Half-year Report
15/11/2024 07:00
LONDON STOCK EXCHANGE ANNOUNCEMENT
Worldwide Healthcare Trust PLC
Unaudited Half Year Results for the six months ended
30 September 2024
This Announcement is not the Company’s Half Year Report & Accounts. It is an
abridged version of the Company’s full Half Year Report & Accounts for the
six months ended 30 September 2024. The full Half Year Report & Accounts,
together with a copy of this announcement, will also shortly be available on
the Company’s website: www.worldwidewh.com where up to date information on
the Company, including daily NAV, share prices and fact sheets, can also be
found.
The Company's Half Year Report & Accounts for the six months ended 30
September 2024 has been submitted to the UK Listing Authority, and will
shortly be available for inspection on the National Storage Mechanism (NSM):
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
For further information please contact: Mark Pope, Frostrow Capital LLP 0203
008 4913.
Performance
Six months to One year to
30 September 31 March
2024 2024
Net asset value per share (total return)* # 0.6% 12.0%
Share price (total return)* # 3.6% 8.6%
Benchmark (total return)^ # 0.0% 10.9%
30 September 31 March Six months
2024 2024 change
Net asset value per share 381.5p 381.1p 0.1%
Share price 345.0p 335.0p 3.0%
Discount of share price to the net asset value per share 9.6% 12.1%
Leverage 1 13.3% 10.8%
Ongoing charges* 0.9% 0.9%
Ongoing charges (including performance fees crystallised during the period)* 0.9% 0.9%
# Source – Morningstar.
^ Benchmark – MSCI World Health Care Index on a net total return, sterling
adjusted basis (see Glossary).
* Alternative Performance Measure (See Glossary).
1 Leverage calculated under the Commitment Method (see Glossary).
Statement from the Chair
“During the period, the Company’s net asset value per share total return
of +0.6% and share price total return of +3.6% outperformed the Benchmark,
which was flat.”
PERFORMANCE
Macroeconomic and geopolitical factors again buffeted global markets during
the period under review. Positive factors for markets included the initiation
of interest rate reductions in the U.S. as well as new stimulus measures in
China. These were somewhat offset by concerns about a global economic slowdown
and the knock-on impacts of interest rate increases in Japan. There were also
unexpected events in the U.S. Presidential race, including the assassination
attempt on former President Trump and the withdrawal from the race of the
incumbent, President Biden.
Against this backdrop, during the period under review, the MSCI World and the
FTSE All-Share Indices produced sterling based total returns of +2.8% and
+6.1%, respectively. The Company’s Benchmark, the MSCI World Healthcare
Index, measured on a net total return, sterling adjusted basis was flat during
the period.
In comparison, the Company’s net asset value (NAV) per share total return
was +0.6%, outperforming the Benchmark during the period and building on our
outperformance in the previous financial year. The NAV performance was
achieved despite the headwind of sterling strengthening against the U.S.
dollar by +6.2%, the U.S. dollar being the currency in which the majority of
the Company’s investments are denominated.
The Company’s share price total return was +3.6%, greater than its NAV total
return, reflecting a narrowing of the discount of the Company’s share price
to its NAV per share from 12.1% at the beginning of the half year to 9.6% at
the end.
Looking at specific names in the portfolio, the largest contributions during
the reporting period came from healthcare services company Tenet Healthcare
and medical technology company Boston Scientific.
The principal detractors from performance were the large capitalisation
biotechnology company Biogen, and healthcare equipment manufacturer Dexcom.
Further information regarding the Company’s investments and performance can
be found in the Portfolio Manager’s Review.
The Company had, on average, leverage of 12.4% during the period, which added
0.5% to performance. As at the half year-end, leverage stood at 13.3%,
compared to 10.8% at the beginning. Our Portfolio Manager continues to adopt
both a pragmatic and a tactical approach to the use of leverage, which adds
to performance in periods of rising portfolio share prices and has benefitted
the Company over time.
Our Portfolio Manager, through its extensive private equity research
capabilities, continues to review unquoted opportunities although, in the
period under review, no new unquoted investments were made. The Company is
able to invest up to 10% of the portfolio, at the time of acquisition, in
unquoted securities. Exposure to unquoted equities accounted for 5.3% of the
total portfolio at the half year-end, and these holdings made a negative
contribution of 0.7% to the Company’s performance during the period under
review.
PERFORMANCE FEE
No performance fee was accrued as at 30 September 2024 and no performance fee
can become payable within the next year. The performance fee arrangements are
described in detail in the Company’s Annual Report.
CAPITAL
Share price discounts continue to persist across the U.K. investment company
sector. As at the period end, the average level of share price discount to NAV
stood at 13.7%. (source: Winterflood Investment Trusts)
It is the Board’s policy to buy back our shares if the Company’s share
price discount to the NAV per share exceeds 6% on an ongoing basis. Despite
the Company’s share buybacks, the discount can remain greater than 6% for
extended periods of time, depending on overall sentiment towards the Company,
the sector and investment trusts generally. Nonetheless, buybacks enhance the
NAV per share for remaining shareholders. In addition, the Board believes that
regular buybacks help to narrow the discount and go some way to dampening
discount volatility.
During the period under review, the Company repurchased a total of 28,230,376
shares for treasury at a cost of £99.8m and at an average discount of 9.6%.
At the period end, there were 517,711,956 shares in issue (excluding the
83,953,244 shares held in treasury). Since the period end to 13 November
2024, a further 4,860,440 shares have been bought back for treasury, at a cost
of £16.8m and at the time of writing, the share price discount stands at
10.5%.
DIVIDENDS
The Board has declared an unchanged interim dividend of 0.7p per share, for
the year to 31 March 2025, which will be payable on 9 January 2025 to
shareholders on the register of members on 29 November 2024. The associated
ex-dividend date is 28 November 2024.
I remind shareholders that it remains the Company’s policy to pay out
dividends at least to the extent required to maintain investment trust
status. These dividend payments are paid out of the Company’s net revenue
for the year and, in accordance with investment trust rules, a maximum of 15%
of income can be retained by the Company in any financial year.
It is the Board’s continuing belief that it is in shareholders’ best
interests to see the Company’s capital deployed in its investment portfolio
rather than paid out as dividends to achieve a particular target yield.
COMPOSITION OF THE BOARD
I am delighted to confirm that, at the beginning of October, Sian Hansen and
William Hemmings joined the Board. Sian is a non-executive Director of Pacific
Assets Trust plc, and formerly the Chief Operating Officer at global strategic
consultancy group CT Group as well as a non-executive Director of JP Morgan
Multi-Asset Global Growth & Income plc. William was the former Head of Closed
End Funds and Head of Investment Companies at abrdn PLC (formerly Aberdeen
Asset Management PLC) and a Director and Deputy Chair of the Association of
Investment Trust Companies. With their significant experience in the
investment trust sector as well as portfolio management, financial, governance
and geopolitical matters, Sian and William will be valuable additions to the
Board and our future deliberations.
OUTLOOK
While macroeconomic and geopolitical conditions continue to be challenging,
your Board believes that the fundamentals of the healthcare sector remain
strong.
Our Portfolio Manager is positive about the outlook for the sector, a view
driven in part by strong innovation cycles, elevated patient volumes and an
ageing global demographic. They also believe that the current high level of
merger and acquisition activity in the sector will continue, supported by
attractive valuations, healthy balance sheets and an increasing need for
larger pharmaceutical and biotechnology companies to address future patent
expirations.
Finally, they also believe that the Republican victory in the U.S. election,
having won both the Presidency and also control of Congress, will provide a
positive backdrop for the healthcare sector, as it is not expected that
legislation detrimental to the industry will be enacted.
