NEWS RELEASE
For immediate
release
23 November 2017
Worldwide
Healthcare Trust PLC
Unaudited Half
Year Results for the six months ended
30 September 2017
This Announcement is not the Company’s Half Year report. It is
an abridged version of the Company’s full Half Year report for the
six months ended 30 September 2017.
The full Half Year report, together with a copy of this
announcement, will also 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 2017 has been
submitted to the UK Listing Authority, and will shortly be
available for inspection on the National Storage Mechanism (NSM):
www.hemscott.com/nsm.do
For further information please contact: Mark Pope, Frostrow Capital LLP 020 3008
4913.
Performance
|
|
Six months
to |
One year to |
|
|
30
September |
31 March |
|
|
2017 |
2017 |
Net asset value per share (total
return)# |
|
7.4% |
28.9% |
Share price (total return)# |
|
10.8% |
35.5% |
Benchmark (total return)^ |
|
2.6% |
24.5% |
|
|
|
|
|
30
September |
31 March |
Six months |
|
2017 |
2017 |
% change |
Net asset value per share |
2,526.3p |
2,367.2p |
6.7 |
Share price |
2,536.0p |
2,304.0p |
10.1 |
Premium/(discount) of share price to
the net asset value per share |
0.4% |
(2.7%) |
— |
Leverage+ |
15.4% |
16.9% |
— |
Ongoing charges |
0.9% |
0.9% |
— |
Ongoing charges (including
performance fees crystallised during the period)+ |
1.1% |
1.0% |
— |
# Source –
Morningstar.
^
Benchmark – MSCI World Health Care Index on a net total return,
sterling adjusted basis. (see glossary)
+ See
glossary. Leverage calculated under the Commitment Method.
Chairman’s Statement
PERFORMANCE
Against a positive backdrop and reduced market volatility, the
healthcare sector produced a satisfactory return, in line with the
wider market over the first six months of the Company’s financial
year. I am pleased to report that both the Company’s net asset
value per share and the share price outperformed the Company’s
Benchmark over the period and that, following last year’s strong
performance, the current financial year has begun on a similarly
positive note.
As can be seen in the chart on the previous page, the Company’s
net asset value total return was +7.4% over the last six months,
outperforming the Company’s Benchmark, the MSCI World Health Care
Index measured on a net total return, sterling adjusted basis,
which returned +2.6%.
The Company’s share price did rather better, with a total return
of +10.8%, and the Company’s share price is now trading
consistently at a premium to the Company’s net asset value per
share. The premium of the Company’s share price to the net asset
value per share as at 30 September
2017 was 0.4%.
I mentioned at the year-end that sterling’s decline against
other major currencies, in particular the U.S. dollar, the currency
in which the majority of the Company’s holdings are denominated,
had helped the Company’s performance in absolute terms. The first
six months of the current financial year saw something of a
recovery in sterling’s fortunes, sterling having appreciated over
7.0% against the U.S. dollar during the period. This relative
dollar weakness inevitably detracted from the Company’s absolute
performance.
Further information on investment performance and the outlook
for the Company is given in the Review of Investments.
CAPITAL
The Board continues to monitor closely the relationship between
the Company’s share price and the net asset value per share. As
referred to above, I am pleased to note that due to the Company’s
strong performance the Company’s shares have been trading at a
small premium to the net asset value per share for some months. As
a result, and also due to investor demand, a total of 1,512,500 new
shares were issued during the period, at an average premium of 0.7%
to the prevailing cum income net asset value per share, raising
£38.4m of new funds.
PERFORMANCE FEE
I am glad to report that the outperformance generated in this
half year has resulted in a performance fee becoming payable, in
accordance with the provisions of the performance fee arrangements,
of £2.4 million. This fee was shared between the Company’s
Portfolio Manager, OrbiMed Capital LLC (“OrbiMed”) and the
Alternative Investment Fund Manager, Frostrow Capital LLP
(“Frostrow”) as described in note 3 to the Financial Statements.
Shareholders will be aware that under new fee arrangements that
became effective on 1 April 2017,
Frostrow no longer receives a performance fee. However, they are
entitled to receive any performance fee that crystallises during
the year ending 31 March 2018 in respect of cumulative
outperformance attained by 31 March
2017.
REVENUE AND DIVIDENDS
The revenue return for the period was £4.2 million, compared to
£4.0 million in the same period last year; this slight increase
comes as a result of a small rise in the yield from portfolio
investments and despite sterling’s appreciation against the U.S.
dollar in the period. The Board has declared an unchanged first
interim dividend of 6.5p per share, for the year to 31 March 2018, which will be payable on
9 January 2018 to shareholders on the
register of members on 24 November
2017. The associated ex-dividend date is 23 November 2017. The second interim dividend for
the year to 31 March 2018 is expected
to be announced in June 2018.
I remind shareholders that it remains the Company’s policy to
pay out dividends to shareholders in the quantum necessary to
maintain investment trust status for each financial year. These
dividend payments are paid out of the Company’s net revenue for the
year and, in accordance with investment trust rules, only a maximum
of 15% of income arising from the shares and securities making up
the investment portfolio can be retained by the Company in any
financial year.
It is the Board’s continuing belief that the Company’s capital
should be fully deployed rather than paid out as dividends to
achieve a particular target yield.
HALF YEAR REPORT & ACCOUNTS
As I mentioned last year, in order to keep costs to a minimum we
will not be providing a hard copy of this year’s Half Year Report
& Accounts. This document is, and will continue to be available
on the Company’s website at www.worldwidewh.com. The Company’s
Annual Report & Accounts will continue to be available in hard
copy, and also on the Company’s website.
OUTLOOK
Our Portfolio Manager believes that investors are now focusing
more on the sector’s strong fundamentals rather than political
uncertainty, with factors such as strong revenue generation,
continued high levels of innovation, a more benign approval
environment at the FDA and expected increased merger and
acquisition activity expected to be key drivers. In addition,
anticipated U.S. tax reforms and cash repatriation are also
expected to be positive for the sector. However, on a cautionary
note, volatility remains an issue as evidenced by the recent
correction in the biotechnology sector.
Our Portfolio Manager’s focus remains on the selection of stocks
with strong prospects and we reiterate our belief that the
long-term investor in the healthcare sector will be well
rewarded.
Sir Martin
Smith
Chairman
23 November 2017
Review of Investments
MARKETS
Global equity markets for the six-month period from 1 April to
30 September 2017 advanced with
admirable aplomb, reaching multiple new all-time highs throughout
the period. Despite some spikes, volatility also remained
relatively low. Overall, strong corporate earnings and positive
economic trends supported the move higher, with little offsets as
political risk in Europe eased and
despite tensions between North
Korea and the United
States. Emerging markets also benefitted from a supportive
global backdrop.
Perhaps the only sources of volatility during the period were
various key global currencies, notably the euro and to a lesser
extent, sterling, which blunted some of the index returns, compared
to a U.S. dollar perspective.
