REG-Biotech Grw Tst PLC: Annual Financial Report
01/06/2022 07:15
The Biotech Growth Trust PLC
(the “Company”)
Audited Results for the Year Ended 31 March 2022
The Company’s annual report for the year ended 31 March 2022 (the “Annual
Report”), which includes the notice of the Company’s forthcoming annual
general meeting, will be posted to shareholders on 10 June 2022. Members of
the public may obtain copies from Frostrow Capital LLP, 25 Southampton
Buildings, London WC2A 1AL or from the Company’s website at
www.biotechgt.com where up to date information on the Company, including daily
NAV, share prices and fact sheets, can also be found.
The Annual Report 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
Frostrow Capital LLP
Company Secretary
0203 709 8734
FINANCIAL HIGHLIGHTS
Net asset value per share** Share price Shareholders’ funds**
957.8p 898.0p £394.2m
2021: 1,446.4p 2021: 1,426.0p 2021: £601.5m
Net asset value per share Share price (total return)*^ Benchmark* (†)
(total return)*^
-33.8% -37.0% -7.4%
2021: +55.1% 2021: +75.2% 2021: +25.1%
Discount of share price to Ongoing Charges^ Active Share*^
net asset value per share*^
6.2% 1.1% 77.3%
2021: 1.4% 2021: 1.1% 2021: 76.3%
* Source: Morningstar
^ Alternative Performance Measure (see glossary beginning on
page 93 of the Annual Report)
† NASDAQ Biotechnology Index (sterling adjusted)
** UK GAAP Measure
CHAIRMAN’S STATEMENT
INTRODUCTION AND RESULTS
The Biotech Growth Trust PLC was launched in June 1997, making this year the
25th anniversary of its listing on the London Stock Exchange. The Company was
incorporated as Reabourne Merlin Life Sciences Investment Trust PLC, with an
initial net asset value of £29.2 million. Our current Portfolio Manager,
OrbiMed, was appointed on 19 May 2005. Since OrbiMed’s appointment and to
the year end, the Company’s net asset value (NAV) has increased by 861.6% or
14.3% per annum.
Following the very strong results of the previous year, this has been a
difficult year for the Company. The Company’s NAV per share total return^
was -33.8% (2021: +55.1%), and the share price total return^ was -37.0% (2021:
+75.2%), both underperforming the Company’s benchmark, the NASDAQ
Biotechnology Index (sterling adjusted) which over the year fell 7.4% (2021:
rose by 25.1%). The disparity between the performance of the Company’s NAV
per share and its share price reflected a widening of the share price discount
to the NAV per share from 1.4% at the start of the Company’s financial year
to 6.2% at the year end.
^ Alternative Performance Measures.
The majority of the Company’s assets are denominated in U.S. dollars with
the result that the Company’s performance was affected by the headwind of
sterling strength during the year, particularly against the U.S. dollar, with
the average exchange over the period being $1.363, some 3.9% stronger than the
previous year’s average of $1.312. However, towards the end of the year, the
situation in Ukraine saw the dollar benefit from its ‘safe haven’ status,
strengthening to $1.317 at the year-end (2021: $1.380). It has continued to
strengthen since the year-end and at the time of writing stood at $1.261.
The Company’s gearing, which increased to 8.4% at the year-end from 6.8% at
the beginning of the year, detracted 3.8% from the Company’s overall NAV
return during the year.
The factors that contributed to the Company’s disappointing performance are
analysed in detail in the Portfolio Manager’s report. The principal driver
has been the very significant divergence in performance affecting all sectors,
but particularly those with a technology base, including biotech, between
large capitalisation stocks and smaller capitalisation ones. This represents a
reversal in the long trend of recent decades.
Within the biotech sector itself, the Company underperformed its Benchmark not
only because it is invested almost exclusively in small capitalisation stocks,
whereas the index is more evenly divided between large and small, but also
because it has some exposure to Chinese biotechnology companies, which were
affected by the broad market downturn in China during the year. The index does
not include China-listed stocks.
The principal detractors from performance reflected these macro trends,
including Guardant Health, an oncology diagnostics company, which declined in
value despite generally strong financial results. However, there were some
positive contributors during the year, most notably Trillium Therapeutics
(which develops cancer immunotherapy treatments) which was acquired by Pfizer
at a price representing a 203% premium to the pre-bid share price. As our
Portfolio Manager explains in their report, mergers and acquisitions in the
biotechnology sector may accelerate if valuations remain depressed and
independent financing options become less attractive for smaller
capitalisation biotechnology companies.
The Company has maintained its selective exposure to crossover investments
(investments in a company’s last private funding round prior to an initial
public offering (“IPO”)) as well as to Chinese biotech; areas in which the
Portfolio Manager has particular expertise. Chinese investments represented
13% (2021: 12%) of the portfolio at the year-end. The value of these Chinese
investments declined in line with the broader sell-off of Chinese companies
during the year. However, despite the difficult macroeconomic environment, our
Portfolio Manager continues to believe the high levels of innovation that can
be found in China represent a significant investment opportunity.
Further analysis of the Company’s performance can be found in the Portfolio
Manager’s Review.
CAPITAL STRUCTURE
The Company’s shares traded at a premium for the first three months of the
year, leading to the issue of 150,000 new shares, at an average premium of
1.0% to the Company’s cum income NAV per share at the time, raising £2.1m
of new funds.
However, towards the end of the first six months, as the Company’s
performance suffered as a result of the aforementioned macroeconomic factors,
the Company’s share price fell to a discount to the NAV per share.
Shareholders will be aware that the Company pursues an active discount
management policy, buying back shares when the discount of the Company’s
share price to its NAV per share is higher than 6%. Accordingly, during the
period the Company bought back 576,087 shares, at an average discount of 6.6%
to the cum income NAV per share at the time, at a total cost of £6.9m.
At the year end there were 41,158,682 shares in issue and the share price
traded at a 6.2% discount to the cum income NAV per share. As we have
previously commented, while it remains possible for the shares to trade at a
discount wider than 6% on any one day, the Company remains committed to
protecting a 6% share price discount over the longer term. Since the year end,
a further 236,953 shares have been bought back for cancellation and at the
time of writing the share price discount stands at 1.2%.
RETURN AND DIVIDEND
The revenue return per share was 0.0p (2021: (0.2)p). No dividend is
recommended in respect of the year ended 31 March 2022 (2021: nil).
THE BOARD
During the year, and as announced in November, we were delighted to welcome
Roger Yates to the Board as a non-executive Director and the Chairman-elect.
We are very pleased to have recruited a Director with such extensive
expertise, both in investment management and in the investment companies
sector. It is intended that Roger will succeed me as Chairman after I retire
at the conclusion of the forthcoming Annual General Meeting (AGM).
For my part, I have served on the Board for ten years, the last six as
Chairman, and have been lucky to have had such constructive and hardworking
colleagues. Particularly over the last two years, since the start of the
COVID-19 pandemic, there have been challenges and the Board has been adaptable
and resourceful throughout. I would also like to pay tribute to the
professionalism and hard work of both our Portfolio Manager, OrbiMed, and
AIFM, Frostrow. I have greatly enjoyed working with them over the last ten
years, and would like to thank them for all they do for the Company, and for
the calm thoughtfulness with which they carry it out. Although recent results
have been disappointing, it has always been the case that investing in early
stage biotech is a long-term game, and knowing their skills and experience, I
believe it is only a question of time before the Company will resume its
superlative long term record.
At the heart of the Company’s strategy is support for the new technologies
highlighted by the Portfolio Manager. These are transforming the diagnosis and
treatment of an increasing number of human diseases, and their success will
mean both relief to those suffering and their families as well as financial
success for the Company.
PERFORMANCE FEE
During the year, following prior periods of sustained outperformance, a
performance fee of £6.98 million crystallised and became payable on 30 June
2021. The balance of the performance fee accrual as at 31 March 2021 was
reversed as a result of the underperformance experienced over the year and
therefore there is currently no provision within the Company’s NAV for any
performance fee payable at a future calculation date. The arrangements for
performance fees are described in detail on pages 46 and 47 of the Annual
Report.
OUTLOOK
There has been no let up in the difficult financial conditions since the year
end, and the Company’s NAV and share price have continued to be weak.
Looking at the broader economic environment, the immediate future looks
challenging at best.
The largest driver of the current volatile stock market conditions is the
recent rise in interest rates, which are aimed at nipping inflation in the
bud. As noted earlier, this is a reversal of a long trend.
Adding to this headwind has been Russia’s invasion of Ukraine. This has
resulted in a sharp rise in political instability, created economic disruption
and threatens to exacerbate inflationary pressures as energy and food supplies
are constrained. Alongside these direct economic effects, geopolitical
instability reduces investors’ risk appetites, potentially undermining asset
prices across a wide range of markets and sectors.
Although the impact of vaccine roll outs means that life in the US and other
developed economies is returning to normal, new variants continue to pose a
risk, and China in particular continues to grapple with rising incidence of
the disease, compounded by low vaccination rates in the elderly population, in
turn leading the authorities to impose lockdowns.
Although the impact of these factors will continue to weigh on financial
markets, our Portfolio Manager remains confident that there are a number of
potential catalysts that could lead to a recovery in the biotechnology sector
this year and into the future, and their overall investment strategy remains
unchanged. Furthermore, they believe that the fundamental investment themes
for the biotechnology sector remain intact and their focus remains on the
selection of stocks with strong prospects for capital enhancement. Your Board
fully supports this strategy and continues to believe that long-term investors
will be rewarded.
Looking back over the ten years I have been on the Board, life sciences,
including biotech, have assumed an increasingly central role in healthcare.
Their critical role in developing modern vaccines for COVID-19 is a good
example. The speed and scale of innovation are breathtaking, and will surely
remain so. The Company is an excellent way to participate in this growing,
dynamic sector.
ANNUAL GENERAL MEETING
The Company’s AGM will be held at the Apothecaries’ Hall, 10 Blackfriars
Lane, London EC4V 6ER on Tuesday, 19 July 2022 at 12 noon. As well as the
formal proceedings, there will be an opportunity for shareholders to meet the
Board and to receive an update from the Portfolio Manager on the Company’s
strategy and its key investments.
After COVID-19 restrictions have prevented us from welcoming shareholders to
this event for the past two years, I very much look forward to seeing as many
shareholders as possible on the day. Of course, should circumstances change
and restrictions be reintroduced, we will update shareholders on the final
arrangements for the meeting through the Company’s website:
www.biotechgt.com. For those investors who are not able to attend the meeting
in person, a video recording of the Portfolio Manager’s presentation will be
uploaded to the website after the meeting. Shareholders can submit questions
in advance by writing to the Company Secretary at info@frostrow.com.
I encourage all shareholders to exercise their right to vote at the AGM. The
Board strongly encourages shareholders to register their votes online in
advance. Registering your vote in advance will not restrict you from attending
and voting at the meeting in person should you wish to do so, subject to any
Government guidance to the contrary. The votes on the resolutions to be
proposed at the AGM will be conducted on a poll. The results of the proxy
votes will be published immediately following the conclusion of the AGM by way
of a stock exchange announcement and on the Company’s website:
www.biotechgt.com.
Andrew Joy
Chairman
31 May 2022
INVESTMENT PORTFOLIO
INVESTMENTS HELD AS AT 31 MARCH 2022
Fair value % of
Security Country/Region(#) £’000 investments
Seagen United States 20,789 4.9
BioMarin Pharmaceutical United States 18,377 4.3
GH Research United States 18,239 4.2
Horizon Therapeutics United States 17,856 4.2
Keros Therapeutics United States 16,934 4.0
Aclaris Therapeutics United States 16,058 3.8
Syndax Pharmaceuticals United States 15,230 3.6
Xenon Pharmaceuticals Canada 14,651 3.4
Yisheng Biopharma* China 14,319 3.3
Gilead Sciences United States 12,986 3.0
Ten largest investments 165,439 38.7
Milestone Pharmaceuticals Canada 12,461 2.9
Vaxcyte United States 12,276 2.9
Illumina United States 11,967 2.8
Theravance Biopharma United States 11,609 2.7
Guardant Health United States 11,274 2.6
XtalPi* China 11,182 2.6
Biogen United States 10,780 2.5
Amgen United States 10,482 2.4
Ultragenyx Pharmaceutical United States 9,227 2.2
Mirati Therapeutics United States 8,899 2.1
Twenty largest investments 275,596 64.4
MeiraGTx Holdings United States 8,705 2.0
Jounce Therapeutics United States 8,700 2.0
Global Blood Therapeutics United States 8,009 1.9
Neurocrine Biosciences United States 7,749 1.8
Argenx Netherlands 7,175 1.7
Mersana Therapeutics United States 7,007 1.6
StemiRNA Therapeutics* China 6,677 1.6
Clover Biopharmaceuticals China 6,622 1.5
Singular Genomics Systems United States 6,282 1.5
Aerovate Therapeutics United States 5,519 1.3
Thirty largest investments 348,041 81.3
PMV Pharmaceuticals United States 4,202 1.0
Janux Therapeutics United States 3,758 0.9
Magenta Therapeutics United States 3,736 0.9
Compass Therapeutics United States 3,635 0.9
RAPT Therapeutics United States 3,618 0.8
Alphamab Oncology China 3,470 0.8
HK inno N South Korea 3,464 0.8
Graphite Bio United States 3,280 0.7
Nanobiotix France 2,805 0.7
Iovance Biotherapeutics United States 2,703 0.6
Forty largest investments 382,712 89.4
HBM Holdings China 2,678 0.6
CSPC Pharmaceutical Group China 2,607 0.6
ALX Oncology Holdings United States 2,544 0.6
RemeGen China 2,535 0.6
VistaGen Therapeutics United States 2,519 0.6
Verona Pharma United Kingdom 2,501 0.6
Shanghai Junshi Biosciences China 2,435 0.6
AWAKN Life Sciences Canada 2,221 0.5
Natera United States 2,129 0.5
Galapagos Belgium 2,035 0.5
Fifty largest investments 406,916 95.1
Edgewise Therapeutics United States 1,947 0.5
Prelude Therapeutics United States 1,811 0.4
OrbiMed Asia Partners* † Asia 1,749 0.4
Gracell Biotechnologies China 1,427 0.3
Burning Rock Biotech China 1,398 0.3
Aslan Pharmaceuticals Singapore 1,286 0.3
CytomX Therapeutics United States 1,278 0.3
Suzhou Basecare Medical China 1,222 0.3
VectivBio Holding Switzerland 1,047 0.3
Small Pharma Canada 979 0.2
Sixty largest investments 421,060 98.4
Harpoon Therapeutics United States 759 0.2
Talaris Therapeutics United States 689 0.2
Fusion Pharmaceuticals Canada 583 0.1
Field Trip Health Canada 572 0.1
Repare Therapeutics Canada 532 0.1
Galecto Denmark 481 0.1
Cabaletta Bio United States 466 0.1
Longboard Pharmaceuticals United States 440 0.1
I-Mab China 377 0.1
Landos Biopharma United States 316 0.1
Seventy largest investments 426,275 99.6
Pyxis Oncology United States 287 0.1
LogicBio Therapeutics United States 268 0.1
IMARA United States 266 0.1
AWAKN Life Sciences warrant 16/06/2023* Canada 238 0.1
AWKN Life Sciences warrant 21/3/2024* Canada 65 –
Total investments 427,399 100.0
All of the above investments are equities unless otherwise stated.