Doug McCutcheon
Chair
14 November 2024
Portfolio
AS AT 30 SEPTEMBER 2024
Market value % of
Investments Sector Country/region £’000 investments
Eli Lilly Pharmaceuticals United States 194,711 9.4
Boston Scientific Health Care Equipment & Supplies United States 161,020 7.8
Intuitive Surgical Health Care Equipment & Supplies United States 124,748 6.0
AstraZeneca Pharmaceuticals United Kingdom 122,151 5.9
Novo Nordisk Pharmaceuticals Denmark 120,276 5.8
Merck Pharmaceuticals United States 95,328 4.6
Tenet Healthcare Health Care Providers & Services United States 79,290 3.8
Biogen Biotechnology United States 78,681 3.8
UnitedHealth Health Care Providers & Services United States 78,003 3.8
Stryker Health Care Equipment & Supplies United States 76,271 3.7
Top 10 investments 1,130,480 54.6
Daiichi Sankyo Pharmaceuticals Japan 67,535 3.3
Sarepta Therapeutics Biotechnology United States 46,781 2.3
Natera Life Sciences Tools & Services United States 46,186 2.2
Argenx Biotechnology Netherlands 45,960 2.2
Eisai Pharmaceuticals Japan 44,425 2.1
Integer Holdings Health Care Equipment & Supplies United States 44,413 2.1
Ionis Pharmaceuticals Biotechnology United States 40,985 2.0
Vertex Pharmaceuticals Biotechnology United States 37,953 1.8
Thermo Fisher Scientific Life Sciences Tools & Services United States 32,628 1.6
Elevance Health Health Care Providers & Services United States 30,545 1.5
Top 20 investments 1,567,892 75.8
Caris Life Sciences * Life Sciences Tools & Services United States 29,554 1.4
Alnylam Pharmaceuticals Biotechnology United States 28,290 1.4
Evolent Health Health Care Providers & Services United States 25,385 1.2
SI-BONE Health Care Equipment & Supplies United States 23,954 1.2
Crossover Health * Health Care Providers & Services United States 23,883 1.2
Cytokinetics Biotechnology United States 21,992 1.1
ICON Life Sciences Tools & Services Ireland 21,664 1.0
Universal Health Services Health Care Providers & Services United States 21,162 1.0
Amgen Biotechnology United States 20,265 1.0
Shanghai INT Medical Instruments Health Care Equipment & Supplies China 20,241 1.0
Top 30 investments 1,804,284 87.2
Regeneron Pharmaceuticals Biotechnology United States 20,066 1.0
Jiangxi Rimag Health Care Providers & Services China 19,926 1.0
Apellis Pharmaceuticals Biotechnology United States 19,574 0.9
Exact Sciences Life Sciences Tools & Services United States 18,926 0.9
Neurocrine Biosciences Biotechnology United States 17,443 0.8
Vaxcyte Biotechnology United States 17,097 0.8
Sino Biopharmaceutical Pharmaceuticals Hong Kong 14,872 0.7
VISEN Pharmaceuticals * Biotechnology China 13,143 0.6
Innovent Biologics Biotechnology China 13,103 0.6
Beijing Yuanxin Technology * Health Care Providers & Services China 12,031 0.6
Top 40 investments 1,970,464 95.2
EDDA Healthcare & Technology * Health Care Equipment & Supplies China 10,677 0.5
Ruipeng Pet Group * Health Care Providers & Services China 9,834 0.5
Medpace Life Sciences Tools & Services United States 8,896 0.4
New Horizon Health ^ Life Sciences Tools & Services China 8,672 0.4
Galderma Pharmaceuticals Switzerland 6,944 0.3
Gushengtang Health Care Providers & Services China 5,980 0.3
MabPlex * Health Care Providers & Services China 5,081 0.2
API Holdings * Health Care Providers & Services India 4,270 0.2
Oscar Health Health Care Providers & Services United States 3,835 0.2
Sinopharm Health Care Providers & Services China 3,784 0.2
Top 50 investments 2,038,437 98.4
Shandong Weigao Group Medical Polymer Health Care Equipment & Supplies China 3,231 0.2
Ikena Oncology Biotechnology United States 2,049 0.1
Shanghai Bio-heart Biological Technology Health Care Equipment & Supplies China 1,704 0.1
Passage Bio Biotechnology United States 1,050 0.1
Peloton Therapeutics – Milestone * Biotechnology United States 503 0.0
Total equities 2,046,974 98.9
Biotech M&A Target Swap Swap Baskets United States 175,109 8.5
Apollo Hospitals Enterprise Health Care Providers & Services India 16,989 0.8
Less: Gross exposure on financed swaps (170,072) (8.2)
Total OTC Swaps 22,026 1.1
Total investments including OTC Swaps 2,069,000 100.0
* Unquoted holding
* Private holding
^ Shares suspended – subject to fair valuation process
SUMMARY
Market value % of
Investments £’000 investments
Quoted Equities 1,937,998 93.6
Equity Swaps 22,026 1.1
Private Equities 108,976 5.3
Total investments 2,069,000 100.0
Portfolio Manager’s Review
MARKETS
Global equity markets moved higher in the reported six-month period,
continuing a trend that first commenced in November 2023. Overall enthusiasm
for global economic conditions, avoidance of a recession, and anticipation of
interest rate cuts all contributed to steady market gains. The MSCI World
Index, the S&P 500 Index, and the FTSE All-Share Index all closed at or near
all-time highs as of 30 September 2024.
Global healthcare stocks also advanced and reached an all-time high (see MSCI
World Health Care Index; in U.S. terms), but modestly lagged the broader
markets during the period. The defensive nature of the sector, coupled with
uncertainty around the frequency and magnitude of interest rate cuts,
conspired to create a headwind. This was particularly true in U.S. markets,
where the S&P 500 rose 3.3% (in sterling terms) versus the S&P 500 Health Care
Index which declined 1.8% (in sterling terms).
ALLOCATION
The Company’s long standing allocation strategy remained unchanged in the
first half of the financial year. Overall, our allocation strategy represents
a diverse distribution of investments across all of the major sub-sectors and
across the global healthcare industry. This allows investors to view the
Company as a “one-stop-shop” for all of their healthcare investment needs
given the broad exposure of the portfolio to the entirety of the healthcare
ecosystem – from therapeutics, to services, to medical technologies, to
growth of emerging markets – given the embedded diversification of the
portfolio of companies represented in the portfolio.
Other key traits of our allocation strategy remained deployed in the reported
period. Specifically, allocation to Large Cap Pharma remained underweight,
owing to (1) disparate fundamentals across the group and (2) the relatively
large weight that is represented within the Benchmark. As of 30 September
2024, total investments across Large Cap Pharma was 13.8% below the Benchmark
(27.0% vs. 40.8%) and total Pharmaceutical holdings (ex-Japan) was 27.8%, or
17.4% below the Benchmark weight (45.2%).
Additionally, allocation to Biotechnology remained above the collective
Benchmark weighting, owing to (1) the enormous therapeutic innovation and new
drug production that stems from Emerging Biotech companies and (2) the
relatively small weight that is represented in the Benchmark. As of 30
September 2024, total investments across Emerging Biotech were 18.2% above the
Benchmark (20.4% vs. 2.2%) and total Biotechnology holdings were 28.5%, or
19.7% above the Benchmark weight (8.8%).
WWH vs. MSCI World Health Care Index
As of 30 September 2024
Subsector WWH MSCI HC +/-
% of NAV % %
Biotechnology 28.5 8.8 19.7
Large Cap Biotech* 8.1 6.6 1.5
Emerging Biotech* 20.4 2.2 18.2
Pharmaceuticals 27.8 45.2 (17.4)
Large Cap Pharma* 27.0 40.8 (13.8)
Spec Pharma* 0.8 4.4 (3.6)
Healthcare Equipment & Supplies 21.9 16.4 5.5
Healthcare Providers & Services 12.0 15.1 (3.1)
Life Science Tools & Services 6.5 10.6 (4.1)
Japan 5.7 3.9 1.8
Emerging Markets 5.5 – 5.5
Privates 5.5 – 5.5
Total 113.4 100.0 13.4
^ Figures expressed as a % of total Net Asset Value. This includes all
derivatives as an economically equivalent position in the underlying holding
and allocated to the underlying holding’s respective Sector and Region.
See Glossary for definition of Pharmaceutical and Biotechnology subsectors.