Healthcare stocks followed a similar trend as the broader
market, with solid and mostly consistent advances and the
achievement of all-time highs in the six-month period. Again, solid
fundamentals coupled with reduced macro concerns fueled the move
higher, partially diminished by currency moves.
PERFORMANCE
We are pleased to report that the Company outperformed both the
broader market and the Benchmark, with a share price total return
of +10.8% and a net asset value total return of +7.4% in the
six-month period. Performance of the Benchmark for the six-month
period ended 30 September 2017 was
+2.6%. This compares to the MSCI World Index return of +2.4%
(measured in sterling terms).
Over a 12-month period, the Company has significantly
outperformed its Benchmark, with a share price total return of
+20.7% and a net asset value total return of +14.5% compared to the
Benchmark return of +8.8%.
Sources of absolute and relative contribution were both diverse
and numerous. All sub-sectors contributed to positive returns, with
only one exception, generic pharmaceuticals, primarily due to the
degradation of fundamentals in that sector. Otherwise the strong
performance recorded for the interim period was mostly driven by
allocation and stock picking in biotechnology and medical
technology & device stocks. The former was driven by a large
rebound in share prices after the dramatic drawdown observed in
2016 and the latter fueled by an innovation and growth cycle that
had not been seen in years. Otherwise, stock returns in large
capitalisation pharmaceuticals, specialty pharmaceuticals, life
science & services, and managed care/services were all
positive.
MAJOR CONTRIBUTORS TO PERFORMANCE
The top individual stock contributors to performance come from a
variety of sub-sectors and geographies, from biotechnology, to
pharmaceuticals, and medical devices, from the United States, to Denmark, and Japan.
Oncology continues to be the hottest therapeutic category for
healthcare investors in 2017. Puma Biotechnology, is an
emerging biotechnology company whose lead asset is an oral
once-daily tyrosine kinase inhibitor called Nerlynx (neratinib),
designed to treat a specific form of early stage breast cancer. The
stock rose substantially during the period due to a favourable U.S.
Food and Drug Administration (“FDA”) Advisory Committee vote in
May 2017, that recommended approval
of Nerlynx. Subsequently, the drug was approved in July 2017 and launched shortly thereafter. Prior
to these events, there had been significant investor scepticism
about the asset’s approvability due to its perceived modest
survival benefit and significant tolerability issues. As a result,
the successful commercialisation of Nerlynx by Puma has fueled
merger and acquisition (“M&A”) speculation, and the share price
has more than doubled during the period.
BeiGene, is a China-based biotechnology company focused on
the development of oncology drugs that serve both local and global
markets. The company has parlayed its expertise in cell biology and
chemistry into a pipeline of four clinical-stage oncology
candidates. BeiGene’s lead candidate, BGB-3111 which targets “BTK”
(Bruton’s tyrosine kinase), was designed to have specificity and
potency advantages over established BTK inhibitors in the treatment
of various blood cancers. The company has commenced late stage
clinical development to demonstrate its superiority, increasing
investor enthusiasm about its blockbuster potential and buoying the
share price. BeiGene’s other oncology candidates in earlier phases
of development are also directed at validated oncology targets
(such as “PD-1”, “PARP”, or “BRAF”) and also may have best-in-class
properties. As such, the share price also moved higher in the
period after the company announced a strategic collaboration with
Celgene for BeiGene’s PD-1 inhibitor, representing BeiGene’s
entry into the “hot” space of immuno-oncology.
A true leader in medical device innovation, Intuitive
Surgical, develops robotic systems and associated instrument
sets for use in a broad array of surgical procedures. Shares in the
company consistently outperformed during the six-month period for a
number of reasons. Robotic procedure volumes and new system
placements, both leading indicators of sales performance, strongly
outperformed analyst expectations in the period. Additionally, the
company announced and launched a new robotic system, da Vinci
X, which is designed to be more affordable and is positioned
favourably against upcoming competitive robotic systems. Lastly,
the company was at the early stages of a new robotic launch in
China for a lung biopsy product
which represents a significant market opportunity and has driven
longer-term consensus estimates and valuations higher for the
stock.
Japan, historically, has often
been a hidden gem for innovation, and Nippon Shinyaku is a
perfect example. The company developed a best-in-class treatment
for a deadly lung disease known as pulmonary arterial hypertension
or PAH. Uptravi (selexipag) was discovered by Shinyaku and licensed
to Swiss-based leaders in PAH, Actelion, nearly 10 years ago. The
drug was successfully launched by Actelion in 2016, drawing the
attention of global drug giant, Johnson and Johnson, who
subsequently acquired Actelion early in 2017. As a result, Shinyaku
began to receive greater recognition by investors for this
potential blockbuster product. Subsequently, Nippon Shinyaku has
been one of the best performing Japanese pharma stocks in 2017.
The worldwide leaders in the treatment of diabetes, Novo
Nordisk, came under pressure in 2016 as pricing, in particular
insulin pricing, was squeezed by payers and competition alike.
However, 2017 bore witness to greater pricing stability and more
clarity on the next wave of innovation for the treatment of one of
the most common diseases in the world. While not completely
de-risked, Novo’s next generation offering, “semaglutide” is poised
to be the most efficacious treatment ever developed for the
treatment of Type II diabetes. Moreover, the company is developing
the compound in both injectable and oral formulations. If the
latter can successfully pass through clinical trials, it can surely
be a mega-blockbuster product. These developments pushed Novo’s
stock price higher during the six-month period.
MAJOR DETRACTORS FROM PERFORMANCE
The largest detractors from performance, similar to the top
contributors, were very diverse in nature. Detractors came from
many subsectors, including medical devices, generics, biosimilars,
biotechnology, and hospitals. In each case, however, an unexpected
negative catalyst caused the share price decline.
The medical device maker, Wright Medical, one of our
major holdings, manufactures state-of-the-art joint replacements,
primarily for shoulder, foot and ankle, trauma and sports medicine
procedures, as well as orthobiologic products. Earlier this year,
the company materially accelerated its plans to expand its sales
force, leading to a brief disruption in the first quarter and
subsequently a shortfall in sales relative to consensus
expectations. While the second quarter showed a reacceleration in
sales trends, the positive impact on the stock was overshadowed by
two hurricanes that struck the high-volume regions of Florida and Texas in September, delaying procedures and
leading investors to question whether management will be able to
hit the guidance range for the full year. The share price fell
sharply in the last month of the period as a result.
Shares of Mylan, a global generic drug manufacturer,
plummeted in August in response to a second-quarter earnings miss
and downwardly-revised full-year financial guidance. Similar to
other companies with significant exposure to the U.S. generic drug
market, Mylan’s operating performance has been stifled by a
combination of increased competitive pressures on its legacy
generic drug portfolio and delayed U.S. FDA approvals/launches of
generics for significant branded products.
