17 November
2021
LONDON STOCK EXCHANGE ANNOUNCEMENT
Worldwide
Healthcare Trust PLC
Unaudited Half
Year Results for the six months ended
30 September 2021
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 2021. 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 2021 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.
Company Summary / Performance
|
|
Six
months to
30 September
2021 |
One year
to
31 March
2021 |
Net asset value per
share (total return)* # |
|
0.4% |
30.0% |
Share price (total
return)* # |
|
(1.5%) |
27.4% |
Benchmark (total
return)^ # |
|
13.0% |
16.0% |
|
|
|
|
|
30
September
2021 |
31
March
2021 |
Six
months
change |
Net asset value per
share |
3,700.7p |
3,703.0p |
(0.1%) |
Share price |
3,625.0p |
3,695.0p |
(1.9%) |
Discount of share price
to the net asset value per share* |
2.0% |
0.2% |
|
Leverage* |
14.7% |
7.6% |
|
Ongoing charges* |
0.8% |
0.9% |
|
Ongoing charges
(including performance fees crystallised during the period)* |
1.3% |
0.9% |
|
# 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)
Chairman’s Statement
Sir Martin
Smith
Performance
Following a period of strong relative and absolute performance,
the first six months of the current financial year have proved to
be challenging for the Company. While the Company’s net asset value
per share total return ended the period in positive territory
(+0.4%), it significantly underperformed the Company’s Benchmark,
the MSCI World Healthcare Index, measured on a net total return,
sterling adjusted basis, which rose by 13.0%. Sterling depreciated
by 2.3% against the U.S. dollar over the period; the U.S. dollar
being the currency in which the majority of the Company’s
investments are denominated. The Company’s share price total return
of -1.5% fared less well and, as a result, the discount of the
Company’s share price to the net asset value per share widened to
2.0% as at 30 September 2021 from
0.2% at the beginning of the period.
The principal reasons for this underperformance were the
significant overweight positions in poorly performing Emerging
Biotechnology* and China, a
strategy that had previously served the Company well. These sectors
were subject to significant volatility as investors rotated to
larger stocks in more developed markets, which is why they were the
largest contributors to the reported relative underperformance. In
addition, absolute performance was affected by the political
uncertainty arising from the incoming new Presidential
administration in the U.S.
Looking at specific names in the portfolio, the largest
contributions during the reporting period came from UK
pharmaceutical and biotechnology company AstraZeneca, Indian
multinational hospital chain company Apollo Hospitals
Enterprise and U.S. medical supplies company DexCom. The
largest detractors from performance were Chinese pharmaceutical
company Jiangsu Hengrui Medicine and U.S. biopharmaceutical
companies Vor Biopharma and Haemonetics. Further
information regarding the Company’s investments and performance can
be found in the Review of Investments.
The Company had, on average, leverage of 10.9% during the period
which contributed 0.04% to performance. As at the half year-end
leverage stood at 14.7% compared to 7.6% at the beginning of the
period. Our Portfolio Manager continues to adopt both a pragmatic
and a tactical approach to the use of leverage.
The underperformance of the Benchmark in the period has resulted
in a reversal of the performance fee provision of £18.9m, which now
stands at zero. In accordance with the terms of the performance fee
arrangements*, following an exceptional period of outperformance in
the period to 30 June 2020, which was
maintained to June 2021, a
performance fee of £12.9m became payable as at 30 June 2021. Further details are provided in
note 3.
* See Glossary.
As I have mentioned previously, 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 capability, has continued to identify opportunities
which have been added to the portfolio. Exposure to unquoted
equities accounted for 7.5% of the total portfolio at the half
year-end, and these holdings made a positive contribution of 1.9%
to the Company’s performance during the period under review.
Capital
The Board continues to monitor closely the relationship between
the Company’s share price and the net asset value per share. As a
result of continued investor demand, a total of 1,122,500 new
shares were issued at a premium to the cum income net asset value
per share during the half year, raising £41.7 million of new funds.
Following the half year end to 16 November 2021, a further
75,000 new shares were issued at a premium to the cum income net
asset value per share, raising £2.8 million of new funds. No shares
were repurchased by the Company during the period under review and
to 16 November 2021.
As mentioned at the Company’s year-end, the ongoing share
issuance programme triggered the requirement for the Company to
produce a prospectus which was published on 13 July 2021. The prospectus provides authority
for the issuance of 20 million new shares. A copy of the prospectus
can be found on the Company’s website at www.worldwidewh.com
Revenue and Dividends
The revenue return for the period was £9.0 million, compared to
£5.6 million in the same period last year. This increase was due
primarily due to a rise in portfolio income. The Board has declared
an increased interim dividend of 7.0p per share, for the year to
31 March 2022 (2021: 6.5p), which
will be payable on 11 January 2022 to
shareholders on the register of members on 19 November 2021. The associated ex-dividend date
is 18 November 2021.
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, only a maximum of 15% of income can be
retained by the Company in any financial year.
It is the Board’s continuing belief that the Company’s capital
should be deployed rather than paid out as dividends to achieve a
particular target yield.
Outlook
Our Portfolio Manager continues to believe that despite this
disappointing half-year, the positive investment themes which
underpin the healthcare sector remain intact and they will continue
to focus on the selection of investments with strong prospects for
capital growth. They further believe that innovation will continue
to be the primary value driver for the healthcare sector. In
addition, an expected increase in mergers and acquisitions
activity, a relatively benign political environment in the U.S. and
a return to favour of both emerging markets healthcare stocks and
Emerging Biotechnology companies will lead to an improvement in the
Company’s performance.
Sir Martin Smith
Chairman
17 November 2021
Review of Investments
Markets
The hallmark of equity markets so far in 2021 has been that
share price returns are being primarily driven by global factors
and events. Whether it be the pandemic “recovery” trade,
growth-to-value rotation, large capitalisation companies over
small, inflation concerns, interest rate gyrations, or other
“factor” influences, the effect of these factors often swamped
company specific fundamental factors in moving share prices. As a
specialist investor in a highly complex and idiosyncratic industry
like healthcare, it was, at best, a frustrating six?month
period.
Of course, the global pandemic wrought by the SARS-Cov-2 virus
has not ended with the administration of billions of COVID-19
vaccine doses worldwide. Despite the explosion of the highly
contagious Delta-variant in mid-2021 across continents, global
equity markets continued to move higher, with multiple indices
reaching record highs in the period.
At a high level, one critical driver of global equities over the
past six-months has been investor sentiment about the global
economic outlook. Concerns about U.S. tax reform, global inflation,
supply chain disruption and unemployment were ignored as stocks
moved higher. Recurring waves of COVID-19 infections across the
globe were also ignored by investors as stocks once again moved
higher. Globally, investor sentiment was buoyed by an economy that
was expected to expand at a pace not seen in 80 years.
