REG-Biotech Grw Tst PLC: Final Results
03/06/2020 17:10
LONDON STOCK EXCHANGE ANNOUNCEMENT
The Biotech Growth Trust PLC
Audited Results for the Year Ended 31 March 2020
The Company’s Annual Report will be posted to shareholders on 12 June 2020.
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
The Company's Annual Report for the year ended 31 March 2020 has been
submitted to the UK Listing Authority, and will shortly be available for
inspection on the National Storage Mechanism (NSM):
www.morningstar.co.uk/uk/nsm
(Documents will usually be available for inspection within two business days
of this notice being given)
Mark Pope, Frostrow Capital LLP, Company Secretary – 0203 008 4913
3 June 2020
STRATEGIC REPORT / CHAIRMAN’S STATEMENT
ANDREW JOY
INTRODUCTION AND RESULTS
As a result of the COVID-19 pandemic the year to 31 March 2020 proved to be
one of the most dramatic in the history of the Company since its inception in
1997. The pandemic has dealt a profound shock to the world in health, economic
and political terms. Healthcare and healthcare stocks are at the epicentre of
this great convulsion. Before reporting on the last year, it is right to
acknowledge that this has been a very difficult time for many people. Victims
have suffered and in some cases, died; key workers, many in healthcare, have
put themselves at great personal risk for the benefit of others; and it has
required all of us to adapt our lives.
One effect of this terrible epidemic has, of course, been to put a spotlight
on the healthcare industry, and the remarkable strength of biotechnology
stocks since mid-March, both relative to other sectors of the stock market and
in absolute terms. The stock market recognises two things. First that in
contrast to some economic sectors, healthcare is set to remain strong after
the end of the pandemic, and represents a blend of defensive and growth
characteristics. This has led to a rotation out of less favoured sectors into
healthcare. This process started in earnest in March and has continued to be
pronounced since the Company’s year-end. Secondly, the market recognises
that the biotechnology sector is itself in an era of innovation without
parallel and could hold the key for treating or indeed preventing a number of
previously intractable diseases, including COVID-19. Although the
biotechnology sector may not necessarily earn lucrative returns from COVID-19
treatments or vaccines, these have been a significant driver of share price
movements in the current environment. Moreover, the investing world does see
that biotechnology is a key and growing part of healthcare and of all of our
futures.
As in a number of other sectors, the crisis appears to have led to a rapid
acceleration of trends which were already in place. Strategically these trends
place the Company in a strong position over the long term.
Turning to the results for the year to 31 March 2020, the Company’s net
asset value per share total return was +18.5%, and the share price total
return was +10.9%, significantly outperforming the Company’s benchmark, the
NASDAQ Biotechnology Index (sterling adjusted) which rose by 1.2% over the
year. At the half year, shareholders will recall that the net asset value per
share had fallen by 5.6%. The annual result thus reflects a very strong second
half total return of +24.1% in the net asset value per share. This has
continued since the Company’s year-end with both the Company’s net asset
value per share, and share price, reaching all-time highs in late April and
early May. The performance over the year was helped by the strength of the
U.S. dollar over the year. It rose by 4.8 % against sterling over the period.
Almost all of the Company’s assets are in U.S. dollars.
The Company’s gearing, which increased to 9.0% at the year-end from 5.5.% at
the beginning of the year, contributed positively 1.0% to the Company’s
overall return during the year. At the time of writing, the gearing had
reduced slightly to 7.2%.
The main driver of the performance however has been the major outperformance
by our Portfolio Manager, of the overall biotechnology market. Earlier in the
year, as explained in the half year report, OrbiMed, with the Board’s
encouragement, shifted the portfolio more towards emerging biotechnology
stocks and away from the giants of the biotechnology industry, which comprise
a significant portion of the index. The intention was to allow OrbiMed to
exercise its advantage of superior research and judgement in smaller
capitalisation stocks, and diverge more from a passive market weighting. This
will tend to mean greater volatility in the net asset value per share, but as
can be seen from the second half performance it also provides the opportunity
to outperform to a material degree.
Last year, the Company made its first investments in Chinese biotechnology
stocks. While most of the biotechnology innovation historically has occurred
in the U.S. and Europe, there is a trend towards increased innovation in
China, the second largest pharmaceutical market in the world. The Chinese
government has taken a number of steps in recent years to encourage greater
innovation in drug development. The early stocks in this strategy have
performed extremely strongly. They will never represent a large share of the
Company’s investments, but they are a segment where OrbiMed, which has had
an investing capability in China since 2009, has a distinct advantage.
Further details regarding the Company’s performance can be found in the
Portfolio Manager’s Review.
COVID-19 AND IMPLICATIONS FOR THE COMPANY
The COVID-19 virus has swept the globe and has claimed many thousands of
lives. It is clear that the pandemic has had a far more severe impact on
markets than previous virus outbreaks, with governments having taken strict
measures to contain the virus. Despite the risks of a global recession with
associated volatility in world stock markets, our Portfolio Manager believes
that healthcare as a defensive sector should fare better than other parts of
the economy. In terms of the impact on biotechnology companies specifically,
there may be some temporary negative impact to commercial sales, potential
delays for clinical trials, possible regulatory delays, and a more dilutive
financing environment with the decline in share prices. However, sales of
drugs taken by patients at home should be minimally impacted, supply chain
disruption for the biotechnology industry has been largely non-existent and
the U.S. Food and Drug Administration (FDA) has stated that it intends to
adhere to drug approval timelines. Most biotechnology companies are believed
to have sufficient cash to avoid any imminent financing needs. Overall, our
Portfolio Manager believes that any headwinds should be manageable for the
industry, and that strategically the sector will benefit.
Our Portfolio Manager’s strategy in light of the COVID-19 outbreak remains
largely unchanged. They are fundamental stock pickers and have been
capitalising on market volatility to improve the quality of the portfolio and
add to their best ideas. They are encouraged by the biotechnology companies
attempting to develop potential treatments and vaccines for COVID-19, but they
have not actively chased these companies, as the probability of success and
ultimate revenue potential from those therapies remains unknown. It should be
noted though that some of the Company’s portfolio companies do have active
COVID-19 programmes, including Gilead Sciences (developing the antiviral
remdesivir), Regeneron Pharmaceuticals (developing antibody treatments for
COVID-19), and CanSino Biologics (a Chinese vaccine company which has already
advanced a vaccine for COVID-19 into human trials).
Looking beyond the COVID-19 pandemic, our Portfolio Manager believes that all
of the fundamental investment themes for the biotechnology sector remain
intact: unprecedented innovation based on novel technologies, a friendly FDA
proactively approving new drugs, compelling valuations relative to historical
norms, and expected continued merger and acquisition (M&A) activity. In
addition, the political landscape had also changed following Joe Biden’s
decisive win over Bernie Sanders. Our Portfolio Manager believes that either a
Trump or Biden Presidency would be relatively benign for the biotechnology
sector and would most likely mean the continuation of the status quo. Our
Portfolio Manager’s focus remains on the selection of stocks with strong
prospects for capital enhancement and your Board firmly believes that
long-term investors will be well rewarded.
CAPITAL STRUCTURE
For most of the year under review, the Company continued to pursue an active
policy of buying back its shares when the discount to the net asset value per
share was materially higher than 6%. However, as a result of extreme market
volatility in March 2020, the Board took the decision that it would be in the
best interests of shareholders to suspend buybacks until a less volatile
period. The Board is committed to protecting the discount at or near the 6%
level and is keeping the resumption of buybacks under close review. At the
year end the discount was 12.7% (2019: 6.7%), however, for much of the period
since this date to the time of writing, the discount has been much narrower,
at just over 6.0%, and at the time of writing (at the close of the UK market
on 2 June), the discount was 2.0%.
During the year to 31 March 2020 the Company bought back 12,760,293 shares for
cancellation (year to 31 March 2019, 3,572,352), representing 24.6% of the
shares in issue at the start of the year. The Company renewed its authority to
buy-back shares at a General Meeting held on 27 January 2020.
The Company has the ability to use gearing up to 20% of the net assets. As
noted above, at the end of the year, the Company had gearing of 9.0%. This has
subsequently fallen to 7.2%.
RETURN AND DIVIDEND
The revenue return per share was 1.0p (2019: 1.0p). No dividend is recommended
in respect of the year ended 31 March 2020 (2019: nil).
THE COMPANY’S AUDITOR
As reported at the half year stage, in the interests of obtaining the best
value for shareholders, the Board agreed that a competitive tender process for
the external audit should be held. This was led by the Audit Committee and
resulted in the appointment of a new external auditor, BDO LLP. Further
details can be found in the Audit Committee Report.
CONTINUATION OF THE COMPANY
The Company’s articles provide that every five years there will be a
continuation vote resolution tabled at the Annual General Meeting falling in
that year. Accordingly, such a resolution is included in the notice of Annual
General Meeting contained within this report. In light of the Company’s
long-term track record, its current strong performance and the positive
outlook for the biotechnology sector, the Board unanimously recommends that
shareholders vote in favour of the resolution allowing the Company to continue
as an investment trust for a further five years.
ANNUAL GENERAL MEETING
The Company’s Annual General Meeting (“AGM”) will be held at the offices
of Frostrow Capital LLP, 25 Southampton Buildings, London WC2A 1AL on
Wednesday, 15 July 2020 at 12 noon.
The Board has considered how best to deal with the potential impact of the
COVID-19 outbreak on arrangements for the AGM. We are required by law to hold
an AGM, but we are concerned for the safety and wellbeing of our shareholders
and other attendees. Given the unprecedented circumstances, the Board has
decided that this year we will conduct only the statutory, formal business to
meet the minimum legal requirements. There will be no opportunity to interact
with the Directors during the meeting. We will not be providing any
refreshments after the meeting in order to minimise contact. It may also prove
to be necessary to postpone the meeting to a later date or to introduce entry
restrictions as considered necessary at the time. Our Portfolio Manager will
be recording a short video presentation which will be available on the
Company’s website on the day of the AGM. Following the meeting there will be
the opportunity to ask questions by way of an interactive session with the
Portfolio Manager and with the Board. Details will be published on the
Company’s website, www.biotechgt.com in advance of the AGM.
The Board strongly encourages all shareholders to exercise their votes in
respect of the meeting in advance and to submit any questions they may have to
the Company Secretary. Shareholders can vote online by visiting
www.signalshares. com and following instructions. Any shareholders who require
a hard copy form of proxy may request one from the registrar, Link Asset
Services. Voting by proxy will ensure that your votes are registered in the
event that attendance at the AGM is not possible or restricted, or if the
meeting is postponed (your votes will still be valid when the meeting is
eventually held). The Board will continue to monitor the Government’s advice
and urges all shareholders to comply with any restrictions in place at the
time of the AGM.
Of course, in the event that the situation has improved and we are able to
hold a meeting with full participation from the Board and the Portfolio
Manager, we will do so. We will keep shareholders updated via the Company’s
website, www.biotechgt.com, in this regard.
Andrew Joy
Chairman
3 June 2020
STRATEGIC REPORT / COMPANY PERFORMANCE
HISTORIC PERFORMANCE FOR THE YEARS ENDED 31 MARCH
2015 2016 2017 2018 2019 2020
Net asset value per share total return*^ 67.4% (24.8%) 27.5% (6.7%) 5.3% 18.5%
Share price total return*^ 69.9% (26.3%) 27.9% (6.1%) 4.6% 10.9%
Benchmark return* 63.7% (21.8%) 29.2% (2.2%) 13.0% 1.2%
Net asset value per share 834.7p 627.9p 800.8p 747.5p 786.8p 932.4p
Share price 793.5p 585.0p 748.0p 702.0p 734.0p 814.0p
Discount of share price to net asset value
per share*^ 4.9% 6.8% 6.6% 6.1% 6.7% 12.7%
Ongoing charges^ 1.2% 1.0% 1.1% 1.1% 1.1% 1.1%
Gearing^ 9.4% 11.1% 3.2% 6.8% 5.5% 9.0%
* Source: Morningstar
^ Alternative Performance Measure (see glossary).
STRATEGIC REPORT / INVESTMENT PORTFOLIO
INVESTMENTS HELD AS AT 31 MARCH 2020
Security Country/ Region Fair value £’000 % of investments
Vertex Pharmaceuticals United States 33,409 8.4
Gilead Sciences United States 29,092 7.3
Biogen United States 21,381 5.3
Applied Therapeutics United States 17,336 4.3
Amgen United States 17,200 4.3
Sarepta Therapeutics United States 16,963 4.2
Neurocrine Biosciences United States 13,445 3.4
Mirati Therapeutics United States 12,726 3.2
Hansoh Pharmaceutical China 12,365 3.1
BioMarin Pharmaceutical United States 11,251 2.8
Ten largest investments 185,168 46.3
MeiraGTx United States 10,670 2.7
Exelixis United States 10,669 2.7
Turning Point Therapeutics United States 10,525 2.6
CRISPR Therapeutics Switzerland 10,458 2.6
Alexion Pharmaceuticals United States 9,527 2.4
Acceleron Pharma United States 9,139 2.3
Agios Pharmaceuticals United States 8,923 2.2
CanSino Biologics China 7,826 2.0
Avrobio United States 7,485 1.9
Adverum Biotechnologies United States 7,454 1.9
Twenty largest investments 277,844 69.6
Zymeworks Canada 7,328 1.9
Burning Rock Biotech (unquoted) China 7,063 1.8
Neoleukin Therapeutics United States 6,927 1.7
Athenex United States 6,781 1.7
Regeneron Pharmaceuticals United States 6,773 1.7
Keros Therapeutics (unquoted)* United States 6,256 1.6
Cara Therapeutics United States 5,460 1.4
Deciphera Pharmaceuticals United States 5,453 1.4
Heron Therapeutics United States 5,084 1.3
Arena Pharmaceuticals United States 4,497 1.1
Thirty largest investments 339,466 85.2
Xenon Pharmaceuticals Canada 4,430 1.1
Aurinia Pharmaceuticals Canada 4,414 1.1
Alphamab Oncology China 4,190 1.0
Theravance Biopharma United States 3,934 1.0
AnaptysBio United States 3,846 1.0
NanoString Technologies United States 3,542 0.9
IGM Biosciences United States 3,273 0.8
Aptose Biosciences Canada 2,658 0.7
IMARA United States 2,382 0.6
OrbiMed Asia Partners L.P. (unquoted)** Asia 2,377 0.6
Forty largest investments 374,512 94.0
* Listed on 7 April 2020 at the IPO price of U.S.$16 per
share (see note 13).
** Partnership Interest.
STRATEGIC REPORT / INVESTMENT PORTFOLIO
INVESTMENTS HELD AS AT 31 MARCH 2020
Security Country/ Region Fair value £’000 % of investments
KalVista Pharmaceuticals United States 2,296 0.6
InflaRx Netherlands 2,034 0.5
NeuBase Therapeutics United States 1,886 0.5
Immunovant United States 1,799 0.5
Aptinyx United States 1,712 0.4
Bioxcel Therapeutics United States 1,588 0.4
Arrowhead Pharmaceuticals United States 1,580 0.4
Prothena Ireland 1,348 0.3
Trillium Therapeutics Canada 1,330 0.3
Pandion Therapeutics (unquoted) United States 1,210 0.3
Fifty largest investments 391,295 98.2
Apellis Pharmaceuticals United States 1,081 0.3
REGENXBIO United States 996 0.2
Arvinas United States 946 0.2
Flexion Therapeutics United States 840 0.2
Menlo Therapeutic United States 831 0.2
Curis United States 705 0.2
Syndax Pharmaceuticals United States 682 0.2
REVOLUTION Medicines United States 670 0.2
Protagonist Therapeutics United States 379 0.1
Ascletis Pharma China 196 -
Sixty largest investments 398,621 100.0
Blueprint Medicines United States 36 -
Total investments 398,657 100.0
All of the above investments are equities unless otherwise stated.
PORTFOLIO BREAKDOWN Fair value £’000 % of investments
Investments
Quoted 381,751 95.7
Equities
Unquoted
Equities 14,529 3.7
Partnership interest 2,377 0.6
Total unquoted investments 16,906 4.3
Total investments 398,657 100.0
STRATEGIC REPORT / PORTFOLIO MANAGER’S REVIEW
GEOFF HSU
PERFORMANCE REVIEW
The Company’s net asset value per share total return was +18.5% during the
year ended 31 March 2020. This compares to a 1.2% increase in the Company’s
benchmark, the NASDAQ Biotechnology Index (measured on a sterling adjusted
basis).
Biotechnology as a sector had a somewhat tepid first half of the financial
year, followed by a much stronger second half that was abruptly cut short by
the COVID-19 related market correction in March. The sector generally
underperformed the broader markets in the first half due to general macro
concerns about the U.S. economic outlook and concerns about the potential for
drug pricing regulation. Macroeconomic concerns included fears that an
escalating trade war between the U.S. and China would lead to a slowing of
economic growth. Even though biotechnology’s exposure to U.S.-China trade
was virtually non-existent, these broader economic concerns led to weakness
among all growth stocks, including small and emerging biotechnology companies.
During the first half of the financial year, concerns about biotechnology also
emerged due to drug pricing rhetoric from President Trump and the progressive
Democratic presidential candidates, Elizabeth Warren and Bernie Sanders. Even
though no legislation was ever passed, policies proposed by the Trump
administration included international reference pricing for Medicare drugs,
inflation-based price caps on drugs, and potential government negotiation of
prices directly with biopharmaceutical companies. In addition, during this
period, Democratic candidates Warren and Sanders expressed their desire to
lower drug prices in the U.S. and implement Medicare For All, a single-payer
government-run healthcare system. The rhetoric on drug pricing from both Trump
and the Democratic presidential candidates created a “political overhang”
on the biotechnology sector that dampened performance for the group.
The second half of the financial year saw a strong rebound in emerging
biotechnology stocks, driven by several positive clinical catalysts and a
resurgence in biotechnology mergers and acquisitions (M&A). The political
overhang also began dissipating, as centrist Democratic candidates like Joe
Biden and Pete Buttigieg began gaining in the polls. Those candidates were
viewed as less likely to adopt extreme drug price controls if elected.
Against this backdrop, the portfolio generated 17.3% of excess net asset value
performance versus the benchmark index for the year ended 31 March 2020. The
outperformance was driven by our greater allocation to emerging biotechnology
versus large capitalisation biotechnology in the portfolio, several
significant positive clinical catalysts (e.g. positive Phase 3 results from
Deciphera Pharmaceuticals and Aurinia Pharmaceuticals), M&A activity, and
strong performance from our China holdings.
CONTRIBUTORS AND DETRACTORS
Deciphera Pharmaceuticals, CanSino Biologics, Aurinia Pharmaceuticals, Vertex
Pharmaceuticals, and Karyopharm Therapeutics were the leading positive
contributors to performance in the portfolio during the year.
• Deciphera Pharmaceuticals is a Massachusetts-based
biotechnology company developing kinase inhibitor treatments for cancer. The
company’s shares appreciated following positive Phase 3 study results for
ripretinib in gastrointestinal stromal tumours (GIST) in August 2019, which
exceeded expectations. The company expects U.S. Food and Drug Administration
(FDA) approval in August 2020 and based on strong data and high unmet medical
need, we expect the drug to become the standard of care in fourth-line GIST.
Deciphera has an ongoing Phase 3 study in second-line GIST, expected to read
out in 2021/22.
• CanSino Biologics is an emerging Chinese vaccine company
developing vaccines for the private pay market in China. The fund participated
in the company’s IPO (Initial Public Offering) as a cornerstone investor in
March 2019. CanSino’s shares initially outperformed due to investor
enthusiasm about their meningococcal vaccine portfolio. Shares gained further
momentum when the company began developing one of the leading vaccine
candidates for COVID-19 in China, now in Phase 2 clinical trials.
• Aurinia Pharmaceuticals shares outperformed following the
release of successful phase 3 trial results for their novel calcineurin
inhibitor, voclosporin, in lupus nephritis. Data from the pivotal trial showed
a meaningful increase in the complete response rate for voclosporin when given
on top of the current standard of care. This is the first positive phase 3
trial for a lupus nephritis drug in a large, global, randomised, placebo
controlled study.
• Vertex Pharmaceuticals shares outperformed as the
company’s cystic fibrosis triple combination therapy, Trikafta, was approved
early and achieved impressive early commercial uptake. The company remains the
leader in cystic fibrosis, with a multi-billion dollar commercial portfolio
driven by Trikafta as well as its first- and second-generation treatments
Orkambi, Kalydeco and Symdeko. Vertex also reported encouraging early data for
its gene editing candidate CTX001 in beta-thalassemia and sickle cell disease,
with early data suggesting a potential functional cure. CTX001 is partnered
with CRISPR Therapeutics.
• Karyopharm is an oncology company developing treatments for
haematologic malignancies. The shares outperformed following positive Phase 3
trial results for their oral drug selinexor in multiple myeloma in
March 2020.
Milestone Pharmaceuticals, Alexion Pharmaceuticals, Mirati Therapeutics, Puma
Biotechnology, and Heron Therapeutics were the principal detractors for the
year.
• Milestone Pharmaceuticals shares fell following
disappointing results for their Phase 3 trial of etripamil for the treatment
of paroxysmal supraventricular tachycardia. While the drug demonstrated an
improvement relative to placebo in converting tachycardia to normal sinus
rhythm early on, the placebo response in the later stages of the trial
prevented the study from achieving the primary endpoint. These results likely
leave the company in need of running an additional pivotal trial.
• Alexion Pharmaceuticals is a large capitalisation
biotechnology company whose lead franchise consists of complement inhibitors
for a variety of orphan haematological and neurological indications. The stock
declined over the period due to continued concerns by investors about future
competition to the company’s lead products Soliris and Ultomiris.