Another hot topic in healthcare investing has been biosimilars:
generic versions of complex, biologic drugs. However, monetising
this global opportunity has proven more difficult. Coherus
Biosciences, is developing biosimilar versions of a number of
branded biotechnology drugs, including the white blood cell
stimulator Neulasta (pegfilgrastim) and the rheumatoid arthritis
drugs Humira (adalimumab) and Enbrel (etanercept). The company had
filed an application for their lead asset, a biosimilar version of
Neulasta, in August 2016. However, in
June 2017, the stock dropped
significantly when the U.S. FDA rejected the drug, stating that the
company needed to re-analyse certain patient samples with a revised
immunogenicity assay. Due to the setback, the company was forced to
reduce its workforce by 30%. The company also suffered a legal
setback, and another share price decline, when its attempt to
invalidate a patent protecting Humira was rejected by the U.S.
Patent & Trademark Office in September of 2017.
Incyte is a Delaware-based biotechnology company. The
company markets Jakafi (ruxolitinib) for myeloproliferative
disorders (abnormal growth of blood cells) and is developing a
portfolio of therapeutics for the treatment of cancers.
Baricitinib, a next generation JAK inhibitor for rheumatology, was
unexpectedly rejected for approval by the U.S. FDA due to rare
safety concerns, despite earlier European approval, causing the
stock to fall. While the stock partially recovered, investor angst
rose in relation to Incyte’s first-in-class IDO inhibitorm
epacadostat, a novel cancer treatment in late stage clinical
development. Despite early positive data that suggested epacadostat
has the potential to be a major player in cancer immunotherapy, the
stock again sold-off after many investors decided to de-risk by
selling the stock ahead of the next looming data update for the
molecule.
HCA Healthcare, is the largest public hospital provider
in the U.S. The past 12 months have proven turbulent for the
company’s business and share price, starting with the lead into the
U.S. Presidential election in November
2016. For the six-month period reported here, the company
reported weak earnings and reduced full year 2017 guidance due to
decelerating utilisation trends. In addition, the stock
underperformed due to concerns that Republicans would successfully
repeal President Obama’s Affordable Care Act (or “Obamacare”),
which would reduce the number of American citizens with health
insurance.
SECTOR DEVELOPMENTS
Whilst 2016 was marked primarily by landmark political events
such as the prospective withdrawal of the United Kingdom from the European Union
(commonly known as Brexit) and the unexpected election of
Donald Trump as the 45th President
of the United States, 2017 can
thus far be characterised as a return to fundamentals for global
healthcare equites; and the fundamentals are good.
Politics are never completely obviated, however, and the current
situation has been quite favourable for therapeutic stocks in the
six-month period, especially in the largest drug market in the
world, the United States.
First, with Republicans in power, the concern over a dramatic
overhaul to drug pricing rules in the U.S. has dropped considerably
(despite the odd Tweet to the contrary from constantly combative
President Trump). Second, President Trump has proposed his plans
for significant tax reform in the U.S. Of import to the healthcare
industry are twofold: (1) the substantial lowering of the U.S.
corporate tax rate and (2) a “tax holiday” for the repatriation of
overseas cash. If adopted, in whole or in part, it would be a
windfall of earnings and cash flows for all large, U.S. domiciled
healthcare companies. In particular, large capitalisation
pharmaceutical and biotechnology companies, such as Pfizer or
Amgen would reap significant rewards given they possess –
cumulatively – hundreds of billions of U.S. dollars of cash
overseas. It would be a boon to the industry and almost assuredly
stimulate a M&A frenzy.
Further, whilst the new Commissioner of the U.S. FDA,
Scott Gottlieb, has introduced some
new plans to increase competition (with the hope to affect drug
prices) in the U.S. drug market, overall, he is viewed as very
aligned with the drug industry’s best interests. Dr. Gottlieb’s
“Drug Competition Action Plan” will accelerate generic drug
approvals (he inherited an FDA backlog of over 2,600 generic drugs
seeking approval), ease generic versions of complex and biologic
drugs onto the market, and seek to reduce the number of older
medicines that lack generic competition by regularly highlighting
the nearly 200 off-patent drugs with no generic alternatives
available. This approach is appealing, utilising a market-based,
lower regulation approach favoured by conservatives to deliver the
drug price cost containment desired by progressives. Generic drug
competition is an effective and under-appreciated tool for lowering
drug prices over time that, importantly, does not stifle
innovation.
Moreover, what is the FDA’s scorecard? It is not a perfect
measure, but we note that as of 30 September
2017, the FDA had approved 34 novel drugs for the U.S.,
already eclipsing the total for all of last year and a 100%
increase year-over-year. This total does not include another 12 new
cancer indications granted to already approved “immuno-oncology”
drugs, one of the most innovative advances in the treatment of
cancer over the past three decades.
Finally, a comment on M&A, a secular theme for us and most
healthcare investors, but the modest pace and subdued level of
M&A activity seen in 2017 has been a source of frustration.
However, we do note the August 2017
blockbuster transaction with Gilead’s U.S.$11 billion acquisition of Kite Pharmaceuticals.
Kite is one of the pioneers of CAR-T immunotherapy a next
generation variation of gene therapy that reprograms a patient’s
own T-cells to attack malignancies. The large valuation is a
compelling validation of biotechnology innovation considering Kite
is still a pre-revenue company with no approved products. We
believe more such transactions will occur, with a potential feeding
frenzy of activity possible if a U.S. tax reform package is enacted
with a repatriation provision for offshore cash balances held by
U.S. companies, as discussed above.
STRATEGY REVIEW
The Company’s mandate remains unchanged: to seek innovation and
growth in the healthcare industry on a global level by investing in
healthcare companies that offer the greatest return potential,
being mindful of risk. As productivity and innovation rise, the
number of investable ideas also rises, but the scrutiny and
diligence required to isolate them becomes more complex.
Biotechnology
The major biotechnology sub-sector continued its recovery during
the six-month period as macro concerns about the biotechnology
sector continued to abate. Heading into 2017, investors were
principally concerned about two issues overhanging the
biotechnology sector: 1) any policy announcement by President Trump
about his plan to lower drug prices, and 2) the potential repeal of
“Obamacare”, President Obama’s signature healthcare reform
bill.
However, despite making public comments about high drug prices
on numerous occasions since the election, President Trump has yet
to announce any official plan to reduce drug prices. Moreover,
investors now believe he will no longer do so and has moved on to
other policy priorities.
In addition, despite controlling both the Presidency and
Congress, the Republicans have failed to repeal Obamacare despite
multiple attempts. The biotechnology industry is less sensitive to
the fate of Obamacare, but uncertainty around the future of the
healthcare system in the United
States had caused many investors to avoid the healthcare
sector altogether. As the prospects for a near-term repeal of
Obamacare have dimmed, the cloud of uncertainty surrounding
healthcare has lifted somewhat. With these macro overhangs
dissipating, sentiment on the biotechnology sector has improved and
investors have begun to realise the attractive valuation of major
biotechnology relative to other sectors.