Overall, we saw an MSCI World Index total return of 10.7% in the
half-year period (sterling adjusted). In the U.S., the
S&P 500 finished up 9.2% (dollar) on a total return basis.
In the U.K., the FTSE All Share total return was 7.9% (sterling).
For healthcare, the Benchmark return was 13.0%. Similarly, the
S&P 500 Healthcare Sub-Index (sterling adjusted)
rose 12.7% on a total return basis.
Performance
For the six-month period ended 30
September 2021, the Company posted a net asset value total
return of +0.4%. and a share price total return of -1.5%. This
performance lagged the Benchmark return of +13.0%. The Company’s
underperformance was due to multiple factors but was focussed on
three primary factors.
- First, two subsectors in which we have long held a strategic
overweight position – Emerging Biotechnology and China – significantly underperformed.
- Second, a backdrop of a rotation by investors from
growth-to-value and from small capitalisation to large
capitalisation stocks, hurt the Company’s relative
performance.
- Third, the persistent threat of U.S. drug price reform created
an overhang for some parts of healthcare.
Our investment strategy, centred around innovation, resulted in
underperformance during the six-month period. Our preferences for
biotechnology over pharmaceuticals, growth over value, and small
capitalisation over large capitalisation companies all conspired
against relative performance. Despite this recent challenging
performance, we plan to maintain this strategy going forward.
Whilst this strategy is susceptible to short-term volatility, it
has proven successful over the longer term.
Since its inception as of 28 April
1995, the Company’s NAV has posted a +4,505.8% total return,
or an average of +15.6% per annum through to 30 September 2021. The Company’s share price
return over the same period has been +4,282.2%, or +15.4% per
annum. This compares to a Benchmark return of +1,990.8%, or +12.2%
per annum over the same investment horizon and is a testament to
the long-term success of our investment approach.
Sector Review
Two sectors that are long term, key strategic overweight
positions for the Company, Emerging Biotechnology and China, were subject to some extreme volatility
in the six-month period and were the largest factors in the
reported underperformance versus the benchmark. Partially
offsetting this poor performance, however, were contributions from
other sectors and regions, most notably Medical Devices
Pharmaceuticals, and India, as
well as from the Company’s portfolio of “unquoteds” (a mix of
private companies and fixed income).
Biotechnology
Following record performance in 2020, the biotechnology sector,
and in particular small and mid-capitalisation stocks, has
dramatically underperformed the overall market thus far in 2021.
With the post-election political overhang, some negative
fundamental news flow, and the abundance of “macro” and sentiment
factors driving investor behaviour, the sector has materially
underperformed to a record extent.
Additionally, investor concerns about news flow from the U.S.
Food and Drug Administration (FDA) increased during the period
which applied further pressure to biotechnology valuation levels.
In 2021, there were several unexpected regulatory trends from the
FDA, notably: surprise Complete Response Letters (effectively
“non?approvals” of new drugs), clinical holds (halting a clinical
trial due to safety concerns), and deferrals on target action dates
(when more time is required to review a new drug application).
Also, of note, was the stretched workload of the FDA due to
COVID-19 related responsibilities, delaying a plethora of clinical
trials, advisory committees, manufacturing site visits, new drug
reviews, and vaccine reviews.
The controversial approval of Biogen’s Aduhelm (aducanumab) by
the FDA, despite mixed clinical trial data and a negative
recommendation by an external advisory committee, also hurt
investor confidence in the agency, leading investors to become
increasingly wary of potential regulatory risks and uncertainties
in biotechnology.
Further, the Emerging Biotechnology sector has been plagued by
several high-profile negative news events in 2021, including
multiple late-stage clinical trial failures as well as unexpected
safety problems across clinical trials. This includes some safety
concerns among high profile new technologies, like gene
editing.
Other issues also created headwinds for biotechnology stocks,
including modest levels of mergers and acquisitions (M&A) in
the period, a paucity of positive clinical catalysts, and a
significant “growth-to-value” rotation that resulted in dramatic
underperformance of biotechnology stocks (as measured by the
S&P Biotech ETF or XBI) when compared to the S&P 500
Index.
Nevertheless, we remain positive on the outlook for the sector,
and believe the broad valuation reset within biotechnology could
catalyse strategic action from acquirors, which could help reignite
investor interest. These companies remain the cradle of innovation
within the sector and will remain a strategic overweight for the
Company.
Emerging Markets
Another strategic overweight for the Company that experienced
volatility was Emerging Market stocks, specifically in China, in the latter part of the reported
six-month period. Like biotechnology stocks described above,
emerging market healthcare names experienced robust returns in
2020, in part due to COVID-19 related tailwinds. Many Chinese
healthcare stocks, especially vaccine players, digital healthcare
and hospital operators were favoured by investors during the
pandemic and valuations rose accordingly.
However, with richer valuations, we witnessed some profit taking
in 2021. This selling pressure was exacerbated by investor concerns
over potential tightening of government regulations in the Chinese
healthcare sector, which first occurred in other industries such as
the internet and education. Harsher government intervention in
these sectors caused investors to worry about additional
regulations that may come in healthcare, creating a “wait and see”
sentiment which allowed share prices to fall further still.
Despite the recent volatility, we believe the correction in
valuations in China is largely
done and investor sentiment may be swinging positive. Further, the
China biopharmaceutical industry
remains innovation-driven and there has been an increasing number
of molecules being licensed to overseas players, a critical point
of validation for the burgeoning research and development (R&D)
activity coming out of China.
Of course, macro tailwinds remain strong. With a declining
number of new-borns, an aging population remains one of the largest
issues in China. As a result,
government investment in the healthcare system, including private
hospitals, internet/ digital healthcare and medical insurance
remains the primary focus of government in the next five-year
plan.
Healthcare
The current calendar year has been challenging for healthcare
stocks. The outcome of the 2020 U.S. Presidential election created
a “Blue Wave” with the Democrats in full control of the White
House, the House of Representatives, and the Senate.
This final election outcome increased the possibility that the
incoming administration would be both motivated and capable of
passing industry-changing legislation – specifically on drug
pricing – that would be harmful to healthcare stocks. Whilst this
has yet to happen (and we believe that it will not), the
compression in valuation compared to the broader market became
evident as many generalist investors chose to avoid what is seen as
a complex area of the market.
This is not without precedent. Previously healthcare stocks have
traded at a steep relative discount due to generalist investor
fears over federal legislative changes related to prescription drug
pricing, notably the Democratic controlled Presidencies of
Bill Clinton in 1993 (“Hillarycare”)
and Barack Obama in 2009
(“Obamacare”). In both cases, the discount eventually reversed
after legislation went nowhere or proved benign or even positive
for the healthcare industry. Ultimately, we expect a similar
reversal in valuations under Joe
Biden.
