REG-Worldwide Healthcare Trust Plc: Half-year Report
23/11/2023 07:15
LONDON STOCK EXCHANGE ANNOUNCEMENT
Worldwide Healthcare Trust PLC
Unaudited Half Year Results for the six months ended
30 September 2023
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 2023. 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 2023 has been submitted to the UK Listing Authority, and will
shortly be available for inspection on the National Storage Mechanism (NSM):
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
For further information please contact: Mark Pope, Frostrow Capital LLP 020
3008 4913.
PERFORMANCE
Six months to One year to
30 September 31 March
2023 2023
Net asset value per share (total return)* # (0.6%) (0.1%)
Share price (total return)* # 0.1% (4.1%)
Benchmark (total return)^ # 0.8% 2.5%
30 September 31 March Six months
2023 2023 change
Net asset value per share(1) 339.3p 343.5p (1.2%)
Share price(1) 309.5p 311.5p (0.6%)
Discount of share price to the net asset value per share* 8.8% 9.3%
Leverage* 14.6% 10.5%
Ongoing charges* 0.8% 0.8%
Ongoing charges (including performance fees crystallised during the period)* 0.8% 0.8%
# Source – Morningstar.
^ Benchmark – MSCI World Health Care Index on a net total
return, sterling adjusted basis (see Glossary).
* Alternative Performance Measure. Leverage calculated under the
Commitment Method (see Glossary).
(1) Comparative figures restated to reflect the ten for one
share split during the period.
STATEMENT FROM THE CHAIR
DOUG MCCUTCHEON
PERFORMANCE
The first half of the Company’s financial year was a volatile period for
markets, and the Company was not immune to this. External events continued to
exert their influence, with geopolitics and macroeconomic conditions at the
forefront of investors’ minds. The MSCI World and the FTSE All-Share Indices
produced sterling based total returns of +4.5% and +1.4%, respectively. The
Company’s Benchmark, the MSCI World Healthcare Index, measured on a net
total return, sterling adjusted basis rose by 0.8%.
Against this backdrop, the Company’s net asset value per share total return
was -0.6%, underperforming the Benchmark during the period. The Company’s
share price total return was slightly better at +0.1%, which reflected a
narrowing of the discount of the Company’s share price to its net asset
value per share to 8.8% at the end of the half year (from 9.3% at the
beginning). During the period, in absolute terms, net asset value performance
was helped by the weakness of sterling, as sterling depreciated by 1.3%
against the U.S. dollar, the currency in which the majority of the Company’s
investments are denominated.
The Company’s investment performance has been disappointing in recent
periods. The Board continues to monitor our performance closely and will
further report on it in the full year results.
Looking at specific names in the portfolio, the largest contributions during
the reporting period came from the large capitalisation pharmaceutical
companies Novo Nordisk and Eli Lilly, both of which benefitted from their
exposure to the rapidly growing GLP-1 agonist anti-obesity therapy market. The
principal detractors from performance were the large capitalisation
pharmaceutical company Bristol Myers Squibb and biotechnology company UniQure.
Further information regarding the Company’s investments and performance can
be found in the Review of Investments.
The Company had, on average, leverage of 14.7% during the period, which
detracted 0.1% from performance. As at the half year-end, leverage stood at
14.6%, compared to 10.5% at the beginning of the period. Our Portfolio Manager
continues to adopt both a pragmatic and a tactical approach to the use of
leverage, which adds to performance in periods of rising portfolio share
prices and has benefitted the Company over time.
The Company is able to invest up to 10% of the portfolio, at the time of
acquisition, in unquoted securities. Our Portfolio Manager, through its
extensive private equity research capabilities, continues to identify unquoted
opportunities although, in the period under review, no new unquoted
investments were made. Exposure to unquoted equities accounted for 6.5% of the
total portfolio at the half year-end, and these holdings made a negative
contribution of -0.3% to the Company’s performance during the period under
review.
SHARE SPLIT
In the Company’s annual report published on 6 June 2023, the Board set out
its plans to undertake a share split of each of the Company’s shares of 25p
each into 10 shares of 2.5p each. The share split proposal was approved by
shareholders at the Company’s Annual General Meeting held on 18 July 2023
and the new shares began trading on 27 July 2023. For every share held
immediately prior to the transaction, shareholders received nine additional
shares. Shareholders should note that the split did not affect the value of
your investment in the Company, nor your shareholder rights.
PERFORMANCE FEE
No performance fee was accrued as at 30 September 2023 and no performance fee
can become payable within the next year. The performance fee arrangements are
described in detail in the Company’s Annual Report.
CAPITAL
Challenging stock market conditions and investor sentiment since the beginning
of 2022 have continued to have a negative impact on share price discounts
across the investment company sector, with the average level of discount
currently standing at c.15.2%*.
* Source: Winterflood Investment Trusts
It is the Board’s policy to buy back our shares if the Company’s share
price discount to the net asset value per share exceeds 6% on an ongoing
basis. Shareholders should note, however, that it remains possible for the
discount to be greater than 6%, particularly when sentiment towards the
Company, the sector and to investment trusts generally remains poor. In such
an environment, buybacks may prove unable to prevent the discount from
widening. However, they enhance the net asset value per share for remaining
shareholders and go some way to dampening discount volatility, which can
adversely affect investors’ risk adjusted returns. Therefore, the
Company’s share buy-back policy remains unchanged.
During the period under review, the Company regularly repurchased shares. A
total of 42,028,574 shares were repurchased for treasury at a cost of £133.4m
and at an average discount of 9.3%. The total number of shares shown to have
been repurchased during the period has been adjusted to reflect the share
split which took effect from 27 July 2023.
At the period end, there were 584,179,056 shares in issue (excluding the
17,486,144 shares held in treasury). Since the period end to 21 November 2023,
a further 11,923,082 shares have been bought back for treasury, at a cost of
£35.8m and at the time of writing, the share price discount stands at 10.7%.
In line with the Company’s stated policy, I confirm that 4,892,258 shares
held in treasury following the date of the Company’s Annual General Meeting
in July 2022, were cancelled. The cancellation took place prior to the share
split. The Company currently holds 29,409,226 shares in treasury.
DIVIDENDS
The Board has declared an interim dividend of 0.7p per share, for the year to
31 March 2024, which will be payable on 11 January 2024 to shareholders on
the register of members on 24 November 2023. The associated ex dividend date
is 23 November 2023. Last year the Company paid an interim dividend of 7.0p
per share. The level of this year’s interim dividend per share is the same
level as last year taking account of the share split which became effective on
27 July 2023.
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
Having joined the Company’s Board in 2016, Humphrey van der Klugt has
expressed his intention to retire as a Director at the conclusion of next
year’s Annual General Meeting, to be held on 10 July 2024. Humphrey became
Chair of the Audit & Risk Committee in September 2016, handing over this role
to Tim Livett in March of this year. Humphrey’s accounting and investment
management experience, as well as his leadership, wisdom and probing
questions, have been very valuable to the Board’s deliberations - he will be
missed. The process of finding a new Director has begun and the Board will
keep shareholders informed of the progress made.
OUTLOOK
Macroeconomic conditions continue to be difficult. Against a backdrop of high
interest rates and volatile markets, equity investment remains challenging.
This includes investing in the healthcare sector. However, the fundamentals of
the healthcare sector remain strong.
As our Portfolio Manager sets out in their report, they are positive about the
outlook for the healthcare sector. At some point, investment fundamentals will
again reassert themselves over the macro environment. Our Portfolio Manager
expects the currently elevated level of merger and acquisition activity to
continue, supported by attractive valuations, healthy balance sheets and,
within the larger pharmaceutical and biotechnology sub-sectors, a need to
address future patent expirations. In addition, the pace of scientific and
technological development within the healthcare sector more broadly will
remain unchecked, with clinical and technological catalysts providing a
regular flow of significant share price moving events.