# Primary listing
† Partnership interest
* Unquoted
PORTFOLIO BREAKDOWN
Fair value % of
Investments £’000 investments
Quoted
Equities 393,169 92.0
393,169 92.0
Unquoted
Equities 32,178 7.5
Warrants 303 0.1
Partnership interest 1,749 0.4
34,230 8.0
Total investments 427,399 100.0
PORTFOLIO MANAGER’S REVIEW
PERFORMANCE REVIEW
After posting an exceptionally strong year on both an absolute and relative
basis for the year ended 31 March 2021, the Company encountered an extremely
challenging period of performance for the year ended 31 March 2022. The
Company’s net asset value per share total return was down 33.8% at the end
of the fiscal year, compared with a 7.4% decrease for the Company’s
benchmark, the NASDAQ Biotechnology Index, measured on a sterling adjusted
basis (the Benchmark).
A “perfect storm” of macro factors led to this disappointing performance.
The fiscal year began with a rotation of investors from growth to value
stocks, as managers repositioned portfolios to overweight economically
sensitive sectors that would benefit most from a post-COVID-19 reopening of
the economy. Biotechnology (biotech) underperformed during this period, as did
many other growth sectors in which investors had allocated capital during the
COVID-19 pandemic. Many of the investor “tourists” who did not regularly
invest in biotech but who were transiently attracted to the industry’s
defensive nature and COVID-19-related research appeared to exit the sector. In
the second half of the fiscal year, increasing concerns about the U.S. Federal
Reserve’s plans to raise interest rates to combat inflation led to continued
weakness in tech stocks, especially earlier-stage enterprises which are not
expected to realize earnings for many years. This macro dynamic was especially
damaging to small capitalization (small cap) biotech performance. Adding
pressure on the portfolio was a significant drawdown in the Chinese markets,
including in Hong Kong, in the second half of the fiscal year. The sell-off
was precipitated by regulatory tightening by the Chinese government across a
variety of sectors, including the Internet tech industry and the for-profit
education industry. Even though there were no new significant regulations
targeting Chinese biotech, the broad market downturn in China adversely
impacted our Chinese biotech positions. Unfortunately, all of these macro
pressures persisted through the end of the fiscal year. Importantly, much of
the weakness in the portfolio was simply due to the general market rerating
downwards rather than any negative fundamental news about the companies
themselves.
The underperformance of the Company versus the Benchmark can be primarily
attributed to two factors: 1) the portfolio’s heavier weighting in small cap
biotech and 2) the portfolio’s exposure to the Chinese market.
As we previously outlined in the half yearly report for the six months ended
30 September 2021, the portfolio is more heavily weighted towards small cap
biotech relative to the Benchmark Index. This reflects the structural strategy
shift the Company undertook in 2019 to emphasize the emerging biotech
companies that are now estimated to account for more than two-thirds of the
R&D pipeline candidates in the biopharmaceutical industry. If one looks at the
market capitalization (market cap) distribution of the Company as at the
beginning of the fiscal year, the Company was 38% overweight small cap stocks
and 33% underweight large capitalization (large cap) stocks relative to the
Benchmark. If one charts the average stock price performance of the Benchmark
constituents in each of those market cap categories, one observes that small
cap biotech underperformed large cap biotech by over 30% during the review
period. This size divergence in performance was a significant headwind to
performance for the portfolio.
[Graph shown in Annual Report]
The disappointing performance of small cap biotech companies primarily
resulted from a general market shift from growth to value, which favored
revenue-generating large cap companies over non-revenue-generating small cap
companies. This phenomenon was not isolated to biotech. The Russell 2000 - a
commonly used market-wide index to track small cap performance -
underperformed the Russell 1000 - a proxy for large-cap performance - by
18.5% during the review period.
[Graph shown in Annual Report]
Fears over rising interest rates during the review period contributed to this
small cap underperformance. Conventional thinking suggests that companies with
earnings far out in the future are more susceptible to interest rate rises due
to the adverse impact of higher discount rates and higher financing costs. We
believe such fears are overblown, as biotech company valuations are far more
dependent on the probability of success of a company’s lead asset and the
future expected revenue from that asset than by the discount rate. Historical
data suggest that rising interest rates actually have very little correlation
with performance of small cap biotech.
Consistent with the small cap weakness, many of the recent IPOs in the
portfolio, which had delivered strong performance in 2020, saw a significant
retracement of their gains in 2021. Across the biotech industry, the average
biotech IPO completed in 2020 saw a share price decline of 28% through 31
March 2022. IPO performance for deals priced in 2021 was -46% through 31 March
2022.
During the first six months of the fiscal year, our underweight positioning in
the COVID-19 vaccine stocks, Moderna and BioNTech, was a significant
contributor to the Company’s underperformance. Both stocks had market
capitalizations above $10 billion at the start of the fiscal year, and thus
would be considered large cap names. We had remained underweight those names
throughout the review period because we could not justify their valuations and
believed investors were overestimating the recurring revenue from COVID-19
vaccine sales. As we anticipated, those stocks began correcting in the second
half of the fiscal year as case counts declined and positive data were
released for oral antivirals such as Pfizer’s Paxlovid and Merck’s
molnupiravir. Even though the U.S. had to deal with an Omicron COVID-19 case
surge during the winter, the hospitalization rate remained manageable, leading
to optimism that future variants would also be more benign given widespread
vaccination and better treatments. At its peak in August, Moderna had become
the largest biotech company in the world by market cap, and Moderna and
BioNTech represented close to 18% of the Benchmark Index. The Company’s
underweight positioning in both names cost the Company about 11 percentage
points of relative NAV performance in the first half of the fiscal year. By
the end of the review period, shares in both had corrected significantly,
reducing the negative aggregate impact of our underweight positioning to
approximately 4.5 percentage points for the entire fiscal year. Due to a
rebalancing of the Benchmark Index in September 2021, Moderna’s weight in
the Index was cut from 13.5% to 9.2% near the peak of its share price.
Unfortunately, this meant that the negative alpha the Company suffered while
the stock was rising could not be fully recouped when the stock declined.
The Chinese biotech portion of our portfolio, representing about 13% of NAV at
31 March 2022, was intended to provide some geographic diversification while
capturing some of the biotech innovation emerging in China. During the review
period, macro headwinds adversely affected the Chinese and Hong Kong stock
markets that were completely distinct from the macro drivers seen in the U.S.
The Chinese stock market was pressured by regulatory tightening by the Chinese
government, slowing economic growth, and potential delisting of Chinese ADRs
from the U.S. stock market due to disagreements between U.S. and Chinese
regulators about accounting disclosures. Compounding these macro dynamics was
the advent of a COVID-19 surge in China towards the end of the fiscal year,
resulting in restrictive lockdowns in certain cities that further impaired
China’s economic growth outlook. As a result of these macro factors, the
Hang Seng Healthcare Index (HSHCI), an index tracking healthcare securities
traded in Hong Kong, fell 45% during the review period. Our China biotech
positions traded in tandem with the broader sell-off. We estimate the
Company’s China-listed positions, which are all considered “active
share” since they are not in the Benchmark, contributed approximately 4
percentage points of relative underperformance during the review period.
EMERGING BIOTECH VALUATIONS AT 20-YEAR LOWS, SUGGESTING A RECOVERY IS OVERDUE
Despite the challenging macro environment adversely impacting the Company’s
performance, we have many reasons to be optimistic that biotech will stage a
rebound in the near-term.
One proxy commonly used to track performance of small and mid-capitalization
biotech is the XBI(1), an equal weighted index of biotech companies created in
2006. About 50% of this index consists of small cap names. If one plots the
relative performance of the XBI versus the S&P 500 (”SPX”), one can see
that since inception, the XBI has outperformed the S&P 500, indicating that
emerging biotech has historically been a sector offering better returns than
the broader market. Over the past 15 years though, there have been short
periods when the XBI has underperformed the S&P 500. Typically, these drawdown
periods result in underperformance versus the S&P 500 of 30-45%. The current
relative performance drawdown of the XBI is 65%, making it the longest and
most severe period of underperformance in the XBI’s history. Importantly,
each of the prior drawdowns was followed by a period of significant
outperformance of the XBI versus the S&P 500. Given the severity of the
current drawdown, history would suggest we are overdue for a period of biotech
outperformance.
(1 ) SPDR S&P Biotech ETF (“XBI”)
[Graph shown in Annual Report]
We believe the unprecedented sell-off in emerging biotech has driven
valuations to 20-year lows, giving a compelling valuation argument to our
bullish stance on the sector. Because emerging biotech companies are not yet
profitable, one way to look at their valuations is simply to compare their
market caps with the net cash on their balance sheets. We view this as an
objective measure of valuation as it does not depend on assumptions regarding
probability of success of assets, launch timing, or future revenue estimates.
By this simple market cap-to-cash metric, data indicate that almost 20% of
biotech companies were trading at market capitalizations below the net cash on
their balance sheets as of the end of the fiscal year. This is a level that we
have not seen in over 20 years. This translates to over 100 companies which
are now trading at negative enterprise values. While some of these companies
have failed programs that merit a valuation below cash, many have interesting
technologies and programs that just haven’t reached fruition yet. The high
proportion of companies trading below cash reflects an overall biotech sector
valuation that is extremely depressed.
[Graphs shown in Annual Report]
Looking more generally at healthcare valuations, we note that the healthcare
constituents of the S&P 500 across all subsectors (not including just biotech)
were also trading at an average forward price/earnings multiple below
historical averages during the fiscal year. Sector-wide valuation contraction
typically occurs when healthcare reform is being considered by the U.S.
government. Over much of the fiscal year, there was Congressional debate about
drug pricing proposals to be included in the Biden administration’s social
spending bill. This likely contributed to depressed valuations for healthcare
broadly. A relief rally generally ensues once there is certainty about such
reform proposals, so passage of a drug pricing bill could act as a clearing
event for the sector.
[Graph shown in Annual Report]
CONTRIBUTORS AND DETRACTORS
Trillium Therapeutics, GH Research, StemiRNA Therapeutics, Xenon
Pharmaceuticals, and Horizon Therapeutics were the leading positive
contributors to performance in the portfolio during the year.
· Trillium Therapeutics is an emerging biotechnology company
developing immunotherapies for cancer. The stock rose in August when Pfizer
announced it was acquiring the company for $2.26 billion, representing a 203%
premium to Trillium’s share price.
· GH Research is a biopharmaceutical company focused on the
treatment of psychiatric and neurological disorders. The initial focus of the
company is on developing its proprietary 5-MeO-DMT inhaled therapy for the
treatment of patients with treatment-resistant depression (TRD). We
participated in a crossover round for GH Research and purchased additional
shares in the IPO. After the IPO, GH Research announced positive Phase 2 data
from its Phase 1/2 trial in TRD with a large effect size over current standard
of care.
· StemiRNA Therapeutics is a private Chinese vaccine company
developing an mRNA-based vaccine for COVID-19. To date, there are no
mRNA-based COVID-19 vaccines approved in China. Given the Chinese
government’s preference for homegrown vaccines to inoculate its population,
we expect domestic vaccine manufacturers like StemiRNA will be preferred as
China further develops vaccine options for its population. The valuation of
the company was written up during the review period in expectation of another
private financing round contingent upon clinical trial commencement of their
vaccine.
· Xenon Pharmaceuticals is an emerging biotechnology company
developing innovative therapeutics to improve the lives of patients with
neurological disorders. The company’s main pipeline program, XEN1101, is a
differentiated Kv7 potassium channel opener being developed for the treatment
of epilepsy and major depressive disorder. In October 2021, shares
appreciated significantly after Xenon announced positive results from its
Phase 2b X-TOLE clinical trial of XEN1101 in adult patients with focal
epilepsy, which showed a higher seizure reduction than currently approved
medications.
· Horizon Therapeutics is a specialty pharmaceutical company
focused on rare autoimmune and inflammatory disorders. The stock moved up
sharply in February 2021 when its largest growth product, Tepezza, an insulin
growth factor-1 receptor inhibitor for the treatment for thyroid eye disease,
meaningfully surpassed sales expectations. The stock moved incrementally
higher throughout the year as the growth outlook for Tepezza continued to be
revised upward.
Singular Genomics Systems, Guardant Health, Aptose Biosciences, Mersana
Therapeutics, and Curis were the principal detractors for the year.
· Singular Genomics Systems is an emerging life science tools
company that has developed a novel sequencing chemistry. The company’s first
product, G4, is a benchtop sequencer and the company is also developing the
PX, a single cell sequencer launching in 2023. The Company participated in
the crossover round for Singular Genomics in early 2021 and it subsequently
went public in May 2021. Shares pulled back significantly after the IPO as
early-stage tools companies fell out of favor. Additional competitive concerns
from Illumina and private company Element Biosciences, ahead of Singular’s
G4 launch, further exacerbated this decline. The company has begun taking
orders for G4 and will begin shipping the product in 2022.
· Guardant Health is an oncology diagnostics company that has
emerged as the preeminent liquid biopsy vendor in therapy selection. The
company also plans to enter the non-invasive screening market in 2022.
Guardant shares suffered due to a broad pullback in growth names in tools and
diagnostics, despite reporting generally strong financial results throughout
the course of the year. The stock was particularly weak after rumors came out
that it was considering a purchase of NeoGenomics, another public oncology
diagnostics company, though the deal was never consummated.
· Aptose Biosciences is a biopharmaceutical company
developing precision medicines to address unmet medical needs in oncology. The
shares were weak after disappointing data from the company’s lead asset in
acute myeloid leukemia. Given earlier initial promising data from a lower dose
cohort, investors were expecting response rates to increase with dose
escalation; however, the company failed to show any additional responses and
there were some tolerability issues that arose.
· Mersana Therapeutics shares declined in Sept 2021 upon the
announcement of interim data for its drug for the treatment of ovarian cancer.
As a result of the findings, the company decided to amend its ongoing
registration trial, resulting in a delay in the timing of potential approval
of the drug.
· Curis is a biotechnology company focused on the development
of therapeutics for the treatment of cancer. The initial focus of the company
is its IRAK4/ FLT3 inhibitor, emavusertib, for acute myeloid leukemia (AML)
and B-cell malignancies. The shares underperformed after the company announced
lackluster updated efficacy data for emavusertib in AML, where response rates
were similar to existing approved FLT3 inhibitors.