Life Sciences
The Life Science Tools and Services sector is another which
benefited significantly from COVID-19 tailwinds in 2020 and this
has continued into 2021. Whilst the Company did enjoy some modest
positive contribution from the sector in the reporting period, it
was below the Benchmark return. The underperformance was
principally due to our positioning in the sector, where we favour
companies we view as long-term secular winners based on novel and
exciting new innovations, as opposed to the more mature
large-capitalisation, diversified companies that make up much of
this sector.
This reflects our longer-term thesis around compelling
investment opportunities across key themes such as liquid biopsy
and spatial genomics. However, in the period, there was significant
volatility across the stocks tied to these newer trends, unlike the
general strength in the larger, more diversified names who were
able to weather COVID-19 related disruptions to their end
markets.
Looking ahead, we continue to see the most attractive
opportunity set in our preferred high growth areas of innovation,
where relative valuations have been recently depressed and which
investors may appreciate attractive upside moving into the end of
the calendar year and into 2022.
Major Contributors to Absolute Net
Asset Value Performance
As has been an important hallmark of the Company’s performance
over the years, major contributors to performance
are represented by a very diverse and distinct set of
companies. Key contributors in the six-month period ended
30 September 2021 included a large capitalisation
pharmaceutical company from the UK, a major hospital operator in
India, and three U.S. based
companies: a specialty drug developer, the maker of an artificial
pancreas, and a cardiovascular medical device maker.
The COVID-19 pandemic brought industry, governments, and
academia together in unison to attempt to thwart one of the most
deadly pandemics in modern history. But it was not without
controversy. One company that attempted to do the right thing,
AstraZeneca, was perhaps the pre-eminent example. Imperfect
execution across trial design, trial logistics, manufacturing, and
communication led to over promising and under delivery of a vaccine
and (so far) a therapeutic for COVID-19.
With it, came share price volatility that obfuscated the
company’s best-in-class growth profile generated by some of the
best innovation and business development in the industry across a
wide range of therapeutic categories, including oncology, diabetes,
respiratory, and cardiometabolic medicine.
We invested in the company during the tumult and now that the
pandemic related headlines have subsided, the company has
maintained a top tier growth trajectory despite a difficult
operating environment with the share price responding
accordingly.
Apollo Hospitals Enterprise is the largest hospital chain
in India with 71 hospitals and
over 10,000 beds as of June 2021. Alongside this, Apollo has
the largest retail pharmacy in India with over 4,000 pharmacies. The company
has recently entered digital healthcare in a significant way under
the umbrella brand, “Apollo 24*7”. Impressive share price
performance, including record highs, came from several factors.
First, occupancy rates have shown a strong recovery through 2021,
to near pre-pandemic highs, though it had COVID-19 related
occupancy as well. The company’s strong execution in terms of cost
control and managing case-mix led to healthy average revenues per
operating bed. Second, multiple new business initiatives have
fuelled investor enthusiasm; another reason for the share price
re-rating. These include “Apollo Healthco” (a recent carve out from
the existing business), “PharmEasy” (a potential IPO with a
prospective U.S.$9 billion
valuation), and other new initiatives showing results and margin
accretion such as proton therapy, clinics, and diagnostics.
Dexcom is a California-based medical device company that
is the market leader in continuous glucose monitoring (CGM). The
company is ushering in a new paradigm in diabetes care – an
artificial pancreas. Historically, monitoring blood glucose was
done via needle-based finger pricks and external devices which gave
only individual data points that were of modest value. Today, using
the company’s innovative technology, patients can now receive
real-time indications of their blood glucose on their mobile phone,
which can detect whether the user’s blood sugar is improving or
worsening, and even communicate with an insulin pump to mimic a
pancreas by automatically and algorithmically administering
insulin.
With up to eight million diabetics requiring daily insulin in
their core markets and hundreds of millions of diabetics globally,
Dexcom has been working tirelessly to drive adoption of this
innovative technology. The past six months were strong
operationally for the company, in particular it posted a very
strong second quarter result, suggesting the current business is
accelerating at the same time as the company moves closer to the
expected launch of its next generation product; G7. As a result,
the share price reached record highs in the period.
Horizon Pharmaceuticals is a US-based specialty
pharmaceutical company that presided over one of the most
successful drug launches ever in 2020, Tepezza (teprotumumab) which
was developed by the company to treat “TED” or thyroid eye disease,
a painful, disfiguring, and debilitating disorder of the
musculature of the eye. Launched in January
2020, the drug was well on its way to blockbuster status
despite the commercial headwinds of the COVID-19 pandemic.
Despite a temporary government-mandated shutdown in the
manufacturing of Tepezza due to the prioritisation of COVID?19
vaccine production, the re-launch of the product in April 2021 exceeded expectations. Management has
continued to raise near-term estimates for Tepezza sales, pushing
the stock to all-time highs during the reported period.
Another distinct and unique example of innovation is
Edwards Lifesciences, a developer of tissue
replacement heart valves, and more specifically transcatheter heart
valves (THV). The company’s current valve portfolio is largely
comprised of aortic heart valves, a market which continues to grow
solidly in the double-digit range and has remained relatively well
insulated from COVID-19 disruptions, given the severity of the
disease that this technology is designed to treat: aortic
stenosis.
A strong competitive position and growing demand have allowed
the company to continue to outperform its peer group with respect
to organic sales and earnings growth rates, resulting in solid
share price performance during the six-month period. Importantly,
there have been several positive updates on the company’s product
pipeline, specifically around mitral heart valve technologies,
which has led to increased investor confidence in sustained high
sales growth for the next several years.
Major Detractors from Absolute Net
Asset Value Performance
Theravance Biopharma is a biopharmaceutical company
specialising in the discovery and development of organ-selective
medicines. The company offers the marketed drug, Yupelri
(revefenacin), a once-daily, nebulised long-acting muscarinic
antagonist for use in the treatment of chronic obstructive
pulmonary disease (COPD). The company’s pipeline is also innovative
and includes a novel mechanism – pan-janus kinase (JAK) inhibition
– for the treatment of both ulcerative colitis and asthma.
Unfortunately, the share price dropped in the reported period
after two separate but high-profile pipeline failures:
(1) TD?1473 – a gut-selective JAK inhibitor for the treatment
of ulcerative colitis and (2) ampreloxetine – a norepinephrine
reuptake inhibitor in neurogenic orthostatic hypotension. Both
TD-1473 and ampreloxetine were discontinued due to a lack of
efficacy shown in their respective clinical trials. The stock fell
as a result, however, the company immediately implemented a
significant cost reduction programme to focus on reaching
profitability, which helped buoy the valuation after these
disappointing catalysts.
