TIDMWWH
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 6.6% 5.5%
per share*
Leverage* 11.5% 10.9%
Ongoing charges* 0.8% 0.9%
Ongoing charges (including performance fees 0.8% 1.4%
crystallised during the period)*
# 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 China Healthcare Equipment/ 22,129 0.3
Technology Supplies
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/ (8,766) (0.1)
Services
Edwards Lifesciences USA Healthcare Equipment/ (12,316) (0.2)
Supplies
Sanofi USA Pharmaceuticals (16,586) (0.3)
Intuitive Surgical USA Healthcare Equipment/ (26,149) (0.4)
Supplies
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:
i. 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
ii. the interim management report includes a true and fair review of the
information required by:
a. 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
b. 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 (444) (8,430) (8,874) (483) 9,706 9,223
performance fees (note 3)
Other expenses (579) (22) (601) (467) - (467)
Net return/(loss) before finance charges 8,272 59,193 67,465 10,296 (225) 10,071
and taxation
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 Six months
ended 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 Six months
ended 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 Six months
ended 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 2,196,097 - 164,008 2,360,105
or loss
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 2,207,375 - 172,473 2,379,848
or loss
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 - - - - (18,888) (18,888)
period*
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 Six months
ended 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).
1. Reconciliation of Operating Return to Net Cash Inflow/(Outflow) from
Operating Activities
(Unaudited) (Unaudited)
Six months Six months
ended 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 (59,193) 225
and taxation
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 3,422 (31,781)
accruals
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 One year to
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 0.8% 1.4%
crystallised during the period)
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:
i. The cumulative outperformance of the investment portfolio over the
Benchmark as at the quarter end date; and
ii. 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 -
END
(END) Dow Jones Newswires
November 23, 2022 02:00 ET (07:00 GMT)
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