Meanwhile, the regulatory environment for the biotechnology and
pharmaceutical sectors has remained extremely favourable, with drug
approvals occurring in a timely manner despite less-than-perfect
data sets. Initial product launches from select large capitisation
biotechnology companies have exceeded expectations, including
Biogen’s launch of Spinraza (nusinersen), a novel treatment
for spinal muscular atrophy, and Regeneron Pharmaceutical’s
launch of Dupixent (dupilumab), a novel antibody for atopic
dermatitis. Moreover, these drugs have launched with significant
price tags, costing hundreds of thousands of dollars and tens of
thousands of dollars, respectively.
We would also highlight that this year has been important for
the development of new treatment modalities from small
capitalisation biotechnology stocks. Spark Therapeutics’
voretigene neparvovec is poised to be the first gene therapy
approved by the FDA. Alnylam Pharmaceuticals recently
reported positive phase III data for patisiran for hereditary ATTR
amyloidosis. This is the first successful pivotal trial of an
RNA-interference based therapy, which is a novel class of drugs to
downregulate expression of genes. Advances with new therapeutic
platforms such as gene therapy, RNA-interference, and CAR-T will
expand the capabilities of the industry to target diseases that
were previously not addressable by conventional drug therapies.
Whilst M&A activity has been relatively quiet, this is
likely due to uncertainty about the specifics of President Trump’s
corporate tax reform plan. We would expect activity to reaccelerate
once there is more clarity on tax reform, which is expected at the
end of 2017 or perhaps early in 2018. Even so, M&A activity has
not been completely absent given the “innovation engine” of
emerging biotechnology stocks discussed above,
Pharmaceuticals
Pharmaceutical stocks, like their biotechnology brethren, have
enjoyed a renaissance in 2017 as the political overhang has vastly
diminished, allowing investors to look past the rhetoric and focus
on fundamentals; in the case of large capitalisation pharmaceutical
stocks, those fundamentals are arguably mixed.
Perhaps most important is that innovation in drug discovery and
development appears to be at or near all-time highs, and nothing
drives value and accretion like new product flow. However, we do
note the inherent heterogeneity within the companies who comprise
this universe. In other words, innovation is not spread equally
across them all, and thus we believe stock selection is key.
Whilst “patent cliffs” are currently at a low level, looming
losses of exclusivity across this sector are not de minimis.
Once again, patent expirations are not spread equally across the
group, hence the growth outlook can be quite variable amongst these
peers. In addition, a new “cliff” is on the horizon with respect to
biosimilars. A host of blockbuster antibody drugs are poised to
lose patent protection over the next three to five years. However,
the approval, uptake, utilisation, and interchangeability of the
biosimilar product to replace the incumbent brand remains a source
of investor debate and thus a source of market uncertainty.
In the U.S., whilst angst over drug pricing from a political
perspective has subsided, payers and managed care players have
become much more savvy with trading patient access for increased
rebates and this has become a hot button topic for drug companies
and investors alike. While generic drug prices continue to decline,
branded drug prices continue to rise, and are even accelerating
given the increased approval rate of higher priced “specialty”
drugs (such as biologics across many therapeutic areas including
oncology, rheumatology, immunology, dermatology, etc.). The payer’s
response to this is to manage patient access to new drugs with
tight controls such as step therapy, prior authorisation,
restricted drug lists, high deductibles, and increased co-pays. The
result can dramatically impact the uptake of a new drug launch. Of
course, truly innovative new drugs with real value propositions –
such as an increase in patient survival – can overcome such
hurdles.
For small capitalisation pharmaceutical stocks, the performance
of U.S.-focused specialty and generic pharmaceutical companies has
disappointed, as companies continued to struggle with the multiple
challenges facing the sector, including: reduced pricing power,
heavy debt burdens, heightened competitive pressures,
underperforming assets, increasingly restrictive third-party payer
formularies – including reduced coverage of new product
introductions – and, unsurprisingly, senior management changes.
Although valuations remain depressed for many companies in the
specialty and generic pharmaceutical sector, we see opportunities
in a handful of reasonably-leveraged companies with important
upcoming clinical and regulatory events and differentiated new
product introductions benefitting from a lesser degree of
third-party payer management. We anticipate that increased M&A
activity, including greater participation from private investors,
could improve sentiment for this group of beleaguered stocks and
drive valuation recoveries over the next 12 months.
Medical Technology and Devices
A number of factors for the medical technology and devices
spaces remain favourable and thus we have a positive view on a
forward-looking basis. First, organic growth rates are tracking at
healthy levels whilst reported growth rates are benefitting from
small and mid-size acquisitions. Undeniably, absolute valuations
remain high, but relative valuations against the S&P 500 Index
are now roughly in line with historical averages despite relatively
superior earnings per share growth in the “MedTech” sector.
Importantly, we view current earnings growth rates as
sustainable through the end of the decade, at least. Though there
has been some investor consternation surrounding U.S.
hurricane-related adverse impacts to sector volumes for the third
quarter earnings period, we believe that these are one-time events.
In our view, procedures are more likely to be delayed into the
fourth quarter than cancelled outright and underlying procurement
volume trends remain strong.
Lastly, U.S. tax reform remains a key catalyst for almost all
MedTech companies, as does the potential delay or repeal of the
medical device excise tax. Turning to stock selection, we continue
to prefer (1) cardiology – where innovation remains industry
leading, (2) surgical robotics – where technology advances have
been and will continue to be disruptive to historical surgical
paradigms, and (3) extremities implants/biologics – which remain at
the very early stages of the adoption curve.
Life Sciences Tools and Services
We remain somewhat guarded for the prospects of the life science
tools space. Certainly valuation continues to be demanding in both
relative and absolute sense. Nevertheless, outperformance in the
past six months was driven by a perceived political and regulatory
shield from an unpredictable administration and healthy end
markets.
Federal funding environments in bio-pharma and academic research
institutions remains buoyant driven by excitement around
developments in oncology. Despite healthy end markets, valuation
and sub-sector rotation dynamics will play even more of a critical
role in positioning as we look ahead into 2018. Major U.S.
corporate tax reform and subsequent repatriation of overseas cash
could catalyse material M&A, especially in bio-pharma. However,
the consolidation of bio-pharma could pressure the life sciences
tools sector as pharmaceutical companies rationalise their research
and development (“R&D”) programmes. Coupled with this potential
headwind and aforementioned valuation, we remain selective in life
sciences tools.
The diagnostics industry, as has been the case for the last
several years, remains an industry beholden to reimbursement
policies set by both private payers and U.S. Medicare. Utilisation
has seen both ups and downs during this period with “Obamacare”
backed tailwinds offset by severe weather-related headwinds.
More importantly, the industry hit a major fundamental set back
this year when the Protecting Access to Medicare Act enacted
legislative reimbursement cuts for Medicare lab fee services that
were more draconian than expected. Set to take effect from
January 2018, if finalised, Medicare
reimbursement for high volume lab tests could be reduced by up to
10%.
The remainder of 2017 could be quite volatile as the lab
industry awaits the final ruling after a contentious public hearing
period. Given the expected reimbursement cuts and potential
reduction in insured lives under the new administration’s political
efforts, we remain cautious on the sector until further clarity can
be observed.