Another notable detractor which fell victim to the broader
biotechnology sell-off was Boston-based Ikena Oncology, which
develops targeted cancer therapies and modulators of the tumour
microenvironment. The company’s lead programme, IK-930, targets
solid tumours with defined genetic mutations. The company expects
this asset to enter clinical development by the end of 2021 and has
a promising pipeline of earlier stage programmes that should also
generate company value. However, in the absence of clinical data,
the shares have been weak following its March 2021 IPO amidst a broader sell off of
early-stage biotechnology companies.
Haemonetics is the largest provider of equipment and
consumables used for plasma collection in the world. The company
has worked to provide value for its customers by pioneering an
innovative new machine and collection process that can
significantly enhance collection plasma yields per donor, at a time
when collections have been significantly challenged due to the
COVID-19 pandemic. Notable players, like Takeda, were readily
adopting this new technology. Unfortunately, however, one of the
company’s largest customers, CSL of Australia, announced in April 2021 that they would not be renewing their
contract with Haemonetics and would instead be moving to a new
entrant into the market. The share price fell as a result, and on
the basis of this new information we exited the stock.
Vor Biopharma is a Massachusetts-based biotechnology company
developing cellular therapies for the treatment of acute myeloid
leukemia. The company’s lead programme utilises CRISPR/Cas9-based
gene editing technology to disrupt the expression of a very
specific protein coding gene (called CD33) in stem cells that
produce blood cells in bone marrow. This is in effort to reduce the
toxicity of CD33-targeted agents including Mylotarg, an
antibody-drug conjugate, and of chimeric antigen receptor T cell
therapy. The share price for the company has waned since its
February 2021 IPO, again reflecting a
lack of current investor interest in the small cap biotechnology
space.
Jiangsu Hengrui Medicine is the largest pharmaceutical
company listed in China and is an
example of a “blue-chip” healthcare stock which we target as a
strategic investment in emerging markets. Their innovative oncology
franchise consists of many “hot targets” including novel therapies
in immuno-oncology (PD-1 inhibitors) and targeted therapies
(tyrosine kinase inhibitors and PARP inhibitors). The company’s
large and robust generic franchise spans many therapeutic
categories including oncology, cardiovascular, pain, and
antibiotics.
Declines in the share price in the reporting period reflected
two factors. First, the company suffered some reimbursement and
pricing setbacks in the Chinese Group Purchasing Organisation (GPO)
programme that concluded during the period, adversely impacting the
company’s revenue in 2021. Second, changes to regulatory guidelines
in China for new cancer drug
approvals (i.e., the requirement of a comparator arm) was a
negative development for the company’s innovative oncology
franchise. Intensified debate over pricing for new cancer drugs in
China also hurt the share price
after the company’s PD-1 inhibitor, AiRuiKa (camrelizumab), faced a
government mandated price revision of over 50%.
Contribution from Unquoted
Holdings
During the six months ended 30 September
2021, the Company continued to take advantage of a
favourable market in crossover investments (i.e. investment in the
last financing round before a company goes public) and we continue
to believe they offer an attractive combination of near-term
liquidity and financial return.
As of 30 September 2021,
investments in unquoted companies (excluding debt securities)
accounted for 7.5% of the Company’s net assets versus 5.3% as of
31 March 2021, and 1.0% as of
31 March 2020. The Company initiated
positions in three China-based
unquoted investments during the period; one investment, Erasca ,
completed its initial public offering in July 2021 despite a difficult market environment
for biotechnology new issues in the
United States. For the period under review, unquoted
equities contributed 1.9% to the Company’s performance.
Leverage Strategy
Historically, the typical leverage level employed by the Company
has been in the mid-to-high teens level. Considering the market
volatility during the past financial year, we have, more recently,
used leverage in a more tactical fashion. For example, 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. This low level of leverage was
maintained for a period of months but was increased ahead of and
into the U.S. Presidential election in November 2020 and decreased in the post-election
period heading into 2021.
However, given the sell-offs in Emerging Biotechnology and
China healthcare stocks during the
six-month period under review, leverage was again increased,
effectively increasing month-over-month thereafter in 2021. The
significant potential for a positive resolution to the U.S. drug
pricing reforms has also pushed gearing up as of the end of
October 2021. We expect to continue
with a tactical approach to leverage in 2022.
Derivative Strategy
The Company has the ability to use equity swaps and options.
During the current review period the Company employed single stock
equity swaps to gain exposure to emerging market Chinese and Indian
stocks. The exposure via swaps averaged 6.7% on a gross basis
during the period and detracted 0.6% from the Company’s
performance. Analysis of the Company’s investments in emerging
markets is set out earlier in this report. Further explanation
regarding swaps can be found in the Glossary.
Looking Ahead
We have long espoused the “Golden Era” of innovation that has
been the primary creator of value for biopharmaceuticals for nearly
ten years now. We have no reason to believe that this is going to
change. In fact, the industry’s response to the COVID-19 pandemic
is just the latest example of the unprecedented innovation and
societal benefit that the industry can offer.
Despite not attracting as much headline attention as vaccines,
the novel therapeutics developed to treat and potentially prevent
the COVID-19 illness are just as impressive as the vaccine
initiatives. The development of multiple antibodies, antibody
cocktails and anti-virals to reduce the severity of symptoms,
prevent hospitalisations, and lower mortality have been critical in
the public fight against COVID-19. The re-purposing of many already
approved medicines to combat the disease burden has been under
reported. Also, the development of oral therapies to reduce illness
and prevent death will be another critical arrow in the quiver
against the pandemic.
The FDA has certainly been in the spotlight in 2021. From its
efforts to combat to COVID-19, to much scrutinised delays for some
new drug approvals, to the controversial approval of new
Alzheimer’s drug, and the on-going lack of an appointed
Commissioner; there has certainly been reason for investor concern.
But what are the facts?
First and foremost, we expect another near record number of new
drug approvals in 2021. With 41 novel approvals in the first three
quarters of the calendar year, the Agency has approved one more
drug compared to the same time period a year ago and has the
potential for 58 approvals in 2021 (source: Washington Analysis).
This would be the second highest level of annual approvals of all
time and would represent the most productive five-year period in
FDA history.
On 7 June 2021, the FDA approved
Aduhelm (aducanumab) for the treatment of Alzheimer’s disease.
However, this unexpected approval set off a maelstrom of
controversy given the debatable clinical efficacy of the drug and
the fact that an external advisory committee voted against
recommending approval of the drug. The ultimate approval debunks
the myth that the FDA cannot operate properly or is too
conservative in the absence of a full-time commissioner. We believe
this view underappreciates the importance of the permanent staff
and career employees who do almost all of the primary due diligence
on behalf of the FDA.