• Mirati Therapeutics is a targeted oncology company
developing a KRAS inhibitor for a variety of solid tumour types. Shares
rallied into the JP Morgan Healthcare Conference in January 2020 on the hopes
of a possible takeout but then significantly underperformed when no takeout
occurred. Shares have also been negatively impacted by competitor Amgen’s
more cautious commentary on their own KRAS program.
• Puma Biotechnology is an emerging biotechnology company that
markets the drug Nerlynx for breast cancer. Shares declined over the period
because the commercial launch has disappointed expectations, primarily due to
the high rate of diarrhea associated with the compound. In addition, changes
in standard of care for breast cancer have diminished the market opportunity
for Nerlynx.
• Heron Therapeutics is developing a long-acting form of
bupivacaine for post-surgical pain. Despite multiple clinical trials that have
shown the superiority of their product HTX-011 versus both placebo and
short-acting bupivacaine, the FDA announced in February that they were
postponing the action date for their drug application by three months. We
continue to believe that HTX-011 will eventually get approved and provide a
valuable non-opioid alternative to pain management post-surgery.
INNOVATION CONTINUES TO DRIVE SECTOR PERFORMANCE
Innovation remains the core driver of biotechnology industry performance, and
we continue to believe the sector is in a “golden era” of innovation at
the present time. Several new technologies-including gene therapy, cell
therapy,
RNA-based therapies, and bispecific antibodies-are just beginning to result in
marketed products to treat patients. We believe we are still in the early
stages of realising the full potential of these technologies, as hundreds of
pipeline candidates based on these technologies are still working their way
through the drug development process. Many of these drug candidates have
already achieved proof of concept in human clinical trials.
Not only do we believe these new technologies will result in therapeutics
delivering substantial clinical benefits for patients, we also believe many of
these therapeutics can generate substantial revenues, in many cases exceeding
U.S,$1 billion in peak worldwide sales. While pricing concerns will always be
a topic of discussion among payers, we continue to believe that truly
innovative products that are superior to standard of care and address an unmet
medical need will be able to command premium prices.
FRIENDLY REGULATORY ENVIRONMENT CONTINUES UNDER NEW FDA LEADERSHIP
Over the past three years, we have witnessed positive developments at the FDA
that have accelerated the drug development and review process and brought
innovative products to market more quickly than in the past. One of President
Trump’s primary strategies for controlling drug price inflation has been to
encourage the FDA to approve more drugs to increase competition in the
marketplace. As a result, the first FDA Commissioner Trump appointed, Scott
Gottlieb, implemented several policies to expedite innovative drug
development, including greater interaction between the FDA and sponsors to
streamline the clinical trial process, increased flexibility by the FDA on the
endpoints required for approval, and modernisation of the FDA’s evaluation
and analytical tools. Gottlieb announced his retirement in March 2019 and was
temporarily replaced by interim commissioner Ned Sharpless, who continued
Gottlieb’s policies. In Dec. 2019, Stephen Hahn, an oncologist from the MD
Anderson Cancer Center, was appointed the permanent FDA Commissioner. He has
largely continued the FDA’s proactive policies towards new drug approvals.
These initiatives have helped to reduce the time, cost, and approval risk for
new drugs in development, which has benefited the biotechnology industry. In
fact, the first three years of the Trump administration have been the most
productive in FDA history in terms of new drug approvals. In addition, we
believe the FDA’s current efforts to accelerate the development and approval
of COVID-19 related treatments and vaccines could also introduce new approval
paradigms that could expedite the development of non-COVID-19 related drugs
after the outbreak subsides.
M&A ACTIVITY STILL BRISK
Biotechnology M&A activity was generally strong during the year ended 31 March
2020, especially in the latter half. Transactions announced included the
U.S.$2.35bn acquisition of Synthorx by Sanofi, the $2.9 bn acquisition of
Audentes Therapeutics by Astellas, and the U.S.$8.4 bn acquisition of The
Medicines Company by Novartis. Premiums paid for many of these deals were in
excess of 100%, reflecting the continued high demand by larger pharmaceutical
players for innovative assets. The portfolio benefited directly from two
announced transactions in the review period which involved targets held: the
$2.4 bn acquisition of Ra Pharma by UCB and the $2.7 bn acquisition of ArQule
by Merck.
Importantly, M&A activity has continued despite the COVID-19 lockdown measures
that have been introduced worldwide. In early May 2020, Menarini announced the
U.S.$677m acquisition of Stemline Therapeutics and Alexion Pharmaceuticals
announced the U.S.$1.4 bn acquisition of Portola Pharmaceuticals. While many
of the customary due diligence efforts required for M&A now need to be
conducted virtually, it appears the industry has successfully adapted to
conducting their business development activities remotely. Dealmaking does not
appear to have slowed down appreciably.
POLITICAL OVERHANGS DISAPPEARING
As we noted earlier, concern about potential government policies to lower drug
prices in the U.S. created a political overhang that dampened biotechnology
performance for much of 2019. We have observed historically that when
healthcare reform or drug pricing legislation is being actively debated in
Washington, valuations tend to contract for the sector. However, whenever the
uncertainty passes and investors realize that the outlook for drug prices is
not so dire for the industry after all, there is generally a relief rally in
biotech. Such a relief rally occurred in 2017, after Hillary Clinton, who
campaigned heavily against the pharmaceutical industry, lost the presidential
election to Donald Trump. Political uncertainty reestablished itself, however,
once Trump started talking about potential policies to lower drug prices and
Democratic presidential candidates began talking about drug price reform on
the campaign trail.
One of the most significant political developments that occurred in March was
the ascendance of Joe Biden as the clear presumptive nominee for the
Democratic nomination. Former Vice President Biden is regarded as a centrist
and assisted President Obama in shepherding the passage of Obamacare, the
healthcare reform bill that expanded healthcare coverage in the U.S. He has
notably not supported the abolishment of private health insurance, unlike his
progressive rivals Bernie Sanders and Elizabeth Warren. While Biden may still
pursue drug pricing reform if elected President, we think a split Congress
after the November elections, with the Republicans controlling the Senate and
the Democrats controlling the House, will prevent any extreme legislation from
passing. Under normal circumstances, we believe Biden’s ascendance as the
Democratic nominee would have catalysed a relief rally in biotechnology, but
the broad market correction due to COVID-19 in March completely overshadowed
that positive political development. As the COVID-19 outbreak comes under
control, we think investors will more greatly appreciate this positive
development for the biotechnology industry.
STRATEGY SHIFTS TO ENHANCE LONG-TERM PERFORMANCE
Over the course of the financial year, we made a number of structural shifts
in the portfolio that we believe will enhance long-term performance.
First, we have lowered the proportion of large capitalisation biotechnology in
the portfolio and chosen to allocate a majority of the Company’s capital to
emerging biotechnology companies. Even though we continue to believe there is
a compelling value argument to be made for large capitalisation biotechnology,
especially as the political overhang clears, we find the number of attractive
investment opportunities in emerging biotechnology has increased markedly over
the past few years, in part due to a robust biotechnology IPO market.
Moreover, according to data provider IQVIA, almost three-quarters of the
entire pharmaceutical industry’s late stage drug development pipeline is now
being developed by “emerging biopharma,” which roughly equates to what we
define as emerging biotechnology. Additionally, if one just focuses on what
IQVIA defines as Next-Generation Biotherapeutics, i.e. those based on the
novel technologies of cell therapy, gene therapy, and nucleic acid based
therapy, over 90% of those late-stage candidates are being developed by
“emerging biopharma.” In order to best capture the wave of innovation
propelling the industry, it seems prudent to tilt the portfolio’s emphasis
towards the emerging biotechnology segment of the biotechnology universe
responsible for most of the innovation. One result of this strategy shift has
been an expansion in the number of names in the portfolio. Whereas previously
we may have had 30-45 names in the portfolio, the name count has now expanded
to 50-65 names. This is because emerging biotechnology investments are
generally in smaller companies with greater risk and less liquidity, so we
typically size those positions at smaller weights than our large
capitalisation biotechnology positions.
Second, we have started allocating a portion of the portfolio to unquoted
private investments. According to the Company’s investment guidelines, up to
10% of the portfolio can be invested in unquoteds. Our intention is to focus
on just investing in “crossover” rounds, the last private financing round
prior to an IPO, in order to maintain a fair degree of near-term liquidity. As
companies go public, we would replace them with new crossover investments as
opportunities arise. We do not intend to engage in early stage venture capital
where an exit is expected many years in the future. Thus far, the
portfolio’s crossover investments have already had a beneficial impact on
overall performance. Given OrbiMed’s stature in the healthcare investing
space, we have excellent deal flow in crossover opportunities that other
biotechnology managers may miss.
Third, our activity in emerging markets, particularly China, has also
increased. The Company has a global mandate, so we are charged with looking
for the best biotechnology investment opportunities in the world. Unlike most
biotechnology portfolio managers, OrbiMed maintains offices in Shanghai and
Hong Kong and has dedicated analysts conducting on-the-ground due diligence on
Chinese opportunities. Given corporate governance issues that have plagued
Chinese companies in the past, we believe this local research effort is
particularly important to investing successfully in the region. Our view is
that we are in the early stages of a burgeoning biotechnology industry in
China that is based on innovation. The Chinese FDA now expedites approvals of
innovative compounds, multinational pharmaceutical companies are increasingly
partnering with Chinese companies on innovative assets, and recently relaxed
IPO listing requirements in Hong Kong and the local A share markets have given
pre-revenue Chinese biotechnology companies an important avenue to finance
their drug development. Overall, these factors should create a growing
biotechnology ecosystem in China, and the Company is well positioned to take
advantage of these opportunities. Recent China investments undertaken in the
past year include AlphaMab Oncology and Hansoh Pharmaceuticals.
COVID-19 IMPACT AND OUTLOOK
No discussion of the financial year would be complete without addressing
COVID-19 and the impact of the COVID-19 pandemic on the markets, the
biotechnology industry, and the portfolio. It is clear that the novel COVID-19
is having a much more severe impact on economies worldwide than previous virus
outbreaks, with governments instituting lockdown measures that have
significantly curtailed economic activity. Despite the severity of the
economic downturn, our view remains that the outbreak will ultimately be
temporary and should not have a long-term detrimental impact on the biotech
industry.
The U.S. stock market suffered a substantial decline from late February to
late March as the COVID-19 spread to Europe and the U.S. The biotechnology
sector and the Company’s performance also declined substantially over that
period, with higher-beta emerging biotechnology stocks declining more than the
lower-beta large-capitalisation biotechnology stocks. In response to the
slowing economy, the U.S. government took unprecedented actions to stimulate
the economy, including the Federal Reserve’s implementation of
“unlimited” quantitative easing and passage of a U.S.$2 trillion fiscal
stimulus package, the largest in U.S. history. In part due to this dramatic
financial intervention, the markets and the biotech sector recovered sharply
from the lows of March. By the end of April 2020, the NASDAQ Biotech Index had
actually exceeded its pre-COVID-19 highs. Likewise, the Company’s net asset
value had reclaimed its highs by late April.
Our investment strategy during this period of extreme volatility remained
largely unchanged. We continued our strategy of fundamental bottom-up
stockpicking. During the steep downturn in March, we took advantage of the
market dislocation to add to some of our higher-conviction portfolio
positions. We did not make significant changes to the overall structure of the
portfolio or alter our emphasis on emerging biotechnology. While we are
encouraged by the biotechnology companies attempting to develop potential
treatments and vaccines for COVID-19, we have not actively “chased” these
names, as the probability of success and ultimate revenue potential from those
therapies remains unknown. Having said that, some of the Company’s portfolio
companies happen to have active COVID-19 programs, including Gilead Sciences
(developing the antiviral remdesivir), Regeneron Pharmaceuticals (developing
antibody treatments for COVID-19), and CanSino Biologics (a Chinese vaccine
company which has advanced a vaccine for COVID-19 into human trials).
The impact of the COVID-19 on the biotechnology industry has been much less
severe relative to other parts of the economy. Most biotechnology companies
are considered essential businesses, so they have been able to operate under
the COVID-19 lockdown measures. There is likely to be a temporary negative
impact to drug sales with the curtailment in doctor and hospital visits, as
well as some delays in clinical trials, but for the most part, the headwinds
seem manageable for the industry. First quarter earnings for large
capitalisation biotechnology companies were generally strong, and sales of
drugs taken by patients at home should be minimally impacted, as they can
receive those drugs by mail without seeing a physician. Supply chain
disruption for biotechnology has been largely non-existent, and the FDA has
continued to adhere to its drug review timelines. The financing environment
for biotechnology has been surprisingly robust, with several companies
executing successful IPOs and follow-on offerings in March and April. We
believe biotechnology can be a defensive sector for equity investors during
this economic downturn.
At the time of this report, it appears that new cases and deaths from COVID-19
have been declining in some of the epicentres of infection, including Italy,
Spain, and New York. Focus has now turned to how best to reopen economies in a
safe way, and we believe general stock market performance looking forward will
hinge on how well those re-openings proceed. Other near-term events that could
improve market sentiment include the implementation of broader antibody
testing to allow governments to design optimal reopening strategies, positive
data points from clinical trials of treatments and vaccines for COVID-19, and
the arrival of summer, when warmer weather may help attenuate further spread
of the virus.
Outside of the COVID-19, all of the fundamental investment themes for biotech
remain intact: unprecedented innovation based on novel technologies, a
friendly FDA proactively approving new drugs, compelling valuations relative
to historical norms, and expected continued M&A activity.
Ultimately, we are confident that the biopharmaceutical industry will be able
to find effective treatments and vaccines for COVID-19. The speed with which
various treatment candidates and vaccine approaches have entered clinical
trials has been impressive, and we may very well see an effective vaccine
emerge by the end of 2020. We think the biopharmaceutical industry’s public
image may actually be strengthened by the ongoing crisis. If a
biopharmaceutical company successfully develops a treatment or vaccine that
curtails the epidemic, society may develop a greater appreciation for the
value to humanity that the industry provides.
ORBIMED UPDATE
In terms of investment team developments at OrbiMed, I would note that my
colleague and co-portfolio manager Richard Klemm resigned in February to
pursue other opportunities. While we are sad to see him leave, OrbiMed has a
deep bench of four talented biotechnology analysts, so there has been minimal
disruption from his departure. Given that the number of investable
biotechnology companies has increased markedly over the past 2-3 years, we are
in the process of hiring three more biotechnology associates to further
buttress our research efforts. I have been co-managing the Company’s
portfolio since 2005 and will remain the sole portfolio manager.
In light of the COVID-19 lockdown measures, most of OrbiMed’s staff have
been working remotely over the past couple of months. The transition has been
smooth, and the entire organisation – analysts, portfolio managers, traders
– are in constant virtual communication every day in real time using the
latest technologies available. Despite the significant challenges that
COVID-19 is posing to countries worldwide, we are more focused than ever on
choosing the best investment opportunities for long-term sustained
performance.
Geoff Hsu
OrbiMed Capital LLC, Portfolio Manager
3 June 2020
PRINCIPAL CONTRIBUTORS TO AND DETRACTORS FROM NET ASSET VALUE PERFORMANCE
Top Five Contributors Contribution for year ended 31 March 2020 £’000 Contribution per share (pence)*
Deciphera Pharmaceuticals 14,461 32.0
CanSino Biologics 14,416 31.9
Aurinia Pharmaceuticals 14,335 31.7
Vertex Pharmaceuticals 12,608 27.9
Karyopharm Therapeutics (†) 11,216 24.8
67,036 148.3
Top Five Detractors
Milestone Pharmaceuticals (†) (6,253) (13.8)
Alexion Pharmaceuticals (5,760) (12.8)
Mirati Therapeutics (5,705) (12.6)
Puma Biotechnology (†) (4,740) (10.5)
Heron Therapeutics (4,235) (9.4)
(26,693) (59.1)
* based on 45,157,104 shares being the weighted average
number of shares in issue for the year ended 31 March 2020
† not held in the portfolio on 31 March 2020
PERFORMANCE ATTRIBUTION FOR THE YEAR ENDED 31 MARCH 2020
Contribution to total returns % %
Benchmark return 1.2
Portfolio Manager’s contribution 14.8
Portfolio total return 16.0
Gearing 1.0
Management fee and other expenses -1.1
Performance fees 0.0
Share buybacks 2.6
Other effects 2.5
Return on net assets 18.5
Source: Frostrow Capital LLP.
STRATEGIC REPORT / 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 and details of the principal risks and challenges it
faces.
Its purpose is to inform the shareholders in the Company and help them to
assess how the Directors have performed their duty to promote the success of
the Company. Please also see the Stakeholder Interests and Board Decision
Making Statement. 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 investment trust, its shares are listed on
the premium segment of the official list and traded on the main market of the
London Stock Exchange. Its investment objective is set out below. In seeking
to achieve this objective, 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. The Board has determined an investment policy and related
guidelines and limits, as described below.
The Company is subject to UK and European legislation and regulations
including UK company law, International Financial Reporting Standards, the
Alternative Investment Fund Managers Directive, the UK Listing, Prospectus,
Disclosure Guidance and Transparency Rules, taxation law and the Company’s
own Articles of Association.
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 Company’s 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
Company’s Benchmark, the Board encourages Frostrow and 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 direct unquoted investments at the time of acquisition.
This limit does not include any investment in private equity funds managed by
the Portfolio Manager or any affiliates of such entity.
• 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
at the discretion of 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 (2019: 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 held at
this year’s Annual General Meeting. The Board unanimously recommends that
shareholders vote in favour of the resolution allowing the Company to continue
as an investment trust for a further five years. (Please see the Notice of
Annual General Meeting for further information).
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;
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 Fact
Sheets, Annual and Half Year 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 in the Strategic 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. OrbiMed’s investment style is such that performance is likely to
deviate from that of the Benchmark. The Board considers the most important
comparator to be the NASDAQ Biotechnology Index (sterling adjusted).
During the year under review the Company’s net asset value per total share
return was +18.5%, outperforming the Benchmark by 17.3%. Since OrbiMed’s
date of appointment (19 May 2005) to 31 March 2020, the Company’s net asset
value per share total return is +836.1% compared with Benchmark performance of
+633.7%. Please see 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. This is monitored
closely by the Board. Please see the Chairman’s Statement for further
information.
^ Alternative Performance Measure (See Glossary).
During the year under review the Company’s share price total return was
+10.9%. Since OrbiMed’s date of appointment (19 May 2005) to 31 March 2020,
the Company’s share price total return is +763.7% compared with Benchmark
performance of +633.7%.
SHARE PRICE (DISCOUNT)/PREMIUM TO NET ASSET VALUE PER SHARE^
The Board undertakes a regular review of the level of discount/premium of the
Company’s share price to the net asset value per share and consideration is
given to ways in which share price performance may be enhanced, including the
effectiveness of marketing and share issuance and buy-backs, where
appropriate. The Board has a discount control mechanism in place intended to
establish a target level of no more than a 6% discount of share price to the
net asset value per share. Shareholders should note, however, that it remains
possible for the share price discount to net asset value per share to be
greater than 6% on any one day due to the fact that the share price continues
to be influenced by overall supply and demand for the Company’s shares in
the secondary market. For most of the year under review, the Company continued
to pursue an active policy of buying back its shares when the discount to the
net asset value per share was materially higher than 6%. However, as a result
of extreme market volatility in March 2020, the Board took the decision that
it would be in the best interests of shareholders to suspend buybacks until a
less volatile period. The Board remains committed to protecting the discount
at or near the 6% level and is keeping the resumption of buybacks under close
review. Please see the Chairman’s Statement for further information.
New shares will only be issued at a premium to the Company’s net asset value
per share. 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 for further
information.
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.
ONGOING CHARGES^
The Board continues to be conscious of expenses and works hard to maintain a
sensible balance between strong service and costs. The reasons for the
continued appointment of the Company’s AIFM and the Portfolio Manager, on
the terms, are set out in the Report of the Directors. In reaching this
decision, the Board took into account the ongoing charges ratio of other
investment companies with specialist mandates.
As at 31 March 2020 the ongoing charges figure was 1.1% calculated by taking
the operating expenses of the Company divided by the average daily assets of
£389.4 million (2019: 1.1% (average daily assets of £432.3 million)).
^ Alternative Performance Measure (see Glossary).
RISK MANAGEMENT
As part of its oversight and risk management responsibilities, the Board is
responsible for the ongoing identification, evaluation and management of the
principal risks faced by the Company and has established a process for the
regular review of these risks and their mitigation.
As a result of the COVID-19 pandemic, the economic risk of a global recession
has risen sharply. Despite the mitigants of monetary and fiscal stimulus, the
Directors believe that the duration of the pandemic and its effects will be a
source of uncertainty for some time to come and may increase some of the risks
set out below. The measures to mitigate these risks have not changed, and the
Company is active in a sector which typically displays defensive
characteristics in uncertain times.
The Directors confirm that they have carried out a thorough assessment of the
principal risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity. The risks
identified and the ways in which they are managed or mitigated are summarised
below.
With the assistance of Frostrow, the Audit Committee has drawn up a risk
matrix which identifies the key risks to the Company. These are reviewed and
noted on a regular basis. These key risks fall broadly under the following
categories:
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
against the benchmark index and the investment guidelines. Additional reports and presentations are regularly presented to investors by the Company’s AIFM and Portfolio Manager.
VOLATILITY AND LEVEL OF DISCOUNT/PREMIUM The risk of the Company’s share price not being representative of its underlying net assets. The Board undertakes a regular review of the level of discount/premium and consideration is given to ways in which share price performance may be enhanced, including the effectiveness of marketing and investor relations services and also share issuance and
buy-backs, if considered appropriate. The Board has an active discount management policy in place, buying back the Company’s shares for cancellation if the market price is at a discount greater than 6% on any given day to the Company’s net asset value per
share. For most of the year under review, the Company continued to pursue an active policy of buying back its shares when the discount to the net asset value per share was materially higher than 6%. However, as a result of extreme market volatility in
March 2020, particularly in the biotechnology sector, the Board took the decision that it would be in the best interests of shareholders to suspend buybacks until a less volatile period. The Board remains committed to protecting the discount at or near the
6% level and is keeping the resumption of buybacks under close review. The making and timing of any share issuance or buy-backs is at the absolute discretion of the Board. New shares will only be issued at a premium to the net asset value per share.