Healthcare Services
In healthcare services, payers have outperformed providers due
to weaker than expected utilisation of healthcare. Specifically,
payers such as health maintenance organisations (also known as
HMOs, a type of health insurance plan that usually limits coverage
to care from doctors who work for or contract with that HMO),
reported strong earnings upside and raised full year 2017 guidance.
In contrast, providers such as hospitals experienced decelerating
volumes and reduced their financial outlooks for the year. (Severe
hurricanes that plagued the southern United States in September 2017 were also disruptive, although
generally viewed as one-time non-recurring impacts.)
Macroeconomic trends have also favoured payers over providers.
For example, payers stand to benefit most from corporate tax reform
because all of their business is conducted in the U.S. and from
rising interest rates because they would generate higher income on
investment portfolios. Rising interest rates is bad for levered
hospitals.
Going forward we remain bullish on HMOs with a view that
utilisation will remain modest, the macroeconomic environment
benign, and the regulatory environment under the Trump
administration favouring the private sector over Obamacare. We
remain bearish on provider stocks including hospitals because they
are negatively impacted by these conditions. Separately, we are
bearish on Pharmacy Benefit Managers (“PBM”s) (who serve as the
middlemen between insurance companies, pharmacies and manufacturers
to secure lower drug costs for insurers and insurance companies) as
this industry transitions from a disciplined duopoly to an
increasingly competitive and more transparent market due to new
entrants.
Emerging Markets
Throughout 2017, the Chinese government has continued to enact
reforms to raise drug quality, improve regulatory speed and
efficiency, and promote innovation. To improve overall drug quality
in China, the government has been
enforcing bioequivalence standards for generic drugs, forcing
companies to certify the quality of their clinical trial data, and
allowing more foreign high-quality drugs into the Chinese market.
These reforms have led to a dramatic drop in the backlog of drugs
pending review at the China Food and Drug Administration (“CFDA”),
as lower-quality pharmaceutical companies with deficient data
packages have pulled their applications.
To improve regulatory speed and efficiency, the CFDA has been
approving clinical trial initiations more quickly, adding more drug
reviewers, and improving the frequency and quality of communication
between the sponsor and the agency. To promote innovation, the
Chinese government has been accelerating the regulatory review of
innovative drugs, increasing reimbursement of innovative drugs, and
decreasing reimbursement of drugs with questionable clinical data.
These reforms have occurred while implementing regulations to
discourage over-prescribing of drugs and enacting rules to simplify
the drug distribution chain to remove cost.
In the short-term, all of these policies have led to a fall in
prescription drug sales. Over the long-term, we believe these
policies are positive for the innovative drug industry and will
remove many of the low-quality companies that have historically
pressured prices. Indeed, the regular drug price cuts that have
characterised the industry have been more moderate recently than in
the past. We continue to favour Chinese players with innovative
pipelines in light of these policies.
The Indian pharmaceutical industry has recently experienced
several regulatory headwinds and policy changes, but despite these
challenges the underlying demand in the sector remains robust. The
industry’s growth rate has declined to c.3.0% during the reported
period, down from c.10.0% the previous year. The reasons behind
this slowdown are multifactorial, including the introduction of the
Goods and Services Tax (GST) that triggered trade inventory
corrections, and the impact of the new draft pharmaceutical policy
aimed at controlling costs and stoking competition. We anticipate
continued volume growth for the industry due to strong underlying
demand owing to rising disposable income, increasing insurance
penetration, improving medical infrastructure, and increasing
incidence of chronic diseases. That said, we are closely monitoring
industry pricing dynamics, with a keen eye on the potential
negative impact of additional government cost control initiatives.
This could emerge as an important near-to-intermediate-term
risk.
Indian companies with significant exposure to the U.S. generic
drug market have also faced additional challenges, similar to their
U.S.-based competitors. These challenges include: (1) increasing
regulatory scrutiny on both manufacturing and marketing operations,
(2) customer consolidation, and (3) higher than expected base
business price erosion. Despite these challenges, the U.S. market
remains an important contributor of revenues and profits to most
Indian pharmaceutical companies. Such challenges should help
well-run Indian companies become more compliant and cost efficient,
allowing management to strengthen and re-focus product pipelines
toward differentiated generics.
Additionally, Indian pharmaceutical companies have benefited
from the high double-digit growth rates witnessed in emerging
markets such as South East Asia,
Middle East, Africa, and Eastern
Europe. Currency dynamics in some of these geographies have
become more favourable allowing Indian companies to reap the
benefits of widely diversified product baskets via leverage of
supply agreements and acquisitions reached in quarters past.
Our strategy in India is
multifold. We strive to invest in (1) high quality companies with a
focus on high growth chronic segments in the domestic market, (2)
companies that prioritise compliant manufacturing and have a
significant and growing U.S. exposure with a focus on a
differentiated generics pipeline, and (3) companies with high
growth and profitable emerging market exposure.
OUTLOOK FOR 2018
Despite recent volatility in the biotechnology sector our
collective optimism is high for 2018. Global healthcare stocks are
clearly now trading on fundamentals again rather than retreating on
political rhetoric. Importantly, our view on the fundamentals of
healthcare is decidedly positive, and we expect continued moves
higher as secular demand and consumption of healthcare goods and
services should continue unabated.
Therapeutic stocks, pharmaceuticals and biotechnology, will
continue to prosper during this golden era of innovation. While the
fruits of genomics were not ripe enough to pick at the turn of the
century, today’s discoveries are turning into real drugs with real
benefits to patients and the entirety of the healthcare system.
Political risk for the sector is perhaps at an all-time modern low.
In fact in the U.S., politics may turn into a tailwind in 2018 if
tax reform can be enacted, creating even more cash flow into a
system which notably benefits from such circumstances.
Overall, with technical and macro pressures fading,
company-specific events that are central to our investment process
should return to prominence, with clinical, regulatory and M&A
catalysts driving individual stock price performance.
Samuel D.
Isaly
OrbiMed Capital LLC
Portfolio Manager
23 November 2017
PRINCIPAL CONTRIBUTORS TO AND
DETRACTORS FROM NET ASSET VALUE PERFORMANCE
For the six months to 30 September
2017
|
|
Contribution |
|
Contribution |
per
share (p)* |
Top Five Contributors |
£’000 |
Puma Biotechnology |
18,307 |
39.2 |
Beigene |
15,998 |
34.2 |
Intuitive Surgical |
8,744 |
18.7 |
Nippon Shinyaku |
8,672 |
18.6 |
Novo Nordisk |
7,808 |
16.7 |
Top Five Detractors |
|
|
Wright Medical |
(13,219) |
(28.3) |
Mylan |
(7,562) |
(16.2) |
Coherus Biosciences |
(7,148) |
(15.3) |
Incyte |
(6,527) |
(14.0) |
HCA Healthcare |
(5,885) |
(12.6) |
* based on
46,719,666 shares being the weighted average number of shares in
issue during the six months ended 30
September 2017.