As an indication of the continued strong demand for healthcare investment
opportunities amongst professional investors, it is encouraging that in recent
weeks our Portfolio Manager has been successful in raising three new funds
totalling in excess of U.S$4.3bn to invest in venture capital, royalties and
Asian healthcare companies.
Doug McCutcheon
Chair
22 November 2023
PORTFOLIO
AS AT 30 SEPTEMBER 2023
Market value % of
Investments Sector Country £’000 investments
Novo Nordisk Pharmaceuticals Denmark 133,917 6.3
AstraZeneca Pharmaceuticals Britain 124,043 5.9
Boston Scientific Health Care Equipment & Supplies United States 111,522 5.3
Humana Health Care Providers & Services United States 103,638 4.9
Intuitive Surgical Health Care Equipment & Supplies United States 93,422 4.4
Merck Pharmaceuticals United States 72,989 3.4
Eli Lilly Pharmaceuticals United States 71,276 3.4
BioMarin Pharmaceutical Biotechnology United States 70,085 3.3
Daiichi Sankyo Pharmaceuticals Japan 70,032 3.3
Sanofi Pharmaceuticals France 69,665 3.3
Top 10 investments 920,588 43.4
Roche Pharmaceuticals Switzerland 66,336 3.1
Eisai Pharmaceuticals Japan 60,173 2.8
Biogen Biotechnology United States 59,855 2.8
Tenet Healthcare Health Care Providers & Services United States 51,933 2.4
Stryker Health Care Equipment & Supplies United States 49,959 2.4
Baxter International Health Care Equipment & Supplies United States 48,558 2.3
Thermo Fisher Scientific Life Sciences Tools & Services United States 46,882 2.2
Ionis Pharmaceuticals Biotechnology United States 46,721 2.2
Caris Life Sciences* Life Sciences Tools & Services United States 45,531 2.1
Evolent Health Health Care Providers & Services United States 44,400 2.1
Top 20 investments 1,440,937 68.0
Mirati Therapeutics Biotechnology United States 43,372 2.0
United Therapeutics Biotechnology United States 41,366 2.0
Cigna Group Health Care Providers & Services United States 39,846 1.9
Sarepta Therapeutics Biotechnology United States 31,865 1.5
Vertex Pharmaceuticals Biotechnology United States 31,624 1.5
AbbVie Pharmaceuticals United States 31,150 1.5
R1 RCM Health Care Providers & Services United States 31,052 1.5
Neurocrine Biosciences Biotechnology United States 30,173 1.4
UnitedHealth Health Care Providers & Services United States 28,919 1.4
SI-BONE Health Care Equipment & Supplies United States 26,138 1.2
Top 30 investments 1,776,443 83.8
Apellis Pharmaceuticals Biotechnology United States 24,767 1.2
Natera Life Sciences Tools & Services United States 23,398 1.1
GSK Pharmaceuticals Britain 22,869 1.1
Shanghai Kindly Medical Instruments Health Care Equipment & Supplies China 21,364 1.0
ICON Life Sciences Tools & Services United States 20,960 1.0
WuXi AppTec Life Sciences Tools & Services China 20,434 1.0
Vaxcyte Biotechnology United States 20,025 0.9
Madrigal Pharmaceuticals Biotechnology United States 19,384 0.9
Crossover Health* Health Care Providers & Services United States 17,407 0.8
New Horizon Health Life Sciences Tools & Services China 15,300 0.7
Top 40 investments 1,982,351 93.5
Beijing Yuanxin Technology* Health Care Providers & Services China 15,207 0.7
EDDA Healthcare & Technology* Health Care Equipment & Supplies China 14,838 0.7
Wuxi Biologics Life Sciences Tools & Services China 14,072 0.7
VISEN Pharmaceuticals* Biotechnology China 13,621 0.6
Jiangxi RiMAG* Health Care Providers & Services China 11,692 0.6
Ruipeng Pet Group* Health Care Providers & Services China 11,015 0.5
Iovance Biotherapeutics Biotechnology United States 10,657 0.5
Xenon Pharmaceuticals Biotechnology Canada 10,038 0.5
uniQure Biotechnology Netherlands 7,410 0.3
Akero Therapeutics Biotechnology United States 7,252 0.3
Top 50 investments 2,098,155 99.0
MabPlex* Health Care Providers & Services China 6,021 0.3
Innovent Biologics Biotechnology China 5,962 0.3
Ikena Oncology Biotechnology United States 5,769 0.3
Shanghai Bio-heart Biological Technology Health Care Equipment & Supplies China 3,640 0.2
Dingdang Health Technology Health Care Providers & Services China 2,658 0.1
API Holdings* Health Care Providers & Services India 1,976 0.1
Passage Bio Biotechnology United States 1,121 0.1
Peloton Therapeutics - Milestone* Biotechnology United States 512 0.0
Total equities 2,125,814 100.3
Equity Swaps
Healthcare M&A Target Swap Basket Swaps United States 101,053 4.8
Catalyst Swap Basket Swaps United States 12,736 0.6
Apollo Hospitals Enterprise Health Care Providers & Services India 13,467 0.6
WuXi AppTec Life Sciences Tools & Services China 18,543 0.9
Less: Gross exposure on financed swaps (151,571) (7.1)
Total Equity Swaps (5,772) (0.3)
Total investments including OTC Swaps 2,120,042 100.0
* Unquoted holding.
SUMMARY
Market value % of
Investments £’000 investments
Listed Equities 1,987,993 93.8
Unquoted Equities 137,821 6.5
Equity Swaps (5,772) (0.3)
Total of all investments 2,120,042 100.0
PORTFOLIO MANAGER’S REVIEW
MARKETS
In the post-pandemic era, major macro factors have clearly been the largest
influencers shaping global equity returns. Extreme inflationary pressures, the
invasion of Ukraine, supply chain issues, and recessionary fears all helped
push equity markets lower in 2022. So far in 2023, declining recessionary
fears and a soft landing for the economy, despite continued upward pressure
for interest rates, has the broad market rebounding. To note, the total
returns in sterling terms for the MSCI World Index for the calendar year to
the end of September was +11.6%, the S&P 500 was +12.0%, and the FTSE
All-Share was +4.3% (source: Bloomberg).
However, 2023 has been difficult for healthcare stocks. In fact, relative
performance versus the S&P has been the worst in over 20 years, with a -18%
spread of share price underperformance for healthcare (in sterling terms)
since the start of the calendar year. The primary issue – again – was
macro in nature. Specifically, a recession did not materialise in 2023, the
economy has been more robust than anticipated, and investors have chased
growth, mostly in technology and communication stocks. Interest rates being
“higher for longer” exacerbated this situation. This has neutralised the
defensive aspects of healthcare stocks and marginalised absolute performance
this year.
PERFORMANCE
For the period under review, the Company produced a net asset value total
return of -0.6% whilst the share price total return was +0.1%. This
performance lagged the Benchmark total return of +0.8% (MSCI World Healthcare
Index). Multiple factors weighed on both absolute and relative performance.
First and foremost, absolute returns were impacted by a lagging healthcare
sector, as discussed on the prior page. With a more robust-than-expected
economy, healthcare share price returns were mostly flat to down in the period
(save for large capitalisation stocks, up modestly on average). The macro
impact on performance can better be identified by breaking down the six-month
period into individual segments. The only segment where healthcare stocks
enjoyed a respite from the macro overhangs was predominantly in April and May
2023. During this period, the fate of the economy was still being debated and
markets were stable and moved higher as did healthcare stocks. Stock picking
mattered, positive catalysts were rewarded, and the Company’s performance
was strong at over a 7% return, more than 5% ahead of the Benchmark.
However, the macro environment reversed at the end of May and into June and
July. Investor confidence in the economy inflected, technology stocks rallied,
and the S&P 500 hit an all-time high at the end of July. During this period,
healthcare stocks lagged materially, fundamentals of the sector were muted,
and catalysts were punished. Biotechnology stocks were particularly
out-of-favour, indiscriminately falling nearly 15% (in U.S.$ terms). This was
reflected in the Company’s absolute and relative performance.