Shareholders should note, however, that it remains possible for the share price discount to the net asset value per share to be greater than 6% on any given day. This is due to the fact that the share price continues to be influenced by overall supply and
demand for the Company’s shares in the secondary market. The volatility of the net asset value per share in an asset class such as biotechnology is another factor over which the Board has no control.
PORTFOLIO PERFORMANCE Investment performance may not be meeting 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 show an analysis of performance compared to 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. Climate change may have an
impact on some of the Company’s investment companies in the coming years potentially affecting their operating models, for example supply chains, physical locations and energy costs. The effects have yet to be fully understood. Both the Board and the
Portfolio Manager are keeping this under close review.
INVESTMENT 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:
OPERATIONAL AND REGULATORY A breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains, whilst a serious breach of other regulatory rules (including those associated with the Alternative Investment Fund Managers Directive) may lead to suspension from the Stock Exchange or to a qualified Audit Report. Other control failures, including cyber crime, relating to the AIFM, the Portfolio Manager or any other of the Company’s service providers, may result in operational and/or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations. The spread of an infectious disease may force governments to introduce rules to restrict meetings and movements of people and take other measures to prevent its spread, which may cause disruption to the Company’s operations. All transactions and income and expenditure forecasts are reviewed by the Board at each Board Meeting. The Board considers regularly all major risks, the measures in place to control them and the possibility of any other risks that could arise. The Board
also ensures that satisfactory assurances are received from service providers. The Audit Committee has reviewed the cyber security policies for the Company’s principal services providers. The Compliance Officer of the AIFM and of the Portfolio Manager
produce regular reports for review at the Company’s Audit Committee meetings and are available to attend such meetings in person if required. The operational and regulatory risks arising from the COVID-19 pandemic, and measures introduced to combat its
spread, were discussed by the Board, with updates on operational resilience received from the Portfolio Manager, AIFM and other key service providers.
MARKET PRICE RISK Uncertainty about future prices of financial instruments held. Falls in stock markets, such as those experienced as a consequence of the COVID-19 pandemic, and the risk of a global recession, are likely to adversely affect the performance of the Company’s investments. 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 to the Board monthly. The Portfolio Manager spreads the investment risk over a wide portfolio of investments, at the year end the Company’s
portfolio comprised investments in 61 companies.
LIQUIDITY RISK Ability to meet funding requirements when they arise. The Portfolio Manager has constructed the portfolio so that funds can be raised at short notice if required.
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 as 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
investors.
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 currency exposure.
LOAN FACILITY The provider of the Company’s loan facility may no longer be prepared to lend to the Company. The Board, the AIFM and the Portfolio Manager are kept fully informed of any likelihood of the withdrawal of the loan facility so that repayment can be effected in an orderly fashion. 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.
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 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 Securities LLC 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 Securities LLC. J.P. Morgan Securities LLC 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 Securities LLC’s insolvency, the Company may be unable to recover in full assets held by it as Custodian or held as collateral. The risk is managed through the selection of a financially strong
counterparty, through limitations on the use of gearing and through reliance on a robust regulatory regime (SEC). In addition, the Board regularly monitors the credit rating of J.P. Morgan Securities LLC. J.P. Morgan Securities LLC is also subject to
regular monitoring by J.P. Morgan Europe Limited, the Company’s Depositary, and the Board receives regular reports from J.P. Morgan Europe Limited. Further information on financial instruments and risk, as required by IFRS 7, can be found in note 13 to the
financial statements.
EMERGING RISKS
The Company has carried out a robust assessment of the Company’s emerging
and principal 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). Failure to
identify emerging risks may cause reactive actions rather than being proactive
and, in worse case, could cause the Company to become unviable or otherwise
fail or force the Company to change its structure, objective or strategy.
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 known) risks are identified
and, so far as practicable, mitigated.
The experience and knowledge of the Directors is useful in these discussions,
as are update papers and advice received from the Board’s key service
providers such as the Portfolio Manager, the AIFM and the Company’s Broker.
In addition, the Company is a member of the AIC, which provides regular
technical updates as well as drawing members’ attention to forthcoming
industry and/or regulatory issues and advising on compliance obligations.
COVID-19
The market and operational risks and financial impact as a result of the
COVID-19 pandemic, and the measures introduced to combat its spread, have been
discussed by the Board, with updates on operational resilience being received
from the Company’s principal services providers. The Company’s Portfolio
Manager continues to provide regular updates to the Board on the financial
impacts of the pandemic on portfolio performance and investee companies as
well as the effect on the biotechnology and healthcare sectors.
The experience and knowledge of the Directors has been invaluable in these
discussions, as are updates from the Company’s principal service providers,
including the Portfolio Manager and the AIFM, the Company’s Broker and
Auditor. In addition, the Company is a member of the Association of Investment
Companies (AIC), which provides regular technical updates including
highlighting forthcoming industry and/or regulatory issues and advising on
compliance obligations.
IMPACT OF BREXIT
The Board has considered whether Brexit poses a discrete risk to the Company.
As the Company is priced in sterling and the Company’s portfolio companies
are priced in foreign currencies sharp movements in exchange rates can affect
the net asset value (see note 13 for the foreign currency sensitivity
analysis).
Furthermore, whilst the Company’s current shareholders are predominantly UK
based, sharp or unexpected changes in investor sentiment, or tax or regulatory
changes, could lead to short-term selling pressure on the Company’s shares
which potentially could lead to the share price discount widening.
Overall, however, the Board believes that over the longer term, Brexit is
unlikely to affect the Company’s business model or whether the Company’s
shares trade at a premium or discount to the net asset value per share. The
Board, the AIFM and the Portfolio Manager will continue to monitor
developments as they occur.
LONG TERM VIABILITY
The Board has carried out a robust assessment of the principal risks facing
the Company including those that would threaten its business model, future
performance, solvency or liquidity. The Board has drawn up a matrix of risks
facing the Company and has put in place a schedule of investment limits and
restrictions, appropriate to the Company’s investment objective and policy,
in order to mitigate these risks as far as practicable. The principal risks
which have been identified, and the steps taken by the Board to mitigate these
as far as possible.
The Board believes it to be appropriate to make this assessment over a
five-year period. This basis is deemed appropriate due to our Portfolio
Manager’s investment horizon and also what the Board believes to be
investors’ horizons, taking account of the Company’s current position and
the potential impact of the principal risks and uncertainties. The Directors
also took into account the liquidity of the portfolio when considering the
viability of the Company over a five-year period and its ability to meet
liabilities as they fall due.
The Directors do not expect there to be any significant change in the
principal risks that have been identified and the adequacy of the mitigating
controls in place. Also the Directors do not envisage any change in strategy
or objectives or any events that would prevent the Company from continuing to
operate over that period as the Company’s assets are liquid, its commitments
are limited and the Company intends to continue to operate as an investment
trust. The Directors recognise that there is a continuation vote due to take
place at this year’s Annual General Meeting. The Directors fully support the
continuation of the Company and expect that the Company will continue to exist
for the foreseeable future, at least for the period of assessment. However, if
such a vote were not passed, the Directors would follow the provisions in the
Articles of Association relating to the winding up or other reorganisation of
the Company and the realisation of its assets.
Based on this assessment, the Directors have a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they
fall due over the next five-year period.
This assessment has included a detailed review of the issues arising from the
COVID-19 pandemic as discussed in both the Chairman’s Statement and in the
Portfolio Manager’s Review.
STAKEHOLDER INTERESTS AND BOARD DECISION-MAKING (SECTION 172 STATEMENT)
The Directors have a duty to promote the success of the Company for the
benefit of shareholders as a whole and to describe how they have performed
this duty having regard to matters set out in section 172(1) of the Companies
Act 2006. In fulfilling this duty, the Directors consider the likely
consequences of their actions over the long term and on other stakeholders. As
an externally managed investment company, the Company does not have employees.
Its main stakeholders therefore comprise its shareholders, who are also its
customers, and a small number of suppliers. These suppliers are external firms
engaged by the Board to provide, amongst others, AIFM, portfolio management,
secretarial, depositary, custodial and banking services. The principal
relationships are with the AIFM and the Portfolio Manager contains further
information. The portfolio management services are fundamental to the
long-term success of the Company through the pursuit of the investment
objective. The Board regularly monitors the Company’s investment performance
in relation to its objective and also to its investment policy and strategy.
It seeks to maintain a constructive working relationship with the AIFM and the
Portfolio Manager and on an annual basis reviews their continuing appointment
to ensure it is in the best long-term interests of shareholders. The Board
receives and reviews detailed presentations and reports from the AIFM and the
Portfolio Manager and other suppliers to enable the Directors to exercise
effective oversight of the Company’s activities. Further information on the
Board’s review process is set out in the Corporate Governance Report. The
AIFM seeks to maintain constructive relationships with the Company’s other
suppliers on behalf of the Company, typically through regular communications,
provision of relevant information and update meetings. To help the Board in
its aim to act fairly as between the Company’s members, it encourages
communications with all shareholders. The Annual and Half Year reports are
issued to shareholders and are available on the Company’s website together
with other relevant information including monthly fact sheets. The AIFM offers
to meet shareholders regularly to provide detailed reports on the progress of
the Company and receive feedback which is provided to the Board. Directors are
also available to meet with shareholders during the year and at the AGM.
Please refer to the Chairman’s Statement for details of this year’s
arrangements. Shareholders’ views are considered as part of the Board’s
regular strategy reviews. Shareholders have the opportunity to validate the
Board’s strategy through a vote every five years on the continuation of the
Company and the Board encourages shareholders to participate in this vote, the
next opportunity will arise at the forthcoming AGM. In seeking to enhance
value for shareholders over the long term, the Board has also established
guidelines to allow the AIFM and the Portfolio Manager to deploy gearing on a
tactical basis when opportunities arise and to implement share buy-backs and
share issuance as appropriate.
As described in more detail within the Corporate Governance Report, the Board
is committed to maintaining and demonstrating high standards of corporate
governance in relation to the Company’s business conduct. The approach taken
by the Portfolio Manager in the context of ESG investing as described in the
Corporate Governance section.
In summary, the Board’s primary focus in promoting the long-term success of
the Company for the benefit of its shareholders as a whole is to direct the
Company with a view to achieving the investment objective in a manner
consistent with its stated investment policy and strategy. In doing so, and as
described above, it has due regard to the impact of its actions on other
stakeholders and the wider community.
LOOKING TO THE FUTURE
The Board concentrates its attention on the Company’s investment performance
and OrbiMed’s investment approach and on factors that may have an effect on
this approach. Marketing reports are given to the Board at each Board meeting
by the AIFM which include how the Company will be promoted and details of
planned communications with existing and potential shareholders. The Board is
regularly updated by the AIFM on wider investment trust industry issues and
discussions are held at each Board meeting concerning the Company’s future
development and strategy.
A review of the Company’s year, its performance since the year-end and the
outlook for the Company can be found in the Chairman’s Statement and in the
Portfolio Manager’s Review. It is expected that the Company’s Strategy
will remain unchanged in the coming year.
The Board recognises that there is a continuation vote due to take place at
the this year’s Annual General Meeting. The Board unanimously recommends
that shareholders vote in favour of the resolution and expects that the
Company will continue to exist for the foreseeable future.
By order of the Board
Frostrow Capital LLP
Company Secretary
3 June 2020
GOVERNANCE / BOARD OF DIRECTORS
ANDREW JOY
Independent Non-Executive Chairman
Joined the Board in 2012 and became Chairman in July 2016
Remuneration: £37,000 pa*
Committees
Andrew is Chairman of the Nominations Committee.
Shareholding in the Company 55,000
Skills and Experience
Andrew was one of the founding Partners of Cinven, a leading private equity
firm investing in Europe and the U.S. He has been Chairman or a Director of
numerous growing companies over the past 30 years. He is a former Chairman of
the BVCA (British Venture Capital and Private Equity Association) and a
Director of the EVCA.
Other Appointments
Andrew is a Senior Advisor of Stonehage Fleming Group, Chairman of the
investment committee of FPE Capital and is a Trustee of several charities.
Standing for re-election: Yes
STEVE BATES
Independent Non-Executive Director
Joined the Board in 2015
Remuneration: £28,500 pa*
Committees
Steve is Chairman of the Management Engagement Committee.
Shareholding in the Company 10,000
Skills and Experience
Steve has extensive experience as an Investment Manager and was head of global
emerging markets at J.P. Morgan Asset Management until 2002. Since then, he
has been an Executive Director of Guard Cap Asset Management Limited (and its
predecessor company).
Other Appointments
Steve is non-executive Chairman of Vinacapital Vietnam Opportunity Fund
Limited and of Third Point Offshore Investors Limited. He sits on, or is
advisor to, various committees in the wealth management and pension fund
areas.
Standing for re-election: Yes
JULIA LE BLAN
Independent Non-Executive Director
Joined the Board in 2016
Remuneration: £28,500 pa*
Committees
Julia is Chair of the Audit Committee.
Shareholding in the Company 7,000
Skills and Experience
A Chartered Accountant, Julia has worked in the financial services industry
for over 30 years. Julia was formerly a non-executive Director of Impax
Environmental Markets plc, and was also formerly a tax partner at Deloitte and
sat for two terms on the AIC’s technical committee.
Other Appointments
Julia is a non-executive Director of BMO UK High Income Trust plc, J.P. Morgan
US Smaller Companies Investment Trust plc and Aberforth Smaller Companies
Trust plc.
Standing for re-election: Yes
PROFESSOR DAME KAY DAVIES CBE
Independent Non-Executive Director
Joined the Board in 2012
Remuneration: £28,500 pa*
Committees
Professor Davies is Chair of the Remuneration Committee and is the Senior
Independent Director.
Shareholding in the Company 3,500
Skills and Experience
Professor Davies is Professor of Genetics and Associate Head of the Medical
Sciences Division at the University of Oxford and a fellow of Hertford
College.
Other Appointments
Professor Davies is a Director of biopharmaceutical company UCB Pharma S.A.
and Chair of the Scientific Advisory Board of Oxstem Limited. Professor Davies
also serves on the GRL Board (Sanger Institute).
Standing for re-election: Yes
GEOFF HSU
Non-Executive Director
Joined the Board in 2018
Remuneration: Nil*
Committees
Geoff does not sit on any of the Company’s Committees.
Shareholding in the Company Nil
Skills and Experience
Geoff is a General Partner of OrbiMed, having joined in 2002 as a
biotechnology analyst. Prior to joining OrbiMed, he worked as an analyst in
the healthcare investment banking group at Lehman Brothers. Mr. Hsu received
his A.B. degree summa cum laude from Harvard University and holds an M.B.A.
from Harvard Business School. Prior to business school, he spent two years
studying medicine at Harvard Medical School.
Other Appointments
Geoff is a General Partner of OrbiMed and does not have any other
appointments.
Standing for re-election: Yes
THE RT HON LORD WILLETTS FRS
Independent Non-Executive Director
Joined the Board in 2015
Remuneration: £26,000 pa*
Committees
N/A
Shareholding in the Company Nil
Skills and Experience
A former Board member of the Francis Crick Institute and of the Biotech
Industry Association, Lord Willetts was the Member of Parliament for Havant
from 1992-2015 and was Minister for Universities and Science from 2010-2014.
Before that, he worked at HM Treasury and the Number 10 Policy Unit. He also
served as Paymaster General in John Major’s Government.
Other Appointments
Lord Willetts is President of the Resolution Foundation and a Visiting
Professor at King’s College London. He is also a Board Member of Surrey
Satellites and Tekcapital and an Honorary Fellow of the Royal Society and of
Nuffield College. He is also Chancellor of the University of Leicester.
Standing for re-election: Yes
* Information as at 31 March 2020
GOVERNANCE / CORPORATE GOVERNANCE
THE BOARD AND COMMITTEES
Responsibility for effective governance lies with the Board. The governance
framework of the Company reflects the fact that as an investment company it
has no employees. Portfolio management is delegated to OrbiMed and risk
management, company management, company secretarial, administrative and
marketing services are delegated to Frostrow.
THE BOARD
Chairman – Andrew Joy Senior Independent Director – Professor Dame Kay Davies Four additional non-executive Directors, all considered independent, except for Geoff Hsu. Key responsibilities: – to provide leadership and set strategy, values and standards within a framework of prudent effective controls which enable risk to be assessed and managed; – to ensure that a robust corporate governance framework is implemented; and – to challenge constructively and scrutinise performance of all outsourced
activities.
Remuneration Committee Chair Professor Dame Kay Davies All Independent Directors Key responsibilities: – to set the remuneration policy of the Company. Audit Committee Chair Julia Le Blan* All Independent Directors Key responsibilities: – to review the Company’s financial Nominations Committee Chairman Andrew Joy All Independent Directors Key responsibilities: – to review regularly the Board’s structure and composition; and – to make recommendations for any changes or new appointments. Management Engagement Committee Chairman Steve Bates All Independent Directors Key responsibilities: – to review regularly the contracts, the performance and remuneration of the Company’s principal service providers.
reports; – to oversee the risk and control environment and financial reporting; and – to review the performance of the Company’s
external Auditor.
* The Directors believe that Julia Le Blan has the necessary
recent and relevant financial experience to Chair the Company’s Audit
Committee.
Copies of the full terms of reference, which clearly define the
responsibilities of each Committee, can be obtained from the Company
Secretary, will be available for inspection at the Annual General Meeting, and
can be found on the Company’s website at www.biotechgt.com
CORPORATE GOVERNANCE STATEMENT
The Board is committed to maintaining and demonstrating high standards of
corporate governance. The Board has considered the principles and
recommendations of the AIC Code of Corporate Governance (‘AIC Code’). The
AIC Code addresses all the principles set out in the UK Corporate Governance
Code (the ‘UK Code’), as well as setting out additional provisions on
issues that are of specific relevance to the Company.
The Financial Reporting Council has confirmed that by following the AIC Code,
boards of investment companies will meet their obligations in relation to the
UK Code and paragraph 9.8.6 of the UK Listing Rules.
The Board considers that reporting in accordance with the principles and
recommendations of the AIC Code provides more relevant and comprehensive
information to shareholders. The AIC Code can be viewed at www.theaic.co.uk.
The Corporate Governance Statement, forms part of the Report of the Directors.
BOARD LEADERSHIP AND PURPOSE
PURPOSE AND STRATEGY
The purpose and strategy of the Company are described in the Strategic Report.
BOARD CULTURE
The Board aims to consider and discuss fully differences of opinion, unique
vantage points and to exploit fully areas of expertise. The Chairman
encourages open debate to foster a supportive and cooperative approach for all
participants. Strategic decisions are discussed openly and constructively. The
Board aims to be open and transparent with shareholders and other stakeholders
and for the Company to conduct itself responsibly, ethically and fairly in its
relationships with service providers.
The Board has gained assurance on whistleblowing procedures at the Company’s
principal service providers to ensure employees at those companies are
supported in speaking up and raising concerns. No concerns relating to the
Company were raised during the year.
SHAREHOLDER RELATIONS
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.
SHAREHOLDER COMMUNICATIONS
The Board monitors the share register of the Company; it also reviews
correspondence from shareholders at each meeting and maintains regular contact
with major shareholders. Shareholders who wish to raise matters with a
Director may do so by writing to them at the registered office of the Company.
The Board supports the principle that the Annual General Meeting (AGM) be used
to communicate with private investors, in particular. Shareholders are usually
encouraged to attend the Annual General Meeting, where they are normally given
the opportunity to question the Chairman, the Board and representatives of the
Portfolio Manager. In addition, the Portfolio Manager usually makes a
presentation to shareholders covering the investment performance and strategy
of the Company at the Annual General meeting. However, in light of government
rules relating to the COVID-19 pandemic at the date of this report, the Board
has made different arrangements for the forthcoming AGM and these are
explained in the Chairman’s Statement. Details of the proxy votes received
in respect of each resolution will be made available on the Company’s
website.
The Board, the AIFM and the Portfolio Manager consider maintaining good
communications with shareholders and engaging with larger shareholders through
meetings and presentations a key priority. Shareholders are informed by the
publication of annual and half-year reports which include financial
statements. These reports are supplemented by the daily release of the net
asset value per share to the London Stock Exchange and the publication of
monthly fact sheets. All this information, including interviews with the
Portfolio Manager, is available on the Company’s website at
www.biotechgt.com.
SIGNIFICANT HOLDINGS AND VOTING RIGHTS
Details of the shareholders with substantial interests in the Company’s
shares, the Directors’ authorities to issue and repurchase the Company’s
shares, and the voting rights of the shares are set out in the Directors’
Report.
THE BOARD
The Board is responsible for the effective Stewardship of the Company’s
affairs. Strategy issues and all operational matters of a material nature are
considered at its meetings.
The Board consists of six non-executive Directors, each of whom, with the
exception of Geoff Hsu, is independent of OrbiMed and the Company’s other
service providers. No member of the Board is a Director of another investment
company managed by OrbiMed, nor has any Board member been an employee of the
Company, OrbiMed or any of the Company’s service providers.
The Board carefully considers the various guidelines for determining the
independence of non-executive Directors, placing particular weight on the view
that independence is evidenced by an individual being independent of mind,
character and judgement. All Directors, with the exception of Geoff Hsu, are
presently considered to be independent. All Directors retire at the AGM each
year and, if appropriate, seek re-election. Each Director has signed a letter
of appointment to formalise the terms of their engagement as a non-executive
Director, copies of which are available on request at the office of Frostrow
Capital LLP and at the Annual General Meeting.