Source: Frostrow Capital LLP
Portfolio
as at 30 September 2017
|
|
Market
value |
% of |
Investments |
Country/region |
£’000 |
investments |
Alexion Pharmaceuticals |
USA |
51,840 |
4.0 |
Boston Scientific |
USA |
49,222 |
3.8 |
Novo Nordisk* |
Denmark |
49,059 |
3.8 |
Eli Lilly |
USA |
45,271 |
3.5 |
Intuitive Surgical |
USA |
43,943 |
3.4 |
Wright Medical |
Netherlands |
43,773 |
3.4 |
Merck |
USA |
41,681 |
3.2 |
Regeneron Pharmaceuticals |
USA |
40,317 |
3.1 |
Cigna |
USA |
34,246 |
2.7 |
Anthem |
USA |
34,229 |
2.7 |
Top 10 investments |
|
433,581 |
33.6 |
Chugai Pharmaceutical |
Japan |
29,759 |
2.3 |
Celgene |
USA |
29,714 |
2.3 |
Edwards Lifesciences |
USA |
29,143 |
2.3 |
Nippon Shinyaku |
Japan |
28,923 |
2.2 |
Incyte |
USA |
27,607 |
2.1 |
Vertex Pharmaceuticals |
USA |
26,435 |
2.1 |
BeiGene |
Cayman Island |
26,260 |
2.0 |
Mylan |
Netherlands |
25,588 |
2.0 |
Illumina |
USA |
24,701 |
1.9 |
Puma Biotechnology |
USA |
23,369 |
1.8 |
Top 20 investments |
|
705,080 |
54.6 |
Amgen |
USA |
23,206 |
1.8 |
Novartis |
Switzerland |
22,528 |
1.7 |
Eisai |
Japan |
22,377 |
1.7 |
Stryker |
USA |
22,124 |
1.7 |
Aetna |
USA |
21,889 |
1.7 |
Galapagos** |
Belgium |
21,653 |
1.7 |
Biogen |
USA |
21,342 |
1.6 |
Unitedhealth Group |
USA |
20,168 |
1.6 |
Clovis Oncology |
USA |
19,365 |
1.5 |
Allergan*** |
Ireland |
19,174 |
1.5 |
Top 30 investments |
|
918,906 |
71.1 |
Genmab |
Denmark |
18,427 |
1.4 |
Array BioPharma |
USA |
18,136 |
1.4 |
Radius Health |
USA |
17,146 |
1.3 |
Alnylam Pharmaceuticals |
USA |
16,464 |
1.3 |
Bristol-Myers Squibb |
USA |
16,264 |
1.2 |
Xencor |
USA |
12,765 |
1.0 |
Thermo Fisher Scientific |
USA |
12,732 |
1.0 |
Nevro |
USA |
12,399 |
1.0 |
Agilent Technologies |
USA |
12,360 |
1.0 |
Juno Therapeutics |
USA |
11,323 |
0.9 |
Top 40 investments |
|
1,066,922 |
82.6 |
Celltrion |
South Korea |
11,130 |
0.9 |
Integra Lifesciences |
USA |
10,981 |
0.9 |
Coherus Biosciences |
USA |
10,743 |
0.8 |
Santen Pharmaceutical |
Japan |
10,485 |
0.8 |
Wright Medical Contingent Value
Rights |
USA |
10,299 |
0.8 |
Momenta Pharmaceuticals |
USA |
10,098 |
0.8 |
Celltrion Healthcare |
South Korea |
9,734 |
0.8 |
Takeda Pharmaceutical |
Japan |
9,578 |
0.7 |
Luye Pharma |
China |
9,191 |
0.7 |
Nuvasive |
USA |
9,123 |
0.7 |
Top 50 investments |
|
1,168,284 |
90.5 |
Sino Biopharmaceuticals |
China |
8,276 |
0.6 |
Biomarin Pharmaceutical |
USA |
7,150 |
0.5 |
Spark Therapeutics |
USA |
6,515 |
0.5 |
Magellan Health |
USA |
6,281 |
0.5 |
Aerie Pharmaceuticals |
USA |
6,107 |
0.5 |
Genoa A QOL Healthcare FRN
28/10/2024 (unquoted) |
USA |
5,927 |
0.5 |
Bioventus FRN 21/11/2021
(unquoted) |
USA |
5,888 |
0.5 |
Medical Depot Holdings FRN
03/01/2024 (unquoted) |
USA |
5,583 |
0.4 |
Ironwood Pharmaceuticals |
USA |
5,273 |
0.4 |
Yestar Healthcare |
China |
5,147 |
0.4 |
Top 60 investments |
|
1,230,431 |
95.3 |
ImmunoGen |
USA |
4,387 |
0.3 |
Bluebird Bio |
USA |
4,237 |
0.3 |
IHH Healthcare |
Malaysia |
4,060 |
0.3 |
Teva Pharmaceutical |
USA |
3,860 |
0.3 |
Fluidigm |
USA |
3,148 |
0.3 |
Wenzhou Kangning Hospital |
China |
2,826 |
0.2 |
Vectura |
UK |
2,440 |
0.2 |
Aegerion Pharmaceuticals 2%
15/08/2019 (unquoted) |
USA |
2,160 |
0.2 |
Innoviva |
USA |
1,502 |
0.1 |
NewLink Genetics |
USA |
981 |
0.1 |
Top 70 investments |
|
1,260,032 |
97.6 |
Deciphera Pharmaceuticals |
USA |
564 |
0.0 |
Ono Pharmaceutical |
Japan |
471 |
0.0 |
Novelion Therapeutics |
Canada |
131 |
0.0 |
Alimera Sciences |
USA |
63 |
0.0 |
Total equities and fixed interest
investments |
|
1,261,261 |
97.6 |
OTC Equity Swaps –
Financed |
|
|
|
Emerging markets Healthcare
(Basket) |
Emerging Markets |
19,097 |
1.5 |
Jiangsu Hengrui Medicine |
China |
16,074 |
1.2 |
JP China HC A-Share (Basket) |
China |
13,824 |
1.1 |
India Health Care (Basket) |
India |
10,923 |
0.8 |
M&A (Basket) |
USA |
9,791 |
0.8 |
Aier Eye Hospital Group |
China |
8,492 |
0.7 |
Jiangsu Nhwa Pharmaceutical |
China |
8,489 |
0.6 |
China O ACK (Basket) |
China |
4,579 |
0.4 |
Less: Gross exposure on financed
swaps |
|
(86,054) |
(6.7) |
OTC Equity Swaps –
Funded |
|
|
|
Aurobindo Pharma |
India |
14,471 |
1.1 |
Strides Shasun |
China |
8,951 |
0.7 |
Ajanta Pharma |
India |
1,800 |
0.2 |
Total OTC Swaps |
|
30,437 |
2.4 |
Total investments including OTC
Swaps |
|
1,291,698 |
100.0 |
Put Options (Long) |
|
602 |
0.0 |
Put Options (Short) |
|
(437) |
0.0 |
Call Options (Long) |
|
132 |
0.0 |
Call Options (Short) |
|
(4) |
0.0 |
Total investments including OTC
Swaps and Options |
|
1,291,991 |
100.0 |
* includes
Novo Nordisk ADR equating to 0.9% of investments.