The final two-months of the period were a mix of both macro and fundamental
influences. On the macro front, a downgrade of the U.S. credit rating and
messaging that interest rates would be “higher for longer” paused the
broad market rally. Fundamentally, interest in healthcare stocks re-ignited
with the better-than-expected disclosure of the cardiovascular benefits of
Novo Nordisk’s weight-loss drug, Wegovy (semaglutide), in August, although
it was partially offset by a sell-off in medical technology stocks as a
result.
In the six-month period, the largest contribution came from investments in
large capitalisation pharmaceutical stocks, most notably Novo Nordisk and Eli
Lilly. The phenomenon that the “obesity drugs” have become is real, given
the outstanding weight loss efficacy and now the objective disclosure that
these drugs can significantly lower the possibility of overweight patients
experiencing heart attack, stroke, or death due to a cardiovascular event.
This buoyed investor (and patient) enthusiasm and share prices reflected this
accordingly. On a relative basis, attribution from large capitalisation
pharmaceutical stocks was modestly negative due to allocation, as this sector
remains a strategic underweight in the portfolio.
Another important source of contribution came from medical technology stocks
in the period. A number of fundamental tailwinds attracted investor flows,
including increased procedural volumes due to a clear inflection in demand and
utilisation of healthcare services (post the pandemic), a positive pricing
environment, and easy year-over-year comparisons. Relative contribution was
even more impressive given positive stock picking in the period. Total
contribution was partially clipped after the cardiovascular benefit of the
aforementioned weight loss drugs was disclosed, as investors feared lowered
future demand from the medical technology industry and much of the sector sold
off.
The Company’s net underperformance was primarily due to allocation in
biotechnology stocks, particularly small and mid-capitalisation biotechnology.
This sub-sector was down by 3% (in sterling total return terms) in the
reported period and down 13% in the calendar year (as measured by the SPDR S&P
Biotech ETF (XBI)). The sub-sector continued to be out of favour with
investors, especially in this prolonged high interest rate environment. In
fact, the performance of the XBI made new records as it continued its
drawdown, now the longest ever at over 31 months since the peak and the
largest as well, now -76% relative to the S&P (as of 29 September 2023). The
negative contribution from biotechnology was partially exacerbated by stock
picking, with some notable idiosyncratic negative catalysts that occurred
during the six-month period.
Another sub-sector of import that contributed to the negative performance was
the investment in Japanese pharmaceutical stocks, predominantly due to stock
picking. Also of note were unquoted (private) holdings which detracted 0.3%.
UNQUOTED HOLDINGS
During the half year, the Company strategically refrained from making new
investments in unquoted (private) companies, as we continued to cautiously
navigate the challenging public offering market for small and
mid-capitalisation therapeutic firms. The capital market funding landscape has
been improving and we are optimistic about the ability of some of our unquoted
investments to achieve listings within the next year.
As of the half year end, unquoted company investments made up 6.5% of the
Company’s portfolio, a slight decrease from 6.7% on 31 March 2023. The
existing unquoted portfolio demonstrates a diverse and forward-looking
approach. Geographically, exposure is evenly distributed among emerging
markets and North American companies. On a sub-sector basis, the exposure is
concentrated in services and life science tools, with small exposures to
biotechnology and medical technology.
During the period under review, the Company’s unquoted investments returned
a loss of £7.3 million, from an opening market value of £145.2 million
across 11 positions, an implied return of -5.1% which detracted -0.3% from
performance. Unfortunately, this negative return was exclusively driven by a
single investment in India, API Holdings (better known as PharmEasy), that
experienced a material write-down in its valuation. The company was compelled
to accept a capital infusion at a distressed valuation after a planned IPO was
delayed due to adverse market conditions, leading to a funding shortfall,
including a potential breach of a debt covenant. Otherwise, eight out of 11
investments posted small positive returns in the period, including North
American unquoted holdings returning a gain of £4.3 million. Given the
emerging positive trends in the market and our strategic approach, we remain
confident in the future performance of our unquoted investments.
Overall, we remain proud of performance since inception over 28-plus years.
Since its inception as of 28 April 1995, the Company’s net asset value has
posted a +4,189% return, a 42x multiple for an average of +14.1% per annum
through to the end of the half year. This compares to a benchmark return of
+2,206% and +11.7% per annum over the same investment horizon, and a FTSE All
Share Index return of +588% and +7.5%.
MAJOR CONTRIBUTORS TO PERFORMANCE
The pursuit of innovation is a longtime hallmark of the Company. In 2023, the
cardiometabolic therapeutic category reached a new level of innovation with
semaglutide, a best-in-class “GLP-1” agonist approved for the treatment of
diabetes (Ozempic) and obesity (Wegovy), a medication from the leader in this
space, Novo Nordisk. Whilst Ozempic was first approved in 2017, and
reformulated as Wegovy in 2021, landmark data was announced in August 2023, in
the form of the “SELECT” trial. This was a global study in nearly 18,000
patients over five years that unequivocally showed a -20% drop in the risk of
an obese patient suffering a “MACE” event (heart attack, stroke, or
cardiovascular related death) by taking a once-weekly injection of Wegovy.
This data surpassed all investor expectations and moved this drug from a
lifestyle intervention into a chronic care medicine that can prolong a
patient’s life. So far, the demand for Wegovy in the U.S. has been
insatiable, and the company is literally selling everything they can make.
Despite the supply constraints, sales of the semaglutide franchise are
annualising at U.S.$10 billion per annum. These sales could reach U.S.$50
billion or more, as the company is developing the drug in a host of additional
indications, including heart failure, fatty liver disease, sleep apnea, kidney
disease, peripheral arterial disease, and even Alzheimer’s disease. With
additional manufacturing coming online into 2024, we expect a potential
doubling of Wegovy sales next year. In the nine months to 29 September 2023,
the stock appreciated nearly 40% (in local currency terms) to become the
largest company in Europe by market capitalisation (source: Bloomberg).
Another top contributor in 2023, also an undisputed leader in innovation, is
Eli Lilly. The U.S.-based pharmaceutical company, like Novo Nordisk, has a
long history in the diabetes and GLP-1 space. The company’s most recent
offering is Mounjaro (tirzepatide), a dual GLP-1 and “GIP” agonist. Whilst
approved for diabetes in 2022, the company presented additional data in
obesity in 2023, showing weight loss eclipsing 20% and even approaching 25% in
some cases. This dual-agonist therapy has pushed weight loss to new levels and
the company benefitted materially from the SELECT trial, with investors (and
the company) assuming that “more is better”: the cardiovascular benefits
shown by Wegovy should extend to Mounjaro, if not moreso, given the superior
weight loss profile. Sales of Mounjaro have already reached U.S.$1 billion per
quarter, with the obesity indication still pending approval by the U.S. Food
and Drug Administration (FDA) by year-end.
Another driver of share price in 2023 for Eli Lilly was their efforts in
Alzheimer’s disease. Specifically, the company announced in May that their
antibody for removing amyloid plaque from the brain (donenemab) significantly
slowed cognitive and functional decline in a phase III study in early
Alzheimer’s disease patients by 35%. This was an impressive result, becoming
only the second molecule to demonstrate disease modifying effects. The drug is
still pending approval by the FDA by year end. During the period under review,
the stock appreciated over 50% (in U.S.$ terms) to become one of the ten
largest companies in the world by market capitalisation (source: Bloomberg).
One of the true pioneers of robotic-assisted surgery is Intuitive Surgical, a
medical equipment company based in California that developed the da Vinci
Surgical System – a combination of software, hardware, and optics that
allows doctors to perform robotically aided surgery from a remote console. In
the quarter proceeding the current financial year, the company’s share price
came under pressure due to concerns around a slowdown in the hospital capital
equipment spending cycle and a delay to their next generation surgical robot.