MEETINGS
The Board meets formally at least four times each year. A representative of
OrbiMed attends all meetings; representatives from Frostrow Capital LLP are
also in attendance at each Board meeting. The Chairman encourages open debate
to foster a supportive and co operative approach for all participants.
The Board has agreed a schedule of matters specifically reserved for decision
by the Board. This includes establishing the investment objectives, strategy
and the Benchmark, the permitted types or categories of investments, the
markets in which transactions may be undertaken, the amount or proportion of
the assets that may be invested in any geography or category of investment or
in any one investment, and the Company’s share issuance and share buyback
policies.
CONFLICTS OF INTEREST
In line with the Companies Act 2006, the Board has the power to authorise any
potential conflicts of interest that may arise and impose such limits or
conditions as it thinks fit. A register of interests and potential conflicts
is maintained and is reviewed at every Board meeting. It was resolved at each
Board meeting during the year that there were no direct or indirect interests
of a Director that conflicted with the interests of the Company. Appropriate
authorisation will be sought prior to the appointment of any new director or
if any new conflicts or potential conflicts arise.
BOARD COMPOSITION AND SUCCESSION
SUCCESSION PLANNING
The Board regularly considers its structure and recognises the need for
progressive refreshment.
The Board has an approved succession planning policy to ensure that (i) there
is a formal, rigorous and transparent procedure for the appointment of new
directors; and (ii) the Board is comprised of members who collectively display
the necessary balance of professional skills, experience, length of service
and industry/Company knowledge.
During the year, the Board reviewed the policy on Directors’ tenure and
considered the overall length of service of the Board as a whole.
POLICY ON THE TENURE OF THE CHAIRMAN AND OTHER NON-EXECUTIVE DIRECTORS
The tenure of each independent, non-executive director, including the
Chairman, is not ordinarily expected to exceed nine years. It should be noted
that, in practice, the date for departure from the Board will be on the Annual
General Meeting following this anniversary. However, the Board has agreed that
the tenure of the Chairman may be extended for a limited time provided such an
extension is conducive to the Board’s overall orderly succession. The Board
believes that this more flexible approach to the tenure of the Chairman is
appropriate in the context of the regulatory rules that apply to investment
companies, which ensure that the chair remains independent after appointment,
while being consistent with the need for regular refreshment and diversity.
Notwithstanding this expectation, the Board considers that a Director’s
tenure does not necessarily reduce his or her ability to act independently and
will continue to assess each Director’s independence annually, through a
formal performance evaluation.
APPOINTMENTS TO THE BOARD
The rules governing the appointment and replacement of Directors are set out
in the Company’s articles of association and the aforementioned succession
planning policy. Where the Board appoints a new director during the year, that
director will stand for election by shareholders at the next Annual General
Meeting (AGM). Subject to there being no conflict of interest, all Directors
are entitled to vote on candidates for the appointment of new directors and on
the recommendation for shareholders’ approval for the Directors seeking
re-election at the AGM. When considering new appointments, the Board
endeavours to ensure that it has the capabilities required to be effective and
oversee the Company’s strategic priorities. This will include an appropriate
range, balance and diversity of skills, experience and knowledge. The Company
is committed to ensuring that any vacancies arising are filled by the most
qualified candidates.
No new appointments were made during the year.
DIVERSITY POLICY
The Board supports the principle of Boardroom diversity, of which gender is
one important aspect. The Company’s policy is that the Board should be
comprised of directors who collectively display the necessary balance of
professional skills, experience, length of service and industry knowledge.
When considering Board appointments, the Board will ensure that a diverse
group of candidates is considered and that appointments are made on merit
against objective criteria, including diversity.
The objective of the policy is to have a broad range of approaches,
backgrounds, skills, knowledge and experience represented on the Board. The
Board believes that this will make the Board more effective at promoting the
long-term sustainable success of the company and generating value for all
shareholders by ensuring there is a breadth of perspectives among the
directors and the challenge needed to support good decision-making. To this
end achieving a diversity of perspectives and backgrounds on the Board will be
a key consideration in any director search process. The Board will, however,
look for at least one third of the directors on the Board to be women.
The gender balance of four men and two women meets the original recommendation
of Lord Davies’ report on Women on Boards. The Board is aware that new
gender representation objectives have been set for FTSE 350 companies and that
targets concerning ethnic diversity have been recommended for FTSE 250
companies. While the Company is not a FTSE 350 constituent the Board will
continue to monitor developments in this area and will consider diversity
during any director search process.
The Board, at its regular meetings, undertakes reviews of key investment and
financial data, revenue projections and expenses, analyses of asset
allocation, transactions and performance comparisons, share price and net
asset value performance, marketing and shareholder communication strategies,
the risks associated with pursuing the investment strategy, peer group
information and industry issues.
The Chairman is responsible for ensuring that the Board receives accurate,
timely and clear information. Representatives of OrbiMed and Frostrow Capital
LLP report regularly to the Board on issues affecting the Company.
The Board is responsible for strategy and has established an annual programme
of agenda items under which it reviews the objectives and strategy for the
Company at each meeting.
APPOINTMENTS TO THE BOARD
The Nominations Committee considers annually the skills possessed by the Board
and identifies any skill shortages to be filled by new Directors.
When considering new appointments, the Board reviews the skills of the
Directors and seeks to add persons with complementary skills or who possess
the skills and experience which fill any gaps in the Board’s knowledge or
experience and who can devote sufficient time to the Company to carry out
their duties effectively.
MEETING ATTENDANCE
The table below sets out the number of scheduled Board and Committee meetings
held during the year ended 31 March 2020 and the number of meetings attended
by each Director.
Board Management Engagement Committee Audit Committee Nominations Committee Remuneration Committee
Number of meetings held in 2019/20: 6 1 4 2 1
Steve Bates 6 1 4 2 1
Professor Dame Kay Davies CBE 6 1 3 2 1
Geoff Hsu* 6 — — — —
Andrew Joy 6 1 4 2 1
Julia Le Blan 6 1 4 2 1
The Rt Hon Lord Willetts 5 1 3 2 1
All of the serving Directors attended the Annual General Meeting held on 11
July 2019.
* Geoff Hsu is not a member of any committees.
The Company is committed to ensuring that any vacancies arising are filled by
the most qualified candidates and recognises the value of diversity in the
composition of the Board. When Board positions become available as a result of
retirement or resignation, the Company will ensure that a diverse group of
candidates is considered.
The Board regularly considers its structure. The Board has an approved
succession planning policy to ensure that
(i) there is a formal, rigorous and transparent procedure for the appointment
of new Directors to the Board; and (ii) the Board is comprised of members who
collectively display the necessary balance of professional skills, experience,
length of service and industry/Company knowledge. The plan is reviewed
annually and at such other times as circumstances may require.
BOARD EVALUATION
During the year the performance of the Board, its committees and individual
Directors (including each Director’s independence) was evaluated through a
formal assessment process led by the Senior Independent Director.
This involved the circulation of a Board effectiveness checklist tailored to
suit the nature of the Company followed by discussions between the senior
Independent Director and each of the Directors where necessary. The
performance of the Chairman was evaluated by the other Directors under the
leadership of the Senior Independent Director. The review concluded that the
Board was working well.
The Board is satisfied that the structure, mix of skills and operation of the
Board continue to be effective and relevant for the Company.
As an independent external review of the Board was undertaken in 2019 the next
such review will be held in 2021.
The Board pays close attention to the capacity of individual Directors to
carry out their work on behalf of the Company. In recommending individual
Directors to shareholders for re-election, it considered their other Board
positions and their time commitments and is satisfied that each Director has
the capacity to be fully engaged with the Company’s business. The Board has
considered the position of all of the Directors as part of the evaluation
process, and believes that it would be in the Company’s best interests to
propose them for election and re-election at the forthcoming Annual General
Meeting for the following reasons:
Andrew Joy, has been a Director since March 2012 and Chairman since July 2016.
He has extensive knowledge of the financial sector and was one of the founding
Partners of Cinven, a leading private equity firm investing in Europe and the
U.S. He has been Chairman or Director of numerous growing companies over the
past 30 years.
Professor Dame Kay Davies CBE who has been a Director since March 2012. She is
the Senior Independent Director and Chair of the Remuneration Committee.
Professor Davies has extensive knowledge of the biopharmaceutical sector and
is Professor of Genetics and Associate Head of the Medical Science Division at
the University of Oxford.
Julia Le Blan joined the Board in July 2016. A Chartered Accountant and a
former tax partner at Deloitte, she has a wealth of financial services
industry and investment company sector experience. Julia became the Chair of
the Audit Committee in July 2017.
Geoff Hsu, who has been a Director since May 2018 is a General Partner of
OrbiMed the Company’s Portfolio Manager. He has been a part of the team that
manages the Company’s portfolio since OrbiMed’s appointment in 2005.
Steve Bates joined the Board in July 2015. He has a wealth of experience as an
investment manager and has extensive experience of the investment company
sector. He is Chairman of the Management Engagement Committee.
The Rt Hon Lord Willetts joined the Board in November 2015. A former
government minister, he has extensive and relevant experience and a strong
interest in the biotechnology sector.
The Chairman is pleased to report that following the formal external
performance evaluation, the Directors’ performance continues to be effective
and they continue to demonstrate commitment to the role.
TRAINING AND ADVICE
New appointees to the Board are provided with a full induction programme. The
programme covers the Company’s investment strategy, policies and practices.
The Directors are also given key information on the Company’s regulatory and
statutory requirements as they arise including information on the role of the
Board, matters reserved for its decision, the terms of reference of the Board
Committees, the Company’s corporate governance practices and procedures and
the latest financial information. It is the Chairman’s responsibility to
ensure that the Directors have sufficient knowledge to fulfil their role and
Directors are encouraged to participate in training courses where appropriate.
The Directors have access to the advice and services of a Company Secretary
through its appointed representative which is responsible to the Board for
ensuring that Board procedures are followed and that applicable rules and
regulations are complied with. The Company Secretary is also responsible for
ensuring good information flows between all parties.
There is an agreed procedure for Directors, in the furtherance of their
duties, to take independent professional advice if necessary at the
Company’s expense.
RISK MANAGEMENT AND INTERNAL CONTROLS
The Board has overall responsibility for the Company’s risk management and
internal control systems and for reviewing their effectiveness. The Company
applies the guidance published by the Financial Reporting Council on internal
controls. Internal control systems are designed to manage, rather than
eliminate, the risk of failure to achieve the business objective and can
provide only reasonable and not absolute assurance against material
misstatement or loss. These controls aim to ensure that the assets of the
Company are safeguarded, that proper accounting records are maintained and
that the Company’s financial information is reliable. The Directors have a
robust process for identifying, evaluating and managing the significant risks
faced by the Company, which are recorded in a risk matrix. The Audit
Committee, on behalf of the Board, considers each risk as well as reviewing
the mitigating controls in place. Each risk is rated for its “likelihood”
and also its “impact” on the Company. This process was in operation during
the year and continues in place up to the date of this report. The process
also involves the Audit Committee receiving and examining regular reports from
the Company’s principal service providers (including their internal controls
reports). The Board then receives a detailed report from the Audit Committee
on its findings. The Directors have not identified any significant failures or
weaknesses in respect of the Company’s internal control systems.
SOCIAL, ECONOMIC AND ENVIRONMENTAL MATTERS
The Directors, through the Company’s Portfolio Manager, encourage companies
in which investments are made to adhere to best practice with regard to
corporate governance. In light of the nature of the Company’s business there
are no relevant human rights issues and the Company does not have a human
rights policy.
The Company recognises that social and environmental issues can have an effect
on some of its investee companies.
The Company is an investment trust and so its own direct environmental impact
is minimal. The Board of Directors consists of six Directors, five of whom are
resident in the UK and one resident in the United States. The Board holds the
majority of its regular meetings in the United Kingdom and has a policy that
travel, as far as possible, is minimal, thereby minimising the Company’s
greenhouse gas emissions. Further details concerning greenhouse gas emissions
can be found within the Report of the Directors.
RESPONSIBLE INVESTING
The Company’s Portfolio Manager, OrbiMed, believes there is a high
congruence between companies that seek to act responsibly and those that
succeed in building long-term shareholder value. To the extent practicable and
reasonable, OrbiMed takes into account applicable environmental, social and
corporate factors when evaluating a prospective or existing investment for the
Company. These criteria form the foundation of OrbiMed’s Responsible
Investing Policy and are among the factors that members of OrbiMed’s
investment team may research and analyse when determining whether to recommend
that the Company makes an investment. In particular, OrbiMed has a focus on
the corporate governance environment that exists at a prospective investee
company when making investment decisions.
EXERCISE OF VOTING POWERS
The Board has delegated authority to the Portfolio Manager to vote the shares
owned by the Company. The Board has instructed that the Portfolio Manager
submit votes for such shares wherever possible. This accords with current best
practice whilst maintaining a primary focus on financial returns. The
Portfolio Manager may refer to the Board on any matters of a contentious
nature. The Board has reviewed OrbiMed’s Voting Guidelines and is satisfied
with their approach.
The Company does not retain voting rights on any shares that are subject to
rehypothecation in connection with the loan facility provided by J.P. Morgan
Securities LLC.
NOMINEE SHARE CODE
Where shares are held in a nominee company name and where the beneficial owner
of the shares is unable to vote in person, the Company nevertheless
undertakes:
• to provide the nominee company with multiple copies of
shareholder communications, so long as an indication of quantities has been
provided in advance; and
• to allow investors holding shares through a nominee company
to attend general meetings, provided the correct authority from the nominee
company is available.
Nominee companies are encouraged to provide the necessary authority to
underlying shareholders to attend the Company’s general meetings.
BENEFICIAL OWNERS OF SHARES – INFORMATION RIGHTS
Beneficial owners of shares who have been nominated by the registered holder
of those shares to receive information rights under section 146 of the
Companies Act 2006 are required to direct all communications to the registered
holder of their shares rather than to the Company’s registrar, Link Asset
Services, or to the Company directly.
By order of the Board
Frostrow Capital LLP
Company Secretary
3 June 2020
GOVERNANCE / REPORT OF THE DIRECTORS
The Directors present this Annual Report on the affairs of the Company
together with the Audited Financial Statements and the Independent Auditor’s
Report for the year ended 31 March 2020. Disclosures relating to performance,
future developments and risk management can be found in the Strategic Report.
COMPANY MANAGEMENT
ALTERNATIVE INVESTMENT FUND MANAGER
Frostrow under the terms of its AIFM agreement with the Company provides,
inter alia, the following services: delegation (subject to the oversight of
Frostrow and the Board) of the portfolio management function to OrbiMed;
investment portfolio administration and valuation; risk management services;
marketing and shareholder services; share price discount and premium
management; administrative and secretarial services; advice and guidance in
respect of corporate governance requirements; maintenance of the Company’s
accounting records; preparation and dispatch of annual and half year reports
and monthly fact sheets; ensuring compliance with applicable legal and
regulatory requirements; and maintenance of the Company’s website.
Frostrow receives a periodic fee equal to 0.30% per annum of the Company’s
market capitalisation, plus a fixed amount equal to £60,000 per annum. Either
party may terminate the AIFM Agreement on not less than 12 months’ notice.
PORTFOLIO MANAGER
OrbiMed under the terms of its portfolio management agreement with the AIFM
and the Company provides, inter alia, the following services: the seeking out
and evaluating of investment opportunities; recommending the manner by which
monies should be invested, disinvested, retained or realised; advising on how
rights conferred by the investments should be exercised; analysing the
performance of investments made; and advising the Company in relation to
trends, market movements and other matters which may affect the investment
objective and policy of the Company. OrbiMed receives a periodic fee equal to
0.65% per annum of the Company’s net asset value. The proportion of the
Company’s assets committed for investment in OrbiMed Asia Partners L.P., a
limited partnership managed by OrbiMed Asia G.P., L.P., an affiliate of the
Portfolio Manager, is excluded from the fee calculation. The Portfolio
Management Agreement may be terminated by the Company, Frostrow or the
Portfolio Manager giving notice of not less than 12 months.
PERFORMANCE FEE
Dependent on the level of long-term outperformance of the Company, the AIFM
and Portfolio Manager are entitled to the payment of a performance fee. The
performance fee is calculated by reference to the amount by which the
Company’s net asset value (‘NAV’) performance has outperformed the
NASDAQ Biotechnology Index (sterling adjusted), the Company’s benchmark
index.
The fee is calculated quarterly by comparing the cumulative performance of the
Company’s NAV with the cumulative performance of the benchmark since the
commencement of the performance fee arrangement on 30 June 2005.
The performance fee amounts to 16.5% of any outperformance over the
benchmark, the AIFM receiving 1.5% and the Portfolio Manager receiving 15%
respectively. Provision is also made within the daily NAV per share
calculation as required and in accordance with generally accepted accounting
standards.
In order to ensure that only sustained outperformance is rewarded, at each
quarterly calculation date any performance fee is based on the lower of:
(i) The cumulative outperformance of the portfolio over the
benchmark as at the quarter end date; and
(ii) The cumulative outperformance of the portfolio over the benchmark
as at the corresponding quarter end date in the previous year.
In addition, a performance fee only becomes payable to the extent that the
cumulative outperformance gives rise to a total fee greater than the total of
all performance fees paid to date. There were no performance fees payable as
at 31 March 2020 (2019: nil).
The proportion of the Company’s assets invested in OrbiMed Asia Partners
L.P. is excluded from the Portfolio Manager’s performance fee calculation.
DEPOSITARY AND CUSTODIAN AND PRIME BROKER
The Company appointed J.P. Morgan Europe Limited (the “Depositary”) as its
depositary. Under the terms of the Depositary Agreement the Company has agreed
to pay the Depositary a fee calculated at 1.75 bps on net assets up to £150
million, 1.50 bps on net assets between £150 million and £300 million, 1.00
bps on net assets between £300 million and £500 million and 0.50 bps on net
assets above £500 million.
The Depositary has delegated the custody and safekeeping of the Company’s
assets to J.P. Morgan Securities LLC who act as the Company’s Custodian and
Prime Broker.
Under the terms of a Delegation Agreement, liability has been transferred
under Article 21(12) of the AIFMD for the loss of the Company’s financial
instruments held in custody by J.P. Morgan Securities LLC from the Depositary
to J.P. Morgan Securities LLC in accordance with Article 21(13) of the AIFMD.
While the Depositary Agreement prohibits the re-use of the Company’s assets
by the Depositary or the Custodian and Prime Broker without the prior consent
of the Company or Frostrow, the Company has consented to the transfer and
re-use of its assets by the Custodian and Prime Broker (known as
“rehypothecation”) in accordance with the terms of an institutional
account agreement between the Company, J.P. Morgan Securities LLC and certain
other J.P. Morgan Entities (as defined therein) (the “Institutional Account
Agreement”). This activity is undertaken in order to take advantage of lower
financing costs on the Company’s loan borrowings and also lower custody
charges.
J.P. Morgan Securities LLC is a registered broker-dealer and is accordingly
subject to limits on rehypothecation, in particular limitations set out in
U.S. SEC Rule 15c3-3. In the event of J.P. Morgan insolvency, the Company may
be unable to recover in full all assets held by it as collateral for the loan
or as Custodian. (See note 13 for further details)
AIFM AND PORTFOLIO MANAGER EVALUATION AND RE-APPOINTMENT
The performance of the AIFM and the Portfolio Manager is reviewed by the
Company’s Management Engagement Committee (the “Committee”) with a
formal evaluation being undertaken each year. As part of this process, the
Committee monitors the services provided by the AIFM and the Portfolio Manager
and receives regular reports and views from them. The Committee also receives
comprehensive performance measurement reports to enable it to determine
whether or not the performance objectives set by the Board have been met. The
Committee reviewed the appropriateness of the appointment of the AIFM and the
Portfolio Manager in February 2020 with a recommendation being made to the
Board.
The Board believes the continuing appointment of the AIFM and the Portfolio
Manager, under the terms described above and on the previous page, is in the
interests of shareholders as a whole. In coming to this decision, it also took
into consideration the following additional reasons:
– the quality and depth of experience allocated by the Portfolio
Manager to the management of the portfolio and the level of performance of the
portfolio in absolute terms and also by reference to the benchmark index; and
– the quality and depth of experience of the company management,
company secretarial, administrative and marketing team that the AIFM allocates
to the management of the Company.
LOAN FACILITY
The Company’s borrowing requirements are met through the utilisation of a
loan facility, repayable on demand, provided by J.P. Morgan Securities LLC.
The potential draw down of the Company’s loan facility with JP Morgan is
limited to 50% of the Company’s Marginable Securities*; however, the maximum
amount of gearing permitted by the Board is 20% of net assets. (Further
details can be found in note 1 and note 13).
*see glossary.
SHARE CAPITAL
As part of the package of measures adopted in 2005 by the Board to improve the
attraction of the Company’s shares to new investors and also to provide the
prospect of a sustained improvement in the rating of the Company’s shares,
an active discount management policy was implemented to buy-back shares to
either hold in treasury or for cancellation if the market price is at a
discount greater than 6% to net asset value per share. For most of the year
under review, the Company continued to pursue an active policy of buying back
its shares when the discount to the net asset value per share was materially
higher than 6%. However, as a result of extreme market volatility in March
2020, particularly in the biotechnology sector ,the Board took the decision
that it would be in the best interests of shareholders to suspend buybacks
until a less volatile period. The Board remains committed to protecting the
discount at or near the 6% level and is keeping the resumption of buybacks
under close review. As at 31 March 2020, the discount was 12.7% (31 March
2019: 6.7%). The making and timing of any share buy-back remains at the
absolute discretion of the Board. Authority to buy-back up to 14.99% of the
Company’s issued share capital is sought at each Annual General Meeting.