POLITICAL RISK FROM DRUG PRICING REFORM DECREASES AS MIDTERM ELECTIONS IN THE
US NEAR
With the presidency and both houses of Congress controlled by Democrats
following the 2020 election, investors had expected some form of drug pricing
reform would be enacted over the past year. The biotech industry was primarily
concerned about any legislation that would allow the United States federal
government to negotiate drug prices. Indeed, a watered-down version of drug
pricing reform was included in the Democrats’ proposed Build Back Better
(BBB) bill in 2021, which would have allowed the federal government to
negotiate prices for some high-cost drugs covered by Medicare and limit annual
increases of drug prices. However, BBB was unable to garner the necessary
support from moderate Democrats, so it did not pass during the fiscal year.
Democrats are currently attempting to rework BBB into a form that all Senate
Democrats can support. Given that Democrats hold a slim majority in the
Senate, the party would look to use a legislative pathway called budget
reconciliation that only requires a simple majority in the Senate for passage.
We believe that such legislation would likely include limited drug pricing
provisions that appeal to both moderates and progressives in the party. Our
view remains that any such legislation will be manageable for the industry and
would actually remove an overhang for the sector. However, the window to pass
an updated version of BBB is rapidly closing as midterm elections approach in
the fall. If the Democrats fail to pass the legislation this spring, the
chances of passage dramatically decrease as politicians increasingly focus on
elections in November. In addition, with Democrats polling poorly ahead of the
midterm elections and President Biden’s low approval numbers, the party is
likely to lose control of at least the House of Representatives and
potentially also the Senate in 2022. This would severely hinder any efforts to
pass significant drug pricing legislation.
REGULATORY CLIMATE IN THE US LIKELY TO REMAIN CONSTRUCTIVE DESPITE
COVID-19-RELATED DELAYS
We have noted in the past that the U.S. Food and Drug Administration (FDA)
regulatory climate over the past few years has been constructive for new drug
approvals. Indeed, in 2021, total new drug approvals were on par with the
elevated pace of approvals seen during the Trump administration. Having said
that, there were a number of regulatory delays for drugs being reviewed at the
FDA during the fiscal year. In many cases this was due to delays in facility
inspections stemming from COVID-19-related travel restrictions rather than any
fundamental issues with the drugs themselves. For most of the fiscal year,
Janet Woodcock, a longstanding senior FDA official, served as acting
commissioner of the agency. In February 2022, Dr. Robert Califf, a
cardiologist, was confirmed as the new permanent FDA Commissioner, bringing
stable leadership to the agency. Dr. Califf formerly served as FDA
commissioner during the Obama administration, where he presided over a stable
and productive drug approval period at the FDA. He is regarded as data-driven
and industry-friendly. We believe he is unlikely to change the current
constructive regulatory stance at the FDA.
IPO AND CROSSOVER ACTIVITY SLOWS DOWN; ATTRACTIVE INVESTMENTS LIKELY TO EMERGE
After two to three years of robust crossover and IPO deal activity, such
activity slowed in the last two quarters of the fiscal year as sector
valuations declined. During the fiscal year, the Company participated in 13
IPOs and seven of the Company’s private investments went public. The Company
made five new crossover investments: GH Research, a European biotech company
developing an agent for depression; Janux Therapeutics, a cancer immunotherapy
company developing T-cell engagers; Awakn Life Sciences, a UK-based company
listed in Canada, developing a drug for alcohol use disorder; StemiRNA
Therapeutics, a Chinese company developing an mRNA-based vaccine for COVID-19;
and XtalPi, a Chinese artificial intelligence drug discovery company. Of these
new crossover investments, only StemiRNA and XtalPi remained private as of 31
March 2022. As of 31 March 2022, the Company had three private investments
(excluding the investment in OrbiMed Asia Partners Fund) totalling 8.2% of
NAV. Given current market conditions, the IPOs for these crossover investments
have been delayed until the IPO environment improves. All private investments
are valued by a third-party valuation agent at the end of each quarter and
incorporate the latest expectation on the timing and valuation of a future
IPO. Crossover investing will remain a part of the Company’s strategy as
opportunities arise, and we will remain vigilant about entry prices in the
current market environment.
With the depressed valuations now seen in small and mid-cap biotech, we expect
that many companies will be forced to undertake financings at very compelling
prices. This presents an opportunity for the Company to potentially invest in
quality assets at lower-than-usual valuations. We expect more companies will
undertake PIPE financings (i.e. private investments in public equity) in which
investors can purchase unregistered shares at a negotiated discount to the
market price, occasionally with additional warrant coverage as a bonus.
OrbiMed’s platform and presence in the healthcare investing space give us
excellent access to this deal flow.
MERGERS AND ACQUISITION (M&A) ACTIVITY WILL LIKELY ACCELERATE
The pace of biotech M&A largely remained consistent with historical averages
for the biotech industry during the fiscal year. Acquisitions of publicly
traded biotech companies have averaged approximately 4-5 transactions per
quarter for the past few years. The Company benefited directly from two M&A
transactions during the fiscal year because of holdings in the target
companies:
· Pacira Pharmaceuticals’ acquisition of Flexion Therapeutics for
$450 million
· Pfizer’s acquisition of Trillium Pharmaceuticals for $2.3 billion
‘Big Pharma’ interest in acquiring innovative biotech companies has always
been strong, but due to the robust financing environment for biotech in the
last two to three years, many biotech companies did not see any urgency to
sell to a larger player. They could simply raise money from equity investors
and continue to build value for their programs on their own. Now, with small
cap biotech valuations at such depressed levels, these management teams are
faced with the daunting prospect of undertaking highly dilutive financings to
support themselves as independent entities. We expect many of these companies
will be more receptive to M&A overtures now that independent financing options
look less attractive. We also expect potential acquirors to increase their
acquisition activity now that the market valuations of prospective targets are
significantly lower. M&A premiums from current depressed valuation levels
could be significant. As an example, in April 2022, Regeneron Pharmaceuticals
announced its intention to acquire Checkmate Pharmaceuticals, an immunotherapy
oncology company trading below net cash, for a 335% premium.
INNOVATION ENGINE STILL ROBUST
Despite the weakness in share prices, the fundamental innovation occurring in
the biotech sector remains robust. According to data provider IQVIA, a record
84 novel active substances were launched globally in 2021 across the
biopharmaceutical industry, double the number five years ago.
Of the 50 drug approvals in 2021 by the FDA, 54% of them were first-in-class
drugs with mechanisms of action different from those of existing therapies.
Below are just some examples of first-in-class novel drug approvals by biotech
companies in 2021:
· Adbry, first IL-13 inhibitor for atopic dermatitis
· Aduhelm, first beta-amyloid antibody for Alzheimer’s disease
· Lupkynis, first calcineurin inhibitor approved for lupus nephritis
· Tezspire, first anti-TSLP antibody for severe asthma
· Lumakras, first KRAS G12C inhibitor for lung cancer
· Empaveli, first anti-C3 complement antibody for paroxysmal nocturnal
hemoglobinuria
· Tavneos, first C5a receptor antagonist for ANCA-associated vasculitis
· Bylvay, first ileal bile acid transporter inhibitor for progressive
familial intrahepatic cholestasis
The number of next-generation biotherapeutics entering development based on
novel development technologies like cell therapy and gene therapy continues to
rise:
[Graph shown in Annual Report]
The Company has exposure across a wide swath of these new technologies, as
shown below (note some positions are double counted because they use more than
one technology):
Antibody-drug conjugates: 12.1% NAV
Gene therapy/gene editing: 7.8% NAV
Cell therapy: 5.6% NAV
Multi-specific antibodies/T-cell engagers: 5.7% NAV
Oligonucleotide therapeutics: 6.8% NAV
Liquid biopsy: 3.8% NAV
Other seminal events in the biotech sector during the review period include:
· Yescarta became the first CAR-T therapy to receive approval
in China
· Intellia Therapeutics announced positive data for its gene
editing therapy for ATTR amyloidosis, the first in human gene editing therapy
to show durable efficacy from a single systemic administration
· Compass Pathways and GH Research announced positive data
for a new class of psychedelic therapies for treatment-resistant depression
While not all of the news in the biotech space was positive during the review
period (as usual, certain companies had setbacks as well), our view is that
the overall trajectory of the industry in terms of value creation remains
overwhelmingly positive. We think there is a significant disconnect between
the share price action during the fiscal year and the fundamental innovation
occurring in the sector.
OUTLOOK AND ORBIMED UPDATE
Given the unprecedented correction we have seen in emerging biotech and
historically low valuations, we think the sector is poised for a substantial
recovery. A rebound in the sector could be catalyzed by clarity on drug
pricing legislation, M&A activity, positive clinical data, or strong product
launches. Our overall strategy has not changed. We will continue to overweight
emerging biotech and invest in crossover rounds and IPOs as opportunities
arise. Gearing will remain in the 5-10% range. Given the substantial drawdown
we have witnessed, we believe current conditions offer an excellent
opportunity for long-term investors to add to their exposure in biotech.
As the biotech universe has expanded, OrbiMed has continued to hire additional
analysts to buttress our research effort. During the review period, we hired
three new biotech analysts and two new China analysts. Our biotech research
team now consists of nine analysts, three of whom have PhD degrees, and our
China team consists of four analysts based in Shanghai and Hong Kong. To
manage COVID-19 risk, our office continues to operate with a hybrid work
schedule (three days in the office, two days work from home), which has worked
smoothly for the team. We have begun increasing our travel to companies and
medical conferences as COVID-19 risk declines.
While it was a difficult fiscal year for the Company due to macro factors, we
continue to believe strongly in the investment case for biotech over the long
term and look forward to a recovery in performance.
Geoff Hsu
OrbiMed Capital LLC, Portfolio Manager
31 May 2022
Strategic Report/PRINCIPAL CONTRIBUTORS TO AND DETRACTORS FROM NET ASSET VALUE
PERFORMANCE
Contribution
for year ended Contribution
31 March 2022 per share
Top Five Contributors £’000 (pence)*
Trillium Therapeutics+ 7,755 18.7
GH Research 4,880 11.8
StemiRNA Therapeutics 4,195 10.1
Xenon Pharmaceuticals 3,547 8.6
Horizon Therapeutics 2,937 7.1
23,314 56.3
Top Five Detractors
Singular Genomics (13,216) (31.9)
Guardant Health (11,945) (28.8)
Aptose Biosciences+ (11,394) (27.5)
Mersana Therapeutics (11,382) (27.5)
Curis+ (11,033) (26.6)
(58,970) (142.3)
* based on 41,441,570 shares being the weighted average number of shares in
issue during the six months period ended 31 March 2022
+ not held in the portfolio at 31 March 2022
PERFORMANCE ATTRIBUTION FOR THE YEAR ENDED 31 MARCH 2022
Contribution to total returns % %
Benchmark return (7.4)
Portfolio Manager’s contribution (21.6)
Portfolio total return (29.0)
Gearing (3.8)
Management fee and other expenses (1.1)
Performance fees 0.0
Share buyback 0.1
Other effects (4.8)
Return on net assets (33.8)
Source: Frostrow Capital LLP.
BUSINESS REVIEW
The Strategic Report contains a review of the Company’s business model and
strategy, an analysis of its performance during the financial year and its
future developments, as well as details of the principal risks and challenges
it faces.
Its purpose is to inform shareholders in the Company and help them to assess
how the Directors have performed their duty to promote the success of the
Company. The Strategic 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. Such statements
should be treated with caution due to the inherent uncertainties, including
both economic and business risk factors, underlying such forward-looking
information.
BUSINESS MODEL
The Biotech Growth Trust PLC is an externally managed investment trust and its
shares are listed on the premium segment of the Official List and traded on
the main market of the London Stock Exchange.
The purpose of the Company is to provide a vehicle for investors to gain
exposure to a portfolio of worldwide biotechnology companies, through a single
investment.
The Company’s strategy is to create value for shareholders by addressing its
investment objective.
As an externally managed investment trust, all of the Company's day-to-day
management and administrative functions are outsourced to service providers.
As a result, the Company has no executive directors, employees or internal
operations.
The Company employs Frostrow Capital LLP (Frostrow) as its Alternative
Investment Fund Manager (AIFM), OrbiMed Capital LLC (OrbiMed) as its Portfolio
Manager, J.P. Morgan Europe Limited as its Depositary and J.P. Morgan
Securities LLC as its Custodian and Prime Broker. Further details about their
appointments can be found in the Report of the Directors on pages 46 and 47 of
the Annual Report.
The Board is responsible for all aspects of the Company’s affairs, including
setting the parameters for and monitoring the investment strategy as well as
the review of investment performance and policy.
The Company is an investment company within the meaning of Section 833 of the
Companies Act 2006 and has been approved by HM Revenue & Customs as an
investment trust (for the purposes of Section 1158 of the Corporation
Tax Act 2010). As a result, the Company is not liable for taxation on
capital gains. The Directors have no reason to believe that approval will not
continue to be retained. The Company is not a close company for taxation
purposes.
INVESTMENT OBJECTIVE AND POLICY
To seek capital appreciation through investment in the worldwide biotechnology
industry. In order to achieve its investment objective, the Company invests in
a diversified portfolio of shares and related securities in biotechnology
companies on a worldwide basis. Performance is measured against the NASDAQ
Biotechnology Index (sterling adjusted) (the Benchmark).
INVESTMENT STRATEGY
The implementation of the Investment Objective has been delegated to OrbiMed
by Frostrow (as AIFM) under the Board’s and Frostrow’s supervision and
guidance.
Details of OrbiMed’s investment strategy and approach are set out in the
Portfolio Manager’s Review. While performance is measured against the
Benchmark, the Board encourages OrbiMed to manage the portfolio without regard
to the Benchmark and its make-up.
While the Board’s strategy is to allow flexibility in managing the
investments, in order to manage investment risk it has imposed various
investment, gearing and derivative guidelines and limits, within which
Frostrow and OrbiMed are required to manage the investments, as set out below.
INVESTMENT LIMITS AND GUIDELINES
The Board seeks to manage the Company’s risk by imposing various investment
limits and restrictions as follows:
· The Company will not invest more than 10%, in aggregate, of
the value of its gross assets in other closed ended investment companies
(including investment trusts) listed on the London Stock Exchange, except
where the investment companies themselves have stated investment policies to
invest no more than 15% of their gross assets in other closed ended investment
companies (including investment trusts) listed on the London Stock Exchange.
· The Company will not invest more than 15%, in aggregate, of
the value of its gross assets in other closed ended investment companies
(including investment trusts) listed on the London Stock Exchange.
· The Company will not invest more than 15% of the value of
its gross assets in any one individual stock at the time of acquisition.
· The Company will not invest more than 10% of the value of
its gross assets in unquoted investments at the time of acquisition. This
limit includes any investment in private equity funds managed by the Portfolio
Manager or any affiliates of such entity (see below).
· The Company may invest or commit for investment a maximum
of U.S.$15 million, after the deduction of proceeds of disposal and other
returns of capital, in private equity funds managed by OrbiMed, the
Company’s Portfolio Manager, or an affiliate thereof.