However, in the reported period, the company drove a material inflection in
procedure volume growth rates given a combination of rebounding U.S. surgical
volumes, further adoption of Intuitive technology in international markets
such as China, and uptake of new robotic instruments that allow for new
procedure indication expansion. Moreover, elevated procedure volumes led to
increased robotic system purchases as hospitals become capacity constrained
and needed to add new robots. Looking forward, the combination of heightened
research & development levels over the past several years and historical
system launch timelines suggest the company is on the verge of another new
system launch, an event that would be a strong catalyst for their shares.
Mirati Therapeutics is a clinical stage precision oncology company located in
San Diego, California. The company’s lead asset, adagrasib (MRTX849), is an
investigational, highly selective and potent oral small molecule inhibitor of
KRAS, a critical target to treat KRAS-mutated cancers commonly found in lung,
colorectal and pancreatic cancers. The development programme over the past
three plus years has been mixed. However, in August of 2023, the company
concurrently announced several updates, including the return of their
well-regarded former CEO, positive clinical updates from two ongoing
development programs focused on lung cancer, and a U.S.$345 million financing.
Shares responded positively as these updates renewed investors’ interest in
the company. We would also note that shortly after the reported period,
Bristol-Myers Squibb announced its intention to acquire Mirati Therapeutics
for an equity value of U.S.$4.5 billion and a total consideration of up to
U.S.$5.8 billion, representing a 52% premium to the 30-day volume-weighted
average price (VWAP) as of the unaffected 4 October 2023 close.
Ionis Pharmaceuticals is a leader in RNA-targeted therapeutics, with a focus
on neuro, orphan, and cardiometabolic diseases. Its antisense platform works
by binding and destroying a messenger RNA (mRNA) in a highly specific manner,
such that the amount of disease-causing protein is significantly decreased.
The technology can also be used to treat disease by increasing protein
production; this led to the development of one the most successful medicines
on the market today, Spinraza (nusinersen), for spinal muscular atrophy (SMA).
The company has made tremendous progress in the last 12 months on both wholly
owned and partnered programmes, creating significant value for shareholders.
Late last year, the company reported positive Phase II data from open label
extension study of donidalorsen, a key pipeline asset, in patients with
hereditary angioedema (HAE). The 95%+ reduction in HAE-attacks in the monthly
dosing arm was unprecedented, suggesting its potential to be a new standard of
care in HAE. In April, Ionis Pharmaceuticals together with Biogen, announced
the approval of Qalsody (tofersen), marking a major scientific advance in
treatment of a specific form of amyotrophic lateral sclerosis (ALS). Following
a very successful Phase 3 study in transthyretin polyneuropathy, we expect
eplontersen (developed with partner AstraZeneca) to be approved on 22 December
2023. In September, the company announced positive olezarsen topline data from
Phase III study in patients with familial chylomicronemia syndrome (FCS);
impressively, the drug eradicated acute pancreatitis events versus placebo,
making this another important medical breakthrough.
MAJOR DETRACTORS FROM PERFORMANCE
In Japan, Daiichi-Sankyo has emerged as the global leader in next generation
antibody-drug conjugates (ADCs). Unlike conventional chemotherapy treatments,
which can damage healthy cells, ADCs are a construct of a targeted medicine
linked to chemotherapy agents that only attack cancer cells. Daiichi-Sankyo
has created new breakthroughs in this technology that has led to new levels of
efficacy and survival in cancer patients across a host of tumour types. Their
first commercial offering, Enhertu (fam-trastuzumab deruxtecan-nxki) has
already achieved blockbuster status, becoming the new standard of care in
metastatic breast cancer (with HER2+ expression). Hence, investor enthusiasm
increased for their second ADC offering, Dato-DXd (datopotamab deruxtecan),
and its role in treating lung cancer. Rising expectations pushed the stock to
an all-time high in June 2023. However, a press release in July 2023,
confirmed that the first Phase III trial for Dato-DXd in lung cancer met its
primary endpoint of progression free survival, whilst the final overall
survival metric was not yet reached. Coupled with equivocal qualitative
language about clinical significance of this finding, plus potentially worse
than expected safety, pushed the stock price lower, falling over 25% (local
currency) from its high over the subsequent month. We believe this reaction
was overdone due to a misinterpretation of the company’s press release. We
held the stock in anticipation of further data disclosures.
Nonalcoholic steatohepatitis, or NASH, is a severe form of fatty liver
disease, a condition in which the liver builds up excessive fat deposits. Over
time, inflammation, fibrosis, and cirrhosis can occur, leading to liver
failure. With few options to treat this deadly condition and a huge prevalence
globally, the commercial opportunity is large. Madrigal Pharmaceuticals is a
clinical-stage biopharmaceutical company based in Pennsylvania, pursuing novel
therapeutics for the treatment of NASH. Their primary pipeline asset,
resmetirom, is a thyroid hormone β-receptor agonist which is believed to play
a role in liver health. It has shown promising data in late stage, pivotal
trials for this disease. However, the emergence of data for the GLP-1 class of
drugs (for the treatment of diabetes and obesity from Eli Lilly and Novo
Nordisk) have shown significant ability to reduce liver fat accumulation,
decrease inflammation, and prevent the progression of fibrosis in patients
with NASH. This finding dramatically hurt investor sentiment for all NASH
players, including Madrigal. Pharmaceuticals Share price declines were
exacerbated by a change in the CEO chair and a subsequent financing, which
removed the takeout premium in the stock.
Massachusetts-based Apellis Pharmaceuticals is developing treatments for
diseases driven by overactivation of the “complement system”, a complex
ecosystem of plasma proteins in the blood that work together to fight
infection. The company has two commercial products which are different
formulations of pegcetacoplan, an inhibitor of the complement protein
“C3”. The first, Empaveli, a systemic formulation for the treatment of a
rare blood disease called paroxysmal nocturnal haemoglobinuria, a disease that
involves the destruction of red blood cells and can present as anaemia, blood
clots, bone marrow failure, and can be lethal. The second is Syfovre, an “in
the eye” formulation for the treatment of an age-related macular
degeneration called geographic atrophy (GA) which leads to blindness. Approved
by the FDA in February 2023, Syfovre was the first marketed therapy for the
treatment of GA. Apellis Pharmaceuticals shares rose in mid-2023 as the
commercial launch of Syfovre was very successful with rapid adoption. However,
in July 2023, shares fell sharply on an unexpected report of severe safety
events, called retinal vasculitis, that worsened vision in a handful of
patients following treatment with Syfovre. Nevertheless, sales of Syfovre have
continued to increase quarter-over-quarter despite the risk of retinal
vasculitis. We held the stock as we believe the share price overly discounted
the risk of this rare adverse event compared to its important benefit.
The Netherlands-based gene therapy player, UniQure, is a clinical-stage
company that focuses on neurological disorders. Gene therapy, whilst still
somewhat nascent, represents an incredible leap in innovation that has
curative properties. Thecompany’s lead asset is a novel gene therapy,
AMT-130, for Huntington’s disease, an inherited disorder that causes cells
in parts of the brain to gradually degenerate and die, progressively impacting
a person’s functional abilities and results in movement, cognitive, and
psychiatric disorders. However, in June 2023 the company provided a mixed
interim update from its Phase I/II trial for AMT-130, which raised investor
concern over target engagement of the gene therapy. That said, we were
encouraged by the totality of the data, including the early indication of
function benefit across multiple measures.
The global pharmaceutical company, Bristol-Myers Squibb, is well known for its
leadership in oncology, with major cancer franchises in both immuno-oncology
and multiple myeloma. However, both franchises are aged and have reached or
are nearing expiration of exclusivity. With a declining topline, the
company’s price-to-earnings multiple has compressed to below 10x, creating
the most heavily discounted stock in the large cap pharmaceutical space.