What else can we expect from the Biden Administration in
Washington? Both Medicare
expansion and drug pricing reform have featured prominently in
debates regarding the social spending bill. The most realistic
Medicare proposals being discussed are incremental; including the
expansion of benefits and lowering the cost of premiums. In the
effort to lower the cost of prescription drugs to patients, there
is a notable lack of consensus regarding the preferred size and
scope of such reforms. We feel that these disagreements may derail
drug pricing legislative efforts completely or produce a
significantly watered-down update, either of which would be
welcomed by investors.
M&A has been a common industry staple in healthcare for
decades, especially in the therapeutics space, and a core part of
the Company’s investment strategy. The fragmented and heterogeneous
nature of the industry, coupled with clinical and technological
complexity, will continue to generate many business-development
deals. That said, there is an ebb and flow to M&A, a variable
cyclicality driven by influences from capital markets, IPOs, and
crossovers, plus considerations like valuation, large
capitalisation company appetites, and of course, the impact of the
pandemic.
The summer of 2021 certainly saw an “ebb” in M&A activity
with a total transaction value of only U.S.$6 billion across eight deals. This inflected in
earnest in October when Merck announced its intention to acquire
Acceleron Pharma for U.S.$11.5 billion. We do expect an uptick in
M&A given the limited cash flow disruption for likely acquirors
arising from the pandemic, continued solid balance sheets and the
positive tone from large capitalisation companies about potential
M&A.
In our current and fast-changing society, new and novel
technologies abound and have impacted many industries. Healthcare
is no exception and technological advances are the primary pillar
for our positive outlook on the industry. We see an unprecedented
level of innovation across the spectrum, from therapeutics to
services, from devices to diagnostics. Moreover, advances in
genomics and biotechnology have pushed the therapeutics space to
such frontiers that the number of known disease states and
druggable targets are at an all-time high. Novel platform
technologies have enabled more therapies to target diseases that
were previously thought to be untreatable.
Sven H. Borho and Trevor M. Polischuk
OrbiMed Capital LLC
Portfolio Manager
17 November 2021
Principal Stock Contributors to and
Detractors from Absolute Net Asset Value Performance
For the Six Months Ended 30 September
2021
Top Five
Contributors |
Contribution
£’000 |
Contribution
per share
£ |
AstraZeneca |
25,830 |
0.4 |
Apollo Hospitals
Enterprise |
24,314 |
0.4 |
Dexcom |
24,034 |
0.4 |
Horizon
Therapeutics |
20,342 |
0.3 |
Edwards
Lifesciences |
18,870 |
0.3 |
|
|
|
Top Five
Detractors |
|
|
Jiangsu Hengrui
Medicine |
(15,075) |
(0.2) |
Vor Biopharma |
(16,320) |
(0.2) |
Haemonetics* |
(17,511) |
(0.3) |
Ikena Oncology |
(18,044) |
(0.3) |
Theravance
Biopharma |
(23,738) |
(0.4) |
Based on 65,108,269 shares being the weighted average number in
issue during the period.
* Not held at 30 September 2021
Source: Frostrow Capital LLP
Portfolio
At 30 September 2021
|
Country/ |
Market
value |
% of |
Investments |
Region |
£’000 |
investments |
Merck |
USA |
142,736 |
5.5 |
Bristol-Myers
Squibb |
USA |
137,650 |
5.3 |
AstraZeneca |
United Kingdom |
130,247 |
5.1 |
Boston Scientific |
USA |
116,803 |
4.5 |
Horizon
Therapeutics |
USA |
107,162 |
4.1 |
Mirati
Therapeutics |
USA |
97,106 |
3.8 |
AbbVie |
USA |
87,273 |
3.4 |
SPDR S&P Biotech
Fund |
USA |
83,707 |
3.3 |
UnitedHealth Group |
USA |
77,142 |
3.0 |
Natera |
USA |
73,070 |
2.8 |
Top 10
investments |
|
1,052,896 |
40.8 |
Vertex
Pharmaceuticals |
USA |
70,291 |
2.7 |
Edwards
Lifesciences |
USA |
67,420 |
2.6 |
Intuitive Surgical |
USA |
65,578 |
2.5 |
DexCom |
USA |
61,592 |
2.4 |
Guardant Health |
USA |
60,004 |
2.3 |
Humana |
USA |
56,437 |
2.2 |
Stryker |
USA |
55,561 |
2.2 |
Zimmer Biomet
Holdings |
USA |
48,380 |
1.9 |
Novartis |
Switzerland |
46,563 |
1.8 |
Caris Science
(unquoted) |
USA |
42,556 |
1.7 |
Top 20
investments |
|
1,627,278 |
62.9 |
Neurocrine
Biosciences |
USA |
38,982 |
1.5 |
Anthem |
USA |
38,724 |
1.5 |
Erasca |
USA |
34,077 |
1.3 |
Progyny |
USA |
33,060 |
1.3 |
Deciphera
Pharmaceuticals |
USA |
32,336 |
1.2 |
ImmunoGen |
USA |
28,454 |
1.1 |
CRISPR
Therapeutics |
Switzerland |
27,417 |
1.1 |
Thermo Fisher
Scientific |
USA |
25,705 |
1.0 |
Oak Street Health |
USA |
25,231 |
1.0 |
Biogen |
USA |
23,556 |
0.9 |
Top 30
investments |
|
1,934,820 |
75.0 |
Alphamab Oncology |
China |
23,475 |
0.9 |
HCA Healthcare |
USA |
23,405 |
0.9 |
Joinn Laboratories
China |
China |
22,332 |
0.9 |
Select Medical
Holdings |
USA |
22,154 |
0.8 |
Arrail (unquoted) |
USA |
19,772 |
0.8 |
Turning Point
Therapeutics |
USA |
17,859 |
0.7 |
Jinxin Fertility
Group |
China |
17,721 |
0.7 |
Shanghai Bioheart
Pharmaceutical (unquoted) |
China |
17,660 |
0.7 |
Crossover Health
(unquoted) |
USA |
17,358 |
0.7 |
Galapagos |
Belgium |
16,759 |
0.6 |
Top 40
investments |
|
2,133,315 |
82.7 |
|
Country/ |
Market
value |
% of |
Investments |
Region |
£’000 |
investments |
EDDA (unquoted) |
China |
16,759 |
0.6 |
Yidu Tech |
China |
16,298 |
0.6 |
Iovance
Biotherapeutics |
USA |
16,136 |
0.6 |
Arcutis
Biotherapeutics |
USA |
16,017 |
0.6 |
Ikena Oncology |
USA |
15,088 |
0.6 |
SI-BONE |
USA |
14,941 |
0.6 |
Beijing Yuanxin
Technology (unquoted) |
China |
14,870 |
0.6 |
Shanghai Kindly Medical
Instruments |
China |
14,831 |
0.6 |
MeiraGTx |
USA |
14,531 |
0.6 |
Theravance
Biopharma |
USA |
14,298 |
0.6 |
Top 50
investments |
|
2,287,084 |
88.4 |
Celldex
Therapeutics |
USA |
14,275 |
0.5 |
Visen (unquoted) |
China |
14,164 |
0.5 |
Ruipeng Pet Group
(unquoted) |
China |
13,922 |
0.5 |
Tenet Healthcare |
USA |
13,173 |
0.5 |
Dingdang Health
Technology Group (unquoted) |
China |
13,083 |