PERFORMANCE
We are pleased to report a positive return, in excess of the Benchmark, for
the reported period. Specifically, for the six-month period ended 30 September
2024, the Company returned a net asset value per share total return of +0.6%
as compared to the MSCI World Health Care Index which was flat on a net total
return, sterling adjusted basis. This continued the trend from the previous
financial year, namely positive returns, both absolute and relative to
the Benchmark.
Overall, positive performance came primarily from stock picking across
non-therapeutic stocks, including Life Science Tools & Services (‘Tools’),
Healthcare Providers & Services (‘Services’), and Healthcare Equipment &
Supplies (‘Medtech’) and Emerging Markets, offset by stock picking in
therapeutic stocks (Pharmaceuticals and Biotechnology). Asset allocation
effects were more muted outside of Biotechnology.
Of note, three periods of volatility contributed to the shape of performance
across the six-month period. First, equity markets dipped for the first time
in five months at the start of the financial year (April) as inflation data
was “hotter” than expected and investor optimism for an interest rate cut
temporarily waned. Whilst equity markets declined in response, as did the
Company’s performance, stock picking generated relative outperformance which
helped offset losses in April. Subsequent gains (both absolute and relative)
were extended into May and June restoring nearly 6.0% of relative performance,
despite Biotechnology’s relative underperformance.
Second, after equity markets reached all-time highs in June (led by market
favourite, Nvidia), Technology stocks wobbled on earnings in July and
triggered a broad macro trade in which “retail favourites” were sold and
year-to-date laggards were bought. This phenomenon adversely impacted the
Company’s performance materially, given our positioning within these same
segments from a healthcare perspective, resulting in losses of almost 5.0% of
both absolute and relative performance in only eight trading days at the end
of July and the beginning of August.
That said, those losses were more than reversed in the remaining days of
August due to (1) extreme market volatility that originated from economic news
in U.S. and Japan which turned healthcare defensive and (2) solid earnings
reports by a host of portfolio companies to close the second quarter reporting
period which also aided performance.
Finally, in September 2024, an interest rate cut by the U.S. Federal Reserve
was the first rate reduction in over four years. Whilst this action boosted
broad markets, healthcare stocks lost their defensive positioning, resulting
in stark declines in the month. The Company’s negative performance was
exacerbated by idiosyncratic negative newsflow from portfolio companies
including Novo Nordisk, Daiichi Sankyo, AstraZeneca, and Ionis Pharmaceuticals
during this same period, reducing absolute and relative total return
performance to +0.6% in the six-month period.
Despite these volatile periods, we do note that a record high net asset value
was achieved during the reported period. A closing net asset value per share
of 408.7p was achieved on 8 August 2024 eclipsing the previous high set in
January 2021.
Performance since inception to 30 September 2024 remains strong, with a
+4,769.8% return since April 1995. This represents an average annualised
return of 14.1% over the 29-plus year period. This ranks the Company in third
place of all closed end trusts across this period, regardless of industry
(source: Winterflood).
SUBSECTOR PERFORMANCE
As mentioned, positive performance came primarily from stock picking across
non-therapeutic stocks (including Tools, Services, Medtech and Emerging
Markets), offset by stock picking in Pharmaceuticals and allocation/stock
selection in Biotechnology.
The largest contribution on a sub-sector level was from Services,
predominantly through stock selection in the U.S. hospitals area and U.S.
managed care, supported by prevailing U.S. Presidential election sentiment
that favoured a Democrat win ahead of the November election. Medtech was the
second largest contributor, primarily from stock selection in multiple large
cap companies with above average growth and operational execution from a
pipeline and innovation perspective. Finally, we note the contribution from
Emerging Markets, specifically China, where healthcare stocks rallied more
than 20.0% (sterling; as per the Hang Seng Healthcare Index) on the heels of a
number of new economic stimulus packages announced in late September,
including interest rate cuts.
On the detractor side, Biotechnology was the largest negative contributor due
to allocation and was exacerbated by stock picking (notably Apellis
Pharmaceuticals and Biogen. See the Major Detractors section for more
information). Pharmaceuticals was also a material detractor, again due to
stock selection (including Merck and Novo Nordisk).
The largest area of relative outperformance on sub-sector level came from
Medtech through both stock picking and allocation. On the latter point, our
emphasis on large cap over small cap with an overlay of operational
excellence, created nearly 1.5% of return over the Benchmark. Other sub-sector
performance was similar in both relative and absolute terms. One exception of
note was in Pharmaceuticals, where the absence of holdings in Roche and
Novartis hurt relative returns in that sub-sector.
PRIVATE HOLDINGS
During the first half of the current financial year, the Company strategically
refrained from making new investments in private companies, as we continued
to cautiously navigate the challenging public offering market for small and
mid-capitalisation healthcare firms. While the capital market funding
landscape continues to improve, most of our private companies are well
capitalised and are being selective with regards to pursuing listings. We
remain optimistic about the ability of our unquoted investments to achieve
listings within the next year as we anticipate further improvement of the
capital market funding environment.
As of the end of the period, private investments made up 5.5% of total net
assets, a decrease from 6.4% on 31 March 2024. This decrease was the result of
one unquoted investment, Jiangxi Rimag Group, which completed its Initial
Public Offering (IPO) in Hong Kong and closed the half year with a post
offering return of roughly 74%.
For the first six months of the current financial year, the Company’s
private investments generated a loss of £14.2 million, from an opening market
value of £133.8 million across 10 companies. The private strategy as a whole
had an implied return of -11.6% which detracted -0.7% from performance.
The existing private portfolio constitutes a diverse set of companies.
Geographically, exposure is evenly distributed among Emerging Markets and
North American companies. On a sub-sector basis, the exposure is concentrated
in Services and Tools, with small exposures to Biotechnology and Medtech.
MAJOR CONTRIBUTORS TO PERFORMANCE
Historically, key performance drivers for the Company, whilst diverse from a
sub-sector perspective, usually share some common characteristics. These
typically include growth, innovation, new product flow, astute business
development acumen, operational excellence, among other positive
characteristics. The current interim period was no different.
The largest contributor in the reported six-month period was Tenet Healthcare,
a Dallas-based, diversified healthcare services company and a leading U.S.
hospital operator. The company’s share price appreciated nearly 50%
(sterling) due to a multitude of factors. First, the company posted very
strong operating results with substantial outperformance versus expectations.
Second, the company executed on some value-creative divestitures of hospitals
at highly favourable multiples and acquisitions of ambulatory surgery centres.
Finally, the company was able to procure improvements in reimbursement from
their Medicaid programs. We expect Tenet will continue to operate well as the
utilisation environment remains favourable for providers.
Another significant contributor in the interim period, Boston Scientific, has
been a long-term portfolio holding. The medical technology company has a
history of innovation, operational excellence, and above average industry
growth. The management team is considered top of their field and investors
were again rewarded over the past six months after the company experienced a
material acceleration in organic sales growth driven by the company’s next
generation pulsed field ablation device for the treatment of atrial
fibrillation. Whilst the company has several other new products launching,
investors are particularly focused on the pulsed field ablation device as the
multi-billion dollar atrial fibrillation market has begun rapidly shifting
toward this new technology. Looking ahead, investors are optimistic that this
market transition can move more rapidly than consensus expectations. Moreover,
Boston Scientific has several important trials evaluating pulse field ablation
in combination with the company’s Watchman left atrial appendage closure
device. Positive results should lead to material market increases for both
technologies. We believe the ongoing company algorithm of best-in-class
organic sales growth, differentiated margin expansion potential and ongoing
mergers & acquisitions (M&A) should result in continued strong and durable
profit growth for the foreseeable future.
The undisputed leader in surgical robotic technology is Intuitive Surgical.