However, this “value play” turned into a “value trap” in 2023. The
company has had one of the most productive pipelines in the industry over the
past three years, with new approvals in immunology, haematology, oncology, and
cardiovascular disease. However, commercial execution of the many new product
launches has underwhelmed, and a top line renaissance has so far failed to
materialise. The share price has subsequently fallen further as has the
multiple. We exited the stock during the period but will look to revisit the
investment opportunity in 2024 where perhaps utilisation and reimbursement of
their new drug portfolio may inflect.
DERIVATIVE STRATEGY
The Company has the ability to utilise equity swaps and options as part of its
financial strategy. Throughout the financial year, the Company leveraged
single stock equity swaps to access Chinese and Indian investments in emerging
markets, which would otherwise be inaccessible through more traditional
investment methods. During the period under review, single stock equity swaps
contributed £7.1 million to performance, and we remain confident in the
long-term prospects of emerging market securities, particularly those trading
locally in mainland China.
Additionally, the Company strategically invested in two customised tactical
basket swaps, targeting growth opportunities in undervalued small and
mid-capitalisation therapeutic companies. These baskets were constructed to
capitalise on two prevailing themes that we anticipate will deliver strong
returns in the current financial year: 1) investment opportunities possessing
considerable potential as attractive acquisition targets for larger
corporations, and 2) those exhibiting a favourable risk/reward profile in
light of upcoming clinical catalysts.
During the period under review, the basket swaps detracted £8.0 million from
performance, primarily due to their direct exposure within the emerging
biotechnology space, which remained under pressure.
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. For example, around the beginning of the COVID-19 pandemic
in March 2020 after the dramatic “V”-shape market recovery of April 2020,
leverage was significantly reduced by over 10% month-over-month, to 3% and
ultimately to 1% in May 2020. Another example includes lowered leverage ahead
of and into the U.S. Presidential election, under the threat of a Democratic
“sweep” of the U.S, Congress.
In 2023, we have flexed leverage modestly in response to the economic climate,
including in consideration of a putative recession and interest rate
fluctuations and speculation. Most recently, we increased leverage back into
the low-to-mid-teens, a reflection of our overall bullishness on the
portfolio, a hopeful turn in biotechnology stocks, and the relative outlook
for healthcare ahead of a potential recession. One caveat that keeps us from
extending leverage even further, is the continued volatile and uncertain macro
backdrop, either economic in nature or even further geopolitical risk factors.
SECTOR DEVELOPMENTS
The plethora of innovation that underpins our positive investment stance in
healthcare has certainly continued in 2023. Whilst not a perfect scorecard,
the number of new drug approvals by the FDA in 2023 is once again at a record
pace. With 51 new drug approvals through the end of September and at least
another 14 novel applications with user fee deadlines by the end of the year
(source: Washington Analysis), the potential to eclipse recent highs is almost
a certainty in 2023.
Interestingly, the contribution of new vaccines, cell therapy, and gene
therapy to the new product approvals (from the Center for Biologics Evaluation
and Research – CBER) has clearly inflected over the past three plus years,
representing a paradigm shift in technological advancement of novel
medications and platforms. Over the past three and a half years, there have
been 31 approvals compared to eight in the previous four years – yet another
key metric in the accelerating innovation engine in bio-pharmaceuticals.
Moreover, after a down year in 2022, the past six plus years have been the
most productive in industry history, with nearly 350 new product approvals
during that span.
Despite a continued – if not accelerated – innovation stemming from the
biotechnology industry, valuations have lagged in historical fashion.
According to the annual IQVIA audit of therapeutic company pipelines, the
number of clinical assets in development has increased more than 70% since
2016 across more than15 categories. We note that these numbers exclude
COVID-related programs. This has pushed the cumulative number of product
pipelines in the industry to all-time highs.
Of this incredible productivity, we note that effectively two-thirds of this
innovation comes from emerging biotechnology companies, which represent a core
holding in the portfolio and have been a strategic investment target of ours,
historically. However, in this more recent macro-driven environment, the
industry has not been rewarded and valuations are so depressed, that the net
return of the XBI is below June 2015 levels by 12%, compared to returns of the
healthcare sector of 80%; the S&P 500 which returned 142%; and the NASDAQ
which returned 189% over this same period. We expect this valuation gap to
close.
Specific examples of innovation are plentiful. In 2022, we focused on some
specific development opportunities that we believed could deliver “The Next
Big Thing” in healthcare, including oncology, obesity, and Alzheimer’s
disease. In 2023, the industry delivered.
First in oncology, the leaders in antibody drug conjugate (ADC) technology,
Daiichi-Sankyo (and partner AstraZeneca), have achieved blockbuster status
with Enhertu (fam-trastuzumab deruxtecan-nxki), the breast cancer drug for
patients with metastatic disease who express any level of the protein called
HER2+. Data for the company’s latest ADC offerings, Dato-DXd and HER3-DXd,
were also presented in the period and we expect regulatory filings as soon as
this year.
In immuno-oncology, Roche (unintentionally) disclosed data for their next
generation agent, tiragolumab (an anti-TIGIT agent), showing a 20% benefit on
top of the standard of care in progression free survival in lung cancer
patients. We are eagerly awaiting more mature data sets in this setting in
2024. AstraZeneca also announced two critically important data sets for their
best-in-class targeted therapy Tagrisso (Osimertinib), which is used to treat
lung cancer patients with a specific EGFR mutation. These data sets included
usage in early stages of the disease (showed a 51% reduction in death) and in
combination with chemotherapy (38% reduction in progression free survival or
death) compared to simply taking Tagrisso alone. These new indications for
Tagrisso will put upward pressure on sales estimates and/or aid in fending off
incoming competition.
Without question, obesity has become the “hot” space in therapeutics in
2023. The advancement of the GLP-1 drugs beyond diabetes and into weight loss
has caught the attention of investors and the public alike. In 2023, we
learned of best-in-class weight loss, at more than 20%, for Eli Lilly’s
Mounjaro (tirzepatide) in obese patients. We expect Eli Lilly to launch
tirzepatide for obesity early in 2024. Not to be outdone, Novo Nordisk
confirmed unprecedented cardiovascular benefit of Wegovy (semaglutide) in
obese patients in a five-year landmark trial called SELECT. Competition
rushing to this space has been significant, but 2023 also demonstrated the
stranglehold that both Eli Lilly and Novo Nordisk have here.
The opportunity for GLP-1 drugs is immense, and it does not stop with just
diabetes and weight loss. Rather, the impact of these “incretins” may have
beneficial effects across multiple organs and disease states. The list of
conditions and co-morbidities, for example, that Novo Nordisk is pursuing
includes heart failure, kidney disease, sleep apnea, peripheral arterial
disease, and even Alzheimer’s disease. Phase III data is already presented
or in-house at the company for heart failure and kidney failure. We look
forward to additional data sets from both Novo Nordisk and Eli Lilly for years
to come.
Finally, a word on Alzheimer’s disease. We have previously described this
category as the “Holy Grail” of new drug development, owing to the huge
unmet medical need, large global prevalence, and potential for lucrative price
flexibility. Whilst now overshadowed by the obesity category, Alzheimer’s
disease still represents a huge opportunity with mega-blockbuster prospects,
where individual medicines could reach over U.S.$10 billion per product per
annum. 2023 bore witness to the first ever full FDA approval for a novel,
disease modifying drug, in this case, Leqembi (lecanemab) from Eisai of Japan
and their U.S. partner, Biogen. The drug launched in March 2023 and we await
key sales milestone in 2024 and beyond.
Eli Lilly was the second company to announce positive Phase III data for yet
another disease modifying agent, donanemab, for Alzheimer’s disease. Acting
on the same target, beta-amyloid, as Leqembi, donanemab may be more
efficacious at slowing cognitive decline but perhaps with some increased side
effect concerns (transient brain swelling). The company expects approval
before the end of 2023. We expect a meaningful launch in 2024.