· The Company’s borrowing policy is that borrowing will not
exceed 20% of the Company’s net assets. The Company’s borrowing
requirements are met through the utilisation of a loan facility, repayable on
demand and provided by J.P. Morgan Securities LLC. This facility can be drawn
by the Portfolio Manager overseen by the AIFM.
· The Company may be unable to invest directly in certain
countries. In these circumstances, the Company may gain exposure to companies
in such countries by investing indirectly through swaps. Where the Company
invests in swaps, exposure to underlying assets will not exceed 5% of the
gross assets of the Company at the time of entering into the contract.
In accordance with the requirements of the UK Listing Authority, any material
change to the investment policy will only be made with the approval of
shareholders by ordinary resolution.
FOREIGN CURRENCY EXPOSURE
The Company does not currently hedge against foreign currency exposure.
DIVIDEND POLICY
The Company invests with the objective of achieving capital growth and it is
expected that dividends, if any, are likely to be small. The Board intends
only to pay dividends on the Company’s shares to the extent required in
order to maintain the Company’s investment trust status.
No dividends were paid or declared during the year (2021: None).
CONTINUATION OF THE COMPANY
An opportunity to vote on the continuation of the Company is given to
shareholders every five years. The next such continuation vote will be
proposed at the Annual General Meeting to be held in 2025.
COMPANY PROMOTION
The Company has appointed Frostrow to provide marketing and investor relations
services, in the belief that a well-marketed investment company is more likely
to grow over time, have a more diverse, stable list of shareholders and its
shares will trade at close to net asset value per share over the long run.
Frostrow actively promotes the Company in the following ways:
Engaging regularly with institutional investors, discretionary wealth managers
and a range of execution-only platforms: Frostrow regularly meets with
institutional investors, discretionary wealth managers and execution-only
platform providers to discuss the Company’s strategy and to understand any
issues and concerns, covering both investment and corporate governance
matters. Such meetings have been conducted on a virtual basis during the
COVID-19 pandemic;
Making Company information more accessible: Frostrow works to raise the
profile of the Company by targeting key groups within the investment
community, holding periodic investment seminars, commissioning and overseeing
PR output and managing the Company’s website and wider digital offering,
including Portfolio Manager videos and social media;
Disseminating key Company information: Frostrow performs the Investor
Relations function on behalf of the Company and manages the investor database.
Frostrow produces all key corporate documents, distributes monthly factsheets,
Annual and Half Yearly Reports and updates from OrbiMed on the portfolio and
market developments; and
Monitoring market activity, acting as a link between the Company, shareholders
and other stakeholders: Frostrow maintains regular contact with sector broker
analysts and other research and data providers, and conducts periodic investor
perception surveys, liaising with the Board to provide up-to-date and accurate
information on the latest shareholder and market developments.
KEY PERFORMANCE INDICATORS (KPIs)
The Board assesses the Company’s performance in meeting its objective
against the following key performance indicators:
· net asset value total return;
· share price total return;
· share price discount to net asset value per share; and
· ongoing charges.
Information on the Company’s performance is provided in the Chairman’s
Statement and the Portfolio Manager’s Review and a record of these measures
is shown on page 1, 5 and 6 of the Annual Report. The KPIs have not changed
from the prior year:
NET ASSET VALUE PER SHARE TOTAL RETURN^
The Directors regard the Company’s net asset value per share total return as
being the overall measure of value delivered to shareholders over the long
term. The Board considers the principal comparator to be the NASDAQ
Biotechnology Index (sterling adjusted) (the Benchmark) OrbiMed’s investment
style is such that performance is likely to deviate from that of the
Benchmark.
During the year under review the Company’s net asset value per total share
return was -33.8%, underperforming the Benchmark by 26.4% (2021: +55.1%,
outperforming the Benchmark by 17.3%). Since OrbiMed’s date of appointment
(19 May 2005) to 31 March 2022, the Company’s net asset value per share
total return is 861.6% compared with 750.2% for the Benchmark. Please refer to
the Chairman’s Statement and the Portfolio Manager’s Review for further
information.
SHARE PRICE TOTAL RETURN^
The Directors also regard the Company’s share price total return to be a key
indicator of performance. This reflects share price growth of the Company
which the Board recognises is important to investors.
During the year under review the Company’s share price total return was
-37.0% (2021: +75.2%%). Since OrbiMed’s date of appointment (19 May 2005) to
31 March 2022, the Company’s share price total return is 852.8% compared
with Benchmark performance of 750.2%. Please refer to the Chairman’s
Statement for further information.
SHARE PRICE (DISCOUNT)/PREMIUM TO NET ASSET VALUE PER SHARE^
The Board regularly reviews the level of the discount/ premium of the
Company’s share price to the net asset value per share and considers ways in
which share price performance may be enhanced, including the effectiveness of
marketing, share issuance and buybacks, where appropriate. The Board has a
discount control mechanism in place, the aim of which is to prevent the level
of the share price discount to the net asset value per share exceeding 6%.
Shareholders should note, however, that it remains possible for the discount
to be greater than 6% on any one day due to sector volatility and the fact
that the share price continues to be influenced by overall supply and demand
for the Company’s shares in the secondary market. Any decision to repurchase
shares is at the discretion of the Board. 576,087 shares were repurchased by
the Company during the year (2021: Nil). The Board is committed to protecting
the discount at or near the 6% level in normal market conditions. Please refer
to the Chairman's Statement for further information.
In addition, in order to help prevent the Company's share price from trading
at a high premium to its net asset value per share, new shares can be issued
at a premium to the Company’s net asset value per share.
The Board believes that the benefits of issuing new shares are as follows:
· to fulfil excess demand in the market in order to help to
manage the premium at which the Company’s shares trade to net asset value
per share;
· to provide a small enhancement to the net asset value per
share of existing shares through new share issuance at a premium to the
estimated net asset value per share;
· to grow the Company, thereby spreading operating costs over
a larger capital base which should reduce the ongoing charges ratio; and
· to improve liquidity in the market for the Company’s
shares.
In total, 150,000 new shares were issued during the year (2021: 2,377,500).
The volatility of the net asset value per share in an asset class such as
biotechnology is a factor over which the Board has no control. The making and
timing of any share buy-backs or share issuance is at the absolute discretion
of the Board. Please see the Chairman’s Statement on pages 2 and 3 for
further information.
ONGOING CHARGES^
Ongoing charges represent the costs that shareholders can reasonably expect to
pay from one year to the next, under normal conditions. The Board continues to
be conscious of expenses and seeks to maintain a sensible balance between high
quality service and costs. The Board therefore considers the ongoing charges
ratio to be a KPI and reviews the figure on a regular basis.
As at 31 March 2022 the ongoing charges figure was 1.1%.
^ Alternative Performance Measure (see glossary beginning on page 93 of the
Annual Report).
RISK MANAGEMENT
The Board is responsible for the management of risks faced by the Company.
Through delegation to the Audit Committee, the Board has established
procedures to manage risk, to review the Company’s internal control
framework and to establish the level and nature of the principal risks the
Company is prepared to accept in order to achieve its long-term strategic
objective. At least twice during a year the Audit Committee carries out a
robust assessment of the principal and emerging risks with the assistance of
Frostrow Capital (the AIFM). A risk management process has been established to
identify and assess risks, their likelihood and the possible severity of
impact. Further information is provided in the Audit Committee Report
beginning on page 53 of the Annual Report. These principal risks and the ways
they are managed or mitigated are set out below:
PRINCIPAL RISKS AND UNCERTAINTIES MANAGEMENT/MITIGATION
OBJECTIVE AND STRATEGY
The Company becomes unattractive to investors. The Board reviews regularly the Company’s investment objective and investment guidelines in the light of investor sentiment, monitoring closely whether the Company should
continue in its present form. The Board also considers the size of the Company to ensure that it is at an appropriate level. The Board, through the AIFM and the Portfolio
Manager, holds regular discussions with major shareholders. Each month the Board receives a report which monitors the investments held in the portfolio compared with the
Benchmark and the investment guidelines. Additional reports and presentations are regularly presented to investors by the Company’s AIFM and Portfolio Manager.
SHARE PRICE VOLATILITY AND LEVEL OF DISCOUNT/PREMIUM
The risk that the Company’s share price is not representative of its underlying net assets. To manage this risk, the Board: · regularly reviews the level of the share price discount/premium to the net asset value per share and considers ways in which share price
performance may be enhanced, including the effectiveness of marketing and investor relations services, new share issuance and share buybacks, as appropriate; · has
implemented a discount management policy, buying back the Company’s shares when the level of the share price discount to the net asset value per share exceeds 6% (in
normal market conditions). Further information on this policy is set out on pages 25 to 26. · may issue shares at a premium to the net asset value per share to help
prevent a share price premium reaching too high a level; · reviews an analysis of the shareholder register at each Board meeting and is kept informed of shareholder
sentiment; and · regularly discusses the Company’s future development and strategy with the Portfolio Manager and the AIFM.
PORTFOLIO PERFORMANCE
Investment performance may not meet shareholder requirements. The Board reviews regularly investment performance against the Benchmark and against the Company’s peer group. The Board also receives regular reports that analyse
performance against other relevant indices. The Portfolio Manager provides an explanation of significant stock selection decisions and an overall rationale for the make
-up of the portfolio. The Portfolio Manager discusses current and potential investment holdings with the Board on a regular basis.
PORTFOLIO MANAGEMENT KEY PERSON RISK
The risk that the individual(s) responsible for managing the Company’s portfolio may leave their employment or may be prevented from undertaking their duties. The Board manages this risk by: · appointing OrbiMed, who in turn have appointed Geoff Hsu to manage the Company’s portfolio. Mr Hsu is ably supported by a team of
researchers and analysts dedicated to the biotechnology sector; · receiving reports from OrbiMed at each Board meeting, such reports include any significant changes in
the make-up of the team supporting the Company; · meeting the wider team at OrbiMed’s offices and encouraging the participation of the wider OrbiMed team in investor
updates; and · delegating to the Management Engagement Committee, the responsibility to perform an annual review of the service received from OrbiMed, including, inter
alia , the team supporting the lead manager and their succession plans.
OPERATIONAL AND REGULATORY
As an externally-managed investment trust, the Company is reliant on the systems of its service providers for dealing, trade processing, administration, financial and other functions. If such systems were to fail or be disrupted (including, for example, as a result of cyber- crime or a pandemic) this could lead to a failure to comply with applicable laws, regulations and governance requirements and/or to a financial loss. To manage these risks, the Board (in some cases meeting as the Audit Committee): · periodically meets representatives from the Company's key service providers to gain a
better understanding of their control environment, and the processes in place to mitigate any disruptive events (including the COVID-19 pandemic); · receives a monthly
report from Frostrow, which includes, inter alia , confirmation of compliance with applicable laws and regulations; · reviews the internal control reports and key
policies (including disaster recovery procedures and business continuity plans) of its service providers; · maintains a risk matrix with details of risks to which the
Company is exposed, the approach to managing those risks, the key controls relied on and the frequency of the controls operation; · receives updates on pending changes to
the regulatory and legal environment and progress towards the Company’s compliance with such changes; and · has considered the increased risk of cyber-attacks and
received reports and assurance from its service providers regarding the information security controls in place.
MARKET PRICE RISK
The Company’s portfolio is exposed to fluctuations in market prices in the biotechnology sector and the regions in which it invests. The biotechnology sector is expected to be more volatile than some other sectors. One sector-specific uncertainty is the exposure to the implications of US drug pricing policy in the US. More generally, market-wide uncertainties which have recently caused increased volatility in stock markets include the COVID-19 pandemic; the outbreak of war in Ukraine and the effects of sanctions against Russia (including rising oil and wider energy pricing and the risk of prices remaining elevated for a prolonged period); the effects of rising interest rates and inflation; slowing global economic growth; and the fear of recession. The Portfolio Manager has responsibility for selecting investments in accordance with the Company’s investment objective and policy and seeks to ensure that investment in
individual stocks falls within acceptable risk levels. Compliance with the limits and guidelines contained in the Company’s investment policy is monitored daily by
Frostrow and OrbiMed and reported monthly to the Board. The investment restrictions ensure that the portfolio is diversified, reducing the risks associated with
individual stocks and markets. OrbiMed report at each Board meeting on the Company’s performance and the macro factors affecting it. The Portfolio Manager spreads
investment risk over a wide portfolio of investments. At the year end the Company’s portfolio comprised investments in 74 companies. As part of its review of the going
concern and long-term viability of the Company, the Board also considers the sensitivity of the Company to changes in market prices and foreign exchange rates (see note
14 beginning on page 84) and the ability of the Company to liquidate its portfolio if the need arose. Further details are included in the Going Concern and Viability
Statements beginning on pages 50 and 32 of the Annual Report, respectively.
VALUATION RISK
Pursuant to the Investment Policy, the Company may invest up to 10% of its gross assets in unquoted investments at the time of acquisition. The valuation of unquoted assets involves a degree of subjectivity and there is a risk that proceeds received on the disposal of unquoted holdings may prove to be significantly lower than the value at which the investment is held in the Company’s portfolio. The majority of the Company’s unquoted investments are valued by an independent, third party valuation agent. The Board has established a Valuation Committee to review
the valuations of the unquoted investments and the methodologies used in the valuations. The Valuation Committee makes recommendations to the Board, as appropriate.
Further information can be found in the Audit Committee Report beginning on page 53 and note 1 to the financial statements on page 74 of the Annual Report.
CLIMATE CHANGE
Climate change events could have an impact on portfolio companies and their operations, as well as on the Company’s service providers, potentially affecting their operating models, supply chains, physical locations and energy costs. Although the effects of climate change have yet to be fully understood, the Board and the Portfolio Manager keep the subject under review. The Board is conscious that
climate change poses a general risk to the investment environment and through discussions with the Portfolio Manager, has noted that the biotechnology industry is not a
major contributor to greenhouse gas emissions. Although the Portfolio Manager does not consider climate change to be a material ESG consideration for the sector for this
reason, energy management is noted as a material concern in the wider healthcare and pharmaceutical sectors, and this forms part of OrbiMed’s ESG monitoring. Please refer
to pages 41 and 42 of the Annual Report for further information.
LIQUIDITY RISK
Ability to meet funding requirements when they arise. The Portfolio Manager has constructed the portfolio in line with the Company's investment policy; the majority of the Company’s assets are investments in quoted equities
that are readily realisable and therefore funds can be raised at short notice if required. Please see pages 7 and 8 of the Annual Report for further information on the
make-up of the portfolio and note 14 beginning on page 84 for further information on this risk.
SHAREHOLDER PROFILE
Activist shareholders whose interests are not consistent with the long-term objectives of the Company may be attracted onto the shareholder register. The AIFM provides a shareholder analysis at every Board meeting so that the Board can give consideration to any action required; this is in addition to regular reporting
by the Company’s broker. The Board has implemented an active discount management policy in order to try to ensure that the Company’s share price trades at a discount no
greater than 6% to the Company’s net asset value per share. The intention is that keeping the discount within a relatively narrow range should discourage activist and
other short-term investors. Please see page 25 of the Annual Report for further information.