The California-based company extended its lead with the debut of their next
generation surgical suite, the da Vinci 5 (Dv5). With a seasoned management
team, a multi-decade head start, and superior robotic technology, we view
Intuitive Surgical as the best positioned company in the fast-growing and
vastly underpenetrated surgical robotics space. The company operates as a
monopoly with its da Vinci suite of robotic systems, and we see upcoming
competitor system launches as being market expansive as opposed to driving
material share gains against Intuitive. During the past six months, investor
expectations for the company’s new Dv5 robotic surgery platform have rapidly
improved. Dv5 system placements have been stronger than investor expectations
during the past two quarters and, importantly, sales of prior generation
systems have outpaced expectations as well. Procedure volumes have continued
to grow at elevated levels, and new instruments have allowed the company to
generate a higher amount of sales per procedure. Lastly, the company’s
margin profile has improved in recent quarters, which has historically been a
point of contention amongst investors. With the Dv5 system launch still in the
early stages, we see continued strong trends for the company for the next
several years.
The treatment of cancer continues to evolve and perhaps the leader to emerge
over the past decade has been U.K.-based AstraZeneca. With dominant positions
in both solid and liquid tumours, the company has been a key innovator in
oncology. The company can also claim leadership in respiratory,
cardiovascular, immunologic, metabolic, and rare diseases. This diversity has
led to outsized growth in the near and long term, the latter was highlighted
during a May 2024 Investor Day in which the company articulated a plan to more
than triple revenues during the current decade. The share price rose in
response, although some gains were pruned in the September period after the
company disclosed efficacy data for a late-stage oncology asset that were
below expectations. Despite the late sell-off, the stock remained a top
contributor in the period. The calendar year 2025 is poised to be catalyst
rich for AstraZeneca, and continued commercial and development execution could
push the share price back to all-time highs.
The rise of “diabesity” continues to be a major theme in therapeutics. The
most recent entrant, Zepbound (tirzepatide for obesity), from Eli Lilly, was
approved in December 2023 and set launch records in 2024, reaching blockbuster
status (more than U.S.$1 billion in sales) in the second quarter alone. Sales
of Mounjaro (tirzepatide for diabetes) reached over U.S.$3 billion at the same
time. The tremendous growth at the company is unprecedented for a global large
cap pharmaceutical company and the share price was rewarded, reaching an
all-time high in August 2024. Some volatility has crept into the share price,
as generalists and retail investors alike crowded into the name, becoming a
“market favourite,” which elicited some unwanted, non-fundamental trading
action. Despite a modest sell-off into the half-year end, the stock remained a
major contributor to performance. Moreover, we expect this to continue as
manufacturing efforts to increase supply will boost sales, global rollouts
inflect, outcomes studies will read out, and data for next generation products
(both orals and injectables) will be presented in earnest in 2025.
MAJOR DETRACTORS FROM PERFORMANCE
Merck is a global large cap pharmaceutical company that is well regarded as a
pioneer in immuno-oncology and vaccine development. It has seen its top line
rise by more than 50% over the past five years and is expected to eclipse the
U.S.$60 billion sales threshold in 2024. Sales in China comprise a portion of
the company’s growth strategy. However, an unexpected slowdown in Gardasil
(a cancer-preventing vaccine) sales in the second quarter spooked investors
who then quickly dumped the stock on the fears that a key long-term growth
driver was in question. The stock fell in late-July 2024 as a result and never
recovered into the financial half-year end. The investment was the largest
detractor in the reported period. Subsequently, the company argued (thus far
unsuccessfully) that this was a near-term issue only and so we continue to
assess the risk/benefit of the company’s impressive pipeline and growth
potential versus near-term sales uncertainty.
The Emerging Biotech company, Apellis Pharmaceuticals has displayed all of the
hallmarks of investing in a speculative Biotechnology company, with high
rewards and high risks. The company developed Syfovre (pegcetacoplan
injection), a first-in-class treatment for geographic atrophy, a specific
form of progressive blindness. Its approval in early 2023 heralded a new
treatment for a devastating disease for which there was no treatment – a
breakthrough innovation – and the company’s valuation soared to over
U.S.$10 billion by mid-2023. However, rare, unexpected, but serious side
effect (ocular vasculitis) leading to irreversible blindness emerged in real
world use. Company efforts to identify and contain the side effect ultimately
proved futile in 2024. European approval was subsequently denied. Questions
later arose around true visual acuity benefit and a follow-on competitor with
likely better efficacy and absent the vasculitis continued to take share. The
company’s valuation at the end of September was less than U.S.$3.5 billion.
Pharmaceutical brand names rarely become part of popular culture, but Novo
Nordisk has recently succeeded with two, Ozempic and Wegovy, joining the ranks
such as Viagra and Lipitor. With the immense popularity and insatiable demand
for these drugs, the share price has enjoyed similar popularity, rising over
30% since the beginning of the calendar year and peaking above 1,000 Danish
Kroner in late June 2024. However, with such admiration comes great
expectations. First, a solid but less-than-perfect second quarter report in
August 2024 exacerbated a macro sell-off that had commenced in late July 2024.
Second, additional selling pressure was triggered in late September 2024 when
the company announced Phase II data for monlunabant, a novel CB1 inverse
agonist, the company’s lead oral asset in the obesity space. The positive
trial was sufficient for Novo Nordisk to advance the agent into the next stage
of clinical trials, but the reported efficacy and safety data disappointed
investors. The share price ultimately finished the six-month period more than
20% below its peak and more than 10% below its 29 March 2024 share price. We
remain confident that the long-term opportunity in the “diabesity”
category (and associated indications) can evolve into the largest market in
the pharmaceutical industry, and that Novo Nordisk can retain a leadership
position that may allow it to more than double its revenues before the
decade’s end.
In the Medtech space, Dexcom stands out as the leader in the development and
production of continuous glucose monitors for diabetes management.
Unfortunately, the company experienced unexpected and unprecedented issues
during the second quarter, where growth slowed considerably due to: (1) a
disruptive U.S. sales force realignment, (2) a slowdown in growth in certain
customer channels, and (3) underperformance in international markets. As a
result of these stunning announcements, the share price fell by more than 40%
(local currency) in late July 2024. Whilst we view the category as very
promising and maintain our belief in Dexcom as a strong company and innovator,
we exited our position as we viewed the current situation as too uncertain and
without asymmetric positive risk.
One of the most innovative new drugs over the past 20 years was Leqembi
(lecanemab), an antibody developed and commercialised by Eisai and partnered
with Biogen for the treatment of mild to moderate Alzheimer’s disease. The
positive pivotal trial (CLARITY-AD) in September 2022 was a landmark study
that surprised both the clinical and investment communities. The subsequent
filing with the U.S. Food and Drug Administration (FDA), a positive Advisory
Committee meeting, an accelerated approval (January 2023) and a full approval
(July 2023) set the stage for a much-anticipated launch. However, some 12
months later, the uptake for Leqembi remained modest and was even denied
approval in Europe over safety concerns, which was overly conservative in our
opinion. Despite positive expert opinion on the clinical importance of Leqembi
for Alzheimer’s patients and their families and caregivers, obstacles for
uptake remain, including lack of a blood-based diagnostics, infusion centre
availability, burden of dose frequency, and a launch primarily presided over
by an inexperienced Tokyo-based pharmaceutical company. All of which pressured
the share price of Biogen in the reported period.
DERIVATIVE STRATEGY
The Company has the ability to utilise equity swaps and options as part of its
financial strategy. Equity swaps are a financial tool (a derivative contract),
that allow for synthetic exposure to a basket of single stocks in an efficient
manner and within a well-defined theme. For example, having 15 to 50+
additional positions at smaller weights in the portfolio (i.e., non-core) is
suboptimal. An equity swap basket facilitates management of the investment
theme and tracking of performance. The swaps contain multiple single stock
long positions and the basket swap counterparty is Goldman Sachs, allowing for
confidence in forward trading and rebalancing strategies.
The Company strategically invested in two customised tactical basket swaps,
targeting growth opportunities in undervalued small and mid-capitalisation
Biotechnology, Pharmaceutical and Medtech companies.
These baskets were constructed to capitalise on three prevailing themes: 1)
investment opportunities possessing considerable potential as attractive
acquisition targets for larger corporations (M&A swap basket) and 2)
substantial valuation dislocations in small and mid-capitalisation medical
device companies brought about by the GLP-1 weight loss craze.