** includes
Galapagos ADR equating to 1% of investments.
*** includes Allergan
5.5% Preference equating to 0.5% of investments.
See note 1 for further details in relation to the OTC Swaps and
Options.
Interim Management Report
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties associated with the
Company are set out on pages 22 to 24 of the Annual Report &
Accounts for the year ended 31 March
2017, which is published on the Company’s website. Such
risks and uncertainties are as applicable for the remaining six
months of the Company’s financial year as they have been for the
period under review. The risks can be summarised under the
following headings: Investment (including leverage risks);
Operational (including financial, corporate governance, accounting,
legal, cyber security and regulatory risks); and, Strategic
(including shareholder relations and share price performance).
The Board acknowledges the continued uncertainty surrounding the
UK’s decision to leave the EU. However, the Board does not consider
that this decision has significantly altered the risk profile of
the Company as the vast majority of the Company’s investments are
based outside the EU.
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, 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
twelve 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.
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 and Accounts has
been prepared in accordance with the Financial Reporting Standard
104 (Interim Financial Reporting); and
(ii) the interim management report
includes a fair review of the information required by 4.2.7R and
4.2.8R of the UK Listing Authority Disclosure Guidance and
Transparency Rules.
In order to provide these confirmations, and in preparing these
financial statements, the Directors are required to:
- select suitable accounting policies and
then apply them consistently;
- make judgments and accounting estimates
that are reasonable and prudent;
- state whether applicable UK Accounting
Standards have been followed, subject to any material departures
disclosed and explained in the financial statements; and
- prepare the financial statements on the
going concern basis unless it is inappropriate to presume that the
Company will continue in business;
and the Directors confirm that they have done so.
The Half Year Report has not been reviewed or audited by the
Company’s auditor.
For and on behalf of the Board
Sir Martin
Smith
Chairman
23 November 2017
Income Statement
for the six months ended 30 September
2017
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September 2017 |
30
September 2016 |
|
Revenue |
Capital |
|
Revenue |
Capital |
|
|
Return |
Return |
Total |
Return |
Return |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Gains on investments |
— |
84,691 |
84,691 |
— |
190,434 |
190,434 |
Exchange gains/(losses) on
overdraft |
— |
7,618 |
7,618 |
— |
(5,806) |
(5,806) |
Income from investments (note
2) |
5,573 |
— |
5,573 |
5,016 |
— |
5,016 |
AIFM, portfolio management, |
|
|
|
|
|
|
and performance fees (note 3) |
(244) |
(14,001) |
(14,245) |
(207) |
(7,696) |
(7,903) |
Other expenses |
(365) |
— |
(365) |
(342) |
— |
(342) |
Net return before
finance |
|
|
|
|
|
|
charges and taxation |
4,964 |
78,308 |
83,272 |
4,467 |
176,932 |
181,399 |
Finance charges |
(42) |
(792) |
(834) |
(21) |
(368) |
(389) |
Net return before
taxation |
4,922 |
77,516 |
82,438 |
4,446 |
176,564 |
181,010 |
Taxation |
(758) |
— |
(758) |
(406) |
— |
(406) |
Net return after
taxation |
4,164 |
77,516 |
81,680 |
4,040 |
176,564 |
180,604 |
Return per share (note
4) |
8.9p |
165.9p |
174.8p |
8.6p |
376.2p |
384.8p |
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 and the
net return/(loss) after taxation is attributable to the owners of
the Company.
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.
Statement of Changes in Equity
for the six months ended 30 September
2017
|
(Unaudited) |
(Unaudited) |
|
Six months |
Six months |
|
ended |
ended |
|
30
September |
30
September |
|
2017 |
2016 |
|
£’000 |
£’000 |
Opening shareholders’ funds |
1,100,903 |
881,758 |
Shares purchased for treasury |
— |
(21,381) |
Issue of new shares |
23,482 |
— |
Return for the period |
81,680 |
180,604 |
Dividends paid – revenue |
(7,447) |
(4,702) |
Closing shareholders’
funds |
1,198,618 |
1,036,279 |
Statement of Financial Position
as at 30 September 2017
|
(Unaudited) |
(Unaudited) |
|
30
September |
30
September |
|
2017 |
2016 |
|
£’000 |
£’000 |
Fixed assets |
|
|
Investments |
1,261,261 |
1,078,761 |
Derivatives – OTC swaps |
30,437 |
35,232 |
|
1,291,698 |
1,113,993 |
Current assets |
|
|
Debtors |
5,125 |
8,433 |
Derivatives – put and call
options |
734 |
561 |
Cash |
10,384 |
16,892 |
|
16,243 |
25,886 |
Current liabilities |
|
|
Creditors: amounts falling due
within one year |
(108,882) |
(102,989) |
Derivatives – put and call
options |
(441) |
(611) |
|
(109,323) |
(103,600) |
Net current liabilities |
(93,080) |
(77,714) |
Total net assets |
1,198,618 |
1,036,279 |
Capital and reserves |
|
|
Ordinary share capital |
11,862 |
11,627 |
Share premium account |
256,786 |
233,537 |
Capital reserve |
911,006 |
772,497 |
Capital redemption reserve |
8,221 |
8,221 |
Revenue reserve |
10,743 |
10,397 |
Total shareholders’
funds |
1,198,618 |
1,036,279 |
Net asset value per share – basic
(note 5) |
2,526.3p |
2,228.3p |
Notes to the Financial Statements
1. ACCOUNTING POLICIES
The condensed Financial Statements for the six months to
30 September 2017 comprise the
statements set out on the previous pages with the related notes
below. They have been prepared in accordance with FRS 104 ‘Interim
Financial Reporting’, the AIC’s Statement of Recommended Practice
issued in November 2014 (‘New SORP’)
and using the same accounting policies as set out in the Company’s
Annual Report and Financial Statements at 31
March 2017.
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 of 30
September 2017
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
Investments held at fair value
through profit or loss |
1,240,201 |
— |
21,060 |
1,261,261 |
Derivatives: OTC Swaps |
— |
30,437 |
— |
30,437 |
Derivatives: put and call options
(long) |
— |
734 |
— |
734 |
Derivatives: put and call options
(short) |
— |
(441) |
— |
(441) |
Total |
1,240,201 |
30,730 |
21,060 |
1,291,991 |
As of 31 March
2017
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
Investments held at fair value
through profit or loss |
1,127,087 |
— |
30,475 |
1,157,562 |
Derivatives: OTC Swaps |
— |
34,410 |
— |
34,410 |
Derivatives: put and call options
(long) |
— |
1,191 |
— |
1,191 |
Derivatives: put and call options
(short) |
— |
(282) |
— |
(282) |
Total |
1,127,087 |
35,319 |
30,475 |
1,192,881 |
2. INCOME
|
(Unaudited) |
(Unaudited) |
|
Six months
ended |
Six months
ended |
|
30
September |
30
September |
|
2017 |
2016 |
|
£’000 |
£’000 |
Investment income |
5,573 |
5,016 |
Total |
5,573 |
5,016 |
3. AIFM, PORTFOLIO MANAGEMENT AND
PERFORMANCE FEES
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September 2017 |
30
September 2016 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
AIFM fee |
(54) |
(1,019) |
(1,073) |
(43) |
(821) |
(864) |
Portfolio management fee |
(190) |
(3,611) |
(3,801) |
(164) |
(3,117) |
(3,281) |
Performance fee charge |
|
|
|
|
|
|
for the period* |
— |
(9,371) |
(9,371) |
— |
(3,758) |
(3,758) |
|
(244) |
(14,001) |
(14,245) |
(207) |
(7,696) |
(7,903) |
* During
the six months ended 30 September
2017, due to outperformance against the Benchmark, a charge
of £9,371,000 occurred (six months ended 30
September 2016: a charge of £3,758,000). In addition,
performance fees, accrued in previous periods, totaling £2,427,000
(six months ended 30 September 2016:
£1,331,000) crystallised and became payable.