CURRENCY RISK
Movements in exchange rates could adversely affect the sterling performance of the portfolio. A significant proportion of the Company’s assets is, and will continue to be, invested in securities denominated in foreign currencies, in particular U.S. dollars. As the
Company’s shares are denominated and traded in sterling, the return to shareholders will be affected by changes in the value of sterling relative to those foreign
currencies. The Board has made clear the Company’s position with regard to currency fluctuations which is that it does not currently manage or mitigate for foreign
currency exposure (see page 85 of the Annual Report).
LOAN FACILITY
The provider of the Company’s loan facility may no longer be prepared to lend to the Company. The Company’s borrowing requirements are met through the utilisation of a loan facility, repayable on demand, provided by J.P. Morgan Securities LLC (see Credit Risk
below). The Company’s borrowing policy is that borrowing will not exceed 20% of the Company’s net assets. The Board, the AIFM and the Portfolio Manager will be kept fully
informed of any intention to withdraw the loan facility so that repayment can be effected in an orderly fashion.
CREDIT RISK
The Company is exposed to credit risk arising from the use of counterparties. If a counterparty were to fail, the Company could be adversely affected through either a delay in settlement or a loss of assets. The most significant counterparty the Company is exposed to is J.P. Morgan Securities LLC (the Company’s Custodian and Prime Broker) which is responsible for the
safekeeping of the Company’s assets and provides the loan facility to the Company. As part of the arrangements with J.P. Morgan Securities LLC (J.P.Morgan) they may take
assets as collateral up to 140% of the value of the loan drawn down. Such assets taken as collateral by J.P. Morgan may be used, loaned, sold, rehypothecated* or
transferred. The level of the Company's gearing is at the discretion of the AIFM and the Board and can be repaid at any time, at which point the assets taken as
collateral will be released back to the Company. Any of the Company’s assets taken as collateral are not covered by the custody arrangements provided by J.P. Morgan. J.P.
Morgan is a registered broker-dealer and is accordingly subject to limits on rehypothecation*, in particular limitations set out in U.S. Securities and Exchange
Commission (SEC) Rule 15c3-3. In the event of J.P. Morgan’s insolvency, the Company may be unable to recover in full assets held by it as Custodian or held as collateral.
See page 88 for further information. The risk is managed through the selection of a financially stable counterparty, limitations on the use of gearing and reliance on a
robust regulatory regime (SEC). In addition, the Board regularly monitors the credit rating of J.P. Morgan. J.P. Morgan is also subject to regular monitoring by J.P.
Morgan Europe Limited, the Depositary, and the Board receives regular reports from the Depositary. During the year the Company entered into swap transactions with Goldman
Sachs International (further details on the associated risks can be found in note 14 beginning on page 84 of the Annual Report). Further information on financial
instruments and risk can be found in note 14 to the financial statements beginning on page 84 of the Annual Report.
* See glossary beginning on page 93.
EMERGING RISKS
The Company has carried out a robust assessment of the Company’s emerging
risks and the procedures in place to identify emerging risks are described
below. The International Risk Governance Council definition of an
‘emerging’ risk is one that is new, or is a familiar risk in a new or
unfamiliar context or under new context conditions (re-emerging).
The Audit Committee reviews a risk map at its half-yearly meetings. Emerging
risks are discussed in detail as part of this process and also throughout the
year to try to ensure that emerging (as well as established) risks are
identified and, so far as practicable, mitigated.
Current identified emerging risks are:
1. The increase in passive investment vehicles investing in the
healthcare and biotechnology sectors may make markets more volatile as the
prices of companies in the Benchmark index are inflated by substantial inflows
and deflated by substantial outflows.
2. The economic slowdown in China as a result of the re-emergence of
COVID-19 may affect the performance of the Company’s China-based
investments.
3 There is an increase in geopolitical risks threatening economic
growth, market stability and investment returns. This includes current or
potential conflicts, such as between Russia and Ukraine, North and South Korea
or China and Taiwan. Alongside this there are broader shifts in political,
economic and cultural power and allegiances that may, over the longer term,
threaten established commercial norms, the protection of intellectual property
rights and market access to the detriment of potential investment
opportunities.
These emerging risks may be considered as new contexts for or examples of
market price risk and the mitigating factors for that risk are set out above.
COVID-19
The Board recognises that the emergence and spread of new coronavirus variants
represents a continuing risk, to the Company’s investments, investment
performance and to its operations. The Portfolio Manager has continued its
dialogue with investee companies and the Board has stayed in close contact
with the AIFM and the Portfolio Manager, regularly monitoring portfolio and
share price developments. The Board has also received assurances from all of
the Company’s service providers in respect of:
· their business continuity plans and the steps being taken
to guarantee the efficiency of their operations while ensuring the safety and
well-being of their employees;
· their cyber security measures including improved
user-access controls, safe remote working and evading malicious attacks; and
· any increased risks of fraud as a result of weakness in
user access controls.
As global vaccination rates continue to grow, the outlook is cautiously
positive, but the Board will continue to monitor developments as they occur.
VIABILITY STATEMENT
In accordance with the UK Corporate Governance Code and the Listing Rules, the
Directors have carefully assessed the Company’s position and prospects as
well as the principal risks and have formed a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they
fall due over the next five financial years. The Company’s shareholders are
asked every five years to vote for the continuation of the Company, and the
next such vote will take place at the Annual General Meeting to be held in
2025. At the current time, the Directors believe they have a reasonable
expectation that this vote will be passed. The Board has chosen a five-year
horizon in view of the long-term nature and outlook adopted by the Portfolio
Manager when making investment decisions. To make this assessment and in
reaching this conclusion, the Audit Committee has considered the Company’s
financial position, its ability to liquidate its portfolio and meet its
liabilities as they fall due and, in particular, notes the following:
· The portfolio is principally comprised of investments
traded on major international stock exchanges. Based on recent market volumes
88.3% of the current portfolio could be liquidated within 30 trading days with
80.5% in seven days and there is no expectation that the nature of the
investments held within the portfolio will be materially different in future;
· The expenses of the Company are predictable and modest in
comparison with the assets and there are no capital commitments foreseen which
would alter that position; and
· The Company has no employees, only its non-executive
Directors. Consequently it does not have redundancy or other employment
related liabilities or responsibilities.
The Audit Committee, as well as considering the potential impact of the
Company’s principal risks and various severe but plausible downside
scenarios, has also made the following assumptions in considering the
Company’s longer-term viability:
· There will continue to be demand for investment trusts;
· The Portfolio Manager will continue to adopt a long-term
view when making investments, and anticipated holding periods will be at least
five years;
· The Company invests principally in the securities of listed
companies traded on international stock exchanges to which investors will wish
to continue to have exposure;
· The closed-ended nature of the Company means that, unlike
open-ended funds, it does not need to realise investments when shareholders
wish to sell their shares;
· Regulation will not increase to a level that makes running
the Company uneconomical; and
· The long-term performance of the Company will continue to
be satisfactory.
The ongoing pandemic and certain geopolitical events were factored into the
assumptions made by assessing their impact on markets, the Company’s
portfolio, and the Company’s service providers and their operations and
considering whether the likelihood of the principal risks materialising had
increased. As part of the viability assessment, the Board considered the
impact of one or more of the principal risks (as identified on pages 27 to 31
of the Annual Report) materialising, modelling substantial falls in the value
of the portfolio and the Company’s NAV as well as severely reduced market
liquidity. In all scenarios, the Board concluded that the Company would be
able to meet its liabilities as they fall due.
ENVIRONMENTAL, SOCIAL, COMMUNITY AND HUMAN RIGHTS MATTERS
As an externally-managed investment trust, the Company does not have any
employees or maintain any premises, nor does it undertake any manufacturing or
other physical operations itself. All its operational functions are outsourced
to third party service providers. Therefore, the Company has no material,
direct impact on the environment or any particular community and, as a result,
the Company itself has no environmental, human rights, social or community
policies.
For the same reasons, the Company is also exempt from reporting against the
Taskforce for Climate-Related Financial Disclosures (TCFD) framework. However,
the Board is aware that climate change poses a general risk to the investment
environment and regularly discusses this with the Portfolio Manager.
The Board is committed to carrying out the Company’s business in an honest
and fair manner with a zero-tolerance approach to bribery, tax evasion and
corruption. As such, policies and procedures are in place to prevent this. In
carrying out the Company’s activities, the Board aims to conduct itself
responsibly, ethically and fairly. The Board’s expectations are that the
Company’s principal service providers have appropriate governance policies
in place.
The Board believes that consideration of environmental, social and governance
(“ESG”) factors is important to shareholders and other stakeholders, and
has the potential to protect and enhance investment returns. The Portfolio
Manager’s investment criteria ensure that ESG factors are integrated into
their investment process and best practice in this area is encouraged by the
Board. The Portfolio Manager engages with the Company’s underlying investee
companies in relation to their corporate governance practices and the
development of their policies on social, community and environmental matters.
Further information on OrbiMed’s responsible investing policy, including
their approach to the consideration of climate change in their investment
process, can be found in the Corporate Governance section beginning on page
38.
PERFORMANCE AND FUTURE DEVELOPMENTS
A review of the Company’s year, its performance and the outlook for the
Company can be found in the Chairman’s Statement and in the Portfolio
Manager’s Review.
The Company’s overall strategy remains unchanged.
STAKEHOLDER INTERESTS AND BOARD DECISION-MAKING (SECTION 172 OF THE COMPANIES
ACT 2006)
The following disclosure, which is required by the AIC Code of Corporate
Governance, describes how the Directors have had regard to the views of the
Company’s stakeholders in their decision-making.
STAKEHOLDER GROUP HOW THE BOARD HAS ENGAGED WITH THE COMPANY’S STAKEHOLDERS
Investors The Board’s key mechanisms of engagement with investors include: · The Annual and Half-yearly Reports · The Annual General Meeting · The Company’s website which hosts reports, articles and insights, monthly factsheets and video interviews with the
Portfolio Manager · The Company’s distribution list which is maintained by Frostrow and is used to communicate with shareholders on a regular basis · Online seminars with presentations from the Portfolio Manager · One-to-one investor meetings The AIFM and
the Portfolio Manager, on behalf of the Board, completed a programme of investor relations throughout the year, reporting to the Board on the feedback received. In addition, the Chairman has been and remains available to engage with the Company’s
shareholders where required.
Portfolio Manager The Board met regularly with the Portfolio Manager throughout the year, both formally at quarterly Board meetings and informally, as required. The Board engaged primarily with key members of the portfolio management team, discussing the Company’s overall
performance as well as developments in individual portfolio companies and wider macroeconomic developments. The Board, meeting as the Audit Committee, also met with members of the Portfolio Manager’s risk management and compliance teams to better
understand their internal controls, as well as their ESG Officer to discuss the integration of ESG factors into the investment process.
Service Providers The Board met regularly with the AIFM, representatives of which attend every quarterly Board meeting to provide updates on risk management, accounting, administration, corporate governance and marketing matters. The Board, meeting as the Management
Engagement Committee, reviewed the performance of all the Company’s service providers, receiving feedback from Frostrow in their capacity as AIFM and Company Secretary. The AIFM, which is responsible for the day-to-day operational management of the
Company, meets and interacts with the other service providers including the Depositary, Custodian and Registrar, on behalf of the Board, on a daily basis. This can be through email, one-to- one meetings and/or regular written reporting. The Audit Committee
reviewed the quality and effectiveness of the audit and recommended to the Board that it be proposed to shareholders that BDO LLP (“BDO”) be re-appointed as Auditor. The Audit Committee also met with BDO to review the audit plan and set their remuneration
for the year.
As an externally managed investment trust, the Company has no employees,
customers, operations or premises. Therefore, the Company’s key stakeholders
(other than its shareholders) are considered to be its service providers.
The need to foster good business relationships with the service providers and
maintain a reputation for high standards of business conduct are central to
the Directors’ decision-making as the Board of an externally managed
investment trust.
KEY AREAS OF ENGAGEMENT MAIN DECISIONS AND ACTIONS TAKEN
Investors: · Ongoing dialogue with shareholders concerning the strategy of the Company, performance and the portfolio. · The impact of market volatility caused by, inter alia , the COVID-19 pandemic and certain geopolitical events, on the portfolio. · Share price performance. The Board and the Portfolio Manager provided updates via RNS, the Company’s website, the distribution list and the usual financial reports and monthly fact sheets. The
Board continued to monitor share price movements closely. When the discount of the share price to the net asset value per share exceeded 6%, the Company sought to buy
back shares in the market. As a result, 576,087 shares were bought back during the year. As a result of the emergence of a premium during the start of the year, 150,000
shares were issued at a premium to the net asset value per share at the time. Please refer to page 25 and 26 of the Annual Report for further information.
Portfolio Manager: · Portfolio composition, performance, outlook and business updates. · The ongoing impact of the COVID-19 pandemic on the Portfolio Manager’s business and the businesses of the portfolio companies. · The integration of sustainability and ESG factors to the Portfolio Manager’s investment process. · The Portfolio Manager’s system of internal controls and investment risk management including their cyber security arrangements. The Board concluded that the Portfolio Manager had continued to successfully implement temporary remote working with no material adverse impact on service delivery. The
Board agreed that high standards of research had been maintained and the Portfolio Manager’s strategy has been implemented consistently. The Board concluded that it was
in the interests of shareholders for OrbiMed to continue in their role as Portfolio Manager on the same terms and conditions. Please refer to page 47 of the Annual Report
for further details. The Board, meeting as the Audit Committee, concluded that the Portfolio Manager’s internal controls were satisfactory. Please refer to the Audit
Committee Report, beginning on page 53 of the Annual Report, for further information. The Board has asked OrbiMed to enhance their reporting on their engagements with
portfolio companies, including relevant ESG issues.
Service Providers: · The ongoing impact of the COVID-19 pandemic and restrictions on service providers’ businesses and service provision. · The promotion and marketing strategy of the Company. · Service providers’ internal controls, business continuity plans and cyber security provisions. · The assessment of the effectiveness of the audit and the Auditor’s reappointment. · The terms and conditions under which the Auditor is engaged. The Board concluded that the Company’s principal service providers had continued to successfully implement temporary remote working with no material adverse impact on
service delivery. The Board concluded that it was in the interests of shareholders for Frostrow to continue in their role as AIFM on the same terms and conditions. See
page 47 of the Annual Report for further details. The Board approved the Audit Committee’s recommendation that it would be in the interests of shareholders for BDO to be
re-appointed as the Company’s auditor for a further year. Please refer to the Audit Committee Report beginning on page 53 and the Notice of AGM beginning on page 98 of
the Annual Report for further information.