During the period under review, the basket swaps gained £8.0 million, which
added 0.4% to performance. The gains were primarily due to the returns
generated by the propriety Biotechnology M&A Target Swap.
Throughout the year, the Company also used single stock equity swaps to access
Chinese and Indian investments, which would otherwise be inaccessible through
more traditional investment methods. During the period under review, single
stock equity swaps contributed £1.7 million to performance, and we remain
confident in the long-term prospects of emerging market securities,
particularly those trading locally in mainland China.
LEVERAGE STRATEGY
Historically, the typical leverage level employed by the Company has been in
the mid-to-high teens range. Considering the market volatility during the past
three plus financial years, we have, more recently, used leverage in a more
tactical fashion.
In 2024, we have flexed leverage modestly in response to the economic climate,
including in consideration of a putative recession earlier in the period and
interest rate fluctuations and speculation. Most recently, leverage has
converged to the low-double digit range, a reflection of our overall
bullishness on the portfolio and a turn in biotechnology stocks. Some factors
that keep us from extending leverage even further are the continued
uncertainty with the macro backdrop, further geopolitical risk, the looming
U.S. Presidential election, and relatively high borrowing costs at present.
SECTOR DEVELOPMENTS
As innovation continues to be the hallmark of our investment strategy, we
persist in monitoring and measuring developments at the FDA, perhaps the most
objective measure of industry productivity. Whilst 2023 was a record
year for new drug approvals with 67, the current calendar year looks nearly
as robust with 43 approvals to date (as of 30 September 2024) and is on pace
for over 50 approvals in the full year. This is commensurate with the
seven-year average of 55 per annum and most important, moves the total number
of new drugs approved over the past eight years at over 450.
This era of productivity is simply incredible, especially considering evolving
standards for new product approvals – both efficacy and safety – is ever
increasing. This year has seen approvals for another antibody for the
treatment of Alzheimer’s disease (Kisunla from Eli Lilly), a first-in-class
“activin” inhibitor for pulmonary arterial hypertension (Winrevair from
Merck), a best-in-class pneumococcal vaccine (Capvaxive from Merck), and the
first ever cell therapy for melanoma (Amtagvi from Iovance).
Another important value driver in the therapeutics space has been the
acceleration of biotechnology M&A over the past three years. A number of
factors have fuelled this M&A frenzy, including a quarter trillion U.S.
dollars of branded drug sales losing patent protection by the end of the
decade, pricing pressure in the U.S. from the Inflation Reduction Act, the
plethora of innovation coming from small-cap Biotechnology companies, and the
still attractive valuations of those companies. The total dollar volume has
decreased in 2024 from 2023 as acquiring companies have pivoted from larger
scale, already commercialised assets to mid-to-late clinical stage assets that
come with smaller price tags. However, the number of deals to date – 33 –
is expected to eclipse last year’s record number of 40. That said, we do
note that after a typical summer holiday hiatus of deal making, we expect M&A
to remain quiet until after the U.S. Presidential election in November, as
risk-averse large cap executives will hedge further efforts until after the
polls are in.
On the legislative front, nothing has been more scrutinised in healthcare than
the emergence of the Inflation Reduction Act (IRA), passed into law by the
Biden Administration in 2022. For the pharmaceutical industry, the IRA is more
commonly referred to as “drug price reform” and this year saw important
developments in Medicare drug price negotiations between the Federal Centres
for Medicare & Medicaid Services (CMS) and companies on the first “List of
10” (ten prescription drugs chosen by CMS given length of time on market,
lack of generic competition, and total Federal expenditures). The list
included Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel,
Imbruvica, Stelara, and Fiasp.
Whilst investors were appropriately concerned over this potentially
industry-altering pricing mechanism, most breathed a sigh of relief when
actual negotiated prices were released ahead of the 1 September 2024 deadline.
Current estimates assumed that Medicare-reimbursed drugs included a rebate of
approximately 50% from list price. Investors believed that this discount could
be extended to 65% or even as much as 80% through the IRA. However, the
average negotiated rebate came to 63% (source: CMS), clearly better than
expected. We believe this may alleviate near term fears about the potential
financial impact of the IRA across the industry.
We continue to monitor the roll out of the IRA. The new drug prices for the
first list of 10 do not take effect until 1 January 2026. However, the next
list will increase to 15 drugs and continue to be published on a rolling
basis. Actual prices may also continue to surprise (in either direction). In
addition, 2025 will see the first implementation of the so called “Part D
Redesign”, which includes, among other things, patient annual out-of-pocket
costs that will be capped at U.S.$2,000 for people with Medicare Part D.
Funding for this benefit comes from a number of sources, including increased
government subsidies, increased patient premiums, increased contribution from
the manufacturers, and also private payers. Impact will vary
company-to-company but also may be offset by increased volumes in certain
therapeutic categories given the improved access to medicine.
Finally, the much-anticipated U.S. Presidential election of 2024 ended with
much of the same drama that led up to it. Whilst polls toggled back and forth
between the candidates, ultimately it was Republican nominee Donald Trump
beating out incumbent candidate Kamala Harris, marking a second (albeit
interrupted) term for President Trump. The final result was without doubt, as
president-elect Trump swept three key battle ground states and easily eclipsed
– with more than 310 – the necessary 270 electoral votes required to
become President. Trump also won on the popular vote at 51% to Harris who
polled less than 48%. The Senate majority control also moved in the
Republican’s favour with more than 51 seats whilst the Republican party
also held the majority of House of Representatives seats. The final result was
an unexpected “Republican Sweep”.
The implications for healthcare are unequivocally positive. Healthcare stocks
were weak ahead of the election on concerns of a Harris win that obviously did
not come to fruition. Moreover, the “Red Sweep” was probably the best-case
scenario for healthcare. Whilst the implications may vary by sub-sector,
overall the Republican party history (and previous Trump administration) has
been industry friendly. With Republicans in total control, we can expect no
controversial legislation to be posited and some possibility now exists that
Drug Price Reform may be repealed/amended in the industry’s favour. But
perhaps the biggest positive is now the lack of any negative legislation by
the Democrats now that they are completely out of power.
OUTLOOK
The malaise that hung over the Biotechnology industry post-COVID has now
evaporated, and investors are re-focused on the fundamentals. The healthcare
industry continues to benefit from significant technological advancements and
accelerating innovation in drug discovery and development. Across
therapeutics, continuous advancements in genetic engineering, personalised
medicine, and synthetic biology are fostering a robust pipeline of new
therapies and treatments. Increased investment in early-stage science feeds
long-term opportunities. Artificial intelligence and machine learning are
already impacting all facets of the industry despite still being in its
infancy. New product approvals are delivering a quantity and quality of
medicines never seen before. The growing elderly demographic worldwide is
driving demand for new healthcare solutions, particularly in areas such as
cancer treatment, chronic disease management, and age-related health issues.
Overall, the future of healthcare will remain robust and dynamic, driven by
data, shaped by innovation, improving access and quality for patients on a
global basis.
Sven H. Borho and Trevor M. Polischuk
OrbiMed Capital LLC
Portfolio Manager
14 November 2024
CONTRIBUTION BY INVESTMENT
PRINCIPAL STOCK CONTRIBUTORS TO AND DETRACTORS FROM ABSOLUTE NET ASSET VALUE
PERFORMANCE
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2024
Top five contributors Sector Country Contribution £’000 Contribution per share* p
Tenet Healthcare Health Care Providers & Services United States 35,414 6.7
Boston Scientific Health Care Equipment & Supplies United States 21,269 4.0
Intuitive Surgical Health Care Equipment & Supplies United States 19,549 3.7
AstraZeneca Pharmaceuticals United Kingdom 13,808 2.6
Eli Lilly Pharmaceuticals United States 12,777 2.4
Top five detractors Sector Country Contribution £’000 Contribution per share p
Biogen Biotechnology United States (14,308) (2.7)
Dexcom** Health Care Equipment & Supplies United States (15,958) (3.0)
Novo Nordisk Pharmaceuticals Denmark (18,414) (3.5)
Apellis Pharmaceutical Biotechnology United States (20,982) (3.9)
Merck Pharmaceuticals United States (21,119) (4.0)
* 531,337,518 Weighted average number of shares
** Not held at 30 September 2024.
INTERIM MANAGEMENT REPORT
PRINCIPAL RISKS AND UNCERTAINTIES
The Directors continue to review the Company’s key risk register, which
identifies the risks and uncertainties that the Company is exposed to, and the
controls in place and the actions being taken to mitigate them.