0.5 |
New Horizon Health |
China |
13,038 |
0.5 |
Seagen |
USA |
12,461 |
0.5 |
Burning Rock
Biotech |
China |
12,385 |
0.5 |
Rimag (unquoted) |
China |
11,704 |
0.5 |
uniQure |
Netherlands |
11,664 |
0.5 |
Top 60
investments |
|
2,416,953 |
93.3 |
CSPC Pharmaceutical
Group |
China |
11,142 |
0.4 |
NanoString
Technologies |
USA |
11,106 |
0.4 |
Hangzhou Tigermed
Consulting |
China |
11,079 |
0.4 |
RxSight |
USA |
9,889 |
0.4 |
Vor BioPharma |
USA |
9,654 |
0.4 |
Danaher |
USA |
9,652 |
0.4 |
Daiichi Sankyo |
Japan |
9,564 |
0.4 |
Shenzhen Hepalink
Pharmaceutical Group |
China |
9,299 |
0.4 |
Medlive Technology |
China |
9,278 |
0.3 |
Harpoon
Therapeutics |
USA |
8,580 |
0.3 |
Top 70
investments |
|
2,516,196 |
97.0 |
Apollo Hospitals
Enterprise |
India |
8,447 |
0.3 |
Achilles
Therapeutics |
USA |
7,988 |
0.3 |
CVRx |
USA |
7,949 |
0.3 |
Shandong Weigao Group
Medical Polymer |
China |
7,809 |
0.3 |
Passage |
USA |
7,502 |
0.3 |
United Laboratories
International Holdings |
China (HK) |
6,528 |
0.3 |
China Medical
System |
China |
6,391 |
0.3 |
MabPlex International
(unquoted) |
China |
5,736 |
0.2 |
Abbisko (unquoted) |
China |
5,714 |
0.2 |
NanoString Technologies
2.63% 01/03/2025 (unquoted) |
USA |
5,681 |
0.2 |
Top 80
investments |
|
2,585,941 |
99.8 |
|
Country/ |
Market
value |
%
of |
Investments |
Region |
£’000 |
investments |
Shanghai Junshi
Biosciences |
China (HK) |
5,623 |
0.2 |
Simcere Pharmaceutical
Group |
China |
4,778 |
0.2 |
Convey Holding
Parent |
USA |
4,050 |
0.2 |
Hansoh
Pharmaceutical |
China (HK) |
1,196 |
0.0 |
AiQ Warrant 13/10/2027
(unquoted) |
USA |
1,187 |
0.0 |
Peloton (DCC**-
unquoted) |
USA |
501 |
0.0 |
Total equities and
fixed interest investments |
|
2,603,276 |
100.8 |
OTC Equity Swaps –
Financed |
|
|
|
JPMorgan iDex US SMID
Biotech Index* |
United States |
47,284 |
1.8 |
Apollo Hospitals
Enterprise |
India |
36,693 |
1.4 |
Jiangsu Hengrui
Medicine |
China |
32,354 |
1.3 |
Shandong
Pharmaceutical |
China |
23,138 |
0.9 |
BGI Genomics |
China |
21,304 |
0.8 |
Takeout* |
China |
12,984 |
0.5 |
Less: Gross exposure
added through financed swaps |
|
(195,211) |
(7.5) |
Total OTC
Swaps |
|
(21,454) |
(0.8) |
Total investments
including OTC Swaps |
|
2,581,822 |
100.0 |
* Basket Swap. See Glossary.
Summary
|
Market
value |
% of |
Investments |
£’000 |
investments |
Quoted equities |
2,402,609 |
93.1 |
Unquoted equities |
194,986 |
7.5 |
Unquoted debt
securities |
5,681 |
0.2 |
Equity swaps |
(21,454) |
(0.8) |
Total of all
investments |
2,581,822 |
100.0 |
** DCC = deferred contingent
consideration.
See note 1 for further details in relation to the OTC Swaps.
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. This is set against the backdrop of increased levels
of risk and uncertainty in evidence since early 2020, as a result
of the impact of the COVID?19 pandemic. The Directors have
considered the impact of this continued uncertainty on the
Company’s financial position and, based on the information
available to them at the date of this report, have concluded that
no adjustments are required to the accounts as at 30 September 2021.
A review of the half-year and the outlook for the Company can be
found in the Chairman’s Statement and the Review of Investments.
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.
- 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, such as those experienced as a consequence of the COVID?19
pandemic, and the risk of a global recession, are likely to
adversely affect the performance of the Company’s investments.
Information on these risks is given in the Annual Report for the
year ended 31 March 2021.The Board believes that the Company’s
principal risks and uncertainties have not changed materially since
the date of that report and are not expected to change materially
for the remaining six months of the Company’s financial year.
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. 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 and
also consequences for the Company resulting from the continuing
uncertainty arising from the COVID-19 pandemic. As previously
reported, stress testing was also carried out in May 2021, 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:
- 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
- the interim management report includes a true and fair review
of the information required by:
- 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
- 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
Sir Martin Smith
Chairman
17 November 2021
Income Statement
For the Six Months Ended 30 September
2021
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Six months ended |
Six months ended |
|
30 September 2021 |
30 September 2020 |
|
Revenue |
Capital |
|
Revenue |
Capital |
|
|
Return |
Return |
Total |
Return |
Return |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
(Losses)/gains on
investments |
– |
(5,449) |
(5,449) |
– |
382,487 |
382,487 |
Foreign exchange
losses |
– |
(4,482) |
(4,482) |
– |
(5,501) |
(5,501) |
Income from investments
(note 2) |
11,246 |
– |
11,246 |
7,785 |
– |
7,785 |
AIFM, portfolio
management, and performance fees (note 3) |
(483) |
9,706 |
9,223 |
(403) |
(22,106) |
(22,509) |
Other expenses |
(467) |
– |
(467) |
(750) |
– |
(750) |
Net return/(loss)
before finance charges and taxation |
10,296 |
(225) |
10,071 |
6,632 |
354,880 |
361,512 |
Finance charges |
(16) |
(308) |
(324) |
(14) |
(259) |
(273) |
Net return/(loss)
before finance |
10,280 |
(533) |
9,747 |
6,618 |
354,621 |
361,239 |
Taxation |
(1,287) |
– |
(1,287) |
(992) |
– |
(992) |
Net return/(loss)
after taxation |
8,993 |
(533) |
8,460 |
5,626 |
354,621 |
360,247 |
Return/(loss) per
share (note 4) |
13.8p |
(0.8)p |
13.0p |
9.9p |
623.0p |
632.9p |
The “Total” column of this statement is the Income Statement of
the Company. The “Revenue” and “Capital” columns are supplementary
to this and are prepared under guidance published by The
Association of Investment Companies.