As at 30 September 2017 total
performance fees of £12,758,000 were accrued (31 March 2017: £3,387,000). This amount consists
of £2,427,000 (31 March 2017: nil)
that has crystallised and is payable of which £2,205,000 was
payable to OrbiMed and £222,000 was payable to Frostrow, and a
provision of £10,331,000 (31 March
2017: £3,387,000). This provision, relating to
outperformance generated at 30 September
2017, will only become payable at future performance fee
calculation dates in the event that the current outperformance is
maintained. The maximum amount that could become payable by
30 September 2018, in the event that
outperformance is maintained is £10,331,000.
See glossary
With effect from 1 April 2017 the
AIFM fee was amended to 0.30% of the market capitalisation up to
£150 million, 0.20% in excess of £150 million and up to £500
million, 0.15% in excess of £500 million and up to £1 billion,
0.125% in excess of £1 billion to £1.5 billion, and over £1.5
billion 0.075%, plus a fixed amount equal to £57,500 per annum. The
Portfolio Management fee remained unchanged at 0.65% per annum of
the Company’s NAV.
The performance fee provision 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. For performance fees payable to 31 March 2018 relating to outperformance attained
by 31 March 2017, the performance fee
is 16.5% of any outperformance over the Benchmark, with OrbiMed
receiving 15% and Frostrow receiving 1.5%. For outperformance
generated from 1 April 2017 the
performance fee is 15% of any outperformance over the Benchmark
payable to OrbiMed.
4. RETURN PER SHARE
|
(Unaudited) |
(Unaudited) |
|
Six months
ended |
Six months
ended |
|
30
September |
30
September |
|
2017 |
2016 |
|
£’000 |
£’000 |
The return per share is based on the
following figures: |
|
|
Revenue return |
4,164 |
4,040 |
Capital return |
77,516 |
176,564 |
Total return/(loss) |
81,680 |
180,604 |
Weighted average
number of shares in issue for the period |
46,719,666 |
46,937,714 |
Revenue return per share |
8.9p |
8.6p |
Capital return per share |
165.9p |
376.2p |
Total return per share |
174.8p |
384.8p |
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. NET ASSET VALUE PER SHARE
The net asset value per share is based on the assets
attributable to equity shareholders of £1,198,618,000 (31 March 2017: £1,100,903,000) and on the number
of shares in issue at the period end of 47,446,278 (31 March 2017: 46,506,278).
6. TRANSACTION COSTS
Purchase transaction costs for the six months ended 30 September 2017 were £366,000 (six months ended
30 September 2016: £249,000).
Sales transaction costs for the six months ended 30 September 2017 were £266,000 (six months ended
30 September 2016: £192,000).
These costs comprise mainly commission.
7. 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 2017.
8. 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 2017
and 30 September 2016 has not been
audited, or reviewed by the Company’s auditor.
The information for the year ended 31
March 2017 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
Alternative Investment Fund Managers
Directive (AIFMD)
Agreed by the European Parliament and the Council of the
European Union and transported into UK legislation, the AIFMD
classifies certain investment vehicles, including investment
companies, as Alternative Investment Funds (AIFs) and requires them
to appoint an Alternative Investment Fund Manager (AIFM) and
depositary to manage and oversee the operations of the investment
vehicle. The Board of the Company retains responsibility for
strategy, operations and compliance and the Directors retain a
fiduciary duty to shareholders.
Benchmark
The performance of the Company is measured against the MSCI
World Health Care Index on a net total return, sterling adjusted
basis. Prior to 1 October 2010
performance was measured against the Datastream World
Pharmaceutical & Biotechnology Index (total return, sterling
adjusted).
Discount or Premium
A description of the difference between the share price and the
net asset value per share. The size of the discount or premium is
calculated by subtracting the share price from the net asset value
per share and is usually expressed as a percentage (%) of the net
asset value per share. If the share price is higher than the net
asset value per share the result is a premium. If the share price
is lower than the net asset value per share, the shares are trading
at a discount.
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.
Gearing
Gearing is calculated as borrowings, less net current assets,
divided by Shareholders’ Funds, expressed as a percentage.
Leverage
Leverage is defined in the AIFMD as any method by which the AIFM
increases the exposure of an AIF. Therefore, the Company has to
comply with the AIFMD leverage requirements. For these purposes the
Board has set a maximum leverage limit of 40% for both methods.
Under AIFMD this limit is expressed as 140%, where 100% represents
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 Options and Equity Swaps for more details
on how exposure through derivatives is calculated.
MSCI World Health Care Index
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)
NAV Total Return
The theoretical total return on shareholders’ funds per share,
including the assumed £100 original investment at the beginning of
the period specified, 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.
Ongoing Charges
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.
Options
An option is an agreement that gives the buyer, who pays a fee
(premium), the right – but not the obligation – to buy or sell a
specified amount of an underlying asset at an agreed price (strike
or exercise price) on or until the expiration of the contract
(expiry). A call option is an option to buy, and a put option an
option to sell.
The potential loss of the buyer is limited to the higher of the
premium paid or the market value of the bought option. On the other
side for the seller of a covered call option (your company does not
sell uncovered options) any loss would be offset by gains in the
covering position, and for sold puts the potential loss is the
strike price times the number of option contracts held. The
exposure, used in calculating the AIFMD leverage limits, is
determined as the delta (an options delta measures the sensitivity
of an option’s price solely to a change in the price of the
underlying asset) adjusted equivalent of the underlying
position.
Performance Fee
Dependent on the level of long-term outperformance of the
Company, a performance fee can be 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. Up
to 31 March 2017, the performance fee
amounted to 16.5% of any outperformance over the Benchmark, the
Portfolio Manager receiving 15% and the AIFM receiving 1.5%,
respectively. With effect from 1 April
2017 the Company’s AIFM no longer receives a performance fee
(see page 27 and also page 28 of the Company’s Annual Report &
Accounts for the year ended 31 March
2017 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 twelve 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.
For and on behalf of
Frostrow Capital LLP, Secretary
23 November 2017
- ENDS -