A review of the half year and the outlook for the Company can be found in the
Chair of the Board’s Statement and the Portfolio Manager’s Review. The
principal risks and uncertainties faced by the Company include the following:
· Exposure to market risks and those additional risks specific to the
sectors in which the Company invests, such as political interference in drug
pricing.
· The Company uses leverage (both through derivatives and gearing) the
effect of which is to amplify the gains or losses the Company experiences.
· Macro events (including geopolitical and regulatory) may have an
adverse impact on the Company’s performance by causing exchange rate
volatility, changes in tax or regulatory environments, and/or a fall in market
prices. Emerging markets, which a portion of the portfolio is exposed to, can
be subject to greater political uncertainty and price volatility than
developed markets.
· Unquoted investments are more difficult to buy, sell or value and so
changes in their valuations may be greater than for listed assets.
· The risk that the individuals responsible for managing the Company’s
portfolio may leave their employment or may be prevented from undertaking
their duties.
· The risk that, following the failure of a counterparty, the Company
could be adversely affected through either delay in settlement or loss of
assets.
· The Board is reliant on the systems of the Company’s service
providers and as such disruption to, or a failure of, those systems could lead
to a failure to comply with law and regulations leading to reputational damage
and/or financial loss to the Company.
· The risk that investing in companies that disregard Environmental,
Social and Governance (ESG) factors will have a negative impact on investment
returns and also that the Company itself may become unattractive to investors
if ESG is not appropriately considered in the Portfolio Manager’s decision
making process.
· The risk, particularly if the investment strategy and approach are
unsuccessful, that the Company may underperform, resulting in the Company
becoming unattractive to investors and a widening of the share price discount
to NAV per share. Also, falls in stock markets, and the risk of a global
recession, are likely to adversely affect the performance of the Company’s
investments.
Further information on these risks is given in the Annual Report for the year
ended 31 March 2024. The Board has noted that global markets are continuing to
experience unusually high levels of uncertainty and heightened geopolitical
risks. The Board continues to monitor this closely.
RELATED PARTY TRANSACTIONS
During the first six months of the current financial year, no material
transactions with related parties have taken place which have affected the
financial position or the performance of the Company during the period.
GOING CONCERN
The Directors believe, having considered the Company’s investment
objectives, risk management policies, capital management policies and
procedures, the nature of the portfolio and expenditure projections, that the
Company has adequate resources, an appropriate financial structure and
suitable management arrangements in place to continue in operational existence
for the foreseeable future and, more specifically, that there are no material
uncertainties relating to the Company that would prevent its ability to
continue in such operational existence for at least 12 months from the date of
the approval of this half yearly financial report. For these reasons, they
consider there is reasonable evidence to continue to adopt the going concern
basis in preparing the accounts. In reviewing the position as at the date of
this report, the Board has considered the guidance issued by the Financial
Reporting Council.
The Directors noted the result of the continuation vote held in 2024 (where
93.7% of the votes cast were in favour of continuation). As part of their
going concern assessments, stress testing was carried out in May 2024, which
modelled the effects of substantial falls in markets and significant
reductions in market liquidity, on the Company’s net asset value, its cash
flows and its expenses.
DIRECTORS’ RESPONSIBILITIES
The Board of Directors confirms that, to the best of its knowledge:
(i) the condensed set of financial statements contained
within the Half Year Report have been prepared in accordance with Financial
Reporting Standard 104 (Interim Financial Reporting); and
(ii) the interim management report includes a true and fair
review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred during the
first six months of the financial year and their impact on the condensed set
of financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in the first six
months of the current financial year and that have materially affected the
financial position or performance of the entity during that period; and any
changes in the related party transactions described in the last annual report
that could do so.
The Half Year Report has not been reviewed or audited by the Company’s
auditors.
This Half Year Report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the information
available to them up to the date of this report and such statements should be
treated with caution due to the inherent uncertainties, including both
economic and business risk factors, underlying any such forward-looking
information.
For and on behalf of the Board
Doug McCutcheon
Chair
14 November 2024
INCOME STATEMENT
For the six months ended 30 September 2024
(Unaudited) 30 September 2024 (Unaudited) 30 September 2023
Revenue Return £’000 Capital Return £’000 Total £’000 Revenue Return £’000 Capital Return £’000 Total £’000
Gains/(losses) on investments – 2,585 2,585 – (11,111) (11,111)
Foreign exchange gains/(losses) – 6,906 6,906 – (6,791) (6,791)
Income from investments (note 2) 8,830 – 8,830 12,481 – 12,481
AIFM, portfolio management, and
performance fees (note 3) (408) (7,751) (8,159) (411) (7,803) (8,214)
Other expenses (654) – (654) (686) – (686)
Net return/(loss) before finance charges and taxation 7,768 1,740 9,508 11,384 (25,705) (14,321)
Finance charges (176) (3,342) (3,518) (246) (4,673) (4,919)
Net return/(loss) before finance 7,592 (1,602) 5,990 11,138 (30,378) (19,240)
Taxation (357) – (357) (1,486) – (1,486)
Net return/(loss) after taxation 7,235 (1,602) 5,633 9,652 (30,378) (20,726)
Return/(loss) per share (note 4) 1.4p (0.3)p 1.1p 1.6p (5.0)p (3.4)p
The “Total” column of this statement is the Income Statement of the
Company. The “Revenue” and “Capital” columns are supplementary to this
and are prepared under guidance published by the Association of Investment
Companies.
All revenue and capital items in the above statement derive from continuing
operations.
The Company has no recognised gains and losses other than those shown above
and therefore no separate Statement of Total Comprehensive Income has been
presented.
The accompanying notes are an integral part of these statements.
STATEMENT OF CHANGES IN EQUITY
For the six months ended 30 September 2024
(Unaudited) 30 September 2024 £’000 (Unaudited) 30 September 2023 £’000
Opening shareholders’ funds 2,080,417 2,150,721
Shares purchased for treasury (99,759) (133,365)
Return/(loss) for the period 5,633 (20,726)
Dividends paid – revenue (11,198) (14,709)
Closing shareholders’ funds 1,975,093 1,981,921
STATEMENT OF FINANCIAL POSITION
As at 30 September 2024
(Unaudited) 30 September 2024 £’000 (Audited) 31 March 2024 £’000
Fixed assets
Investments 2,046,974 2,108,235
Derivatives – OTC swaps 22,026 944
2,069,000 2,109,179
Current assets
Debtors 8,635 10,232
Cash and cash equivalents 41,496 73,797
50,131 84,029
Current liabilities
Creditors: amounts falling due within one year (144,038) (100,373)
Derivative – OTC Swaps – (12,418)
(144,038) (112,791)
Net current liabilities (93,907) (28,762)
Total net assets 1,975,093 2,080,417
Capital and reserves
Ordinary share capital – (note 5) 15,042 15,042
Capital redemption reserve 9,564 9,564
Share premium account 841,599 841,599
Capital reserve 1,092,035 1,193,396
Revenue reserve 16,853 20,816
Total shareholders’ funds 1,975,093 2,080,417
Net asset value per share – (note 6) 381.5p 381.1p
CASH FLOW STATEMENT
For the Six months ended 30 September 2024
Note (Unaudited) Six months ended 30 September 2024 £’000 (Unaudited) Six months ended 30 September 2023 £’000
Net cash (outflow)/inflow from operating activities 8 (4,336) 5,174
Purchases of investments and derivatives (411,658) (554,711)
Sales of investments and derivatives 420,462 560,892
Realised gains/(losses) on foreign exchange 4,803 (2,218)
Net cash inflow from investing activities 13,607 3,963
Shares repurchased (98,072) (133,365)
Equity dividends paid (11,198) (14,709)
Interest paid (3,518) (4,919)
Net cash outflow from financing activities (112,788) (152,993)
Increase in net debt (103,517) (143,856)
Cash flows from operating activities includes interest received of £1,684,000
(2023: £1,885,000) and dividends received of £7,448,000 (2023:
£10,135,000).