Another key investment theme we have been monitoring is the pace of mergers
and acquisitions in the therapeutics space, fuelled by distressed
biotechnology valuations, and a looming wave of drug patent expirations for
the large cap pharmaceutical companies. This has created a very positive
environment for deal making as high interest and a quiet initial public
offering market has created some barriers to access for capital. 2023 is on
pace for a record year, with 21 deals so far in the financial year, including
four deals alone in the first three weeks of October. We certainly expect the
number of transactions this year to eclipse the previous financial year (29)
with total deal value potentially surpassing U.S.$100 billion.
A new emerging regulatory theme is a more activist Federal Trade Commission
(“FTC”), which has increasingly opposed mergers & acquisitions. Within
healthcare, the FTC has opposed the Amgen/Horizon Therapeutics acquisition and
is reviewing the Pfizer/Seagen transaction. In some cases, the FTC is relying
on novel and unproven theories, for example that a merger could hamper
innovation and slow the pace of drug development. Our focus (and a key return
driver) is on smaller biotechnology companies that are acquired by larger
pharmaceutical companies, transactions that remain largely uncontested by the
FTC. That said, in September 2023 the FTC relented and has allowed the Horizon
transaction to move forward to completion. The Seagen acquisition appears to
have been less acrimonious and we expect that to also conclude favourably
before the end of the year.
The Inflation Reduction Act (IRA) of 2022 has further advanced in 2023, with
the most recent development being the disclosure by the Centers for Medicare &
Medicaid Services (CMS) its list of 10 drugs up for the first price
negotiations under the IRA. The list contained a mix of expected drugs, such
as Eliquis and Xarelto for cardiovascular disease, and unexpected drugs, like
Jardiance, Farxiga, and Fiasp for diabetes. We conclude that it was mostly
benign. The majority of drugs are facing imminent patent expirations and or
generics anyhow, including Eliquis, Xarelto, Januvia, Entresto, Enbrel,
Imbruvica, Farxiga, and Stelara. This blunts much of the impact that a lower
Medicare price will bring to the financials of these companies. As we have
postulated before, the net impact of the IRA is negative, but mostly
manageable by the industry. That said, the mix of drugs listed for the first
cycle of negotiation does raise some questions, including: How were they
selected by CMS? How were total sales calculated? Were there any political
motivations? Were new formulations protected? Some of these answers may become
more transparent in 2024.
The industry is not accepting the immediate consequences of the IRA. We note
that several companies have sued the Biden administration on the IRA including
Bristol-Myers Squibb, Johnson & Johnson, Merck, AstraZeneca, Novartis, and
Boehringer Ingelheim. In addition, the lobby group Pharmaceutical Research
Manufactures of America and the U.S. Chamber of Commerce sued as well. We do
note that Astellas withdrew their suit after their cancer drug, Xtandi,
unexpectedly did not make the list.
There are a host of arguments that are being made by the industry that are
questioning the constitutionality of IRA, whilst AstraZeneca has claimed the
IRA contravenes the Orphan Drug Act. Tactically, the industry is taking a
“shots on goal” approach. In other words, any judge from any district from
any court in any of these cases could rule in favour of the industry on any
argument. Even a SINGLE ruling against the government could halt the drug
price negotiations portion of the IRA. Ultimately the Supreme Court will have
the final say. We do not expect these legal proceedings to result in any
near-term victory by the industry, and any potential preliminary injunction,
whilst possible, would be an upside surprise. Nevertheless, this accumulation
of legal proceedings allows the industry to maintain optionality to quash
price negotiations anytime ahead of the 2026 enactment of the drug price
negotiation clause of the IRA.
OUTLOOK
Whilst the investment backdrop for healthcare has been challenging, the state
of the industry is strong. The long-term growth potential of healthcare
remains, underpinned by global demographics, aging populations, and constant,
persistent demand. Innovation, the true hallmark of the Company, continues to
advance in unparalleled fashion. Innovation is not just in the domain of
biotechnology, but across therapeutics, medical technology, patient services,
analytics, and platform technologies. Together, they are improving patient
care, advancing medical knowledge, and creating new medicines, with many that
now can offer a cure. The productivity in the therapeutics space continues to
be exceptional, with pipelines the fullest they have ever been, and the number
of new drug approvals at all-time highs. The inflection in M&A in the space is
just one testimony to this productivity, one that we believe will continue in
2024. We look forward to what next year brings, across the entirety of the
healthcare spectrum, as the growth of this industry continues to create a
multitude of exciting investment opportunities.
Sven H. Borho and Trevor M. Polischuk
OrbiMed Capital LLC
Portfolio Manager
22 November 2023
CONTRIBUTION BY INVESTMENT
PRINCIPAL STOCK CONTRIBUTORS TO AND DETRACTORS FROM ABSOLUTE NET ASSET VALUE
PERFORMANCE
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
Contribution
Contribution per share*
Top Five Contributors Sector Country £’000 p
Novo Nordisk Pharmaceuticals Denmark 27,228 4.5
Eli Lilly Pharmaceuticals United States 26,553 4.4
Intuitive Surgical Health Care Equipment & Supplies United States 19,329 3.2
Mirati Therapeutics Biotechnology United States 10,817 1.8
Ionis Pharmaceuticals Biotechnology United States 10,348 1.7
Top Five Detractors
Bristol-Myers Squibb ** Pharmaceuticals United States 12,246 (2.0)
UniQure Biotechnology Netherlands 14,545 (2.4)
Apellis Pharmaceuticals Biotechnology United States 14,617 (2.4)
Madrigal Pharmaceuticals Biotechnology United States 14,797 (2.4)
Daiichi Sankyo Pharmaceuticals Japan 17,996 (3.0)
* Based on 606,004,086 shares being the weighted average number in issue
during the period.
** Not held at 30 September 2023.
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 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 2023. The Board has noted that global markets are continuing to
experience unusually high levels of uncertainty and heightened geopolitical
risks. Against a background of rising interest rates and slowing economic
growth, risks associated with leverage and illiquid assets, especially in
combination, have become more elevated. The Board has investment guidelines in
place to mitigate these risks.
RELATED PARTY TRANSACTIONS
During the first six months of the current financial year no material
transactions with related parties have taken place which have affected the
financial position or the performance of the Company during the period.
GOING CONCERN
The Directors believe, having considered the Company’s investment
objectives, risk management policies, capital management policies and
procedures, the nature of the portfolio and expenditure projections, that the
Company has adequate resources, an appropriate financial structure and
suitable management arrangements in place to continue in operational existence
for the foreseeable future and, more specifically, that there are no material
uncertainties relating to the Company that would prevent its ability to
continue in such operational existence for at least 12 months from the date of
the approval of this half yearly financial report. For these reasons, they
consider there is reasonable evidence to continue to adopt the going concern
basis in preparing the accounts. In reviewing the position as at the date of
this report, the Board has considered the guidance issued by the Financial
Reporting Council.
As part of their assessment, the Directors have given careful consideration to
the next continuation vote to be held in 2024. As previously reported, stress
testing was carried out in May 2023, 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:
1. 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
1. the interim management report includes a true and fair review of the
information required by:
1. 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
2. DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last annual report that could
do so.
The Half Year Report has not been reviewed or audited by the Company’s
auditors.
This Half Year Report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the information
available to them up to the date of this report and such statements should be
treated with caution due to the inherent uncertainties, including both
economic and business risk factors, underlying any such forward-looking
information.
For and on behalf of the Board
Doug McCutcheon
Chair
22 November 2023
INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 2023 30 September 2022
Revenue Capital Revenue Capital
Return Return Total Return Return Total
£’000 £’000 £’000 £’000 £’000 £’000
(Losses)/Gains on investments – (11,111) (11,111) – 82,697 82,697
Foreign exchange losses – (6,791) (6,791) – (15,052) (15,052)
Income from investments (note 2) 12,481 – 12,481 9,295 – 9,295
AIFM, portfolio management, and performance fees (note 3) (411) (7,803) (8,214) (444) (8,430) (8,874)
Other expenses (686) – (686) (579) (22) (601)
Net return/(loss) before finance charges and taxation 11,384 (25,705) (14,321) 8,272 59,193 67,465
Finance charges (246) (4,673) (4,919) (61) (1,157) (1,218)
Net return/(loss) before finance 11,138 (30,378) (19,240) 8,211 58,036 66,247
Taxation (1,486) – (1,486) (323) – (323)
Net return/(loss) after taxation 9,652 (30,378) (20,726) 7,888 58,036 65,924
Return/(loss) per share (note 4)* 1.6p (5.0)p (3.4)p 1.2p 8.9p 10.1p
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.