By order of the Board
Frostrow Capital LLP
Company Secretary
31 May 2022
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors are required to prepare the
financial statements in accordance with UK-adopted international accounting
standards. Under company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Company and of the profit or loss for the Company
for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and accounting estimates that are reasonable and
prudent;
- state whether they have been prepared in accordance with
UK-adopted international accounting standards, subject to any material
departures disclosed and explained in the financial statements;
- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business; and
- prepare a directors’ report, a strategic report and
directors’ remuneration report which comply with the requirements of the
Companies Act 2006.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006.
They are also responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of fraud and
other irregularities. The Directors are responsible for ensuring that the
Annual Report and financial statements, taken as a whole, are fair, balanced,
and understandable and provide the information necessary for shareholders to
assess the performance, business model and strategy.
WEBSITE PUBLICATION
The Directors are responsible for ensuring the Annual Report and the financial
statements are made available on a website. Financial statements are published
on the Company’s website in accordance with legislation in the United
Kingdom governing the preparation and dissemination of financial statements,
which may vary from legislation in other jurisdictions. The maintenance and
integrity of the Company’s website is the responsibility of the Directors.
The Directors’ responsibility also extends to the ongoing integrity of the
financial statements contained therein.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT
We confirm that to the best of our knowledge:
- the financial statements have been prepared in accordance with
the applicable set of accounting standards and give a true and fair view of
the assets, liabilities, financial position and the return of the Company for
the year ended 31 March 2022; and
- the Annual Report includes a fair review of the development and
performance of the business and the financial position of the Company,
together with a description of the principal risks and uncertainties that they
face.
The Directors consider the Annual Report taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to
assess the Company’s position and performance, business model and strategy.
On behalf of the Board
Andrew Joy
Chairman
31 May 2022
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2022
2022 2021
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Investment income 2 1,084 – 1,084 986 – 986
(Losses)/gains on investments held at fair value through profit or loss 8 – (206,032) (206,032) – 221,127 221,127
Exchange (losses)/gains on currency balances – (2,340) (2,340) – 3,394 3,394
AIFM, Portfolio management and performance fees 3 (237) 6,232 5,995 (268) (23,826) (24,094)
Other expenses 4 (678) (124) (802) (647) (30) (677)
Profit/(loss) before finance costs and taxation 169 (202,264) (202,095) 71 200,665 200,736
Finance costs 5 (9) (166) (175) (9) (170) (179)
Profit/(loss) before taxation 160 (202,430) (202,270) 62 200,495 200,557
Taxation 6 (149) – (149) (131) – (131)
Profit/(loss) for the year 11 (202,430) (202,419) (69) 200,495 200,426
Basic and diluted earnings/(loss) per share 7 0.0p (488.5)p (488.5)p (0.2)p 500.7p 500.5p
The Company does not have any income or expenses which are not included in the
profit/(loss) for the year. Accordingly the “profit/(loss) for the year”
is also the “total comprehensive profit/(loss) for the year”, as defined
in IAS 1 (revised) and no separate Statement of Other Comprehensive Income has
been presented.
The “Total” column of this statement represents the Company’s Income
Statement, prepared in accordance with UK-adopted International Accounting
Standards and with the requirements of the Companies Act 2006 as applicable to
companies reporting under those standards. The “Revenue” and “Capital”
columns are supplementary to this and are prepared under guidance published by
the Association of Investment Companies.
The accompanying notes are an integral part of this statement.
STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2022
2022 2021
Notes £’000 £’000
Non current assets
Investments held at fair value through profit or loss 8 427,399 643,270
Current assets
Other receivables 10 49 4,760
Cash and cash equivalents – 1,502
49 6,262
Total assets 427,448 649,532
Current liabilities
Other payables 11 1,499 20,668
Loan 14 31,741 26,779
Derivative – OTC equity swaps 8, 9 – 618
33,240 48,065
Net assets 394,208 601,467
Equity attributable to equity holders
Ordinary share capital 12 10,289 10,396
Share premium account 79,951 77,895
Capital redemption reserve 13,141 12,997
Capital reserve 16 291,231 500,594
Revenue reserve (404) (415)
Total equity 394,208 601,467
Net asset value per share 13 957.8p 1,446.4p
The financial statements on pages 70 to 91 of the Annual Report were approved
by the Board on 31 May 2022 and were signed on its behalf by:
Andrew Joy
Chairman
The accompanying notes are an integral part of this statement.
The Biotech Growth Trust PLC – Company Registration Number 3376377
(Registered in England and Wales)
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2022
Ordinary Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
At 1 April 2021 10,396 77,895 12,997 500,594 (415) 601,467
Net (loss)/profit for the year – – – (202,430) 11 (202,419)
Issue of new shares 12 37 2,060 – – – 2,097
Cost of share issuance – (4) – – – (4)
Repurchase of own shares for cancellation (144) – 144 (6,933) – (6,933)
At 31 March 2022 13 10,289 79,951 13,141 291,231 (404) 394,208
FOR THE YEAR ENDED 31 MARCH 2021
Ordinary Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
At 1 April 2020 9,802 43,021 12,997 300,099 (346) 365,573
Net profit/(loss) for the year – – – 200,495 (69) 200,426
Issue of new shares 12 594 34,945 – – – 35,539
Cost of share issuance – (71) – – – (71)
At 31 March 2021 13 10,396 77,895 12,997 500,594 (415) 601,467
The accompanying notes are an integral part of this statement.
See note 16 for details of the amounts of reserves available for distribution.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2022
2022 2021
Notes £’000 £’000
Operating activities
(Loss)/profit before taxation* (202,270) 200,557
Finance costs 175 179
Losses/(gains) on investments held at fair value through profit or loss 8 204,987 (222,562)
Transaction costs 1,045 1,435
Foreign exchange losses/(gains) 2,340 (3,394)
(Increase)/decrease in other receivables (14) 3
(Decrease)/increase in other payables (18,255) 18,239
Taxation paid 6 (149) (131)
Net cash outflow from operating activities (12,141) (5,674)
Investing activities
Purchases of investments and derivatives (439,160) (599,120)
Sales of investments and derivatives 453,237 575,006
Transaction costs (1,045) (1,435)
Net cash inflow/(outflow) from investing activities 13,032 (25,549)
Financing activities
Gross proceeds from the issue of shares 2,097 35,539
Cost of share issuance (4) (71)
Repurchase of own shares for cancellation (6,933) –
Finance costs – interest paid (175) (179)
Net drawdown/(repayment) of the loan facility 2,622 (2,564)
Net cash (outflow)/inflow from financing activities (2,393) 32,725
Net (decrease)/increase in cash and cash equivalents (1,502) 1,502
Cash and cash equivalents at start of year 1,502 –
Cash and cash equivalents at end of year – 1,502
* Includes dividends earned during the year of £1,027,000 (2021:
£875,000) and bond income of £37,000 (2021: £111,000).
CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
2022 2021
£’000 £’000
Balance as at 1 April 26,779 32,737
Net cash flow on the loan facility 2,622 (2,564)
Foreign exchange losses/(gains) 2,340 (3,394)
Loan balance at 31 March 31,741 26,779
The accompanying notes are an integral part of this statement.
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
(A) BASIS OF PREPARATION
The financial statements of the Company have been prepared in accordance with
UK-adopted International Accounting Standards and with the requirements of the
Companies Act 2006 as applicable to companies reporting under those standards.
The principal accounting policies adopted are set out below.
The financial statements have been prepared under the historical cost
convention, except for the measurement at fair value of investments. Where
presentational guidance is set out in the Statement of Recommended Practice
(the “SORP”) for Investment Trust Companies and Venture Capital Trusts
produced by the Association of Investment Companies (“AIC”) dated April
2021, the Directors have sought to prepare the Financial Statements on a basis
compliant with the recommendations of the SORP.
The Board has considered an assessment of the Company’s ability to meet its
liabilities as they fall due, including stress and liquidity tests which
modelled the effects of significant reductions in market liquidity on the
Company’s financial position. The results of the tests showed that the
Company would have sufficient cash through access to the JP Morgan loan
facility, or the ability to liquidate a sufficient proportion of its listed
holdings, to meet its liabilities as they fall due. Based on the information
available to the Directors at the time of this report, including the liquidity
of the Company’s listed investments and the results of the stress tests, the
Directors are satisfied that the Company has adequate financial resources to
continue in operation for at least the next 12 months from the date the
financial statements are approved and that, accordingly, it is appropriate to
adopt the going concern basis in preparing these financial statements.
The Company’s financial statements are presented in sterling and all values
are rounded to the nearest thousand pounds (£’000) except when otherwise
indicated.
Judgements and key sources of estimation and uncertainty
The preparation of the financial statements requires the Directors to make
judgements, estimates and assumptions that affect the amounts reported for
assets and liabilities as at the statement of financial position date and the
amounts reported for revenues and expenses during the year. However, the
nature of estimation means that actual outcomes could differ from those
estimates. In the process of applying the Company’s accounting policies, the
Directors have made the following estimate:
Fair value of the unquoted investments estimate
The Board has established a Valuation Committee to review the valuations and
the valuation methodologies of the Company’s unquoted investments. The Board
has approved the valuations of the unquoted investments on the recommendation
of the Valuation Committee.
The unquoted investment, OrbiMed Asia Partners L.P., has been valued using the
net asset value as presented in the partnership’s Consolidated Financial
Statements as at 31 December 2021. The statements were audited by KPMG LLP
(New Jersey Headquarters) and were approved on 30 March 2022. As at the date
of this report, the Directors have received confirmation that the March 2022
valuation is in line with the estimated valuation used in these financial
statements.
The following three investments, StemiRNA, XtalPi and Yisheng Biopharma have
been valued by Kroll, formerly Duff & Phelps, an independent valuer, using the
probability – weighted expected returns methodology: (“PWERM”). Under
the PWERM, fair value is determined using models based on the consideration of
values for the Company under different scenarios, such as ‘partial
recovery’, ‘full recovery’ and expected IPO dates. Examples of inputs
into the valuation models are:
· the probability assigned to potential future outcomes;
· discount rates and
· likely exit scenarios.
AWAKN warrants have been valued using the Black Scholes model with the
volatility having been assessed by Kroll. See note 14 for further details.
(B) INVESTMENTS
Investments are recognised and de-recognised on the trade date.
As the entity’s business is investing in financial assets with a view to
profiting from their total return in the form of dividends or increases in
fair value, investments are classified as fair value through profit or loss
(FVTPL) and are initially recognised at fair value. The entity manages and
evaluates the performance of these investments on a fair value basis in
accordance with its investment strategy, and information about the investments
is provided internally on this basis to the Board.
Investments classified at fair value through profit or loss, which are quoted
investments, are measured at subsequent reporting dates at fair value which is
either the bid or the last trade price, depending on the convention of the
exchange on which it is quoted.
In respect of unquoted investments, or where the market for a financial
instrument is not active, fair value is established by using valuation
techniques which may include using weighted expected returns, reference to the
current fair value of another instrument that is substantially the same,
discounted cash flow analysis and option pricing models. Where there is a
valuation technique commonly used by market participants to price the
instrument and that technique has been demonstrated to provide reliable
estimates of prices obtained in actual market transactions, that technique is
utilised.
Gains and losses on disposal and fair value changes are also recognised in the
Income Statement.
(C) PRESENTATION OF INCOME STATEMENT
In order to better reflect the activities of an investment trust company, and
in accordance with guidance issued by the AIC, supplementary information which
analyses the Income Statement between items of a revenue and capital nature
has been presented alongside the Income Statement. Net revenue is the measure
the Directors believe appropriate in assessing the Company’s compliance with
certain requirements set out in section 1158 of the Corporation Tax Act 2010.
The requirements are to distribute net revenue but only so far as there are
positive revenue reserves.
(D) INVESTMENT INCOME
Dividends receivable on equity shares are recognised on the ex-dividend date.
Where no ex-dividend date is quoted, dividends are recognised when the
Company’s right to receive payment is established. Foreign dividends are
grossed up at the appropriate rate of withholding tax, with the withholding
tax recognised in the taxation charge.
Dividends from investments in unquoted shares and securities are also
recognised when the Company’s right to receive payment is established.
Income from fixed interest securities is recognised on a time appointment
basis so as to reflect the effective interest rate.
In deciding whether a dividend should be regarded as a Capital or Revenue
receipt, the Company reviews all relevant information as to the reasons for
and sources of the dividend on a case by case basis depending upon the nature
of the receipt.
Special dividends of a revenue nature are recognised through the revenue
column of the Income Statement. Special dividends of a capital nature are
recognised through the capital column of the Income Statement.
(E) EXPENSES AND FINANCE COSTS
All expenses are accounted for on an accruals basis. Expenses are charged
through the Income Statement as follows:
· transaction costs on the acquisition or disposal of an
investment are charged to the capital column of the Income Statement;
· expenses are charged to the capital column of the Income
Statement where a connection with the maintenance or enhancement of the value
of the investment can be demonstrated, and accordingly;
· during the year, AIFM and Portfolio Management fees were
charged 95% to the capital column of the Income Statement as the Directors had
expected that in the long term virtually all of the Company’s returns would
come from capital;
· during the year, loan interest was charged 95% to the
capital column of the Income Statement as the Directors had expected that in
the long term virtually all of the Company’s returns would come from
capital;
· performance fees are charged 100% to the capital column of
the Income Statement. Performance fees are recognised as a liability of the
Company when they crystallise and become due for payment. Details of the
performance fee are set out on page 46 and 47 of the Annual Report; and
· all other expenses are charged to the revenue column of the
Income Statement.
(F) TAXATION
In line with the recommendations of the SORP, the allocation method used to
calculate tax relief on expenses presented against capital returns in the
supplementary information in the Income Statement is the “marginal basis”.
Under this basis, if taxable income is capable of being offset entirely by
expenses presented in the revenue column of the Income Statement, then no tax
relief is transferred to the capital column.
Investment trusts which have approval under Section 1158 Corporation Tax Act
2010 are not liable for taxation on capital gains.
Current tax is provided at the amounts expected to be paid or recovered.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the Balance Sheet liability method.
Deferred tax liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the Income Statement, except when it relates to items
charged or credited directly to equity, or Other Comprehensive Income (OCI),
in which case the deferred tax is also dealt with in equity or OCI
respectively.
(G) FUNCTIONAL AND PRESENTATION CURRENCY
The financial information is shown in sterling, being the Company’s
presentational currency. In arriving at the functional currency the Directors
have considered the following:
(i) the primary economic environment of the Company;
(ii) the currency in which the original capital was raised;
(iii) the currency in which distributions would be made;
(iv) the currency in which performance is evaluated; and
(v) the currency in which the capital would be returned to shareholders
on a break up basis.
The Directors have also considered the currency to which the underlying
investments are exposed and liquidity is managed. The Directors are of the
opinion that sterling best represents the functional currency.
(H) FOREIGN CURRENCIES
Transactions involving currencies other than sterling are recorded at the
exchange rate ruling on the transaction date. At each Statement of Financial
Position date, monetary items and non-monetary assets and liabilities that are
fair valued, which are denominated in foreign currencies, are retranslated at
the closing rates of exchange.