RECONCILIATION OF NET CASH FLOW MOVEMENT TO MOVEMENT IN NET DEBT
(Unaudited) Six months ended 30 September 2024 £’000 (Unaudited) Six months ended 30 September 2023 £’000
Increase in net debt resulting from cash flows (103,517) (143,856)
Gains/(losses) on foreign currency cash and cash equivalents 2,103 (4,574)
Movement in net debt in the period (101,414) (148,430)
Net debt at 1 April 4,855 2,997
Net debt at 30 September* (96,559) (145,433)
* The net debt figure as at 30 September 2024 includes cash
and cash equivalents less the overdraft drawn of £138,055,000 (30 September
2023: £219,230,000).
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The condensed Financial Statements for the six months to 30 September 2024
comprise the statements together with the related notes below. They have been
prepared in accordance with FRS 104 ‘Interim Financial Reporting’, the
AIC’s Statement of Recommended Practice published in July 2022 (‘SORP’)
and using the
same accounting policies as set out in the Company’s Annual Report and
Financial Statements at 31 March 2024.
Going concern
After making enquiries, and having reviewed the Investments, Statement of
Financial Position and projected income and expenditure for the next 12
months, the Directors have a reasonable expectation that the Company has
adequate resources to continue in operation for the foreseeable future. The
Directors have therefore adopted the going concern basis in preparing these
condensed financial statements.
Fair value
Under FRS 102 and FRS 104 investments have been classified using the following
fair value hierarchy:
Level 1 – Quoted market prices in active markets
Level 2 – Prices of a recent transaction for identical instruments
Level 3 – Valuation techniques that use:
(i) observable market data; or
(ii) non-observable data
AS AT 30 SEPTEMBER 2024 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000
Investments held at fair value through profit or loss 1,929,327 – 117,647 2,046,974
Derivatives: OTC swaps (assets) – 22,026 – 22,026
Derivatives: OTC swaps (liabilities) – – – –
Financial instruments measured at fair value 1,929,327 22,026 117,647 2,069,000
As at 31 March 2024 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000
Investments held at fair value through profit or loss 1,975,108 – 133, 127 2,108,235
Derivatives: OTC swaps (assets) – 944 – 944
Derivatives: OTC swaps (liabilities) – (12,418) – (12,418)
Financial instruments measured at fair value 1,975,108 (11,474) 133,127 2,096,761
2. INCOME
(Unaudited) Six months ended 30 September 2024 £’000 (Unaudited) Six months ended 30 September 2023 £’000
Investment income 7,146 10,596
Interest Income 1,684 1,885
Total 8,830 12,481
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
(Unaudited) Six months ended 30 September 2024 (Unaudited) Six months ended 30 September 2023
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
AIFM fee 72 1,365 1,437 72 1,369 1,441
Portfolio management fee 336 6,386 6,722 339 6,434 6,773
Performance fee charge for the period – – – – – –
408 7,751 8,159 411 7,803 8,214
As at 30 September 2024 no performance fees were accrued or payable (31 March
2024: nil accrued).
No performance fee could become payable by 30 September 2025.
See Glossary for further information on the performance fee.
4. RETURN/(LOSS) PER SHARE
(Unaudited) Six months ended 30 September 2024 £’000 (Unaudited) Six months ended 30 September 2023 £’000
The return per share is based on the following figures:
Revenue return 7,235 9,652
Capital (loss)/return (1,602) (30,378)
Total return 5,633 (20,726)
Weighted average number of shares in issue for the period 531,229,280 606,004,086
Revenue return per share 1.4p 1.6p
Capital (loss)/return per share (0.3)p (5.0)p
Total (loss)/return per share 1.1p (3.4)p
The calculation of the total, revenue and capital returns per ordinary share
is carried out in accordance with IAS 33, “Earnings per Share (as adopted in
the EU)”.
5. SHARE CAPITAL
Shares number Treasury shares number Total shares in issue number
As at 1 April 2024 545,942,332 55,722,868 601,665,200
Purchase of shares into treasury (28,230,376) 28,230,376 –
As at 30 September 2024 517,711,956 83,953,244 601,665,200
(Unaudited) 30 September 2024 £’000 (Audited) 31 March 2024 £’000
Issued and fully paid:
Nominal value of ordinary shares of 2.5p 15,042 15,042
During the period ended 30 September 2024 the Company bought back ordinary
shares into treasury at a cost of
£99.8m (Year ended 31 March 2024: £252.8m).
At the AGM of the Company held in July 2023, shareholders approved a
resolution for a ten for one share split such that each shareholder would
receive ten shares with a nominal value of 2.5 pence each for every one share
held. 541,498,680 additional shares (541,019,916 to shareholders and 478,764
in relation to shares held in treasury) were created on
27 July 2023 following this approval.
6. NET ASSET VALUE PER SHARE
The net asset value per share is based on the assets attributable to equity
shareholders of £1,975,093,000 (31 March 2024: £2,080,417,000) and on the
number of shares in issue at the period end of 517,711,956 (31 March 2024:
545,942,332).
* restated to reflect the ten for one share split.
7. TRANSACTION COSTS
Purchase transaction costs for the six months ended 30 September 2024 were
£204,000 (six months ended 30 September 2023: £499,000).
Sales transaction costs for the six months ended 30 September 2024 were
£340,000 (six months ended 30 September 2023: £528,000).
8. RECONCILIATION OF OPERATING RETURN TO NET CASH
INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES
(Unaudited) Six months ended 30 September 2024 £’000 (Unaudited) Six months ended 30 September 2023 £’000
Gains/losses before finance costs and taxation 9,508 (14,321)
(Less: capital gains)/add: capital losses before finance charges and taxation (1,740) 25,705
Revenue return before finance charges and taxation 7,768 11,384
Expenses charged to capital (7,751) (7,803)
Decrease/(increase) in other debtors 226 (474)
Increase in other creditors and accruals 3,754 2,678
Net taxation suffered on investment income (825) (611)
Amortisation – –
Net cash (outflow)/inflow from operating activities (4,336) 5,174
9. PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks facing the Company are listed in the Interim Management
Report. An explanation of these risks and how they are managed is contained in
the Strategic Report and note 16 of the Company’s Annual Report & Accounts
for the year ended 31 March 2024.
10. COMPARATIVE INFORMATION
The condensed financial statements contained in this half year report do not
constitute statutory accounts as defined in section 434 of the Companies Act
2006. The financial information for the half years ended 30 September 2024 and
30 September 2023 has not been audited or reviewed by the Company’s
auditor.
The information for the year ended 31 March 2024 has been extracted from the
latest published audited financial statements of the Company. Those financial
statements have been filed with the Registrar of Companies. The report of the
auditor on those financial statements was unqualified, did not include a
reference to any matters to which the auditors drew attention by way of
emphasis without qualifying the report, and did not contain statements under
either section 498 (2) or 498 (3) of the Companies Act 2006.
Earnings for the first six months should not be taken as a guide to the
results for the full year.
Glossary of Terms and Alternative Performance Measures (“APMs”)
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (“AIFMD”)
Agreed by the European Parliament and the Council of the European Union and
transposed into UK legislation, the AIFMD classifies certain investment
vehicles, including investment companies, as Alternative Investment Funds
(“AIFs”) and requires them to appoint an Alternative Investment Fund
Manager (“AIFM”) and depositary to manage and oversee the operations of
the investment vehicle. The Board of the Company retains responsibility for
strategy, operations and compliance and the Directors retain a fiduciary duty
to shareholders.
BENCHMARK
The performance of the Company is measured against the MSCI World Health Care
Index on a net total return, sterling adjusted basis.
The net total return is calculated by reinvesting dividends after the
deduction of withholding taxes.