ANNUAL GENERAL MEETING
THE FOLLOWING INFORMATION TO BE CONSIDERED AT THE FORTHCOMING ANNUAL GENERAL
MEETING IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in any doubt about the action you should take, you should seek
advice from your Stock broker, bank manager, solicitor, accountant or other
financial adviser authorised under the Financial Services and Markets Act 2000
(as amended). If you have sold or transferred all of your ordinary shares in
the Company, you should pass this document, together with any other
accompanying documents, including the form of proxy, at once to the purchaser
or transferee, or to the Stock broker, bank or other agent through whom the
sale or transfer was effected, for onward transmission to the purchaser or
transferee.
The Company’s Annual General Meeting will be held at the offices of Frostrow
Capital LLP, 25 Southampton Buildings, London WC2A 1AL on Wednesday, 15 July
2020 at 12 noon. Please refer to the Chairman’s Statement for details of
this year’s arrangements.
Resolutions relating to the following items of special business will be
proposed at the forthcoming Annual General Meeting.
Resolution 11 Authority to allot shares
Resolution 12 Authority to disapply pre-emption rights
Resolution 13 Authority to buy back shares
Resolution 14 Authority to hold General Meetings (other than the AGM) on at
least 14 clear days’ notice
Resolution 15 To approve the continuance of the Company as an investment trust
for a further period of five years.
The full text of the resolutions can be found in the Notice of Annual General
Meeting.
DIRECTORS
DIRECTORS’ FEES
A report on Directors’ Remuneration and also the Directors’ Remuneration
Policy Report are set out on the Governance section.
DIRECTORS’ & OFFICERS’ LIABILITY INSURANCE COVER
Directors’ & Officers’ liability insurance cover was maintained by the
Board during the year ended 31 March 2020. It is intended that this policy
will continue for the year ended 31 March 2021 and subsequent years.
DIRECTORS’ INDEMNITIES
As at the date of this report, indemnities are in force between the Company
and each of its Directors under which the Company has agreed to indemnify each
Director, to the extent permitted by law, in respect of certain liabilities
incurred as a result of carrying out his/her role as a Director of the
Company. The Directors are also indemnified against the costs of defending any
criminal or civil proceedings or any claim by the Company or a regulator as
they are incurred provided that where the defence is unsuccessful the Director
must repay those defence costs to the Company. The indemnities are qualifying
third party indemnity provisions for the purposes of the Companies Act 2006.
A copy of each deed of indemnity is available for inspection at the
Company’s registered office during normal business hours and will be
available for inspection at the Annual General Meeting.
SUBSTANTIAL SHAREHOLDINGS
The Company was aware of the following substantial interests in the voting
rights of the Company as at 30 April 2020, the latest practicable date before
publication of the annual report.
30 April 2020 31 March 2020
Shareholders No. of shares % of Issued share capital No. of shares % of Issued share capital
Hargreaves Lansdown 4,197,889 10.7 3,994,369 10.2
Interactive Investor 3,203,868 8.2 3,138,192 8.0
Border to Coast Pensions Partnership 2,390,000 6.1 2,600,000 6.6
Rathbones 2,303,624 5.9 2,280,306 5.8
Charles Stanley 1,779,608 4.5 1,774,694 4.5
Brewin Dolphin, Stockbrokers 1,781,219 4.5 1,664,554 4.2
M&G Investment Management 1,458,674 3.7 1,458,674 3.7
As at both 31 March and 30 April 2020 the Company had 39,207,269 shares in
issue.
FINANCIAL INSTRUMENTS
The Company’s financial instruments comprise its portfolio, cash balances,
debtors and creditors that arise directly from its operations, such as sales
and purchases awaiting settlement, accrued income and the loan facility. The
financial risk management and policies arising from its financial instruments
are disclosed in note 13 to the Financial Statements.
RESULTS AND DIVIDEND
The results attributable to shareholders for the year and the transfer to
reserves are shown on the Income Statement. No dividend is proposed in respect
of the year ended 31 March 2020 (2019: nil).
ALTERNATIVE PERFORMANCE MEASURES
The Financial Statements set out the required statutory reporting measures of
the Company’s financial performance. In addition, the Board assesses the
Company’s performance against a range of criteria which are viewed as
particularly relevant for investment trusts and explained in greater detail in
the Strategic Report, under the heading ‘Key Performance Indicators’.
Please also see the glossary.
AWARENESS AND DISCLOSURE OF RELEVANT AUDIT INFORMATION
So far as each of the Directors is aware, there is no relevant audit
information (as defined in the Companies Act) of which the Company’s
auditors are unaware.
Each of the Directors has taken all the steps that he or she ought to have
taken as a Director in order to make himself or herself aware of any relevant
audit information (as defined) and to establish that the Company’s auditors
are aware of that information.
The above confirmation is given and should be interpreted in accordance with
the provision of Section 418(2) of the Companies Act 2006.
CAPITAL STRUCTURE
The Company’s capital structure is composed solely of Ordinary Shares of 25p
each. During the year 12,760,293 shares were repurchased by the Company at an
average discount of 8.9% to the Company’s net asset value per share and at a
cost of £104.2 million. No new shares were issued by the Company during the
year. At the end of the year under review and to the date of this report there
were 39,207,269 Ordinary Shares in issue. Further details are given in note 11
to the Financial Statements.
VOTING RIGHTS IN THE COMPANY’S SHARES
Details of the voting rights in the Company’s shares at the date of this
Annual Report are given in note 9 to the Notice of Annual General Meeting.
POLITICAL AND CHARITABLE DONATIONS
The Company has not in the past and does not intend in the future to make
political or charitable donations.
MODERN SLAVERY ACT 2015
The Company does not provide goods or services in the normal course of
business, and as a financial investment vehicle does not have customers. The
Directors do not therefore consider that the Company is required to make a
statement under the Modern Slavery Act 2015 in relation to slavery or human
trafficking.
ANTI-BRIBERY AND CORRUPTION POLICY
The Board has adopted a zero tolerance approach to instances of bribery and
corruption. Accordingly it expressly prohibits any Director or associated
persons when acting on behalf of the Company, from accepting, soliciting,
paying, offering or promising to pay or authorise any payment, public or
private, in the United Kingdom or abroad to secure any improper benefit for
themselves or for the Company.
A copy of the Company’s anti-bribery and corruption policy can be found on
its website at www.biotechgt.com. The policy is reviewed regularly by the
Audit Committee.
CRIMINAL FINANCES ACT 2017
The Company has a commitment to zero tolerance towards the criminal
facilitation of tax evasion.
GLOBAL GREENHOUSE GAS EMISSIONS
The Company has no greenhouse gas emissions to report from its operations, nor
does it have responsibility for any other emissions producing sources under
Large and Medium sized Companies and Groups (Accounts and Reports) Regulations
2008 (as amended), (including those within our underlying investment
portfolio).
COMMON REPORTING STANDARD (CRS)
CRS is a global standard for the automatic exchange of information
commissioned by the Organisation for Economic Cooperation and Development and
incorporated into UK law by the International Tax Compliance Regulations 2015.
CRS requires the Company to provide certain additional details to HMRC in
relation to certain shareholders. The Registrars, Link Asset Services, have
been engaged to collate such information and file the reports with HMRC on
behalf of the Company.
CORPORATE GOVERNANCE
The Corporate Governance Statement forms part of the Report of the Directors.
LISTING RULE 9.8.4
Listing Rule 9.8.4 requires the Company to include certain information in a
single identifiable section of the Annual Report or a cross reference table
indicating where the information is set out. The Directors confirm that there
are no disclosures to be made under Listing Rule 9.8.4.
GOING CONCERN
The financial statements have been prepared on a going concern basis. The
Directors consider this is the appropriate basis as the Company has adequate
resources to continue in operational existence for the foreseeable future,
being taken as 12 months after approval of the financial statements. The
Company’s shareholders are asked every five years to vote for the
continuation of the Company, this will be put to shareholders at this year’s
Annual General Meeting. The validity of the going concern basis depends on the
outcome of the continuation vote on which the Board is recommending that
shareholders vote in favour; the Board expects that the Company will continue
to exist for the foreseeable future. In particular, no provision has been made
for the cost of winding-up the Company or other reorganisation in the event
that the resolution is not passed. The content of the Company’s portfolio,
trading activity, the Company’s cash balances and revenue and expense
forecasts, and the trends and factors likely to affect the Company’s
performance are reviewed and discussed at each Board meeting. The Board has
considered a detailed assessment of the Company’s ability to meet its
liabilities as they fall due, including stress and liquidity tests which
modelled the effects of further substantial falls in markets and significant
reductions in market liquidity to that experienced to date in connection with
the COVID-19 pandemic, on the Company’s net asset value, its cash flows and
its expenses. Further information is provided in the Audit Committee report.
Based on the information available to the Directors at the date of this
report, including the results of these stress tests, the conclusions drawn in
the Viability Statement, the Company’s cash balances, and the liquidity of
the Company’s investments, the Directors are satisfied that the Company has
adequate financial resources to continue in operation for at least the next 12
months and that, accordingly, it is appropriate to continue to adopt the going
concern basis in preparing the financial statements.
ARTICLES OF ASSOCIATION
Amendment of the Company’s Articles of Association requires a special
resolution to be passed by shareholders.
SECURITIES FINANCIAL TRANSACTIONS REGULATION (‘SFTR’) DISCLOSURE
The Company has not engaged in Securities Financing Transactions (as defined
in Article 3 of Regulation (EU) 2015/2365) during the year. Securities
financing transactions include repurchase transactions, securities or
commodities lending and securities or commodities borrowing, buy-sell back
transactions or sell-buy back transactions and margin lending transactions) or
total return swaps. Accordingly, disclosures required by Article 13 of the
Regulation are not applicable for the year ended 31 March 2020.
By order of the Board
Frostrow Capital LLP
Company Secretary
3 June 2020
GOVERNANCE / 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 have elected to prepare
Financial Statements under International Financial Reporting Standards
(“IFRSs”) as adopted by the European Union. 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 of 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 IFRSs as
adopted by the European Union, 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 to
enable them to ensure that the financial statements and the Directors’
Remuneration Report 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.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors’ Report, Directors’ Remuneration
Report and Corporate Governance Statement that complies with that law and
those regulations. The Directors are responsible for the maintenance and
integrity of the corporate and financial information included on the
Company’s website, which is maintained by the Company’s AIFM. The
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.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL REPORT
We confirm that to the best of our knowledge:
- the Company’s financial statements, which have been prepared in
accordance with IFRSs as adopted by the European Union on a going concern
basis, give a true and fair view of the assets, liabilities, financial
position and profit of the Company for the year ended 31 March 2020; and
- the Chairman’s Statement, the Strategic Report includes a fair
review of the information required by 4.1.8R to 4.1.11R of the FCA’s
Disclosure Guidance and Transparency Rules.
The Directors consider the Annual Report and the financial statements, 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
3 June 2020
GOVERNANCE / AUDIT COMMITTEE REPORT
FOR THE YEAR ENDED 31 MARCH 2020
COMPOSITION AND MEETINGS
The Audit Committee the (“Committee”) comprises the independent Directors.
The AIC Code permits the chairman of the board to be a member of the Committee
(but not to chair it) if he/she was independent on appointment. The Chairman
of the Board was independent on appointment and continues to be so. The
Directors therefore feel it is appropriate for him to be a member of the
Committee. Julia Le Blan, who has recent and relevant financial experience,
was appointed Chair of the Committee in July 2017. In addition, the Board
recognises the requirement for the Audit Committee as a whole to have
competence relevant to the sector in which the Company operates. The Committee
members have a combination of financial, investment and business experience
which is highly relevant to both the biotechnology and investment trust
sectors.
The Committee met four times during the year.
Role and Responsibilities of the Audit Committee
1. To review the Company’s half-year and annual financial
statements together with announcements and other filings relating to the
financial performance of the Company.
2. To advise the Board on whether the Annual Report and the
financial statements, taken as a whole, is fair, balanced and understandable.
3. To review the risk management and internal control processes of
the Company and its key service providers. As part of this review the
Committee reviewed the appropriateness of the Company’s anti bribery and
corruption policy and also its policy on the prevention of the facilitation of
tax evasion.
4. To develop and implement a policy for the effectiveness of the
external Auditor, and agreeing the scope of its work, and its remuneration.
Also, to be responsible for the selection process of the external Auditor
(including the leadership of the audit tender process) and to have primary
responsibility for the Company’s relationship with the external Auditor.
5. To review the effectiveness of the external audit and the
process.
6. To review the independence and objectivity of the external
Auditor.
7. To consider any non-audit work to be carried out by the Auditor.
The Audit Committee reviews the need for non-audit services to be performed by
the Auditor in accordance with the Company’s non-audit services policy, and
authorises such on a case by case basis having given consideration to the cost
effectiveness of the services and the objectivity of the Auditor.
8. To consider the need for an internal audit function. Since the
Company delegates its day-to-day operations to third parties and has no
employees, the Committee has determined there is no requirement for such a
function.
9. To report its findings to the Board. The Committee’s terms of
reference are available for review on the Company’s website at
www.biotechgt.com.
SIGNIFICANT ISSUES CONSIDERED BY THE AUDIT COMMITTEE DURING THE YEAR FINANCIAL
STATEMENTS
The production of the Company’s Annual Report (including the audit by the
Company’s external Auditor) is a thorough process involving input from a
number of different areas. In order to be able to confirm that the Annual
Report is fair, balanced and understandable, the Board has requested that the
Committee advise on whether it considers these criteria have been satisfied.
As part of this process the Committee has considered to the following:
- the procedures followed in the production of the Annual Report,
including the processes in place to assure the accuracy of the factual
content;
- the extensive levels of review that were undertaken in the
production process, by the Company’s AIFM and also by the Committee; and
- the internal control environment as operated by the Portfolio
Manager, AIFM and other service providers.
As a result of the work undertaken by the Committee, it has confirmed that the
Annual Report for the year ended 31 March 2020, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company’s financial position, performance,
business model and strategy. The Committee has confirmed this to the Board.
COMPANY’S INVESTMENTS – VALUATION AND OWNERSHIP
The Committee approached and dealt with this area of risk by:
- ensuring that all investment holdings and cash/ deposit balances
had been agreed to an independent confirmation from the Custodian and Prime
Broker. In addition, receiving and reviewing details of the internal control
procedures in place at the Portfolio Manager, the AIFM and the Custodian and
Prime Broker and also receiving regular reports from both the Custodian and
Prime Broker and also the Depositary (whose role it is to safeguard the
Company’s assets and to verify their valuation);
- reconfirming its understanding of the processes in place to record
investment transactions and income, and to value the portfolio;
- reviewing and amending, where necessary, the Company’s register
of key risks in light of changes to the portfolio and the investment
environment; and
- gaining an overall understanding of the performance of the
portfolio both in capital and revenue terms through comparison to the
Benchmark.
VALUATION OF UNQUOTED INVESTMENTS
The Company has the ability to make unquoted investments up to a limit of 10%
of the portfolio at the time of acquisition. Both the Company’s Directors
and the AIFM need to ensure that an appropriate value is placed on such
investments within the Company’s net asset value. The Committee worked with
the Company’s Portfolio Manager and the AIFM to establish clear guidelines
for the valuation of unquoted investments, including the use of valuations
produced by independent external valuers, where appropriate.
RECOGNITION OF REVENUE FROM INVESTMENTS
The Committee took steps to gain an understanding of the processes in place to
record investment income and transactions. The Committee sought and received
confirmation from the Company’s AIFM that all dividends both received and
receivable had been accounted for correctly. The Committee noted and took
comfort from the segregation of duties in place between the Company’s AIFM
and the Custodian and Prime Broker.
TAXATION – ENSURING THAT THE REGULATIONS FOR THE COMPANY TO MAINTAIN ITS
INVESTMENT TRUST STATUS HAVE BEEN OBSERVED
The Committee approached and dealt with the area of risk, surrounding
compliance with section 1158 of the Corporation Tax Act 2010, by:
– seeking confirmation from the AIFM that the Company continues
to meet the eligibility conditions as outlined in section 1158 through reports
received at each Board meeting and also as part of the monthly Compliance
Monitoring Report sent to the Board;
– by obtaining written confirmation from HMRC, evidencing the
approval of the Company as an investment trust under the regime; and
– understanding the risks and consequences if the Company
breaches this approval in future years.
CALCULATION OF AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
The AIFM, Portfolio Management and performance fees are calculated in
accordance with the AIFM and Portfolio Management Agreements. The Committee
reviews and agrees the calculation of any performance fee that becomes
payable.
ALLOCATION OF PORTFOLIO MANAGEMENT FEES, MANAGEMENT FEES AND FINANCE COSTS
BETWEEN REVENUE AND CAPITAL
The Committee considered the allocation of Portfolio Management fees,
Management fees and finance costs between revenue and capital during the year.
After taking advice from the Company’s Auditor and considering the AIC SORP
and the Company’s Investment Objective and the nature of its long-term
returns, it recommended to the Board that the allocation should be amended
from the current allocation of 100% to capital to 5% chargeable to revenue and
95% to capital. The Board agreed that this should become effective from 1
April 2020.
OTHER REPORTING MATTERS
INVESTMENT PERFORMANCE
The Committee also gained an overall understanding of the performance of the
investment portfolio both in capital and revenue terms through ongoing
discussions and analysis with and the Company’s Portfolio Manager and also
with comparison to suitable key performance indicators.
ACCOUNTING POLICIES
During the year the Committee ensured that the accounting policies, were
applied consistently throughout the year. In light of there being no unusual
transactions during the year or other possible reasons, the Committee agreed
that there was no reason to change the policies.
GOING CONCERN
Having reviewed the Company’s financial position and liabilities, the
Committee is satisfied that it is appropriate for the Board to prepare the
financial statements on the going concern basis. The Committee notes that
there is a continuation vote due to take place at this year’s Annual General
Meeting and that the Board is fully supportive of the continuation of the
Company and expects that the continuation vote will be passed.
INTERNAL CONTROLS
The Board has established an ongoing process for identifying, evaluating and
managing any major risks faced by the Company. The process accords with advice
issued by the FRC and is subject to regular review by the Audit Committee. The
Board has overall responsibility for the Company’s system of internal
controls and for reviewing its effectiveness. However, such a system is
designed to manage rather than eliminate risks of failure to achieve the
Company’s business objectives and can only provide reasonable and not
absolute assurance against material misstatement or loss. The Audit Committee
has reviewed the effectiveness of the Company’s system of internal controls
for the year ended 31 March 2020. During the course of its review the Audit
Committee has not identified or been advised of any failings or weaknesses
that have been determined as significant. All business risks faced by the
Company are recorded in a detailed risk map which is reviewed periodically. In
arriving at its judgement of what constitutes a sound system of internal
control, the Directors considered the following factors:
- the nature and extent of risks which it regards as acceptable for
the Company to bear within its overall business objective;
- the threat of such risks becoming a reality; and
- the Company’s ability to reduce the incidence and impact of risk
on its performance.
Against this background, the Board has split the review of risk and associated
controls into five sections (as contained in the Company’s risk matrix)
reflecting the nature of the risks being addressed. These sections are as
follows:
- corporate strategy;
- investment activity;
- published information, compliance with laws and regulations;
- service providers; and
- financial activity.
Details of the key risks to the Company can be found in the Business Review.
The Company has obtained from its various service providers assurances and
information relating to their internal systems and controls to enable the
Board to make an appropriate risk and control assessment, including the
following:
- details of the control environment in operation;
- identification and evaluation of risks and control objectives;
- review of communication methods and procedures; and
- assessment of the control procedures.
All of the Company’s management functions are performed by third parties
whose internal controls are reviewed by the Board or on its behalf by
Frostrow.
In accordance with guidance issued to directors of listed companies, the
Directors confirm that they have carried out a review of the effectiveness of
the system of internal financial control and risk management during the year,
as set out above and that the ongoing process for identifying, evaluating and
managing significant risks faced by the Company, has been in place for the
year under review and up to 3 June 2020.
VIABILITY STATEMENT
The Committee also considered the longer-term viability of the Company in
connection with the Board’s statement in the Strategic Report. The Committee
reviewed the Company’s financial position (including its cash flows and
liquidity position), the principal risks and uncertainties and the results of
stress tests and scenarios which considered the impact of severe stock market
volatility on shareholders’ funds. This included modelling further
substantial market falls, and significantly reduced market liquidity, to that
experienced recently in connection with the COVID-19 pandemic. The scenarios
assumed that there would be no recovery in asset prices and that listed
portfolio companies which have cut or cancelled any dividends due since the
COVID-19 outbreak would not reinstate them.
The results demonstrated the impact on the Company’s NAV, its expenses, its
cash flows and its ability to meet its liabilities. In even the most stressed
scenario, the Company was shown to have sufficient cash, or to be able to
liquidate a sufficient portion of its listed holdings, in order to be able to
meet its liabilities as they fall due. Based on the information available to
the Directors at the time, the Committee therefore concluded it was reasonable
for the Board to expect 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 Committee recognises that there is a continuation vote due to take place
at this year’s Annual General Meeting. The Committee expects that the
Company will continue to exist for the forseeable future and at least for the
period of assessment.
APPOINTMENT OF NEW AUDITOR
During the year, in the interests of obtaining the best value for shareholders
(see Chairman’s Statement for further information) and as notified in the
Company’s half yearly report for the six months ended 30 September 2019, the
Audit Committee led a competitive audit tender process. A selection of audit
firms was invited to participate, and three firms submitted proposals and were
interviewed by the Audit Committee.
In line with the requirements of the EU Audit Regulation, the Committee
submitted two audit firm candidates for the engagement to the Board, together
with a justified preference for one of them. Following due consideration, the
Board resolved to appoint the Committee’s preferred candidate, BDO LLP.
Accordingly, Ernst & Young LLP resigned as the Company’s auditor and
provided a statement explaining the reasons for its resignation which was
posted to shareholders in accordance with the Companies Act 2006. The
statement is available on the Company’s website and the National Storage
Mechanism. The Directors wish to thank Ernst & Young for their service as
auditor.