Exchange differences are included in the Income Statement and allocated as
capital if they are of a capital nature, or as revenue if they are of a
revenue nature.
(I) RESERVES
Ordinary share capital
· represents the nominal value of the issued share capital.
Share premium account
· represents the surplus of net proceeds received from the
issue of new shares over the nominal value of such shares. The Share premium
account is non-distributable.
Capital redemption reserve
· a transfer will be made to this reserve on cancellation of
the Company’s own shares purchased, equal to the nominal value of the
shares. This reserve is non-distributable.
Capital reserves
The following are credited or charged to the capital column of the Income
Statement and then transferred to the Capital Reserve:
· gains or losses on disposal of investments;
· exchange differences of a capital nature;
· expenses allocated to this reserve in accordance with the
above policies;
· increases and decreases in the valuation of investments
held at year-end; and
· shares which have been bought back by the Company for
cancellation.
Realised Capital Reserves are distributable by way of a dividend.
Revenue reserve
· reflects all income and expenditure recognised in the
revenue column of the Income Statement. Amounts standing to the credit of the
Revenue Reserve are distributable by way of dividend.
(J) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash in hand, demand deposits and
short-term deposits with a maturity of three months or less, highly liquid
investments readily convertible to known amounts of cash and subject to
insignificant risk of changes in value.
(K) OTHER RECEIVABLES AND OTHER PAYABLES
Other receivables and payables are typically settled in a short time frame and
are carried at the amount due to be settled. As a result, the fair value of
these balances is considered to be materially equal to the carrying value.
(L) LOAN
The Company has a loan facility repayable on demand, provided by J.P. Morgan
Securities LLC (“J.P. Morgan”). As part of the arrangements with J.P.
Morgan they may take assets as collateral, up to 140% of the value of the loan
drawn down. Such assets taken as collateral by J.P. Morgan may be used,
loaned, sold, rehypothecated† or transferred. Any of the Company’s assets
taken as collateral are not covered by the custody arrangements provided by
J.P. Morgan. Loans payable on demand are carried at the undiscounted amount of
the cash or other consideration expected to be paid. Interest on the facility
is charged at the United States overnight bank funding rate plus 45 basis
points. Finance costs are apportioned 95% to capital in accordance with the
policy set out under note 1(e) expenses and finance costs on page 75.
† See glossary beginning on page 93 of the Annual Report.
(M) OPERATING SEGMENTS
IFRS 8 requires entities to define operating segments and segment performance
in the financial statements based on information used by the Board of
Directors. The Directors are of the opinion that the Company is engaged in a
single segment of business, being the investments business. The results
published in this report therefore correspond to this sole operating segment.
(N) FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are recognised on the statement of
financial position when the Company becomes a party to the contractual
provisions of the instrument. Financial assets are derecognised when the
Company’s contractual right to the cash flows from the asset expires or
substantially all the risks and rewards of ownership are transferred.
Financial liabilities are derecognised when the contractual obligation is
discharged, with gains and losses recognised in the income statement.
The Company uses derivative financial instruments namely equity swaps. All
derivative instruments are valued initially, and at subsequent reporting
dates, at fair value in the Statement of Financial Position.
The equity swaps are accounted for as Fixed Assets or Current Liabilities (see
the glossary beginning on page 93 of the Annual Report).
(O) ADOPTION OF NEW AND REVISED STANDARDS
At the date of authorisation of these financial statements the following
standards and amendments to standards, which have not been applied in these
financial statements, were in issue, but not yet effective:
· IFRS 17, ‘Insurance contracts’ (effective for
accounting periods beginning on or after 1 January 2023).
· Amendments to IAS1 ‘Classification of liabilities as
current or non-current’ (effective for accounting periods beginning on or
after 1 January 2023).
· Amendments to IAS 8 ‘Definition of Accounting
Estimates’ (effective for accounting periods on or after 1 January 2023).
· Amendments to IAS 1 and IFRS Practice Statement 2
‘Disclosure of Accounting Policies’ (effective for accounting periods on
or after 1 January 2023).
· Amendments to IAS 12 ‘Deferred Tax related to Assets and
Liabilities arising from a Single Transaction’ (effective for accounting
periods on or after 1 January 2023).
The Company does not believe that there will be a material impact on the
financial statements or the amounts reported from the adoption of these
standards.
In the current financial period the Company has applied to the following
amendment to standards:
· IFRS 9, IAS 39, IFRS 7, IFRS 16 and IFRS 4: Interest Rate
Benchmark Reform – phase 2 (amended) (effective for accounting periods
beginning on or after 1 January 2021).
There is no material impact on the financial statements or the amounts
reported from the adoption of these amendment to the standards.
2. INCOME
2022 2021
£’000 £’000
Investment income
Overseas dividend income 1,027 875
Bond income 37 111
Other income
Derivatives 17 –
Deposit interest 3 –
Total income 1,084 986
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
AIFM fee – Frostrow Capital LLP 72 1,369 1,441 84 1,600 1,684
Portfolio management fee – OrbiMed Capital LLC 165 3,128 3,293 184 3,493 3,677
Performance fee (written back)/charged during the year* – (10,729) (10,729) – 18,733 18,733
237 (6,232) (5,995) 268 23,826 24,094
* During the financial year under review, due to
underperformance against the Benchmark and in accordance with the performance
fee arrangements in place, a reversal of prior period provisions totalling
£10,729,000 occurred. (2021: charge of £18,733,000).
As at 31 March 2022, no performance fees were accrued or payable (31 March
2021: £17,708,000 accrued). Of the £17,708,000 prior year accrual,
£6,979,000 crystallised and became payable at 30 June 2021, resulting in the
£10,729,000 reversal noted above.
Further details of the AIFM, portfolio management fee and the performance fee
basis can be found in the Report of the
Directors on page 46 and 47 of the Annual Report.
4. OTHER EXPENSES
2022 2021
Total Total
£’000 £’000
Directors’ emoluments 173 154
AIFM fixed fee – 60
Fees payable to the Company’s auditor for the audit of the Company’s financial statements 40 38
Fees payable to the Company’s auditor for other services to the Company+ 5 4
Registrar fees 35 35
Depositary fees 68 70
Marketing and PR costs 70 63
Legal and professional fees^ 103 64
Listing fees 46 35
Printing costs 30 24
Other costs 108 100
Total expenses charged to Revenue 678 647
Professional fees (charged to Capital)* 124 30
Total expenses 802 677
^ Includes quarterly valuation fees in relation to the
valuation of the unquoted investments (2021: valued six monthly).
* Professional fees in respect of acquisition of unquoted
and pre-IPO investments.
+ See page 57 of the Annual Report for further information.
Details of the amounts paid to Directors are included in the Directors’
Remuneration Report on pages 58 to 61 of the Annual Report.
5. FINANCE COSTS
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Loan interest 9 166 175 9 170 179
9 166 175 9 170 179
6. TAXATION
(A) ANALYSIS OF CHARGE IN THE YEAR:
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Overseas tax suffered 149 – 149 131 – 131
Total taxation for the year (see note 6(b)) 149 – 149 131 – 131
(B) FACTORS AFFECTING TOTAL TAX CHARGE FOR YEAR
Approved investment trusts are exempt from tax on capital gains made within
the Company.
The tax assessed for the year is higher than the standard rate of corporation
tax in the UK of 19% (2021: 19%). The differences are explained below:
2022 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Net profit/(loss) before taxation 160 (202,430) (202,270) 62 200,495 200,557
Corporation tax at 19% (2021: 19%) 30 (38,462) (38,432) 12 38,094 38,106
Effects of:
Non-taxable losses/(gains) on investments – 39,591 39,591 – (42,659) (42,659)
Non-taxable overseas dividends (195) – (195) (166) – (166)
Overseas tax suffered 149 – 149 131 – 131
Excess expenses unused 165 (1,129) (964) 154 4,565 4,719
Total tax charge 149 – 149 131 – 131
(C) PROVISION FOR DEFERRED TAX
No provision for deferred taxation has been made in the current or prior year.
The Company has not provided for deferred tax on capital profit or losses
arising on the revaluation or disposal of investments, as it is exempt from
tax on these items because of its status as an investment trust company.
At 31 March 2022, the Company had unutilised management expenses and other
losses of £78,625,000 (2021: £83,655,000) that are available to offset
future taxable revenue.
A deferred tax asset of £19,656,000 (25% tax rate) (2021: £15,895,000 (19%
tax rate)) arising as a result of these excess management expenses and other
losses has not been recognised because the Company is not expected to generate
sufficient taxable income in future periods in excess of the available
deductible expenses. Given the composition of the Company’s portfolio, it is
not likely that this asset will be used in the foreseeable future and
therefore no asset has been recognised in the financial statements.
7. BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE
2022 2021
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Earnings/(loss) per share 0.0 (488.5) (488.5) (0.2) 500.7 500.5
The total loss per share of 488.5p (2021: profit of 500.5p) is based on the
total loss attributable to equity shareholders of £202,419,000 (2021: profit
of £200,426,000).
The revenue profit per share of 0.0p (2021: loss of 0.2p) is based on the
revenue profit attributable to equity shareholders of £11,000 (2021: loss of
£69,000). The capital loss per share of 488.5p (2021: profit of 500.7p) is
based on the capital loss attributable to equity shareholders of £202,430,000
(2021: profit of £200,495,000).
The total loss per share is based on the weighted average number of shares in
issue during the year of 41,441,570 (2021: 40,046,064).
There are no dilutive instruments issued by the Company (2021: none).
8. INVESTMENTS
As at 31 March 2022, all investments with the exception of the unquoted
investments have been classified as Level 1. The unquoted investments have
been classified as either Level 2 or Level 3. See note 14 for further details.
2022 2021
Derivative Derivative
Financial Financial
Quoted Instruments Quoted Instruments
Investments Unquoted – Net Total Investments Unquoted – Net Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Opening book cost 534,610 29,098 – 563,708 345,728 11,000 – 356,728
Opening investment holding gains 70,926 8,636 (618) 78,944 36,023 5,906 – 41,929
Valuation at 1 April 2021 605,536 37,734 (618) 642,652 381,751 16,906 – 398,657
Movements in the year
Purchases at cost 424,962 13,284 – 438,246 556,274 29,824 6,286 592,384
Sales proceeds (450,556) (123) 2,167 (448,512) (552,465) (11,594) (6,892) (570,951)
Transfer between levels 19,625 (19,625) – – – – – –
Net movement in investment holding (losses)/gains (206,398) 2,960 (1,549) (204,987) 219,976 2,598 (12) 222,562
Valuation at 31 March 2022 393,169 34,230 – 427,399 605,536 37,734 (618) 642,652
Closing book cost at 31 March 2022 512,894 22,943 – 535,837 534,610 29,098 – 563,708
Investment holding (losses)/gains at 31 March 2022 (119,725) 11,287 – (108,438) 70,926 8,636 (618) 78,944
Valuation at 31 March 2022 393,169 34,230 – 427,399 605,536 37,734 (618) 642,652
The Company received £447,863,000 (2021: £570,367,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£466,513,000 (2021: £385,989,000).
These investments have been revalued over time and until they were sold any
unrealised gains/loss were included in the fair value of these investments.
GAINS ON INVESTMENTS (PER THE INCOME STATEMENT)
2022 2021
£’000 £’000
(Losses)/gains on disposal based on historical cost (204,987) 222,562
Transaction costs (1,045) (1,435)
(Losses)/gains on investments held at fair value through profit or loss (206,032) 221,127
The total transaction costs for the year were £1,045,000 (31 March 2021:
£1,435,000) broken down as follows: purchase transaction costs for the year
to 31 March 2022 were £396,000 (31 March 2021: £851,000), sale transaction
costs were £649,000 (31 March 2021: £584,000). These costs consist mainly of
commission. Transaction costs are recorded in the capital column of the Income
Statement.
9. DERIVATIVE FINANCIAL INSTRUMENTS
2022 2021
£’000 £’000
Fair value of OTC equity swaps (assets) – –
Fair value of OTC equity swaps (liabilities) – (618)
– (618)
(See page 95 of the Annual Report for further details).
10. OTHER RECEIVABLES
2022 2021
£’000 £’000
Future settlements – sales – 4,725
Prepayments and accrued income 49 35
49 4,760
11. OTHER PAYABLES
2022 2021
£’000 £’000
Future settlements – purchases 452 1,366
Other creditors and accruals 1,047 1,594
Performance fees accrued – 17,708
1,499 20,668
12. ORDINARY SHARE CAPITAL
2022 2021
Number of Number of
Shares Shares
Allotted, issued and fully paid at 1 April 2021 41,584,769 39,207,269
Issue of new shares 150,000 –
Shares bought back for cancellation during the year (576,087) 2,377,500
At 31 March 2022 41,158,682 41,584,769
During the year 150,000 new ordinary shares were issued for a consideration of
£2,093,000 net of issue costs of £4,000 (2021: 2,377,500 shares were issued
for a consideration of £35,468,000 net of issue costs of £71,000) and
576,087 shares bought back for cancellation for a consideration of £6,933,000
(2021: nil).
2022 2021
£’000 £’000
Allotted, issued and fully paid shares of 25p 10,289 10,396
13. NET ASSET VALUE PER SHARE
2022 2021
Net asset value per share 957.8p 1,446.4p
The net asset value per share is based on the net assets attributable to
equity shareholders of £394,208,000 (2021: £601,467,000) and on 41,158,682
(2021: 41,584,769) shares in issue at 31 March 2022.
14. RISK MANAGEMENT POLICIES AND PROCEDURES
As an investment trust, the Company invests in equities and other investments
for the long term in order to achieve its investment objective as stated on
page 23 of the Annual Report. In pursuing its investment objective, the
Company is exposed to a variety of risks that could result in either a
reduction or increase in the Company’s net assets or in profits.
The Company’s financial instruments comprise securities and other
investments, cash balances, debtors and creditors and a loan facility that
arise directly from its operations (for example, in respect of sales and
purchases awaiting settlement).
The main risks the Company faces from its financial instruments are (i) market
price risk (comprising currency risk, interest rate risk and other price risk
(i.e. changes in market prices other than those arising from interest rate or
currency risk)), (ii) liquidity risk and (iii) credit risk. The Board also
considers (iv) fair value measurement and (v) capital management.
The Board reviews and agrees policies regularly for managing and monitoring
each of these risks.
OTC EQUITY SWAPS (See glossary beginning on page 93 of the Annual Report for
further details)
The Company uses OTC equity swap positions to gain access to Chinese markets
where the Company is not locally registered to trade directly. The swap
positions previously held in BGI Genomics were sold prior to the Company’s
year end.
1. MARKET PRICE RISK:
The Company’s portfolio is exposed to fluctuations in market prices in the
biotechnology sector and the regions in which it invests. Market-wide
uncertainties which have recently caused increased volatility in the markets
include the outbreak of war in Ukraine and the ongoing COVID-19 pandemic
including further lockdowns in China, and increased inflationary pressures.
The Company’s exposure to market price fluctuations are monitored by the
AIFM and the Portfolio Manager in pursuance of the investment objective.