* The comparative return per share figures have been restated to reflect
the ten for one share split. For weighted average purposes, the share split
has been treated as happening on the first day of the accounting periods.
STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£’000 £’000
Opening shareholders’ funds 2,150,721 2,268,233
Shares purchased for treasury (133,365) (36,086)
(Loss)/Return for the period (20,726) 65,924
Dividends paid – revenue (14,709) (12,721)
Closing shareholders’ funds 1,981,921 2,285,350
STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2023
(Unaudited) (Audited)
30 September 31 March
2023 2023
£’000 £’000
Fixed assets
Investments 2,125,814 2,186,417
Derivatives – OTC swaps 5,499 209
2,131,313 2,186,626
Current assets
Debtors 16,734 4,376
Cash and cash equivalents 43,642 58,925
60,376 63,301
Current liabilities
Creditors: amounts falling due within one year (198,497) (72,105)
Derivative – OTC Swaps (11,271) (27,101)
(209,768) (99,206)
Net current liabilities (149,392) (35,905)
Total net assets 1,981,921 2,150,721
Capital and reserves
Ordinary share capital – (note 5) 15,042 16,265
Capital redemption reserve 9,564 8,341
Share premium account 841,599 841,599
Capital reserve 1,097,282 1,261,025
Revenue reserve 18,434 23,491
Total shareholders’ funds 1,981,921 2,150,721
Net asset value per share – (note 6)* 339.3p 343.5p
* The comparative Net asset value per share figures have been restated to
reflect the ten for one share split. See notes 5 and 6 for further details.
CASH FLOW STATEMENT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
Note £’000 £’000
Net cash inflow/(outflow) from operating activities 8 5,174 3,678
Purchases of investments and derivatives (554,711) (460,385)
Sales of investments and derivatives 560,892 580,399
Realised losses on foreign exchange (2,218) (14,343)
Net cash inflow/(outflow) from investing activities 3,963 105,671
Issue of shares – –
Shares repurchased (133,365) (36,086)
Equity dividends paid (14,709) (12,721)
Interest paid (4,919) (1,218)
Net cash (outflow)/inflow from financing activities (152,993) (50,025)
Decrease/(increase) in net debt (143,856) 59,324
Cash flows from operating activities includes interest received of £1,885,000
(2022: £592,000) and dividends received of £10,135,000 (2022: £9,235,000).
RECONCILIATION OF NET CASH FLOW MOVEMENT TO MOVEMENT IN NET DEBT
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£’000 £’000
(Increase)/decrease in net debt resulting from cashflows (143,856) 59,324
Losses on foreign currency cash and cash equivalents (4,574) (709)
Movement in net debt in the period (148,430) 58,615
Net debt at 1 April 2,997 (87,003)
Net debt at 30 September (145,433) (28,388)
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The condensed Financial Statements for the six months to 30 September 2023
comprise the Income Statement, the Statement of Changes in Equity, the
Statement of Financial Position, the Cash Flow Statement and the
Reconciliation of Net Cash Flow Movement to Movement in Net Debt together with
the related notes below. They have been prepared in accordance with FRS 104
‘Interim Financial Reporting’, the AIC’s Statement of Recommended
Practice published in February 2021 (‘SORP’) and using the same accounting
policies as set out in the Company’s Annual Report and Financial Statements
at 31 March 2023.
GOING CONCERN
After making enquiries, and having reviewed the Investments, Statement of
Financial Position and projected income and expenditure for the next 12
months, the Directors have a reasonable expectation that the Company has
adequate resources to continue in operation for the foreseeable future. The
Directors have therefore adopted the going concern basis in preparing these
condensed financial statements.
FAIR VALUE
Under FRS 102 and FRS 104 investments have been classified using the following
fair value hierarchy:
Level 1 – Quoted market prices in active markets
Level 2 – Prices of a recent transaction for identical instruments
Level 3 – Valuation techniques that use:
(i) observable market data; or
(ii) non-observable data
Level 1 Level 2 Level 3 Total
AS AT 30 SEPTEMBER 2023 £’000 £’000 £’000 £’000
Investments held at fair value through profit or loss 1,987,993 – 137,821 2,125,814
Derivatives: OTC swaps (assets) – 5,499 – 5,499
Derivatives: OTC swaps (liabilities) – (11,271) – (11,271)
Financial instruments measured at fair value 1,987,993 (5,772) 137,821 2,120,042
Level 1 Level 2 Level 3 Total
AS AT 31 MARCH 2023 £’000 £’000 £’000 £’000
Investments held at fair value through profit or loss 2,041,247 – 145,170 2,186,417
Derivatives: OTC swaps (assets) – 209 – 209
Derivatives: OTC swaps (liabilities) – (27,101) – (27,101)
Financial instruments measured at fair value 2,041,247 (26,892) 145,170 2,159,525
2. INCOME
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£’000 £’000
Investment income 10,596 8,713
Interest Income 1,885 582
Total 12,481 9,295
3. AIFM, PORTFOLIO MANAGEMENT AND PERFORMANCE FEES
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 2023 30 September 2022
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
AIFM fee 72 1,369 1,441 76 1,444 1,520
Portfolio management fee 339 6,434 6,773 368 6,986 7,354
Performance fee charge for the period* – – – – – –
411 7,803 8,214 444 8,430 8,874
As at 30 September 2023 no performance fees were accrued or payable (31 March
2023: nil accrued).
No performance fee could become payable by 30 September 2024.
See Glossary for further information on the performance fee.
4. RETURN/(LOSS) PER SHARE
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£’000 £’000
The return per share is based on the following figures:
Revenue return 9,652 7,888
Capital return/(loss) (30,378) 58,036
Total return (20,726) 65,924
Weighted average number of shares in issue for the period 606,004,086 650,534,570
Revenue return per share 1.6p 1.2p
Capital return/(loss) per share (5.0)p 8.9p
Total return per share (3.4)p 10.1p
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)”.
The comparative return per ordinary share figures have been restated to
reflect the ten for one share split on 27 July 2023. For weighted average
purposes, the share split has been treated as happening on the first day of
the accounting period.
5. SHARE CAPITAL
Total
Treasury shares
Shares shares in issue
number number number
As at 1 April 2023 62,620,763 2,438,015 65,058,778
Purchase of shares into treasury – pre-share split (2,507,439) 2,507,439 –
Shares cancelled from Treasury – (4,892,258) (4,892,258)
Issue of shares following ten for one share split 541,019,916 478,764 541,498,680
Purchase of shares into treasury – post-share split (16,954,184) 16,954,184 –
As at 30 September 2023 584,179,056 17,486,144 601,665,200
(Unaudited) (Audited)
30 September 31 March
2023 2023
£’000 £’000
Issued and fully paid:
Nominal value of ordinary shares of 2.5p 14,604 16,265
During the period ended 30 September 2023 the Company bought back ordinary
shares into treasury at a cost of £133,365,000 (Year ended 31 March 2023:
£91,514,000).
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 £1,981,921,000 (31 March 2023: £2,150,721,000) and on the
number of shares in issue at the period end of 584,179,056 (31 March 2023:
626,207,630*).
* restated to reflect the ten for one share split.
7. TRANSACTION COSTS
Purchase transaction costs for the six months ended 30 September 2023 were
£499,000 (six months ended 30 September 2022: £705,000).