Peter Smith was the audit partner for the financial year under review and he
has confirmed BDO’s willingness to continue to act as Auditor to the Company
for the forthcoming financial year. BDO’s appointment is subject to
shareholder approval at the next Annual General Meeting (AGM) to be held in
July, and details can be found in the Notice of AGM.
As a public company listed on the London Stock Exchange, the Company is
subject to mandatory auditor rotation requirements. Based on these
requirements, another tender process will be conducted no later than 2029.
The Committee will, however, continue to consider annually the need to go to
tender for audit quality, remuneration or independence reasons.
EXTERNAL AUDITOR
MEETINGS:
This year the nature and scope of the audit together with BDO LLP’s audit
plan were considered by the Committee on 20 February 2020. The Chair of the
Committee had a meeting with them specifically to discuss the audit and any
issues that arose (of which there were none of any significance). The
Committee then met BDO LLP on 20 May 2020 to formally review the outcome of
the audit and to discuss the limited issues that arose. The Committee also
discussed the presentation of the Annual Report with the Auditor and sought
their perspective.
INDEPENDENCE AND EFFECTIVENESS:
In order to fulfil the Committee’s responsibility regarding the independence
of the Auditor, the Committee reviewed:
– the senior audit personnel in the audit plan for the year,
– the Auditor’s arrangements concerning any conflicts of
interest,
– the extent of any non-audit services, and
– the statement by the Auditor that they remain independent
within the meaning of the regulations and their professional standards.
In order to consider the effectiveness of the audit process, the Committee
reviewed:
– the Auditor’s fulfilment of the agreed audit plan,
– the report arising from the audit itself, and
– feedback from the Company’s AIFM.
No non-audit services were undertaken by either Ernst & Young LLP or BDO LLP
during the year. During the previous year Ernst & Young LLP undertook a review
of the Company’s Key Information Document, where their fee amounted to
£6,500. The Committee continues to keep the provision of non-audit services
under close review. The Company’s policy on the provision by the Auditor of
non-audit services to the Company can be found below.
The Committee is satisfied with the Auditor’s independence and the
effectiveness of the audit process, together with the degree of diligence and
professional scepticism brought to bear.
NON-AUDIT SERVICES POLICY
The Company operates on the basis whereby the provision of all non-audit
services by the Auditor has to be pre-approved by the Audit Committee. Such
services are only permissible where no conflicts of interest arise, the
service is not expressly prohibited by audit legislation, where the
independence of the Auditor is not likely to be impinged by undertaking the
work and the quality and the objectivity of both the non-audit work and audit
work will not be compromised. In particular, non-audit services may be
provided by the Auditor if they are inconsequential or would have no direct
effect on the Company’s financial statements and the audit firm would not
place significant reliance on the work for the purposes of the statutory
audit.
PERFORMANCE EVALUATION
The Committee conducted a review of its performance at the February 2020
meeting. In addition, the Committee’s activities fell within the scope of
the review of Board effectiveness carried out during the year. It was
concluded that the Committee was performing satisfactorily and that no
recommendations needed to be made to the Board.
Julia Le Blan
Chair of the Audit Committee
3 June 2020
GOVERNANCE / DIRECTORS’ REMUNERATION REPORT
FOR THE YEAR ENDED 31 MARCH 2020
This report has been prepared in accordance with Schedule 8 of the Large and
Medium-sized Companies and Groups (Accounts and Reports) (Amendment)
Regulations 2013. A non-binding Ordinary Resolution for the approval of this
report will be put to the shareholders at the Annual General Meeting.
The law requires the Company’s Auditor to audit certain of the disclosures
provided in this report. Where disclosures have been audited, they are
indicated as such and the Auditor’s opinion is included in their report to
shareholders. The Remuneration Policy Report forms part of this report.
The Remuneration Committee considers the framework for the remuneration of the
Directors on an annual basis. It reviews the ongoing appropriateness of the
Company’s remuneration policy and the individual remuneration of Directors
by reference to the activities of the Company and comparison with other
companies of a similar structure and size. This is in line with the AIC Code.
In the year to 31 March 2020, the Directors’ fees were paid at the following
annual rates: the Chairman of the Company £37,000, Julia Le Blan as Chair of
the Audit Committee and I as the Senior Independent Director received £28,500
and Steven Bates as Chairman of the Management Engagement Committee received
£28,500. The remaining Directors received £26,000.
Following a review of Directors’ fees during the year, the Board resolved to
keep them unchanged for the year ending 31 March 2021.
All levels of remuneration reflect both the time commitment and responsibility
of the role.
DIRECTORS’ FEES
The Directors, as at the date of this report, and who all served throughout
the year (unless where stated), received the fees listed in the table below.
These exclude any employers’ national insurance contributions, if
applicable.
As noted in the Strategic Report, all of the Directors are non-executive and
therefore there is no Chief Executive Officer. The Company does not have any
employees. There is therefore no CEO or employee information to disclose.
DIRECTORS’ EMOLUMENTS FOR THE YEAR (AUDITED)
The Directors who served in the year received the following emoluments in the
form of fees:
Year ended 31 March 2020 Year ended 31 March 2019
Date of
Appointment Taxable Taxable
to the Board Fees Benefits+ Total Fees Benefits+ Total
£ £ £ £ £ £
Andrew Joy (Chairman) 15 March 2012 37,000 – 37,000 36,500 – 36,500
Steve Bates 8 July 2015 28,500 – 28,500 27,000 – 27,000
Sven Borho (retired 16 May 2018) 23 March 2006 – – – 3,204 – 3,204
Professor Dame Kay Davies CBE 15 March 2012 28,500 326 28,826 28,000 571 28,571
Julia Le Blan 12 July 2016 28,500 – 28,500 28,000 – 28,000
The Rt Hon Lord Willetts 11 November 2015 26,000 – 26,000 25,500 – 25,500
148,500 326 148,826 148,204 571 148,775
+ Taxable benefits primarily comprise travel and associated
expenses incurred by the Directors in attending Board and Committee meetings
in London. These are re-imbursed by the Company and, under an interpretation
of HMRC Rules, are subject to tax and National Insurance and therefore are
treated as a Benefit in Kind with this table.
Geoff Hsu joined the Board on 16 May 2018. Mr Hsu has waived his Director’s
fee.
The Directors are entitled to be re-imbursed for reasonable expenses incurred
by them in connection with the performance of their duties and attendance at
Board and General Meetings.
In certain circumstances, under HMRC rules, travel and other out of pocket
expenses reimbursed to the Directors may be considered as taxable benefits.
Where expenses are classed as taxable under HMRC guidance they are shown in
the Taxable Benefits column of the table on the previous page.
RELATIVE COST OF DIRECTORS’ REMUNERATION FOR THE YEAR ENDED 31 MARCH 2020
To enable shareholders to assess the relative cost of Directors’
remuneration, this has been shown in the table below compared with the
Company’s AIFM, Portfolio Management, other expenses and the cost of
repurchasing their shares.
2020 2019 Difference
£’000 £’000 £’000
Fees payable to non-executive Directors 149 148 1
AIFM, Portfolio management fees and other expenses 4,280 4,558 (278)
Repurchase of own shares for cancellation 104,202 29,620 74,582
During the year ended 31 March 2020 no performance fees were paid (2019:
£nil).
DIRECTORS’ REMUNERATION REPORT
At the Annual General Meeting held in July 2019 the results in respect of the
non-binding resolution to approve the Directors’ Remuneration Report were as
follows:
Percentage of Percentage of Number of
votes cast votes cast votes
For Against withheld
98.9% 1.1% 82,585
DIRECTORS’ REMUNERATION POLICY
At the Annual General Meeting held in July 2019 the results in respect of the
binding resolution to approve the Directors’ Remuneration Policy were as
follows:
Percentage of Percentage of Number of
votes cast votes cast votes
For Against withheld
98.9% 1.1% 82,585
A copy of the Directors’ Remuneration Policy may be inspected by
shareholders by either contacting the Company Secretary or visiting the
Company’s website at www.biogtechgt.com.
LOSS OF OFFICE
Directors do not have service contracts with the Company but are engaged under
Letters of Appointment. These specifically exclude any entitlement to
compensation upon leaving office for whatever reason.
SHARE PRICE RETURN
Share price versus the NASDAQ Biotechnology Index (sterling adjusted). The
chart overleaf illustrates the shareholder return for a holding in the
Company’s shares as compared to the NASDAQ Biotechnology Index (sterling
adjusted), which the Board has adopted as the measure for both the Company’s
performance and that of the Portfolio Manager for the period.
SHAREHOLDER TOTAL RETURN FOR TEN YEARS TO 31 MARCH 2020
DIRECTORS’ INTERESTS IN SHARES (AUDITED)
The Directors’ interests in the share capital of the Company are shown in
the table below:
Number of shares held as at
3 June 31 March 31 March
2020 2020 2019
Andrew Joy (Chairman) 55,000 55,000 55,000
Steve Bates 10,000 10,000 10,000
Professor Dame Kay Davies CBE 3,500 3,500 3,500
Julia Le Blan 7,000 7,000 7,000
Geoff Hsu nil nil nil
The Rt Hon Lord Willetts nil nil nil
None of the Directors was granted or exercised rights over shares during the
year. During the year Geoff Hsu was a General Partner at OrbiMed, the
Company’s Portfolio Manager, which is party to the Portfolio Management
Agreement with the Company and receives fees.
ANNUAL STATEMENT
On behalf of the Board I confirm that the Remuneration Policy, and
Remuneration Report summarise, as applicable, for the year to 31 March 2020:
(a) the major decisions on Directors’ remuneration;
(b) any substantial changes relating to Directors’ remuneration made
during the year; and
(c) the context in which the changes occurred and decisions have been
taken.
Professor Dame Kay Davies CBE
Senior Independent Director and Chair of the Remuneration Committee
3 June 2020
GOVERNANCE / DIRECTORS’ REMUNERATION POLICY
The Board’s policy is that the remuneration of the Directors should reflect
the experience of the Board as a whole, and is determined with reference to
comparable organisations and appointments. There are no performance conditions
attaching to the remuneration of the Directors as the Board does not believe
that this is appropriate for non-executive Directors. This policy is reviewed
annually and it is intended that it will continue for the year ending 31 March
2021 and for subsequent financial years.
The fees for the Directors are determined within the limits set out in the
Company’s Articles of Association, the maximum aggregate limit currently
being £250,000 per annum, and they are not eligible for bonuses, pension
benefits, share options, long-term incentive schemes or other benefits. The
Company does not have any employees.
DIRECTORS’ REMUNERATION YEAR ENDED 31 MARCH 2020
None of the Directors has a service contract. The terms of their appointment
provide that Directors shall retire and be subject to election at the first
Annual General Meeting after their appointment and to re-election annually
thereafter. The terms also provide that a Director may be removed without
notice and that compensation will not be due on leaving office.
No communications have been received from shareholders regarding Directors’
remuneration.
In accordance with best practice recommendations the Board will put the
Remuneration Policy to shareholders at the Annual General Meeting at least
once every three years.
Approval of this policy was granted by shareholders at the Annual General
Meeting held in July 2017 and so shareholder approval will again be sought at
this year’s Annual General Meeting.
GOVERNANCE / INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF THE BIOTECH
GROWTH TRUST PLC
OPINION
We have audited the financial statements of The Biotech Growth Trust plc (the
‘Company’) and for the year ended 31 March 2020 which comprise the Income
Statement, Statement of Financial Position, Statement of Changes in Equity,
Statement of Cash Flows and notes to the financial statements, including a
summary of significant accounting policies. The financial reporting framework
that has been applied in their preparation is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the European Union.
In our opinion the financial statements:
- give a true and fair view of the state of the Company’s affairs
as at 31 March 2020 and of the Company’s profit for the year then ended;
- have been properly prepared in accordance with IFRSs as adopted by
the European Union;
- have been prepared in accordance with the requirements of the
Companies Act 2006.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the
audit of the financial statements section of our report. We are independent of
the Company in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the FRC’s Ethical
Standard as applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.
CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT
We have nothing to report in respect of the following information in the
annual report, in relation to which the ISAs (UK) require us to report to you
whether we have anything material to add or draw attention to:
- the directors’ confirmation in the annual report that they have
carried out a robust assessment of the Company’s emerging and principal
risks and the disclosures in the annual report that describe the principal
risks and the procedures in place to identify emerging risks and explain how
they are being managed or mitigated;
- the directors’ statement in the financial statements about
whether the directors considered it appropriate to adopt the going concern
basis of accounting in preparing the financial statements and the directors’
identification of any material uncertainties to the Company’s ability to
continue to do so over a period of at least twelve months from the date of
approval of the financial statements;
- whether the directors’ statement relating to going concern
required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit; or
- the directors’ explanation in the annual report as to how they
have assessed the prospects of the Company, over what period they have done so
and why they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgment, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified, including those
which had the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
Matter Audit Response
Valuation, existence and ownership of investments (Note 1 and Note 8) The investment portfolio at the year-end was comprised of Level 1, listed equity investments valued at £381,751k and Level 3 unlisted investments of £16,906k. We consider the valuation, existence and ownership of investments to be the most significant audit areas as investments represent the most significant balance in the Financial Statements and underpin the principal activity of the entity. The valuation of investments is a key accounting estimate where there is an inherent risk of management override arising from the investment valuations being prepared by the Alternative Investment Fund Manager (AIFM) and the Portfolio Manager, who are remunerated based on the market capitalisation or net asset value of the Company. There is also a potential risk over the existence, or that the company does not have appropriate title over these investments, as this is an area that could be subject to manipulation. We responded to this matter by testing the valuation, existence and ownership of 100% of the portfolio of investments. We performed the following procedures: - Checked
the appropriateness of the valuation methodology applied by the AIFM and Portfolio Manager. - Agreed the investment holdings to independently received third party
confirmations from the custodian, or other supporting documentation as appropriate, to check existence and ownership. - Agreed the exchange rates used to independent
source. - Considered the adequacy and operating effectiveness of the relevant controls in place at the custodian through review of the latest available assurance report
addressing the relevant controls in place at the custodian. With respect of 100% of the Level 1 listed equity investments we also: - Checked that the year-end price has
been agreed to externally quoted prices from reputable sources With respect of 100% of the Level 3 unlisted investments we also: - Challenged whether the valuation
methodology was the most appropriate in the circumstances under the International Private Equity and Venture Capital Valuation (‘IPEV’) Guidelines and IFRS 13. -
Recalculated the value attributable to the Company. - Corroborated the inputs to source documents including Sales and purchase agreements, fund statements and IPO prices
to Bloomberg. - Considered the appropriateness of management’s experts where these have been utilised in valuing the unquoted investments - Performed sensitivity analysis
where appropriate. We also considered the completeness, accuracy and presentation of investment related disclosures. Key Observations Based on the procedures performed
we consider the investment valuations to be within an appropriate range and did not identify any issues with existence and title of the investment portfolio. We consider
the investment disclosures to be appropriate.
OUR APPLICATION OF MATERIALITY
We consider materiality to be the magnitude by which misstatements,
individually or in aggregate, including omissions, could reasonably influence
the economic decisions of users that are made on the basis of the Financial
Statements. We apply the concept of materiality both in planning and
performing our audit, and in evaluating the results of our work. Misstatements
below these levels will not necessarily be evaluated as immaterial as we also
take into account of the nature of identified misstatements, and the
particular circumstances of their occurrence, when evaluating their effect on
the financial statements as a whole.
Materiality Measure Purpose Key considerations and benchmarks 2020 Quantum
(£)
Financial Statement Materiality (1% of total equity) Determining the nature and extent of our risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature and extent of further audit procedures. - A principal consideration for members of the Company in assessing the financial performance given that the principal activity of the Company Purpose is that of an Investment Trust. - The nature and disposition of the investment portfolio. £3,610,000
Performance Materiality (70% of Financial Statement Materiality) Lower level of materiality applied in performance of the audit when determining the nature and extent of testing applied to individual balances and classes of transactions - Risk and control environment. £2,527,000
Given the importance of the distinction between revenue and capital for the
Company we have also applied a separate testing threshold of £180,000 for the
revenue column of the income statement, being the higher of 10% of the revenue
profit before taxation and our reporting threshold as described below.
We agreed with the Audit Committee that we would report to the Committee all
individual audit differences in excess of £180,000, being 5% of materiality
as well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
AN OVERVIEW OF THE SCOPE OF OUR AUDIT
We gained an understanding of the legal and regulatory framework applicable to
the Company and the industry in which it operates, and considered the risk of
acts by the Company which were contrary to applicable laws and regulations,
including fraud. These included but were not limited to compliance with
sections 1158 and 1159 of the Corporation Tax Act, the Companies Act 2006, the
FCA listing and DTR rules, the principles of the UK Corporate Governance Code,
industry practice represented by the SORP and IFRS accounting standards, VAT,
Employers NI and other taxes. We also considered the Company’s qualification
as an Investment Trust under UK tax legislation as any breach of this would
lead to the Company losing various deductions and exemptions from corporation
tax.
Our audit procedures were designed to respond to risks of material
misstatement in the financial statements, recognising that the risk of not
detecting a material misstatement due to fraud is higher than the risk of not
detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery, misrepresentations or through collusion.
We focused on laws and regulations that could give rise to a material
misstatement in the Company financial statements. Our tests included, but were
not limited to:
- obtaining an understanding of the control environment in
monitoring compliance with laws and regulations;
- review of minutes of board meetings throughout the period;
- we made enquiries of the existence of legal invoice and
correspondence in the period and reviewed any that were applicable;
- review of Investment Trust compliance workings and reports;
- enquiries and representations of management and the Board of
Directors;
- agreement of the financial statement disclosures to underlying
supporting documentation; and
- Multi-tier review of the financial statements against disclosure
checklists.
There are inherent limitations in an audit of financial statements and the
further removed non-compliance with laws and regulations is from the events
and transactions reflected in the financial statements, the less likely we
would become aware of it. As in all of our audits we also addressed the risk
of management override of internal controls, including testing journals and
evaluating whether there was evidence of bias by the directors that
represented a risk of material misstatement due to fraud.
OTHER INFORMATION
The directors are responsible for the other information. The other information
comprises the information included in the annual report, other than the
financial statements and our auditor’s report thereon. Our opinion on the
financial statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form
of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the
other information. If, based on the work we have performed, we conclude that
there is a material misstatement of the other information, we are required to
report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other
information where we conclude that those items meet the following conditions:
- Fair, balanced and understandable – the statement given by the
directors that they consider the annual report and financial statements taken
as a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position, performance,
business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or
- Audit committee reporting – the section describing the work of
the audit committee does not appropriately address matters communicated by us
to the audit committee; or
- Directors’ statement of compliance with the UK Corporate
Governance Code – the parts of the directors’ statement required under the
Listing Rules relating to the Company’s compliance with the UK Corporate
Governance Code containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure
from a relevant provision of the UK Corporate Governance Code.
OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion, the part of the directors’ remuneration report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
- the information given in the strategic report and the directors’
report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
- the strategic report and the directors’ report have been
prepared in accordance with applicable legal requirements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
In the light of the knowledge and understanding of the Company and its
environment obtained in the course of the audit, we have not identified
material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters in relation to
which the Companies Act 2006 requires us to report to you if, in our opinion:
- adequate accounting records have not been kept by the Company, or
returns adequate for our audit have not been received from branches not
visited by us; or
- the Company financial statements and the part of the directors’
remuneration report to be audited are not in agreement with the accounting
records and returns; or
- certain disclosures of directors’ remuneration specified by law
are not made; or
- we have not received all the information and explanations we
require for our audit.
RESPONSIBILITIES OF DIRECTORS
As explained more fully in the directors’ responsibilities statement, the
directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view, and for such internal
control as the directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Company’s ability to continue as a going concern, disclosing,
as applicable, matters related to going concern and using the going concern
basis of accounting unless the directors either intend to liquidate the
Company or to cease operations, or have no realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/ auditorsresponsibilities. This description forms part of our
auditor’s report.
OTHER MATTERS WHICH WE ARE REQUIRED TO ADDRESS
Following the recommendation of the Audit Committee and we were appointed by
the Board of Directors on 20 February 2020 to audit the financial statements
for the year ending 31 March 2020 and subsequent financial periods. The period
of total uninterrupted engagement is 1 year, covering the year ending 31 March
2020.
The non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Company and we remain independent of the Company in conducting
our audit.
Our audit opinion is consistent with the additional report to the audit
committee.
USE OF OUR REPORT
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work
has been undertaken so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the Company’s
members as a body, for our audit work, for this report, or for the opinions we
have formed.
Peter Smith (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor London, UK
3 June 2020
BDO LLP is a limited liability partnership registered in England and Wales
(with registered number OC305127).
FINANCIAL STATEMENTS / INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2020
2020 2019
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Investment Income
Investment income 2 1,313 — 1,313 1,246 — 1,246
Total income 1,313 — 1,313 1,246 — 1,246
Gains on investments
Gains on investments held at fair value through profit or loss 8 — 67,624 67,624 — 27,798 27,798
Exchange losses on currency balances — (2,982) (2,982) — (2,380) (2,380)
Expenses
AIFM, Portfolio management and performance fees 3 — (3,629) (3,629) — (4,013) (4,013)
Other expenses 4 (651) — (651) (545) — (545)
Profit before finance costs and taxation 662 61,013 61,675 701 21,405 22,106
Finance costs 5 — (580) (580) — (820) (820)
Profit before taxation 662 60,433 61,095 701 20,585 21,286
Taxation 6 (196) – (196) (186) — (186)
Profit for the year 466 60,433 60,899 515 20,585 21,100
Basic and diluted earnings per share 7 1.0p 133.9p 134.9p 1.0p 37.8p 38.8p
The Company does not have any income or expenses which are not included in the
profit for the year. Accordingly the “profit for the year” is also the
“total comprehensive profit 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 International Financial Reporting
Standards (IFRS) as adopted by the EU. 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.