All revenue and capital items in the above statement derive from
continuing operations.
The Company has no recognised gains and losses other than those
shown above and therefore no separate Statement of Total
Comprehensive Income has been presented.
The accompanying notes are an integral part of these
statements.
Statement of Changes in Equity
For the Six Months Ended 30 September
2021
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2021 |
2020 |
|
£’000 |
£’000 |
Opening shareholders’
funds |
2,381,425 |
1,538,298 |
Issue of new
shares |
41,676 |
192,754 |
Return for the
period |
8,460 |
360,247 |
Dividends paid –
revenue |
(10,085) |
(10,512) |
Closing
shareholders’ funds |
2,421,476 |
2,080,787 |
Statement of Financial Position
As at 30 September 2021
|
(Unaudited) |
(Audited) |
|
30
September |
31
March |
|
2021 |
2021 |
|
£’000 |
£’000 |
Fixed
assets |
|
|
Investments |
2,603,276 |
2,416,038 |
Derivatives – OTC
swaps |
21,226 |
18,864 |
|
2,624,502 |
2,434,902 |
Current
assets |
|
|
Debtors |
19,486 |
18,172 |
Cash and cash
equivalents |
60,277 |
29,595 |
|
79,763 |
47,767 |
Current
liabilities |
|
|
Creditors: amounts
falling due within one year |
(240,109) |
(92,932) |
Derivative – OTC
Swaps |
(42,680) |
(8,312) |
|
(282,789) |
(101,244) |
Net current
assets/(liabilities) |
(203,026) |
(53,477) |
Total net
assets |
2,421,476 |
2,381,425 |
Capital and
reserves |
|
|
Ordinary share
capital |
16,359 |
16,078 |
Share premium
account |
837,752 |
796,357 |
Capital reserve |
1,542,095 |
1,542,628 |
Capital redemption
reserve |
8,221 |
8,221 |
Revenue reserve |
17,049 |
18,141 |
Total shareholders’
funds |
2,421,476 |
2,381,425 |
Net asset value per
share – (note 5) |
3,700.7p |
3,703.0p |
Cash Flow Statement
For the Six Months Ended 30 September
2021
|
|
(Unaudited) |
(Unaudited) |
|
|
Six
months ended |
Six
months ended |
|
|
30
September |
30
September |
|
|
2021 |
2020 |
|
Note |
£’000 |
£’000 |
Net cash
(outflow)/inflow from operating activities |
7 |
(13,453) |
485 |
Purchases of
investments and derivatives |
|
(540,411) |
(505,070) |
Sales of investments
and derivatives |
|
384,014 |
546,830 |
Realised gain/(loss) on
foreign exchange transactions |
|
(1,770) |
(5,282) |
Net cash
(outflow)/inflow from investing activities |
|
(158,167) |
36,478 |
Issue of shares |
|
44,253 |
191,353 |
Equity dividends
paid |
|
(10,085) |
(10,512) |
Interest paid |
|
(324) |
(273) |
Net cash inflow from
financing activities |
|
33,844 |
180,568 |
(Increase)/decrease
in net debt |
|
(137,776) |
217,531 |
Cash flows from operating activities includes interest received
of £780,000 (2020: £1,290,000) and dividends received of
£10,650,000 (2020: £7,629,000).
Reconciliation of Net Cash Flow
Movement to Movement in Net Debt
|
(Unaudited) |
(Unaudited) |
|
Six months
ended |
Six months
ended |
|
30
September |
30
September |
|
2021 |
2020 |
|
£’000 |
£’000 |
(Increase)/decrease in
net debt resulting from cashflows |
(137,776) |
217,531 |
Losses on foreign
currency cash and cash equivalents |
(2,712) |
(219) |
Movement in net debt
in the period/year |
(140,488) |
217,312 |
Net debt at 1
April |
(20,301) |
(150,516) |
Net debt at
period/year |
(160,789) |
66,796 |
Notes to the Financial Statements
1. Accounting Policies
The condensed Financial Statements for the six months to
30 September 2021 comprise the
Company’s primary financial statements together with the related
notes below. They have been prepared in accordance with FRS 104
‘Interim Financial Reporting’, the AIC’s Statement of Recommended
Practice issued in October 2019
(‘SORP’) and using the same accounting policies as set out in the
Company’s Annual Report and Financial Statements at 31 March 2021.
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:
- observable market data; or
- non-observable data
AS OF 30
SEPTEMBER 2021 |
Level
1 |
Level
2 |
Level
3 |
Total |
£’000 |
£’000 |
£’000 |
£’000 |
Investments held at
fair value through profit or loss |
2,402,609 |
••• |
200,667 |
2,603,276 |
Derivatives: OTC swaps
(assets) |
– |
21,226 |
– |
21,226 |
Derivatives: OTC swaps
(liabilities) |
– |
(42,680) |
– |
(42,680) |
Financial
instruments measured at fair value |
2,402,609 |
(21,454) |
200,667 |
2,581,822 |
AS OF 31
MARCH 2021 |
Level
1 |
Level
2 |
Level
3 |
Total |
£’000 |
£’000 |
£’000 |
£’000 |
Investments held at
fair value through profit or loss |
2,275,409 |
– |
140,629 |
2,416,038 |
Derivatives: OTC swaps
(assets) |
– |
18,864 |
– |
18,864 |
Derivatives: OTC swaps
(liabilities) |
– |
(8,312) |
– |
(8,312) |
Financial
instruments measured at fair value |
2,275,409 |
10,552 |
140,629 |
2,426,590 |
2. Income
|
(Unaudited) |
(Unaudited) |
|
Six
months ended |
Six
months ended |
|
30
September |
30
September |
|
2021 |
2020 |
|
£’000 |
£’000 |
Investment income |
11,246 |
7,785 |
Total |
11,246 |
7,785 |
3. AIFM, Portfolio Management and
Performance Fees
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
Six months ended |
|
Six months ended |
|
|
30 September 2021 |
|
30 September 2020 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
AIFM fee |
82 |
1,565 |
1,647 |
74 |
1,398 |
1,472 |
Portfolio management
fee |
401 |
7,617 |
8,018 |
329 |
6,261 |
6,590 |
Performance fee charge
for the period* |
– |
(18,888) |
(18,888) |
– |
14,447 |
14,447 |
|
483 |
(9,706) |
(9,223) |
403 |
22,106 |
22,509 |
- During the six months ended 30 September
2021, due to underperformance against the Benchmark in the
period, a reversal of prior period provisions totalling £18,888,000
occurred (six months ended 30 September
2020: charge of £14,447,000).