Sales transaction costs for the six months ended 30 September 2023 were
£528,000 (six months ended 30 September 2022: £592,000).
8. RECONCILIATION OF OPERATING RETURN TO NET CASH INFLOW/(OUTFLOW) FROM
OPERATING ACTIVITIES
(Unaudited) (Unaudited)
Six months ended Six months ended
30 September 30 September
2023 2022
£’000 £’000
(Loss)/Gains before finance costs and taxation (14,321) 67,465
Add: capital loss/(Less: capital gain)/before finance charges and taxation 25,705 (59,193)
Revenue return before finance charges and taxation 11,384 8,272
Expenses charged to capital (7,803) (8,452)
(Increase)/Decrease in other debtors (474) 525
Increase in other creditors and accruals 2,678 3,422
Net taxation suffered on investment income (611) 19
Amortisation – (108)
Net cash inflow from operating activities 5,174 3,678
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 2023.
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 2023 and
30 September 2022 has not been audited or reviewed by the Company’s
auditor.
The information for the year ended 31 March 2023 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.
DISCOUNT OR PREMIUM (“APM”)
A description of the difference between the share price and the net asset
value per share. The size of the discount or premium is calculated by
subtracting the share price from the net asset value per share and is usually
expressed as a percentage (%) of the net asset value per share. If the share
price is higher than the net asset value per share the result is a premium. If
the share price is lower than the net asset value per share, the shares are
trading at a discount.
EMERGING BIOTECHNOLOGY
Biotechnology companies with a market capitalisation less than U.S.$10
billion.
EQUITY SWAPS
An equity swap is an agreement in which one party (counterparty) transfers the
total return of an underlying equity position to the other party (swap holder)
in exchange for a one-off payment at a set date. Total return includes
dividend income and gains or losses from market movements. The exposure of the
holder is the market value of the underlying equity position.
Your Company uses two types of equity swap:
* funded, where payment is made on acquisition. They are equivalent
to holding the underlying equity position with the exception of additional
counterparty risk and not possessing voting rights in the underlying; and,
* financed, where payment is made on maturity. As there is no initial
outlay, financed swaps increase economic exposure by the value of the
underlying equity position with no initial increase in the investments value
– there is therefore embedded leverage within a financed swap due to the
deferral of payment to maturity.
The Company employs swaps for two purposes:
* To gain access to individual stocks in the Indian, Chinese and
other emerging markets, where the Company is not locally registered to trade
or is able to gain in a more cost efficient manner than holding the stocks
directly; and,
* To gain exposure to thematic baskets of stocks (a Basket Swap).
Basket Swaps are used to build exposure to themes, or ideas, that the
Portfolio Manager believes the Company will benefit from and where holding a
Basket Swap is more cost effective and operationally efficient than holding
the underlying stocks or individual swaps.
LEVERAGE (“APM”)
Leverage is defined in the AIFMD as any method by which the AIFM increases the
exposure of an AIF. In addition to the gearing limit the Company also has to
comply with the AIFMD leverage requirements. For these purposes the Board has
set a maximum leverage limit of 140% for both methods. This limit is expressed
as a percentage with 100% representing no leverage or gearing in the Company.
There are two methods of calculating leverage as follows:
The Gross Method is calculated as total exposure divided by Shareholders’
Funds. Total exposure is calculated as net assets, less cash and cash
equivalents, adding back cash borrowing plus derivatives converted into the
equivalent position in their underlying assets.
The Commitment Method is calculated as total exposure divided by
Shareholders’ Funds. In this instance total exposure is calculated as net
assets, less cash and cash equivalents, adding back cash borrowing plus
derivatives converted into the equivalent position in their underlying assets,
adjusted for netting and hedging arrangements.
As at As at
30 September 2023 31 March 2023
Fair Value Exposure* Fair Value Exposure*
£’000 £’000 £’000 £’000
Investments 2,125,814 2,125,814 2,186,417 2,186,417
OTC equity swaps (5,772) 145,799 (26,892) 190,704
2,120,042 2,271,613 2,159,525 2,377,121
Shareholders’ funds 1,981,921 2,150,721
Leverage % 14.6% 10.5%
* Calculated in accordance with AIFMD requirements using the
Commitment Method
MSCI WORLD HEALTH CARE INDEX (THE COMPANY’S BENCHMARK)
The MSCI information (relating to the Benchmark) may only be used for your
internal use, may not be reproduced or redisseminated in any form and may not
be used as a basis for or a component of any financial instruments or products
or indices. None of the MSCI information is intended to constitute investment
advice or a recommendation to make (or refrain from making) any kind of
investment decision and may not be relied on as such. Historical data and
analysis should not be taken as an indication or guarantee of any future
performance analysis, forecast or prediction. The MSCI information is provided
on an “as is” basis and the user of this information assumes the entire
risk of any use made of this information. MSCI, each of its affiliates and
each other person involved in or related to compiling, computing or creating
any MSCI information (collectively, the “MSCI Parties”) expressly
disclaims all warranties (including, without limitation, any warranties of
originality, accuracy, completeness, timeliness, non-infringement,
merchantability and fitness for a particular purpose) with respect to this
information. Without limiting any of the foregoing, in no event shall any MSCI
Party have any liability for any direct, indirect, special, incidental,
punitive, consequential (including, without limitation lost profits) or any
other damages. (www.msci.com)
NET ASSET VALUE (NAV) TOTAL RETURN (“APM”)
The theoretical total return on shareholders’ funds per share, reflecting
the change in NAV assuming that dividends paid to shareholders were reinvested
at NAV at the time the shares were quoted ex-dividend. A way of measuring
investment management performance of investment trusts which is not affected
by movements in discounts/premiums.
Six months to Year to
30 September 31 March
2023 2023*
(p) (p)
Opening NAV per share 343.5 346.5
Decrease in NAV per share (4.2) (3.0)
Closing NAV per share 339.3 343.5
% Change in NAV per share (1.2%) (0.9%)
Impact of reinvested dividends 0.6% 0.8%
NAV per share Total Return (0.6%) (0.1%)
* The comparative NAV per share figures have been restated to
reflect the ten for one share split. See notes 4 to 6 for further details.
ONGOING CHARGES (“APM”)
Ongoing charges are calculated by taking the Company’s annualised ongoing
charges, excluding finance costs, taxation, performance fees and exceptional
items, and expressing them as a percentage of the average daily net asset
value of the Company over the year.
Six months to One year to
30 September 31 March
2023 2023
£’000 £’000
AIFM & Portfolio Management fees 8,214 17,534
Other Expenses 686 1,142
Total Ongoing Charges 8,900 18,676
Performance fees paid/crystallised – –
Total 8,900 18,676
Average net assets 2,111,076 2,247,296
Ongoing Charges (annualised) 0.8% 0.8%
Ongoing Charges (annualised, including performance fees paid or crystallised during the period) 0.8% 0.8%
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 2023 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:
1. The cumulative outperformance of the investment portfolio over the
Benchmark as at the quarter end date; and
2. The cumulative outperformance of the investment portfolio over the
Benchmark as at the corresponding quarter end date in the previous year.
The effect of this is that outperformance has to be maintained for a 12 month
period before the related fee is paid.
In addition, a performance fee only becomes payable to the extent that the
cumulative outperformance gives rise to a total fee greater than the total of
all performance fees paid to date.
SHARE PRICE TOTAL RETURN (“APM”)
Return to the investor on mid-market prices assuming that all dividends paid
were reinvested.
Six months to One year to
30 September 31 March
2023 2023*
Opening share price 311.5 327.5
Decrease in share price (2.0) (16.0)
Closing share price 309.5 311.5
% Change in share price (0.6%) (4.8%)
Impact of reinvested dividends 0.7% 0.7%
Share price Total Return 0.1% (4.1%)
* The comparative share price figures have been restated to
reflect the ten for one share split. See notes 4 to 6 for further details.
For and on behalf of
Frostrow Capital LLP, Secretary
22 November 2023
- ENDS -
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