FINANCIAL STATEMENTS / STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2020
2020 2019
Notes £’000 £’000
Non current assets
Investments held at fair value through profit or loss 8 398,657 431,172
Current assets
Other receivables 9 2,532 60
2,532 60
401,189 431,232
Current liabilities
Other payables 10 2,879 11,515
Loan 13 32,737 10,841
35,616 22,356
Net assets 365,573 408,876
Equity attributable to equity holders
Ordinary share capital 11 9,802 12,992
Share premium account 43,021 43,021
Capital redemption reserve 12,997 9,807
Capital reserve 16 300,099 343,868
Revenue reserve (346) (812)
Total equity 365,573 408,876
Net asset value per share 12 932.4p 786.8p
The financial statements were approved by the Board on 3 June 2020 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)
FINANCIAL STATEMENTS / STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2020
Ordinary Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Note £’000 £’000 £’000 £’000 £’000 £’000
At 31 March 2019 12,992 43,021 9,807 343,868 (812) 408,876
Net profit for the year — — — 60,433 466 60,899
Repurchase of own shares for cancellation (note 11) (3,190) — 3,190 (104,202) — (104,202)
At 31 March 2020 12 9,802 43,021 12,997 300,099 (346) 365,573
FOR THE YEAR ENDED 31 MARCH 2019
Ordinary Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Note £’000 £’000 £’000 £’000 £’000 £’000
At 31 March 2018 13,960 43,021 8,839 352,903 (1,327) 417,396
Net profit for the year — — — 20,585 515 21,100
Repurchase of own shares for cancellation (note 11) (968) — 968 (29,620) — (29,620)
At 31 March 2019 12 12,992 43,021 9,807 343,868 (812) 408,876
The accompanying notes are an integral part of this statement.
FINANCIAL STATEMENTS / STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2020
2020 2019
Notes £’000 £’000
Operating activities
Profit before taxation* 61,095 21,286
Finance costs 580 820
Gains on investments held at fair value through profit or loss 8 (67,624) (27,798)
Foreign exchange losses 2,982 2,380
Increase in other receivables (17) —
Decrease in other payables (5) (81)
Net cash outflow from operating activities before interest payable and taxation (2,989) (3,393)
Finance costs – interest paid 5 (580) (820)
Taxation paid 6 (196) (186)
Net cash outflow from operating activities (3,765) (4,399)
Investing activities
Purchases of investments held at fair value through profit or loss (491,471) (395,525)
Sales of investments held at fair value through profit or loss 582,401 441,324
Net cash inflow from investing activities 90,930 45,799
Financing activities
Repurchase of own shares for cancellation (106,079) (27,743)
Net drawdown /(repayment) of the loan facility 18,914 (13,657)
Net cash outflow from financing activities (87,165) (41,400)
Net increase in cash and cash equivalents — —
Cash and cash equivalents at start of year — —
Cash and cash equivalents at end of year — —
CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES
2020 2019
£’000 £’000
Balance as at 1 April 10,841 22,118
Net cash flow 18,914 (13,657)
Foreign exchange losses 2,982 2,380
Loan balance at 31 March 32,737 10,841
* Includes dividends earned during the year of £1,313,000
(2019: £1,246,000).
The accompanying notes are an integral part of this statement.
FINANCIAL STATEMENTS / NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
(A) BASIS OF PREPARATION
The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (“IFRS”). These comprise
standards and interpretations approved by the International Accounting
Standards Board (“IASB”), together with interpretations of the
International Accounting Standards and Standing Interpretations Committee
approved by the International Accounting Standards Committee (“IASC”) that
remain in effect, to the extent that IFRS have been adopted by the European
Union.
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 October
2019, 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 and cash flows. 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 results of the stress tests and the liquidity of the Company’s listed
investments, the Directors are satisfied that the Company has adequate
financial resources to continue in operation for at least the next 12 months
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. The accounts have been prepared on a going concern basis as the
Directors consider that in the foreseeable future (at least 12 months from the
date of approval of the financial statements) the Company will continue to be
able to meet its liabilities as they fall due.
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 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 2019 with a 5% discount applied. The statements
were audited by KPMG LLP (New Jersey Headquarters) and were approved on 31
March 2020. As at the date of signing, the Directors have now received
confirmation that the March 2020 valuation is in line with the estimated
valuation used in these Financial Statements.
Burning Rock Biotech has been valued by Duff & Phelps, an independent valuer,
using the probability – weighted expected returns methodology. Keros
Therapeutics has been valued at the IPO price of $16, which was within the
expected IPO price range. Subsequent to the year end, on the 7 April 2020 the
Company listed. Pandion Therapeutics was purchased on 23 March 2020 and has
been valued at cost at the year end.
(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) 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.
Dividends from investments in unquoted shares and securities are recognised
when they become receivable.
(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
100% 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; however this allocation is reviewed regularly by the Audit
Committee and during the year it was decided to charge 95% of these fees to
capital with effect from 1 April 2020 in line with the Directors’ revised
expectations; and
- during the year, loan interest was charged 100% 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; however
this allocation is reviewed regularly by the Audit Committee and during the
year it was decided to charge 95% of loan interest to capital with effect from
1 April 2020 in line with the Directors’ revised expectations.
- 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 crystalise and become due for payment;
- and all other expenses are charged to 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) FOREIGN CURRENCIES
The currency of the primary economic environment in which the Company operates
(the functional currency) is sterling, which is also the presentation currency
of the Company. 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.
(H) FUNCTIONAL AND PRESENTATION CURRENCY
The financial information is shown in sterling, being the Company’s
presentation 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.
(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
- 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 100% to capital in accordance with the
policy set out under note 1(e) expenses and finance costs.
† See glossary.
(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.
In line with IFRS 8, additional disclosure by geographical segment has been
provided in note 14 of this Annual Report.
(N) 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.
(O) ADOPTION OF NEW AND REVISED STANDARDS
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:
- Amendments to IFRS 3 ‘Definition of Business’ (effective for
accounting periods beginning on or after 1 January 2020)
- Amendments to IAS 1 & IAS 8 ‘Definition of Material’
(effective for accounting periods beginning on or after 1 January 2020)
- IFRS 17 ‘Insurance contracts’ (effective for accounting
periods beginning on or after 1 January 2021)
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.
The following standard, effective for accounting periods beginning on or after
1 January 2019, has not been applied in preparing these financial statements:
- IFRS 16 ‘Leases’ specifies accounting for leases and removes
the distinction between operating and finance leases.
This standard is not applicable to the Company as it has no leases.
For the financial year under review, the Company has applied the following
interpretation:
- IFRIC 23 ‘Uncertainty over Income Tax’ provides guidance on
uncertain income tax treatments and specifies that an entity must consider
whether it is probable that the relevant tax authority will accept each tax
treatment or group of tax treatments that it plans to use in its income tax
filling. Where deemed to be more than probable, uncertain tax positions should
be disclosed in the financial statements of the company.
There is no material impact on the Company in relation to the adoption of this
standard.
2. INCOME
2020 2019
£’000 £’000
Investment income
Overseas dividend income 1,313 1,246
Total income 1,313 1,246
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
2020 2019
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
AIFM fee — Frostrow Capital LLP — 1,086 1,086 — 1,214 1,214
Portfolio management fee — OrbiMed Capital LLC — 2,543 2,543 — 2,799 2,799
— 3,629 3,629 — 4,013 4,013
There were no performance fees payable during the year (2019: nil).
Further details of the AIFM, portfolio management fee and the performance fee
basis can be found in the Report of the Directors.
4. OTHER EXPENSES
2020 2019
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Directors’ emoluments 149 — 149 148 — 148
AIFM fixed fee 60 — 60 60 — 60
Auditor’s remuneration for the audit of the Company’s financial statements 32 — 32 26 — 26
Auditor’s remuneration for agreed upon procedures — — — 7 — 7
Registrar fees 38 — 38 38 — 38
Depositary fees 58 — 58 62 — 62
Marketing and PR costs 64 — 64 57 — 37
Listing fees 35 — 35 27 — 27
Printing costs 28 — 28 25 — 25
Other costs 187 — 187 95 — 95
Total expenses 651 — 651 545 — 545
Details of the amounts paid to Directors are included in the Directors’
Remuneration Report.
5. FINANCE COSTS
2020 2019
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Loan interest — 580 580 — 820 820
— 580 580 — 820 820
6. TAXATION
(A) ANALYSIS OF CHARGE IN THE YEAR:
2020 2019
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Overseas tax suffered 196 — 196 186 — 186
Total taxation for the year (see note 6(b)) 196 — 196 186 — 186
(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% (2019: 19%). The differences are explained below:
2020 2019
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Net profit on ordinary activities before taxation 662 60,433 61,095 701 20,585 21,286
Corporation tax at 19% (2019: 19%) 126 11,482 11,608 133 3,911 4,044
Effects of:
Non-taxable gains on investments — (12,848) (12,848) — (5,281) (5,281)
Non-taxable losses on currency balances — 566 566 — 452 452
Non-taxable overseas dividends (250) — (250) (237) — (237)
Overseas tax suffered 196 — 196 186 — 186
Excess expenses unused 124 800 924 104 918 1,022
Total tax charge 196 — 196 186 — 186
(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 2020, the Company had unutilised management expenses and other
losses of £58,773,000 (2019: £53,846,000) that are available to offset
future taxable revenue.
A deferred tax asset of £11,167,000 (19% tax rate) (2019: £9,154,000 (17%
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 PER SHARE
2020 2019
Revenue Capital Total Revenue Capital Total
pence pence pence pence pence pence
Earnings per share 1.0 133.9 134.9 1.0 37.8 38.8
The total earnings per share of 134.9p (2019: profit 38.8p) is based on the
total profit attributable to equity shareholders of £60,899,000 (2019: profit
of £21,100,000).
The revenue profit per share of 1.0p (2019: profit 1.0p) is based on the
revenue profit attributable to equity shareholders of £466,000 (2019: revenue
profit of £515,000). The capital profit per share of 133.9p (2019: profit
37.8p) is based on the capital profit attributable to equity shareholders of
£60,433,000 (2019: profit £20,585,000).
The total earnings per share are based on the weighted average number of
shares in issue during the year of 45,157,104 (2019: 54,430,259).
There are no dilutive instruments issued by the Company (2019: none).
8. INVESTMENTS
As at 31 March 2020, all investments with the exception of the unquoted
investments in OrbiMed Asia Partners L.P. fund, Burning Rock Biotech, Keros
Therapeutics and Pandion Therapeutics have been classified as level 1. The
unquoted investments have been classified as level 3. See note 13 for further
details.
2020 2019
Listed Listed
Equity Unquoted Total Equity Unquoted Total
£’000 £’000 £’000 £’000 £’000 £’000
Opening book cost 392,378 1,198 393,576 430,429 1,032 431,461
Opening investment holding gains 35,755 1,841 37,596 11,746 2,459 14,205
Valuation at 1 April 2019 428,133 3,039 431,172 442,175 3,491 445,666
Movements in the year
Purchases at cost 473,995 10,174 484,169 398,139 166 398,305
Sales proceeds (584,926) (442) (585,368) (441,282) — (441,282)
Gains on investment* 64,549 4,135 68,684 29,101 (618) 28,483
Valuation at 31 March 2020 381,751 16,906 398,657 428,133 3,039 431,172
Closing book cost at 31 March 2020 345,728 11,000 356,728 392,378 1,198 393,576
Investment holding gains at 31 March 2020 36,023 5,906 41,929 35,755 1,841 37,596
Valuation at 31 March 2020 381,751 16,906 398,657 428,133 3,039 431,172
* Due to early adoption of the revised SORP issued in
October 2019, the presentation of gains arising from disposals of investments
and gains on revaluation of investments have now been combined. Please see
Accounting Policies note 1(a).
The Company received £584, 856,000 (2019: £400, 976,000) from investments
sold in the year. The book cost of these investments when they were purchased
was £521,602,000 (2019: £436,496,000).
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)
2020 2019
£’000 £’000
Gains on disposal and revaluation of investments 68,684 28,483
Transaction costs (1,060) (685)
Gains on investments held at fair value through profit or loss 67,624 27,798
The total transaction costs for the year were £1,060,000 (31 March 2019:
£685,000) broken down as follows: purchase transaction costs for the year to
31 March 2020 were £548,000, (31 March 2019: £379,000), sale transaction
costs were £512,000 (31 March 2019: £306,000). These costs consist mainly of
commission. Transaction costs are recorded in the capital column of the Income
Statement.
9. OTHER RECEIVABLES
2020 2019
£’000 £’000
Future settlements – sales 2,494 39
Prepayments 38 21
2,532 60
10. OTHER PAYABLES
2020 2019
£’000 £’000
Future settlements – purchases 1,816 8,570
Other creditors and accruals 1,063 1,068
Repurchase of own shares — 1,877
2,879 11,515
11. ORDINARY SHARE CAPITAL
2020 2019
Number of Number of
Shares Shares
Allotted, issued and fully paid at 1 April 2019 51,967,562 55,839,913
Shares bought back for cancellation during the year (12,760,293) (3,872,351)
At 31 March 2020 39,207,269 51,967,562
2020 2019
£’000 £’000
Allotted, issued and fully paid shares of 25p 9,802 12,992
12. NET ASSET VALUE PER SHARE
2020 2019
Net asset value per share 932.4p 786.8p
The net asset value per share is based on the net assets attributable to
equity shareholders of £365,573,000 (2019: £408,876,000) and on 39,207,269
(2019: 51,967,562) shares in issue at 31 March 2020.
13. 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. 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.
1. MARKET PRICE RISK:
The fair value or future cash flows of a financial instrument held by the
Company may fluctuate because of changes in market prices. This market risk
comprises three elements – currency risk, interest rate risk and other price
risk.
The Company’s portfolio is exposed to market price fluctuations which are
monitored by the AIFM and the Portfolio Manager in pursuance of the investment
objective.
No derivatives or hedging instruments are utilised to manage market price
risk.
(a) 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 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.
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
£374,080,000 (2019: £424,491,000) of investments denominated in U.S. dollars
and £24,577,000 (2019: £6,681,000) 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 2020 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.
2020 2019
£’000 £’000
Sterling equivalent of US$ and other non-sterling exposure
Current assets 2,494 39
Creditors (1,816) (8,570)
Loan (non-sterling) (32,751) (10,827)
Foreign currency exposure on net monetary items (32,073) (19,358)
Investments held at fair value through profit or loss 398,657 431,172
Total net foreign currency exposure 366,584 411,814
The table below details the sensitivity of the Company’s profit or loss
after taxation for the year to a 10% increase and decrease in the value of
sterling compared to the U.S. dollar and other non-sterling currencies (2019:
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:
2020 2019
£’000 £’000
Impact on revenue return —
Impact on capital return 40,345 45,322
Total return after tax/effect on shareholders’ funds 40,345 45,322
If sterling had strengthened against the U.S. dollar and other non-sterling
currencies, as stated above, this would have had the following effect:
2020 2019
£’000 £’000
Impact on revenue return —
Impact on capital return (33,009) (37,082)
Total return after tax/effect on shareholders’ funds (33,009) (37,082)
(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).
2020 2019
£’000 £’000
Financial liabilities:
Loan facility 32,737 10,841
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 2020 was £32,737,000 (2019: £10,841,000).
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 £327,000 (2019:
£108,000).
(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 (2019: 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 2020 would have increased/decreased by £78,974,000
(2019: £85,415,000), 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.
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. Short term funding flexibility can be
achieved through the use of the bank loan facility.
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 2020, based
on the earliest date on which payment can be required, are as follows:
2020 2019
3 months 3 months
or less or less
£’000 £’000
Loan facility (repayable on demand) 32,737 10,841
Future settlements 1,816 8,570
Amounts due to brokers and accruals 1,063 2,945
35,616 22,356
3. CREDIT RISK:
Credit risk is the risk of failure of a counterparty to discharge its
obligations resulting in the Company suffering a loss.
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 2020, the maximum value of assets available for rehypothecation
was £45,832,000, being 140% of the loan balance of £32,737,000 (31 March
2019: £15,177,000 being 140% of the loan balance of £10,841,000).
See the Business Review for further details on the loan facility and the
associated credit risk.
† See glossary.
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.
- 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; and
- 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 2020 the Company’s exposure to credit risk amounted to
£2,494,000 and was in respect of amounts due from brokers in relation to
future settlements (2019: £39,000).
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 2020 Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Assets
Financial investments held at fair value through profit or loss 381,751 — 16,906 398,657
As of 31 March 2019 Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Assets
Financial investments designated at fair value through profit or loss 428,133 — 3,039 431,172
As at 31 March 2020 the investments in OrbiMed Asia Partners LP Fund, Burning
Rock Biotech, Keros Therapeutics and Pandion Therapeutics have been classified
as Level 3. The OrbiMed Asia Partners Fund LP has been valued at the net asset
value as at 31 December 2019 with a 5% discount applied and it is believed
that the value of the fund as at 31 March 2020 will not be materially
different. The Directors have now received confirmation that the March 2020
valuation is in line with the estimated valuation. If the value of the fund
was 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 2020 would have increased/ decreased by £238,000 (2019:
£304,000).
Burning Rock Biotech has been valued by Duff & Phelps, an independent valuer,
using the probability – weighted expected returns methodology. Keros
Therapeutics has been valued at the IPO price of US$16, which was within the
expected IPO price range. Subsequent to the year end, on the 7 April 2020, the
company listed. Pandion Therapeutics was purchased on 23 March 2020 and has
been valued at cost at the year end. If the value of these unquoted companies
were to increase or decrease by 10% while all other variables had remained
constant, the return to shareholders would have increased/ decreased by
£1,453,000.
Level 3 Reconciliation
Please see below a reconciliation disclosing 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.
2020 2019
£’000 £’000
Assets
As at 1 April 3,039 3,491
Purchase of unquoted investments 10,174 —
Net movement in investment holding gains (loss) during the year 4,135 (618)
Call (Return of capital)/payment (442) 166
Assets as at 31 March 16,906 3,039
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 2020 the Company was geared 9.0% (2019:
5.5%).
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.
Shares may be repurchased by the Company as explained in the Business Review.
The Company’s objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
14. GEOGRAPHICAL REPORTING*
2020 2019
Value of Value of
Region investments investments
£’000 £’000
North America 350,800 388,577
Europe 13,840 24,004
Asia 34,017 18,591
Total 398,657 431,172
* the country of an investee company’s incorporation or
listing does not always accord to the country or countries to which the
Company is exposed.
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
Company’s AIFM, and OrbiMed Capital LLC, the Company’s Portfolio Manager,
are disclosed in the Report of the Directors. 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.
Geoff Hsu has waived his Directors’ fees. Details of the Directors’
interests in the capital of the Company can be found in the Directors’
Remuneration Report.
Three current and two former partners at OrbiMed Capital LLC have a minority
financial interest totalling 20% in Frostrow Capital LLP, the Company’s
AIFM. Details of the fees paid to Frostrow Capital LLP by the Company can be
found in note 3.
16. CAPITAL RESERVE
2020 2019
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 306,272 37,596 343,868 338,698 14,205 352,903
Net gains on investments 63,291 4,333 67,624 4,407 23,391 27,798
Exchange losses (2,982) — (2,982) (2,380) — (2,380)
Expenses charged to capital (4,209) — (4,209) (4,833) — (4,833)
Repurchase of own shares for cancellation (104,202) — (104,202) (29,620) — (29,620)
At 31 March 258,170 41,929 300,099 306,372 37,596 343,868
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 2020 there were no contingent liabilities or capital
commitments for the Company (2019: £nil).
FURTHER INFORMATION / AIFMD RELATED DISCLOSURE
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (AIFMD) DISCLOSURE (UNAUDITED)
INVESTMENT OBJECTIVE AND LEVERAGE
A description of the investment strategy and objectives of the Company, the
types of assets in which the Company may invest, the techniques it may employ,
any applicable investment restrictions, the circumstances in which it may use
leverage, the types and sources of leverage permitted and the associated
risks, any restrictions on the use of leverage and the maximum level of
leverage which the AIFM and Portfolio Manager are entitled to employ on behalf
of the Company and the procedures by which the Company may change its
investment strategy and/or the investment policy can be found in the Business
Review.
The table below sets out the current maximum permitted limit and actual level
of leverage for the Company. The figures are shown as a percentage of net
assets:
Gross Commitment
Method Method
Maximum level of leverage 130.0% 130.0%
Actual level at 31 March 2020 109.0% 109.0%
REMUNERATION OF AIFM STAFF
Following completion of an assessment of the application of the
proportionality principle to the FCA’s AIFM Remuneration Code, the AIFM has
disapplied the pay-out process rules with respect to it and any of its
delegates. This is because the AIFM considers that it carries out non-complex
activities and is operating on a small scale.
Further disclosures required under the AIFM Rules can be found within the
Investor Disclosure Document on the Company’s website: www.biotechgt.com.
FURTHER INFORMATION / GLOSSARY OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES
(‘APMS’)
AIC
Association of Investment Companies.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (AIFMD)
Agreed by the European Parliament and the Council of the European Union and
transported into UK legislation, the AIFMD classifies certain investment
vehicles, including investment companies, as Alternative Investment Funds
(AIFs) and requires them to appoint an Alternative Investment Fund Manager
(AIFM) and depositary to manage and oversee the operations of the investment
vehicle. The Board of the Company retains responsibility for strategy,
operations and compliance and the Directors retain a fiduciary duty to
shareholders.
ALTERNATIVE PERFORMANCE MEASURE (‘APM’)
An APM is a numerical measure of the Company’s current, historical or future
financial performance, financial position or cash flows, other than a
financial measure defined or specified in the applicable financial framework.
In selecting these Alternative Performance Measures, the Directors considered
the key objectives and expectations of typical investors in an investment
trust such as the Company.
