000
(31 March 2022: £2,268,233,000) and on the number of
shares in issue at the period end of 64,363,249 (31 March 2022: 65,457,246).
7. Transaction Costs
Purchase transaction costs for the six months ended 30 September 2022 were £705,000 (six months ended
30 September 2021: £461,000).
Sales transaction costs for the six months ended 30 September 2022 were £592,000 (six months ended
30 September 2021: £403,000).
- Reconciliation of Operating Return to Net Cash
Inflow/(Outflow) from Operating Activities
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2022 |
2021 |
|
£’000 |
£’000 |
Gains before finance
costs and taxation |
67,465 |
10,071 |
(Less: capital
gain)/add: capital loss before finance charges and taxation |
(59,193) |
225 |
Revenue return
before finance charges and taxation |
8,272 |
10,296 |
Expenses charged to
capital |
(8,452) |
9,706 |
Decrease/(increase) in
other debtors |
525 |
(133) |
Increase/(decrease) in
provisions, and other creditors and accruals |
3,422 |
(31,781) |
Net taxation suffered
on investment income |
19 |
(1,293) |
Amortisation |
(108) |
(248) |
Net cash
inflow/(outflow) from operating activities |
3,678 |
(13,453) |
9. Principal Risks and
Uncertainties
The principal risks facing the Company are listed in the Interim
Management Report. An explanation of these risks and how they are
managed is contained in the Strategic Report and note 16 of the
Company’s Annual Report & Accounts for the year ended
31 March 2022.
10. Comparative Information
The condensed financial statements contained in this half year
report do not constitute statutory accounts as defined in section
434 of the Companies Act 2006. The financial information for the
half years ended 30 September 2022
and 30 September 2021 has not been audited or reviewed by the
Company’s auditor.
The information for the year ended 31
March 2022 has been extracted from the latest published
audited financial statements of the Company. Those financial
statements have been filed with the Registrar of Companies. The
report of the auditor on those financial statements was
unqualified, did not include a reference to any matters to which
the auditors drew attention by way of emphasis without qualifying
the report, and did not contain statements under either section
498 (2) or 498 (3) of the Companies Act 2006.
Earnings for the first six months should not be taken as a guide
to the results for the full year.
Glossary of Terms and Alternative
Performance Measures (“APMs”)
Alternative Investment Fund Managers
Directive (“AIFMD”)
Agreed by the European Parliament and the Council of the
European Union and transposed into UK legislation, the AIFMD
classifies certain investment vehicles, including investment
companies, as Alternative Investment Funds (“AIFs”) and requires
them to appoint an Alternative Investment Fund Manager (“AIFM”) and
depositary to manage and oversee the operations of the investment
vehicle. The Board of the Company retains responsibility for
strategy, operations and compliance and the Directors retain a
fiduciary duty to shareholders.
Benchmark
The performance of the Company is measured against the MSCI
World Health Care Index on a net total return, sterling adjusted
basis. (Please see the Glossary).
The net total return is calculated by reinvesting dividends
after the deduction of withholding taxes.
Discount Or Premium (“APM”)
A description of the difference between the share price and the
net asset value per share. The size of the discount or premium is
calculated by subtracting the share price from the net asset value
per share and is usually expressed as a percentage (%) of the net
asset value per share. If the share price is higher than the net
asset value per share the result is a premium. If the share price
is lower than the net asset value per share, the shares are trading
at a discount.
Emerging Biotechnology
Biotechnology companies with a market capitalisation less than
$10 billion.
Equity Swaps
An equity swap is an agreement in which one party (counterparty)
transfers the total return of an underlying equity position to the
other party (swap holder) in exchange for a one-off payment at a
set date. Total return includes dividend income and gains or losses
from market movements. The exposure of the holder is the market
value of the underlying equity position.
Your Company uses two types of equity swap:
· funded, where payment is made on
acquisition. They are equivalent to holding the underlying equity
position with the exception of additional counterparty risk and not
possessing voting rights in the underlying; and,
· financed, where payment is made
on maturity. As there is no initial outlay, financed swaps increase
economic exposure by the value of the underlying equity position
with no initial increase in the investments value – there is
therefore embedded leverage within a financed swap due to the
deferral of payment to maturity.
The Company employs swaps for two purposes:
· To gain access to individual
stocks in the Indian, Chinese and other emerging markets, where the
Company is not locally registered to trade or is able to gain in a
more cost efficient manner than holding the stocks directly;
and,
· To gain exposure to thematic
baskets of stocks (a Basket Swap). Basket Swaps are used to build
exposure to themes, or ideas, that the Portfolio Manager believes
the Company will benefit from and where holding a Basket Swap is
more cost effective and operationally efficient than holding the
underlying stocks or individual swaps.
Inflation Reduction Act 2022
U.S. legislation which became effective in August 2022. It contains a package of measures to
tackle inflation including lower prescription drug and healthcare
costs.
Leverage (“APM”)
Leverage is defined in the AIFMD as any method by which the AIFM
increases the exposure of an AIF. In addition to the gearing limit
the Company also has to comply with the AIFMD leverage
requirements. For these purposes the Board has set a maximum
leverage limit of 140% for both methods. This limit is expressed as
a percentage with 100% representing no leverage or gearing in the
Company. There are two methods of calculating leverage as
follows:
The Gross Method is calculated as total exposure divided by
Shareholders’ Funds. Total exposure is calculated as net assets,
less cash and cash equivalents, adding back cash borrowing plus
derivatives converted into the equivalent position in their
underlying assets.
The Commitment Method is calculated as total exposure divided by
Shareholders’ Funds. In this instance total exposure is calculated
as net assets, less cash and cash equivalents, adding back cash
borrowing plus derivatives converted into the equivalent position
in their underlying assets, adjusted for netting and hedging
arrangements.