Further information on the composition of the portfolio is set out on pages 7
and 8 of the Annual Report.
This market risk comprises three elements – foreign currency risk, interest
rate risk and other price risk.
(a) Foreign currency risk:
The Company’s portfolio is denominated in currencies other than sterling
(the Company’s functional currency, and in which it reports its results). As
a result, movements in exchange rates can significantly affect the sterling
value of those items.
Management of the risk
The AIFM and the Portfolio Manager monitor the Company’s exposure to foreign
currencies on a continuous basis and report to the Board regularly. The
Company does not hedge against foreign currency movements to manage market
price risk.
The Company does not use financial instruments to mitigate the currency
exposure in the period between the time that the income is included in the
financial statements and its receipt.
Foreign currency exposure
At the date of the Statement of Financial Position the Company held
£395,486,000 (2021: £588,142,000) of investments denominated in U.S. dollars
and £31,913,000 (2021: £54,510,000) in other non-sterling currencies.
Foreign currency sensitivity
The fair value of the Company’s monetary items that have foreign currency
exposure at 31 March 2022 is shown below.
Where the Company’s equity investments (which are not monetary items) are
priced in a foreign currency they are shown separately in the analysis as to
show the overall level of exposure.
2022 2021
£’000 £’000
Sterling equivalent of US$ and other non-sterling exposure
Current assets 19 6,251
Creditors (452) (1,366)
Loan (non-sterling) (31,709) (26,779)
Foreign currency exposure on net monetary items (32,142) (21,894)
Investments held at fair value through profit or loss including derivative equity swap 427,399 642,652
Total net foreign currency exposure 395,257 620,758
The table on page 86 details the sensitivity of the Company’s profit or loss
after taxation for the year (investment values) to a 10% increase and decrease
in the value of sterling compared to the U.S. dollar and other non-sterling
currencies (2021: 10% increase and decrease).
The above percentages have been determined based on market volatility in
exchange rates over the previous twelve months. The analysis is based on the
Company’s foreign currency financial instruments held at each Statement of
Financial Position date, after adjusting for an increase/decrease in the AIFM
and Portfolio management fees.
If sterling had weakened against the U.S. dollar and other non-sterling
currencies, as stated above, this would have had the following effect:
2022 2021
£’000 £’000
Impact on revenue return – –
Impact on capital return 43,500 72,055
Total return after tax/effect on shareholders’ funds 43,500 72,055
If sterling had strengthened against the U.S. dollar and other non-sterling
currencies, as stated above, this would have had the following effect:
2022 2021
£’000 £’000
Impact on revenue return – –
Impact on capital return (35,592) (52,836)
Total return after tax/effect on shareholders’ funds (35,592) (52,836)
(b) Interest rate risk:
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates.
Interest rate exposure
The Company’s main exposure to interest rate risk is through its loan
facility with J.P. Morgan Securities LLC which is repayable on demand.
At the year-end financial liabilities subject to interest rate risk were as
follows (there were no assets subject to interest rate risk).
Fixed Floating Floating
rate rate rate
2022 2022 2021
£’000 £’000 £’000
Unquoted debt instruments cash – – –
Loan facility – 31,741 26,779
Financial swap position (Gross exposure) – – 3,397
– 31,741 30,176
Management of the risk
The level of borrowings is approved and monitored by the Board and the AFIM on
a regular basis.
Interest rate sensitivity
The majority of the Company’s financial assets are equity shares and other
investments which neither pay interest nor have a maturity date. The Company
has a loan facility with J.P.Morgan Securities LLC as disclosed above. The
amount utilised at 31 March 2022 was £31,741,000 (2021: £26,779,000).
Interest is charged at the United States overnight bank funding rate plus 45
basis points. The level of interest fluctuates in line with the funding rate
and the amount of the loan. If the rate increased by 1%, the impact on the
profit or loss and net assets would be expected to be £317,000
(2021: £268,000).
(c) Other price risk
Other price risk may affect the value of the quoted investments.
If market prices at the date of the Statement of Financial Position had been
20% higher or lower (2021: 20% higher or lower) while all other variables had
remained constant, the return and net assets attributable to shareholders for
the year ended 31 March 2022 would have increased/decreased by £84,668,000
(2021: £127,982,000), after adjusting for an increase or decrease in the AIFM
and the Portfolio management fees. The calculations are based on the portfolio
valuations as at the respective Statement of Financial Position dates.
Other price risk exposure
2022 2021
Notional Notional
Assets Liabilities exposure* Assets Liabilities exposure*
£’000 £’000 £’000 £’000 £’000 £’000
Investments 427,399 – 427,399 643,270 – 643,270
OTC Equity Swaps – – – – (618) 2,779
427,399 – 427,399 643,270 (618) 646,049
* Calculated in accordance with AIFMD requirements, see
glossary beginning on page 93 of the Annual Report for further details.
2. LIQUIDITY RISK:
This is the risk that the Company will encounter difficulty in meeting
obligations associated with financial liabilities.
Management of the risk
Liquidity risk is not significant as the majority of the Company’s assets
are investments in quoted equities that are readily realisable within one
week, in normal market conditions. Stress tests have been performed to
understand how long the portfolio would take to realise in such situations.
The Board is comfortable that in such situations the Company would be able to
meet its liabilities as they fall due. Short-term funding flexibility can be
achieved through the use of the bank loan facility. The maximum amount of
gearing permitted by the Board is 20% of net assets.
The Board gives guidance to the Portfolio Manager as to the maximum amount of
the Company’s resources that should be invested in any one company.
Liquidity exposure and maturity
Contractual maturities of the financial liabilities as at 31 March 2022, based
on the earliest date on which payment can be required, are as follows:
2022 2022 2021 2021
3 months 3 to 3 months 3 to
or less 12 months or less 12 months
£’000 £’000 £’000 £’000
Loan facility (repayable on demand) 31,741 – 26,779 –
Future settlements 452 – 1,366 –
Performance fees accrued – – – 17,708
Derivative – OTC equity swaps – – – 618
Other creditors and accruals 1,047 – 1,594 –
33,240 – 29,739 18,326
3. CREDIT RISK:
Credit risk is the risk of failure of a counterparty to discharge its
obligations resulting in the Company suffering a loss.
As noted on page 31 of the Annual Report, J.P. Morgan Securities LLC (“J.P.
Morgan”) may take assets with a value of up to 140% of the loan as
collateral. Such assets held by J.P. Morgan are available for
rehypothecation†.
As at 31 March 2022, the maximum value of assets available for rehypothecation
was £44,437,000 being 140% of the loan balance of £31,741,000 (31 March
2021: £37,491,000 being 140% of the loan balance of £26,779,000).
See pages 31 and 47 for further details on the loan facility and the
associated credit risk.
† See glossary beginning on page 93 of the Annual Report.
Management of the risk
The risk is not significant and is managed as follows:
J.P. Morgan
· by receiving and reviewing regular updates from the
Custodian and Prime Broker and Depository.
· by reviewing their Internal Control reports and regularly
monitor J.P. Morgan’s credit rating. J.P. Morgan has a credit rating of Aa3
(Moody’s), A+ (S&P) and AA (Fitch).
· by reviewing on a monthly basis assets which are available
for rehypothecation.
Other counterparties
· by only dealing with brokers which have been approved by
OrbiMed Capital LLC and banks with high credit ratings such as Goldman Sachs
International who have a credit rating of A1 (Moody’s), A+ (S&P) and A+
(Fitch);
· by investing in markets that mainly operate DVP (delivery
versus payment) settlement.
· all cash balances are held with approved counterparties.
J.P. Morgan is the Custodian of the Company’s assets and all assets are
segregated from J.P. Morgan’s own assets.
At 31 March 2022 the Company’s exposure to credit risk amounted to £nil and
was in respect of amounts due from brokers in relation to future settlements
(2021: £4,725,000).
4. FAIR VALUE MEASUREMENT
Hierarchy of investments
As required under IFRS 13 “Fair Value Measurement”, the Company has
classified its financial assets designated at fair value through profit or
loss using a fair value hierarchy that reflects the significance of the inputs
used in making the fair value measurements. The hierarchy has the following
levels:
· Level 1 – quoted prices (unadjusted) in active markets
for identical assets or liabilities;
· Level 2 – inputs other than quoted prices included with
Level 1 that are observable for the asset or liability, either directly (i.e.
as prices) or indirectly (i.e. derived from prices); and
· Level 3 – inputs for the asset or liability that are not
based on observable market data (unobservable inputs).
As of 31 March 2022 Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Assets 393,169 303 33,927 427,399
Financial investments held at fair value through profit or loss 393,169 303 33,927 427,399
As of 31 March 2021 Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Assets 605,536 251 37,483 643,270
Derivatives: equity Swap (liabilities) – (618) – (618)
Financial investments held at fair value through profit or loss 605,536 (367) 37,483 642,652
As at 31 March 2022, the investment in OrbiMed Asia Partners LP Fund has been
classified as Level 3. The OrbiMed
Asia Partners Fund LP has been valued at the net asset value as at 31 December
2021 and the Directors have received confirmation that the March 2022
valuation is in line with the estimated valuation. If the value of the fund
were to increase or decrease by 10%, while all other variables had remained
constant, the return and net assets attributable to shareholders for the year
ended 31 March 2022 would have increased/decreased by £175,000 (2021:
£212,000).
The following investments have been valued by the Board, following
recommendations received from the Valuation Committee which has reviewed in
detail both the valuation and the methodologies provided by Kroll, an
independent valuer. StemiRNA, XtalPi and Yisheng Biopharma have been valued
using the probability-weighted expected returns methodology and are classified
as Level 3. If the value of these investments were to increase or decrease by
10%, while all other variables remain constant, the return attributable to
shareholders for the year ended 31 March 2022 would have increased/decreased
by £3,218,000.
These Level 3 investments include assumptions based on non-observable market
data such as:
(i) probability of scenario,
(ii) expected time to sale date and
(iii) discount rates.
The table below sets out the range of inputs applied in arriving at the fair
value of the level three investments.
2022 Probability of scenario* 10%-35%
Probability of scenario weighted average 22.5%
2021 Probability of scenario* 7.5%-35%
Probability of scenario weighted average 21.3%
2022 Expected time to sale range 0.3-1.8 years
Expected time to sale weighted average 1.05 years
2021 Expected time to sale range 0.2-1.8 years
Expected time to sale weighted average 1.0 year
2022 Discount rate 20.5%
Discount rate weighted average 20.5%
2021 Discount rate 20.5%
Discount rate weighted average 20.5%
*Scenarios include probability of partial recovery, full recovery and IPO.
AWAKN warrants have been valued using the Black Scholes model with the
volatility having been assessed by Kroll. They have been classified as Level
2.
14. RISK MANAGEMENT POLICIES AND PROCEDURES continued
Level 3 Reconciliation
The reconciliation below shows the changes during the year for the financial
assets and liabilities designated at fair value through profit or loss
classified as being Level 3. There has been no transfer between fair value
hierarchy levels.
2022 2021
£’000 £’000
Assets
As at 1 April 37,483 16,906
Purchase of unquoted investments 13,266 29,824
Sale of unquoted investments (40) (11,594)
Net movement in investment holding gains during the year 2,843 2,347
Transfer from level 3 to level 1 (19,625) –
Assets as at 31 March 33,927 37,483
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:
Financial assets and financial liabilities are either carried in the Statement
of Financial Position at their fair value or at a reasonable approximation of
fair value.
5. CAPITAL MANAGEMENT
The Company’s capital management objectives are:
· to ensure that it will be able to continue as a going
concern; and
· to maximise the total return to its equity shareholders.
The Board’s policy is to limit gearing to a maximum of 20% of the
Company’s net assets. As at 31 March 2022 the Company was geared 8.4% (2021:
6.8%).
The Company’s capital is disclosed in the Statement of Financial Position
and is managed on a basis consistent with its investment objective and policy
as set out on pages 23 and 24 of the Annual Report.
Shares may be repurchased by the Company as explained on page 25 of the Annual
Report.
The Company’s objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
15. TRANSACTIONS WITH THE MANAGERS AND RELATED PARTIES
The following are considered to be related parties:
· Frostrow Capital LLP
· OrbiMed Capital LLC
· The Directors of the Company
Details of the relationship between the Company and Frostrow Capital LLP, the
AIFM, and OrbiMed Capital LLC, the Portfolio Manager, are disclosed in the
Report of the Directors on page 46 of the Annual Report. Geoff Hsu, who joined
the Board on 16 May 2018, is a General Partner at OrbiMed. Details of fees
paid to OrbiMed by the Company can be found in note 3. All material related
party transactions have been disclosed in notes 3 and 4.
The Company holds an interest in OrbiMed Asia Partners Fund which equates to
0.4% of the investments held at 31 March 2022. Further details can be found
on pages 8 and 74 of the Annual Report.
Details of the remuneration of all Directors can be found on page 59. Geoff
Hsu has waived his Director’s fees. Details of the Directors’ interests in
the capital of the Company can be found on page 61 of the Annual Report.
Three current and two former partners at OrbiMed Capital LLC have a minority
financial interest totalling 20% in Frostrow Capital LLP, the AIFM. Details of
the fees paid to Frostrow Capital LLP by the Company can be found in note 3.
16. CAPITAL RESERVE
2022 2021
Capital Reserves Capital Reserves
Investment Investment
holdings holdings
gains/ gains/
Other (losses) Total Other (losses) Total
£’000 £’000 £’000 £’000 £’000 £’000
At 1 April 421,917 78,677 500,594 258,170 41,929 300,099
Net (losses)/gains on investments (19,170) (186,862) (206,032) 184,379 36,748 221,127
Exchange (losses)/ gains (2,340) – (2,340) 3,394 – 3,394
Expenses charged to capital 5,942 – 5,942 (24,026) – (24,026)
Repurchase of own shares for cancellation (6,933) – (6,933) – – –
At 31 March 399,416 (108,185) 291,231 421,917 78,677 500,594
Sums within the Total Capital Reserve less unrealised gains (those on
investments not readily convertible to cash) are available for distribution.
Investment holding gains in the table above are unrealised.
17. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
As at 31 March 2022 there were no contingent liabilities or capital
commitments for the Company (2021: nil).
The figures and financial information for 2021 are extracted from the
published Annual Report for the year ended 31 March 2021 and do not constitute
the statutory accounts for that year. The Annual Report for the year ended 31
March 2021 has been delivered to the Registrar of Companies and included the
Independent Auditor’s Report which was unqualified and did not contain a
statement under either section 498(2) or section 498(3) of the Companies Act
2006.
The figures and financial information for 2022 are extracted from the Annual
Report for the year ended 31 March 2022 and do not constitute the statutory
accounts for the year. The Annual Report for the year ended 31 March 2022
includes the Independent Auditor’s Report which is unqualified and does not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The Annual Report and financial statements have not yet
been delivered to the Registrar of Companies.
ANNOUNCEMENT ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
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