BREXIT
BREXIT – British exit – refers to the UK leaving the EU. A public vote was
held in June 2016, when 17.4 million people opted for BREXIT. This gave the
Leave Side 52% compared with 48% for Remain. The UK left the EU at midnight on
31 January 2020. A transition period is now in place until 31 December 2020.
During this period, all EU rules and regulations continue to apply to the UK.
DISCOUNT OR PREMIUM^
A description of the difference between the share price and the net asset
value per share. The size of the discount or premium is calculated by
subtracting the share price from the net asset value per share and is usually
expressed as a percentage (%) of the net asset value per share. If the share
price is higher than the net asset value per share the result is a premium. If
the share price is lower than the net asset value per share, the shares are
trading at a discount.
As at As at
31 March 2020 31 March 2019
P P
Share Price 814.0 734.0
Net Asset value per share (see note 12 for further information) 932.4 786.8
Discount of share price to net asset value per share 12.7% 6.7%
GEARING^
Gearing represents prior charges, adjusted for net current liabilities,
expressed as a percentage of net assets. Prior charges includes all loans and
overdrafts for investment purposes.
31 March 31 March
2020 2019
£’000 £’000
Prior Charges 32,737 10,841
Current Liabilities (excluding prior changes) 347 11,455
33,084 22,296
Net Assets 365,573 408,876
Gearing 9.0% 5.5%
^ Alternative Performance Measure
LEVERAGE^
The AIFM Directive (the “Directive”) has introduced the obligation on the
Company and its AIFM in relation to leverage as defined by the Directive. The
Directive leverage definition is slightly different to the Association of
Investment Companies method of calculating gearing and is as follows: any
method by which the AIFM increases the exposure of an AIF it manages whether
through borrowing of cash or securities, or leverage embedded in derivative
positions.
There are two methods for calculating leverage under the Directive – the
Gross Method and the Commitment Method. The process for calculating exposure
under each methodology is largely the same, except, where certain conditions
are met, the Commitment Method enables instruments to be netted off to reflect
‘netting’ or ‘hedging’ arrangements and the entity exposure is
effectively reduced.
MARGINABLE SECURITIES
Marginable securities are stocks, bonds, futures or other securities capable
of being traded on a Margin Account and are available for rehypothecation.
NET ASSET VALUE (NAV)
The value of the Company’s assets, principally investments made in other
companies and cash being held, less any liabilities. The NAV is also described
as ‘shareholders’ funds’. The NAV is often expressed in pence per share
after being divided by the number of shares which have been issued. The NAV
per share is unlikely to be the same as the share price which is the price at
which the Company’s shares can be bought or sold by an investor. The share
price is determined by the relationship between the demand and supply of the
shares in the secondary market.
NET ASSET VALUE PER SHARE TOTAL RETURN^
Net Asset Value per share return for the year ended 31 March 2020 is
calculated by taking percentage movement from the net asset value per share as
at 31 March 2019 of 786.8p (2018: 747.5p) to the net asset value at 31 March
2020 of 932.4p (2019: 786.8p). The Company has not paid any dividends to
shareholders during the above mentioned years.
ONGOING CHARGES^
Ongoing charges are calculated by taking the Company’s annualised operating
expenses expressed as a proportion of the average daily net asset value of the
Company over the year.
The costs of buying and selling investments are excluded, as are interest
costs, taxation, performance fees, cost of buying back or issuing ordinary
shares and other non-recurring costs.
31 March 31 March
2020 2019
£’000 £’000
Operating Expenses 4,280 4,558
Average Daily Net Assets for the Year – 389,364 432,314
Ongoing charges 1.1% 1.1%
REHYPOTHECATION
Rehypothecation is the practice by banks and brokers of using collateral
posted as security for loans as regulated by the US Securities Exchange
Commission.
FURTHER INFORMATION / NOTICE OF THE ANNUAL GENERAL MEETING
Notice is hereby given that the Annual General Meeting of The Biotech Growth
Trust PLC will be held at 25 Southampton Buildings, London WC2A 1AL on
Wednesday, 15 July 2020, for the following purposes:
ORDINARY BUSINESS
To consider and, if thought fit, pass the following as ordinary resolutions:
1. To receive and, if thought fit, to accept the Audited Financial
Statements and the Report of the Directors for the year ended 31 March 2020
2. To approve the Directors’ Remuneration Report for the year
ended 31 March 2020
3. To approve the Directors’ Remuneration Policy
4. To re-elect Andrew Joy as a Director of the Company
5. To re-elect Professor Dame Kay Davies CBE as a Director of the
Company
6. To re-elect Steve Bates as a Director of the Company
7. To re-elect The Rt Hon Lord Willetts as a Director of the Company
8. To re-elect Julia Le Blan as a Director of the Company
9. To re-elect Geoff Hsu as a Director of the Company
10. To appoint BDO LLP as Auditor to the Company and to authorise the
Audit Committee to determine their remuneration
SPECIAL BUSINESS
To consider and, if thought fit, pass the following resolutions of which
resolutions 12, 13 and 14 will be proposed as special resolutions:
AUTHORITY TO ALLOT SHARES
11. THAT in substitution for all existing authorities the Directors be
and are hereby generally and unconditionally authorised in accordance with
Section 551 of the Companies Act 2006 (the “Act”) to exercise all powers
of the Company to allot relevant securities (within the meaning of Section 551
of the Act) up to a maximum aggregate nominal amount of £980,181 (being 10%
of the issued share capital of the Company at the date of the notice convening
the meeting at which this resolution is proposed) and representing 3,920,726
shares of 25 pence each or, if changed, the number representing 10% of the
issued share capital of the Company at the date at which this resolution is
passed, provided that this authority shall expire at the conclusion of the
Annual General Meeting of the Company to be held in 2021 or 15 months from the
date of passing this resolution, whichever is the earlier, unless previously
revoked, varied or renewed, by the Company in general meeting and provided
that the Company shall be entitled to make, prior to the expiry of such
authority, an offer or agreement which would or might require relevant
securities to be allotted after such expiry and the Directors may allot
relevant securities pursuant to such offer or agreement as if the authority
conferred hereby had not expired.
DISAPPLICATION OF PRE-EMPTION RIGHTS
12. THAT in substitution of all existing powers the Directors be and are
hereby generally empowered pursuant to Sections 570 and 573 of the Companies
Act 2006 (the “Act”) to allot equity securities (within the meaning of
section 560 of the Act) including if immediately before the allotment, such
shares are held by the Company as treasury shares (as defined in Section 724
of the Act) for cash pursuant to the authority conferred on them by resolution
11 set out in the notice convening the Annual General Meeting at which this
resolution is proposed or otherwise as if section 561(1) of the Act did not
apply to any such allotment and to sell relevant shares (within the meaning of
section 560 of the Act) for cash as if section 561(1) of the Act did not apply
to any such sale, provided that this power shall be limited to the allotment
of equity securities pursuant to:
(a) an offer of equity securities open for acceptance for a period
fixed by the Directors where the equity securities respectively attributable
to the interests of holders of shares of 25 pence each in the Company
(“Shares”) are proportionate (as nearly as may be) to the respective
numbers of Shares held by them but subject to such exclusions or other
arrangements in connection with the issue as the Directors may consider
necessary, appropriate, or expedient to deal with equity securities
representing fractional entitlements or to deal with legal or practical
problems arising in any overseas territory, the requirements of any regulatory
body or stock exchange, or any other matter whatsoever; and
(b) (otherwise than pursuant to sub-paragraph (a) above) up to an
aggregate nominal value of £980,181 (or, if changed, the number representing
10% of the issued share capital of the Company at the date of the meeting at
which this resolution is passed),
and expires at the conclusion of the next Annual General Meeting of the
Company after the passing of this resolution or 15 months from the date of
passing this resolution, whichever is the earlier, unless previously revoked,
varied or renewed by the Company in general meeting and provided that the
Company shall be entitled to make, prior to the expiry of such authority, an
offer or agreement which would or might require equity securities to be
allotted after such expiry and the Directors may allot equity securities
pursuant to such offer or agreement as if the power conferred hereby had not
expired.
AUTHORITY TO REPURCHASE ORDINARY SHARES
13. THAT the Company be and is hereby generally and unconditionally
authorised in accordance with section 701 of the Companies Act 2006 (the
“Act”) to make one or more market purchases (within the meaning of section
693(4) of the Act) of ordinary shares of 25 pence each in the capital of the
Company (“Shares”) either for retention as treasury shares for future
reissue, resale, transfer or for cancellation provided that:
(a) the maximum aggregate number of Shares authorised to be purchased
shall be that number of Shares which is equal to 14.99% of the issued Share
capital of the Company as at the date of the passing of this resolution;
(b) the minimum price (exclusive of expenses) which may be paid for a
Share is 25 pence;
(c) the maximum price (exclusive of expenses) which may be paid for a
Share is an amount equal to the greater of (i) 105% of the average of the
middle market quotations for a Share as derived from the Daily Official List
of the London Stock Exchange for the five business days immediately preceding
the day on which that Share is purchased and (ii) the higher of the price of
the last independent trade in shares and the highest then current independent
bid for shares on the London Stock Exchange as stipulated in Article 5(1) of
Regulation No. 2233/2003 of the European Commission (Commission Regulation of
22 December 2003 implementing the Market Abuse Directive as regards exemptions
for buy-back programmes and stabilisation of financial instruments);
(d) the authority hereby conferred shall expire at the conclusion of
the Annual General Meeting of the Company to be held in 2021 or, if earlier,
on the expiry of 15 months from the date of the passing of this resolution
unless such authority is renewed prior to such time; and
(e) the Company may make a contract to purchase Shares under this
authority before the expiry of such authority which will or may be executed
wholly or partly after the expiration of such authority, and may make a
purchase of Shares in pursuance of any such contract.
GENERAL MEETINGS
14. THAT the Directors be authorised to call general meetings (other
than Annual General Meetings) on not less than 14 clear days’ notice, such
authority to expire at the conclusion of the next Annual General Meeting of
the Company or, if earlier, until expiry of 15 months from the date of the
passing of this resolution.
CONTINUANCE OF THE COMPANY
15. To approve the continuance of the Company as an investment trust for
a further period of five years.
By order of the Board Registered office:
Frostrow Capital LLP One Wood Street
Company Secretary London EC2V 7WS
3 June 2020
NOTES
1. Members are entitled to appoint a proxy to exercise all or
any of their rights to attend and to speak and vote on their behalf at the
meeting. A shareholder may appoint more than one proxy in relation to the
meeting provided that each proxy is appointed to exercise the rights attached
to a different share or shares held by that shareholder. A proxy need not be a
shareholder of the Company.
2. A vote withheld is not a vote in law, which means that the
vote will not be counted in the calculation of votes for or against the
resolutions. If no voting indication is given, a proxy may vote or abstain
from voting at his/her discretion. A proxy may vote (or abstain from voting)
as he or she thinks fit in relation to any other matter which is put before
the meeting.
3. This year, hard copy forms of proxy have not been included
with this notice. Members can vote by: logging onto www.signalshares.com and
following instructions; requesting a hard copy form of proxy directly from the
registrars, Link Asset Services at enquires@linkgroup.co.uk or in the case of
CREST members, utilising the CREST electronic proxy appointment service in
accordance with the procedures set out below. To be valid any proxy form or
other instrument appointing a proxy must be completed and signed and received
by post or (during normal business hours only) by hand at Link Asset Services,
PXS1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF no later than 12 noon on
13 July 2020.
4. In the case of a member which is a company, the instrument
appointing a proxy must be executed under its seal or signed on its behalf by
a duly authorised officer or attorney or other person authorised to sign. Any
power of attorney or other authority under which the instrument is signed (or
a certified copy of it) must be included with the instrument.
5. The return of a completed proxy form, other such instrument
or any CREST Proxy Instruction (as described below) will not prevent a
shareholder attending the meeting and voting in person if he/she wishes to do
so.
6. Any person to whom this notice is sent who is a person
nominated under section 146 of the Companies Act 2006 to enjoy information
rights (a “Nominated Person”) may, under an agreement between him/her and
the shareholder by whom he/she was nominated, have a right to be appointed (or
have someone else appointed) as a proxy for the meeting. If a Nominated Person
has no such proxy appointment right or does not wish to exercise it, he/she
may, under any such agreement, have a right to give instructions to the
shareholder as to the exercise of voting rights.
7. The statement of the rights of shareholders in relation to
the appointment of proxies in paragraphs 1 and 3 above does not apply to
Nominated Persons. The rights described in these paragraphs can only be
exercised by shareholders of the Company.
8. Pursuant to regulation 41 of the Uncertificated Securities
Regulations 2001, only shareholders registered on the register of members of
the Company (the “Register of Members”) at the close of business on 13
July 2020 (or, in the event of any adjournment, on the date which is two days
before the time of the adjourned meeting) will be entitled to attend and vote
or be represented at the meeting in respect of shares registered in their name
at that time. Changes to the Register of Members after that time will be
disregarded in determining the rights of any person to attend and vote at the
meeting.
9. As at 3 June 2020 (being the last business day prior to the
publication of this notice) the Company’s issued share capital consists of
39,207,269 ordinary shares, carrying one vote each. Therefore, the total
voting rights in the Company as at 3 June 2020 are 39,207,269.
10. CREST members who wish to appoint a proxy or proxies through the
CREST electronic proxy appointment service may do so by using the procedures
described in the CREST Manual. CREST Personal Members or other CREST sponsored
members, and those CREST members who have appointed a service provider(s),
should refer to their CREST sponsor or voting service provider(s), who will be
able to take the appropriate action on their behalf.
11. In order for a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST message (a “CREST Proxy
Instruction”) must be properly authenticated in accordance with the
specifications of Euroclear UK and Ireland Limited (“CRESTCo”), and must
contain the information required for such instruction, as described in the
CREST Manual. The message, regardless of whether it constitutes the
appointment of a proxy or is an amendment to the instruction given to a
previously appointed proxy must, in order to be valid, be transmitted so as to
be received by the issuer’s agent (ID RA10) no later than 48 hours before
the time appointed for holding the meeting. For this purpose, the time of
receipt will be taken to be the time (as determined by the timestamp applied
to the message by the CREST Application Host) from which the issuer’s agent
is able to retrieve the message by enquiry to CREST in the manner prescribed
by CREST. After this time any change of instructions to proxies appointed
through CREST should be communicated to the appointee through other means.
12. CREST members and, where applicable, their CREST sponsors, or
voting service providers should note that CRESTCo does not make available
special procedures in CREST for any particular message. Normal system timings
and limitations will, therefore, apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take
(or, if the CREST member is a CREST personal member, or sponsored member, or
has appointed a voting service provider, to procure that his CREST sponsor or
voting service provider(s) take(s)) such action as shall be necessary to
ensure that a message is transmitted by means of the CREST system by any
particular time. In this connection, CREST members and, where applicable,
their CREST sponsors or voting system providers are referred, in particular,
to those sections of the CREST Manual concerning practical limitations of the
CREST system and timings.
13. The Company may treat as invalid a CREST Proxy Instruction in
the circumstances set out in Regulation 35(5)(a) of the Uncertificated
Securities Regulations 2001.
14. In the case of joint holders, where more than one of the joint
holders purports to appoint a proxy, only the appointment submitted by the
most senior holder will be accepted. Seniority is determined by the order in
which the names of the joint holders appear in the Register of Members in
respect of the joint holding (the first named being the most senior).
15. Members who wish to change their proxy instructions should
submit a new proxy appointment using the methods set out above. Note that the
cut-off time for receipt of proxy appointments (see above) also applies in
relation to amended instructions; any amended proxy appointment received after
the relevant cut-off time will be disregarded.
16. Members who have appointed a proxy using the hard-copy proxy
form and who wish to change the instructions using another hard-copy form,
should contact Link Asset Services on 0871 664 0300 or 0371 664 0300 if
calling from outside the United Kingdom. Calls cost 12p per minute plus your
phone company’s access charge. Calls outside the United Kingdom will be
charged at the applicable international rate. Lines are open between
09.00-17.30, Monday to Friday excluding public holidays in England and Wales.
17. If a member submits more than one valid proxy appointment, the
appointment received last before the latest time for the receipt of proxies
will take precedence.
18. In order to revoke a proxy instruction, members will need to
inform the Company. Members should send a signed hard copy notice clearly
stating their intention to revoke a proxy appointment to Link Asset Services,
PXS1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF.
In the case of a member which is a company, the revocation notice must be
executed under its common seal or signed on its behalf by an officer of the
company or an attorney for the company. Any power of attorney or any other
authority under which the revocation notice is signed (or a duly certified
copy of such power of attorney) must be included with the revocation notice.
If a member attempts to revoke their proxy appointment but the revocation is
received after the time for receipt of proxy appointments (see above) then,
subject to paragraph 4, the proxy appointment will remain valid.
FURTHER INFORMATION / EXPLANATORY NOTES TO THE RESOLUTIONS
Resolution 1 – To receive the Annual Report and Accounts
The Annual Report and Accounts for the year ended 31 March 2020 will be
presented to the Annual General Meeting. These accounts accompanied this
Notice of Meeting and shareholders will be given an opportunity at the meeting
to ask questions.
Resolution 2 and 3 – Remuneration Report and Remuneration Policy
The Report on Directors’ Remuneration is set out in full in the Governance
section. The Remuneration Policy is also set out in the Governance section.
Resolutions 4 to 9 – Re-election and election of Directors
Resolutions 4 to 9 deal with the re-election of each Director.
The Board has confirmed, following a performance review, that the Directors
standing for re-election continue to perform effectively.
Resolution 10 – Appointment of Auditor and the determination of their
remuneration
Resolution 10 relates to the appointment of BDO LLP as the Company’s
independent Auditor to hold office until the next Annual General Meeting of
the Company and also authorises the Audit Committee to set their remuneration.
Resolutions 11 and 12 – Issue of Shares
Ordinary Resolution 11 in the Notice of Annual General Meeting will renew the
authority to allot the unissued share capital up to an aggregate nominal
amount of £980,181 (equivalent to 3,920,726 shares, or 10% of the Company’s
existing issued share capital on 3 June 2020 or, if changed, the number
representing 10% of the issued share capital of the Company at the date at
which this resolution is passed). Such authority will expire on the date of
the next Annual General Meeting or after a period of 15 months from the date
of the passing of the resolution, whichever is earlier. This means that the
authority will have to be renewed at the next Annual General Meeting.
When shares are to be allotted for cash, Section 551 of the Companies Act 2006
(the “Act”) provides that existing shareholders have pre-emption rights
and that the new shares must be offered first to such shareholders in
proportion to their existing holding of shares. However, shareholders can, by
special resolution, authorise the Directors to allot shares otherwise than by
a pro rata issue to existing shareholders. Special Resolution 12 will, if
passed, give the Directors power to allot for cash equity securities up to 10%
of the Company’s existing share capital on 3 June 2020 or, if changed, the
number representing 10% of the issued share capital of the Company at the date
at which this resolution is passed, as if Section 551 of the Act does not
apply. This is the same nominal amount of share capital which the Directors
are seeking the authority to allot pursuant to Resolution 11. This authority
will also expire on the date of the next Annual General Meeting or after a
period of 15 months, whichever is earlier. This authority will not be used in
connection with a rights issue by the Company.
The Directors intend to use the authority given by Resolutions 11 and 12 to
allot shares and disapply pre-emption rights only in circumstances where this
will be clearly beneficial to shareholders as a whole. The issue proceeds
would be available for investment in line with the Company’s investment
policy. No issue of shares will be made which would effectively alter the
control of the Company without the prior approval of shareholders in general
meeting.
Resolution 13 – Share Repurchases
The Directors wish to renew the authority given by shareholders at the General
Meeting held in January 2020. The principal aim of a share buy-back facility
is to enhance shareholder value by acquiring shares at a discount to net asset
value, as and when the Directors consider this to be appropriate. The purchase
of shares, when they are trading at a discount to net asset value per share,
should result in an increase in the net asset value per share for the
remaining shareholders. This authority, if conferred, will only be exercised
if to do so would result in an increase in the net asset value per share for
the remaining shareholders and if it is in the best interests of shareholders
generally. Any purchase of shares will be made within guidelines established
from time to time by the Board. It is proposed to seek shareholder authority
to renew this facility for another year at the Annual General Meeting.
Under the current Listing Rules, the maximum price that may be paid on the
exercise of this authority must not exceed the higher of (i) 105% of the
average of the middle market quotations for the shares over the five business
days immediately preceding the date of purchase and (ii) the higher of the
last independent trade and the highest current independent bid on the trading
venue where the purchase is carried out. The minimum price which may be paid
is 25p per share. Shares which are purchased under this authority will either
be cancelled or held as treasury shares.
Special Resolution 13 in the Notice of Annual General Meeting will renew the
authority to purchase in the market a maximum of 14.99% of shares in issue as
at the date of the passing of the resolution. Such authority will expire on
the date of the next Annual General Meeting or after a period of 15 months
from the date of passing of the resolution, whichever is earlier. This means
in effect that the authority will have to be renewed at the next Annual
General Meeting or earlier if the authority has been exhausted.
Resolution 14 – General Meetings
Special Resolution 14 seeks shareholder approval for the Company to hold
General Meetings (other than the Annual General Meeting) on not less than at
14 clear days’ notice.
Resolution 15 – Continuance of the Company
Ordinary Resolution 15 seeks shareholder approval for the Company to continue
as an investment trust for a period of five years.
Recommendation
The Board considers that the resolutions relating to the above items, are in
the best interests of shareholders as a whole. Accordingly, the Board
unanimously recommends to the shareholders that they vote in favour of the
above resolutions to be proposed at the forthcoming Annual General Meeting as
the Directors intend to do in respect of their own beneficial holdings
totalling 75,500 shares.
Frostrow Capital LLP,
Company Secretary
3 June 2020
ANNOUNCEMENT ENDS
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