LARGE CAP BIOTECH
Biotechnology company with fully integrated discovery, development and
commercial capabilities and considered sustainably profitable.
LARGE CAP PHARMA
Global, multinational pharmaceutical companies with fully integrated
discovery, development and commercial capabilities.
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 then
dividing by the net asset value per share. It is usually expressed as a
percentage (%) of the net asset value per share. If the share price is higher
than the net asset value per share the result is a premium. If the share price
is lower than the net asset value per share, the shares are trading at a
discount.
EMERGING BIOTECH
Biotechnology company that does not fit the criteria of Large Cap Biotech,
ranging from early-stage development to newly profitable.
EQUITY SWAPS
An equity swap is an agreement in which one party (counterparty) transfers the
total return of an underlying equity position to the other party (swap holder)
in exchange for a one-off payment at a set date. Total return includes
dividend income and gains or losses from market movements. The exposure of the
holder is the market value of the underlying equity position.
Your Company uses two types of equity swap:
* funded, where payment is made on acquisition. They are equivalent to holding
the underlying equity position with the exception of additional counterparty
risk and not possessing voting rights in the underlying; and,
* financed, where payment is made on maturity. As there is no initial outlay,
financed swaps increase economic exposure by the value of the underlying
equity position with no initial increase in the investments value – there is
therefore embedded leverage within a financed swap due to the deferral of
payment to maturity.
The Company employs swaps for two purposes:
* To gain access to individual stocks in the Indian, Chinese and other
emerging markets, where the Company is not locally registered to trade or is
able to gain in a more cost efficient manner than holding the stocks directly;
and,
* To gain exposure to thematic baskets of stocks (a Basket Swap). Basket Swaps
are used to build exposure to themes, or ideas, that the Portfolio Manager
believes the Company will benefit from and where holding a Basket Swap is more
cost effective and operationally efficient than holding the underlying stocks
or individual swaps.
GENERICS
Any therapeutics company, domestic or global, that focuses a majority of its
efforts (not necessarily 100%) on developing and selling generic and/or
biosimilar prescription and/or OTC products.
LEVERAGE
Leverage is defined in the AIFMD as any method by which the AIFM increases the
exposure of an AIF. In addition to the gearing limit the Company also has to
comply with the AIFMD leverage requirements. For these purposes the Board has
set a maximum leverage limit of 140% for both methods. This limit is expressed
as a percentage with 100% representing no leverage or gearing in the Company.
There are two methods of calculating leverage as follows:
The Gross Method is calculated as total exposure divided by Shareholders’
Funds. Total exposure is calculated as net assets, less cash and cash
equivalents, adding back cash borrowing plus derivatives converted into the
equivalent position in their underlying assets.
The Commitment Method is calculated as total exposure divided by
Shareholders’ Funds. In this instance total exposure is calculated as net
assets, less cash and cash equivalents, adding back cash borrowing plus
derivatives converted into the equivalent position in their underlying assets,
adjusted for netting and hedging arrangements.
See the definition of Equity Swaps for more details on how exposure through
derivatives is calculated.
As at As at
30 September 2024 31 March 2024
Fair Value £’000 Exposure* £’000 Fair Value £’000 Exposure* £’000
Investments 2,046,974 2,046,974 2,108,235 2,108,235
OTC equity swaps 22,026 191,150 (11,474) 198,082
2,069,000 2,238,124 2,096,761 2,306,317
Shareholders’ funds 1,975,093 2,080,417
Leverage % 13.3% 10.8%
* Calculated in accordance with AIFMD requirements using the
Commitment Method
MSCI WORLD HEALTH CARE INDEX (THE COMPANY’S BENCHMARK)
The MSCI information (relating to the Benchmark) may only be used for your
internal use, may not be reproduced or redisseminated in any form and may not
be used as a basis for or a component of any financial instruments or products
or indices. None of the MSCI information is intended to constitute investment
advice or a recommendation to make (or refrain from making) any kind of
investment decision and may not be relied on as such. Historical data and
analysis should not be taken as an indication or guarantee of any future
performance analysis, forecast or prediction. The MSCI information is provided
on an “as is” basis and the user of this information assumes the entire
risk of any use made of this information. MSCI, each of its affiliates and
each other person involved in or related to compiling, computing or creating
any MSCI information (collectively, the “MSCI Parties”) expressly
disclaims all warranties (including, without limitation, any warranties of
originality, accuracy, completeness, timeliness, non-infringement,
merchantability and fitness for a particular purpose) with respect to this
information. Without limiting any of the foregoing, in no event shall any MSCI
Party have any liability for any direct, indirect, special, incidental,
punitive, consequential (including, without limitation lost profits) or any
other damages. (www.msci.com)
NET ASSET VALUE (NAV) TOTAL RETURN (“APM”)
The theoretical total return on shareholders’ funds per share, reflecting
the change in NAV assuming that dividends paid to shareholders were reinvested
at NAV at the time the shares were quoted ex-dividend. A way of measuring
investment management performance of investment trusts which is not affected
by movements in discounts/premiums.
Six months to 30 September 2024 (p) Year to 31 March 2024 (p)
Opening NAV per share 381.1 343.5
Increase in NAV per share 0.4 37.6
Closing NAV per share 381.5 381.1
% Change in NAV per share 0.1% 10.9%
Impact of reinvested dividends 0.5% 1.1%
NAV per share Total Return 0.6% 12.0%
ONGOING CHARGES (“APM”)
Ongoing charges are calculated by taking the Company’s annualised ongoing
charges, excluding finance costs, taxation, performance fees and exceptional
items, and expressing them as a percentage of the average daily net asset
value of the Company over the year.
Six months to 30 September 2024 £’000 One year to 31 March 2024 £’000
AIFM & Portfolio Management fees 8,159 16,267
Other Expenses 654 1,294
Total Ongoing Charges 8,813 17,561
Performance fees paid/crystallised – –
Total 8,813 17,561
Average net assets 2,067,356 2,036,653
Ongoing Charges (annualised) 0.9% 0.9%
Ongoing Charges (annualised, including performance fees paid or crystallised during the period) 0.9% 0.9%
PERFORMANCE FEE
Dependent on the level of long-term outperformance of the Company, a
performance fee can become payable.
The performance fee is calculated by reference to the amount by which the
Company’s net asset value (‘NAV’) performance has outperformed the
Benchmark.
The fee is calculated quarterly by comparing the cumulative performance of the
Company’s NAV with the cumulative performance of the Benchmark since the
launch of the Company in 1995. Provision is also made within the daily NAV per
share calculation as required and in accordance with generally accepted
accounting standards. The performance fee amounts to 15.0% of any
outperformance over the Benchmark (see Company’s Annual Report & Accounts
for the year ended 31 March 2024 for further information).
In order to ensure that only sustained outperformance is rewarded, at each
quarterly calculation date any performance fee payable is based on the lower
of:
i) The cumulative outperformance of the investment portfolio
over the Benchmark as at the quarter end date; and
ii) The cumulative outperformance of the investment portfolio over
the Benchmark as at the corresponding quarter end date in the previous year.
The effect of this is that outperformance has to be maintained for a 12 month
period before the related fee is paid.
In addition, a performance fee only becomes payable to the extent that the
cumulative outperformance gives rise to a total fee greater than the total of
all performance fees paid to date.
SHARE PRICE TOTAL RETURN (“APM”)
Return to the investor on mid-market prices assuming that all dividends paid
were reinvested.
Six months to 30 September 2024 (p) One year to 31 March 2024 (p)
Opening share price 335.0 311.5
Increase in share price 10.0 23.5
Closing share price 345.0 335.0
% Change in share price 3.0% 7.5%
Impact of reinvested dividends 0.6% 1.1%
Share price Total Return 3.6% 8.6%
SPEC PHARMA
Any other therapeutics company that does not fit the criteria of Large Cap
Pharma that develops and sell pharmaceutical products, often focused on a
limited number of therapeutic areas (or technologies), with a domestic and
sometimes global footprint.
For and on behalf of
Frostrow Capital LLP, Secretary
14 November 2024
- ENDS -
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