See the definition of Equity Swaps (in the Glossary) for more
details on how exposure through derivatives is calculated.
|
As at |
As at |
|
30 September 2022 |
31 March 2022 |
|
Fair
Value |
Exposure* |
Fair
Value |
Exposure* |
|
£’000 |
£’000 |
£’000 |
£’000 |
Investments |
2,360,105 |
2,360,105 |
2,379,848 |
2,379,848 |
OTC equity swaps |
(36,267) |
187,473 |
(5,129) |
135,018 |
|
2,323,838 |
2,547,578 |
2,374,719 |
2,514,866 |
Shareholders’
funds |
|
2,285,350 |
|
2,268,233 |
Leverage % |
|
11.5% |
|
10.9% |
* Calculated in accordance with AIFMD
requirements using the Commitment Method
MSCI World Health Care Index (The
Company’s Benchmark)
The MSCI information (relating to the Benchmark) may only be
used for your internal use, may not be reproduced or redisseminated
in any form and may not be used as a basis for or a component of
any financial instruments or products or indices. None of the MSCI
information is intended to constitute investment advice or a
recommendation to make (or refrain from making) any kind of
investment decision and may not be relied on as such. Historical
data and analysis should not be taken as an indication or guarantee
of any future performance analysis, forecast or prediction. The
MSCI information is provided on an “as is” basis and the user of
this information assumes the entire risk of any use made of this
information. MSCI, each of its affiliates and each other person
involved in or related to compiling, computing or creating any MSCI
information (collectively, the “MSCI Parties”) expressly disclaims
all warranties (including, without limitation, any warranties of
originality, accuracy, completeness, timeliness, non-infringement,
merchantability and fitness for a particular purpose) with respect
to this information. Without limiting any of the foregoing, in no
event shall any MSCI Party have any liability for any direct,
indirect, special, incidental, punitive, consequential (including,
without limitation lost profits) or any other damages.
(www.msci.com)
Net Asset Value (“NAV”) Total Return
(“APM”)
The theoretical total return on shareholders’ funds per share,
reflecting the change in NAV assuming that dividends paid to
shareholders were reinvested at NAV at the time the shares were
quoted ex-dividend. A way of measuring investment management
performance of investment trusts which is not affected by movements
in discounts/premiums.
|
Six
months to |
Year
to |
|
30
September |
31
March |
|
2022 |
2022 |
|
(p) |
(p) |
Opening NAV per
share |
3,462.2 |
3,703.0 |
Increase/(decrease) in
NAV per share |
88.5 |
(237.8) |
Closing NAV per
share |
3,550.7 |
3,465.2 |
% Change in NAV per
share |
2.6% |
(6.4%) |
Impact of reinvested
dividends |
0.5% |
0.6% |
NAV per share Total
Return |
3.1% |
(5.8%) |
Ongoing Charges (“APM”)
Ongoing charges are calculated by taking the Company’s
annualised ongoing charges, excluding finance costs, taxation,
performance fees and exceptional items, and expressing them as a
percentage of the average daily net asset value of the Company over
the year.
|
Six
months to |
One year
to |
|
30
September |
31
March |
|
2022 |
2022 |
|
£’000 |
£’000 |
AIFM & Portfolio
Management fees |
8,874 |
18,765 |
Other Expenses |
601 |
1,305 |
Total Ongoing
Charges |
9,475 |
20,070 |
Performance fees
paid/crystallised |
– |
12,861 |
Total |
9,475 |
32,931 |
Average net assets |
2,257,375 |
2,356,131 |
Ongoing Charges
(annualised) |
0.8% |
0.9% |
Ongoing Charges
(annualised, including performance fees paid or crystallised during
the period) |
0.8% |
1.4% |
Performance Fee
Dependent on the level of long-term outperformance of the
Company, a performance fee can become payable. The performance fee
is calculated by reference to the amount by which the Company’s net
asset value (“NAV”) performance has outperformed the Benchmark.
The fee is calculated quarterly by comparing the cumulative
performance of the Company’s NAV with the cumulative performance of
the Benchmark since the launch of the Company in 1995. Provision is
also made within the daily NAV per share calculation as required
and in accordance with generally accepted accounting standards. The
performance fee amounts to 15.0% of any outperformance over the
Benchmark (see page 43 of the Company’s Annual Report &
Accounts for the year ended 31 March
2022 for further information).
In order to ensure that only sustained outperformance is
rewarded, at each quarterly calculation date any performance fee
payable is based on the lower of:
- The cumulative outperformance of the investment portfolio over
the Benchmark as at the quarter end date; and
- The cumulative outperformance of the investment portfolio over
the Benchmark as at the corresponding quarter end date in the
previous year.
The effect of this is that outperformance has to be maintained
for a 12 month period before the related fee is paid.
In addition, a performance fee only becomes payable to the
extent that the cumulative outperformance gives rise to a total fee
greater than the total of all performance fees paid to date.
Share Price Total Return (“APM”)
Return to the investor on mid-market prices assuming that all
dividends paid were reinvested.
|
Six
months to |
One year
to |
|
30
September |
31
March |
|
2022 |
2022 |
Opening share
price |
3,275.0 |
3,695.0 |
Increase/(decrease) in
share price |
40 |
(420.0) |
Closing share
price |
3,315.0 |
3,275.0 |
% Change in share
price |
1.2% |
(11.4%) |
Impact of reinvested
dividends |
0.7% |
0.6% |
Share price Total
Return |
1.9% |
(10.8%) |
For and on behalf of
Frostrow Capital LLP, Secretary
22 November
2022
- ENDS -