As at 30 September 2021 no
performance fees were accrued or payable (31
March 2021: £31,748,000 accrued). Of the 31 March 2021 accrual £12,860,000 crystallised
and became payable as at 30 June 2021
and £18,888,000 reversed due to underperformance, as noted above.
The performance fee paid related to outperformance generated as at
30 June 2020 that was maintained to
30 June 2021.
The maximum amount that could become payable by 30 September 2022 is £18,888,000. This would only
be payable in full if the current period’s underperformance is
reversed and the outperformance achieved as at 31 March 2021 is re-attained.
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 |
|
2021 |
2020 |
|
£’000 |
£’000 |
The return per share is
based on the following figures: |
|
|
Revenue return |
8,993 |
5,626 |
Capital
(loss)/return |
(533) |
354,621 |
Total
return |
8,460 |
360,247 |
Weighted average number
of shares in issue for the period |
65,108,269 |
56,922,562 |
Revenue return per
share |
13.8p |
9.9p |
Capital (loss)/return
per share |
(0.8)p |
623.0p |
Total return per
share |
13.0p |
632.9p |
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 £2,421,476,000 (31 March 2021: £2,381,425,000) and on the number
of shares in issue at the period end of 65,432,755 (31 March 2021: 64,310,255).
6. Transaction Costs
Purchase transaction costs for the six months ended 30 September 2021 were £461,000 (six months ended
30 September 2020: £831,000).
Sales transaction costs for the six months ended 30 September 2021 were £403,000 (six months ended
30 September 2020: £473,000).
These costs comprise mainly commission.
7. Reconciliation of Operating Return
to Net Cash Inflow from Operating Activities
|
(Unaudited) |
(Unaudited) |
|
Six months
ended |
Six months
ended |
|
30
September |
30
September |
|
2021 |
2020 |
|
£’000 |
£’000 |
Gains before finance
costs and taxation |
10,071 |
361,512 |
Add: capital
loss/(less: capital gain) before finance charges and taxation |
225 |
(354,880) |
Revenue return
before finance charges and taxation |
10,296 |
6,632 |
Expenses charged to
capital |
9,706 |
(22,106) |
(Increase)/decrease in
other debtors |
(133) |
1,198 |
(Decrease)/increase in
provisions, and other creditors and accruals |
(31,781) |
15,294 |
Net taxation suffered
on investment income |
(1,293) |
(428) |
Amortisation |
(248) |
(105) |
Net cash
(outflow)/inflow from operating activities |
(13,453) |
474 |
8. 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 2021.
9. 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 2021
and 30 September 2020 has not been audited or reviewed by the
Company’s auditor.
The information for the year ended 31
March 2021 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 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.
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.$10bn.
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 % with 100% representing no leverage or gearing in the Company.
There are two methods of calculating leverage as follows:
The Gross Method is calculated as total exposure divided by
Shareholders’ Funds. Total exposure is calculated as net assets,
less cash and cash equivalents, adding back cash borrowing plus
derivatives converted into the equivalent position in their
underlying assets.
The Commitment Method is calculated as total exposure divided by
Shareholders Funds. In this instance total exposure is calculated
as net assets, less cash and cash equivalents, adding back cash
borrowing plus derivatives converted into the equivalent position
in their underlying assets, adjusted for netting and hedging
arrangements.
See the definition of Options and Equity Swaps for more details
on how exposure through derivatives is calculated.
|
|
As at |
|
As at |
|
30 September 2021 |
|
31 March
2021 |
|
Fair
Value |
Exposure* |
Fair
Value |
Exposure* |
|
£’000 |
£’000 |
£’000 |
£’000 |
Investments |
2,603,276 |
2,603,276 |
2,416,038 |
2,416,038 |
OTC equity swaps |
(21,454) |
173,757 |
10,552 |
145,636 |
|
2,581,822 |
2,777,033 |
2,426,590 |
2,561,674 |
Shareholders’
funds |
|
2,421,476 |
|
2,381,425 |
Leverage % |
|
14.7% |
|
7.6% |
* 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)
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 |
One year
to |
|
30
September |
31
March |
|
2021 |
2021 |
|
(p) |
(p) |
Opening NAV per
share |
3,703.0 |
2,868.9 |
(Decrease)/increase in
NAV per share |
(2.3) |
834.1 |
Closing NAV per
share |
3,700.7 |
3,703.0 |
% Change in NAV per
share |
(0.1)% |
29.1% |
Impact of reinvested
dividends |
0.5% |
0.9% |
NAV per share Total
Return |
0.4% |
30.0% |
Ongoing Charges (‘APM’)
Ongoing charges are calculated by taking the Company’s
annualised ongoing charges, excluding finance costs, taxation,
performance fees and exceptional items, and expressing them as a
percentage of the average daily net asset value of the Company over
the year.
|
Six months
to |
One year
to |
|
30
September |
31
March |
|
2021 |
2021 |
|
£’000 |
£’000 |
AIFM & Portfolio
Management fees |
9,665 |
17,068 |
Other Expenses |
467 |
1,338 |
Total Ongoing
Charges |
10,132 |
18,406 |
Performance fees
paid/crystallised |
12,860 |
– |
Total |
22,992 |
18,406 |
Average net assets |
2,384,758 |
2,112,164 |
Ongoing Charges
(annualised) |
0.8% |
0.9% |
Ongoing Charges
(annualised, including performance fees paid or crystallised during
the period) |
1.3% |
0.9% |
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. The
performance fee amounts to 15.0% of any outperformance over the
Benchmark (see page 44 of the Company’s Annual Report &
Accounts for the year ended 31 March
2021 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:
- The cumulative outperformance of the investment portfolio over
the Benchmark as at the quarter end date; and
- 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.
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 |
|
2021 |
2021 |
Opening share
price |
3,695.0 |
2,920.0 |
Increase in share
price |
(70.0) |
775.0 |
Closing share
price |
3,625.0 |
3,695.0 |
% Change in share
price |
(1.9)% |
26.5% |
Impact of reinvested
dividends |
0.4% |
0.9% |
Share price Total
Return |
(1.5)% |
27.4% |
For and on behalf of
Frostrow Capital LLP, Secretary
17 November
2021
- ENDS -